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

                       H.R. 1728, THE MORTGAGE REFORM AND
                       ANTI-PREDATORY LENDING ACT OF 2009

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

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   ----------

                                 APRIL 23, 2009

                                   ----------

           Printed for the use of the Committee on Financial Services

                               Serial No. 111-25

                       H.R. 1728, THE MORTGAGE REFORM AND
                       ANTI-PREDATORY LENDING ACT OF 2009

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

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 APRIL 23, 2009

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 111-25

                      U.S. GOVERNMENT PRINTING OFFICE
    51-584 PDF                WASHINGTON : 2009
    -----------------------------------------------------------------------
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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             KENNY MARCHANT, Texas
    RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
    CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
    ED PERLMUTTER, Colorado              BILL POSEY, Florida
    JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
    BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
    ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
    JACKIE SPEIER, California            LEONARD LANCE, New Jersey
    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

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        April 23, 2009...............................................     1
    Appendix:
        April 23, 2009...............................................    93

                                   WITNESSES
                            Thursday, April 23, 2009

    Amorin, Jim, President, Appraisal Institute......................    71
    Antonakes, Steven L., Commissioner of Banks for The Commonwealth
      of Massachusetts, on behalf of The Conference of State Bank
      Supervisors....................................................    10
    Aponte, Graciela, Legislative Analyst, on behalf of Eric
      Rodriguez, Vice President of Public Policy, National Council of
      La Raza........................................................    50
    Arbury, Jim, Senior Vice President, Government Affairs, on behalf
      of The National Multi Housing Council and The National
      Apartment Association..........................................    72
    Berner, G. Gary, Executive Vice President, Commercial Real
      Estate, First Niagara Bank, on behalf of The American Bankers
      Association....................................................    60
    Braunstein, Sandra F., Director, Division of Consumer and
      Community Affairs, Board of Governors of the Federal Reserve
      System.........................................................     8
    Calhoun, Michael, President, Center for Responsible Lending......    44
    Dalton, Hon. John H., President, Housing Policy Council, The
      Financial Services Roundtable..................................    62
    Kittle, David G., Chairman, Mortgage Bankers Association.........    63
    Leonard, Denise, Chairman, Government Affairs, National
      Association of Mortgage Brokers................................    68
    McMillan, Charles, President, National Association of Realtors...    69
    Menzies, R. Michael S., Sr., President and Chief Executive
      Officer, Easton Bank and Trust Company, on behalf of The
      Independent Community Bankers of America.......................    65
    Ryan, Honorable T. Timothy, Jr., President and Chief Executive
      Officer, Securities Industry and Financial Markets Association.    66
    Saunders, Margot, Of Counsel, National Consumer Law Center.......    46
    Shelton, Hilary O., Vice President for Advocacy & Director,
      Washington Bureau, NAACP.......................................    48
    Taylor, John, President and Chief Executive Officer, National
      Community Reinvestment Coalition...............................    42

                                    APPENDIX

    Prepared statements:
        Bachus, Hon. Spencer.........................................    94
        Kanjorski, Hon. Paul E.......................................    98
        Meeks, Hon. Gregory W........................................    99
        Amorin, Jim..................................................   103
        Antonakes, Steven L..........................................   112
        Aponte, Graciela.............................................   141
        Arbury, Jim..................................................   149
        Berner, G. Gary..............................................   156
        Braunstein, Sandra F.........................................   166
        Calhoun, Michael.............................................   179
        Dalton, Hon. John H..........................................   200
        Kittle, David G..............................................   216
        Leonard, Denise..............................................   224
        McMillan, Charles............................................   239
        Menzies, R. Michael S., Sr...................................   245
        Ryan, Honorable T. Timothy, Jr...............................   253
        Saunders, Margot.............................................   264
        Shelton, Hilary O............................................   286
        Taylor, John.................................................   290

                  Additional Material Submitted for the Record

    Posey, Hon. Bill:
        Letter from the U.S. Chamber of Commerce.....................   315
        Letter from the Consumer Mortgage Coalition..................   318
    Watt, Hon. Melvin:
        Written statement of the American Homeowners Grassroots
          Alliance...................................................   344
        Letter from the Credit Union National Association (CUNA).....   349
        Letter from Hon. Chris Koster, Attorney General of Missouri..   353

                       H.R. 1728, THE MORTGAGE REFORM AND
                       ANTI-PREDATORY LENDING ACT OF 2009

                                  ----------

                            Thursday, April 23, 2009

                 U.S. House of Representatives,
                       Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 10:04 a.m., in
    room 2128, Rayburn House Office Building, Hon. Melvin L. Watt
    presiding.
        Members present: Representatives Frank, Kanjorski, Waters,
    Maloney, Gutierrez, Velazquez, Watt, Ackerman, Sherman, Meeks,
    Moore of Kansas, Capuano, Clay, McCarthy of New York, Baca,
    Lynch, Miller of North Carolina, Green, Cleaver, Bean, Moore of
    Wisconsin, Hodes, Ellison, Klein, Wilson, Perlmutter, Donnelly,
    Foster, Carson, Speier, Childers, Minnick, Adler, Kilroy,
    Driehaus, Kosmas, Grayson, Himes, Peters, Maffei; Bachus,
    Castle, Royce, Manzullo, Biggert, Miller of California, Capito,
    Hensarling, Garrett, Neugebauer, McHenry, Bachmann, Marchant,
    Posey, Lee, Paulsen, and Lance.
        Mr. Watt. [presiding] Good morning, everybody. This hearing
    of the full Committee on Financial Services will come to order.
    Let me first extend the apologies of the chairman, Barney
    Frank, who had to be on the Senate side this morning to testify
    at a confirmation hearing and asked me to preside over today's
    activities until he returns. We have three panels, so it's
    going to be a fairly long day, and I should advise members
    that, as Barney would do if he were here, I will try to be
    pretty strict on the time. So if you have a question that you
    want an answer to, please ask it far enough in advance of the
    expiration of the time to allow for the witnesses to answer.
    Otherwise, we'll have to move on, because the committee is so
    big and we have three panels, and we want to cover all of the
    territory today, and a lot of people I think will be perhaps
    leaving to go back to their districts.
        As is the rule, the opening statements will be divided into
    10 minutes on each side, and without objection, all members'
    opening statements will be made a part of the record. So anyone
    who wants to submit a statement for the record is entitled to
    do that.
        I will recognize myself for 2 minutes for an opening
    statement just to welcome the witnesses on this panel and
    subsequent panels to make it clear that today's hearing is
    about H.R. 1728, the Mortgage Reform and Anti-Predatory Lending
    Act, which Representative Miller of North Carolina,
    Representative Watt of North Carolina, Representative Frank,
    and a number of other members are co-sponsors of; we are aware
    that the bill that has been introduced is out there and subject
    to comment, and we are aggressively listening to comments about
    various aspects of this bill and trying to take those comments
    into account to reach a product that protects consumers and the
    public, protects the economy from future meltdowns of the kind
    that we have experienced, and does not dry up credit in the
    process.
        Those are our three primary objectives here, and sometimes
    those things may be in conflict with each other, and drawing
    language that walks that delicate balance and accomplishes all
    three of those objectives is inordinately difficult. So the
    testimony and assistance of people who will be testifying today
    we consider immensely important and want to give reasonable
    assurance that every piece of input will be taken into account.
        My time has expired, and I will now recognize Mr.
    Hensarling for 2\1/2\ minutes.
        Mr. Hensarling. Thank you, Mr. Chairman. I appreciate this
    hearing being held. It is a very serious subject, but
    unfortunately, the bill is rather disappointing. Clearly, there
    were a number of causes of the economic turmoil that our Nation
    finds itself in today, but none loom larger than Federal
    regulation and Federal legislation surrounding Fannie Mae and
    Freddie Mac. Now the government gave them monopoly powers. The
    government enabled them to make monopoly profits. The
    government told them to finance loans to people who ultimately
    could not afford to pay them back. The dice were rolled and the
    American taxpayer lost.
        Note the title of this bill is the Mortgage Reform and
    Anti-Predatory Lending Act. There can be no clear mortgage
    reform without reform of Fannie and Freddie. And for those who
    say that this has already been accomplished, well, when Fannie
    and Freddie have been effectively nationalized, when their
    market share for new mortgages has gone from roughly 50 percent
    to 90 percent, when the taxpayer is on the hook for hundreds of
    billions of dollars, I think not.
        With respect to the second half of the title, Anti-
    Predatory Lending, well, the bill is almost completely silent
    as to predatory borrowing. We know that FINCEN has stated that
    mortgage fraud has increased over 1,400 percent in the last
    decade, and the majority of that fraud was tied to borrowers
    who lied about their income, their assets, their occupancy.
    Ninety-nine percent of this bill deals with the duties,
    responsibilities and liabilities of lenders. We do need to
    reform that. But it is almost silent as to the duties of the
    borrower. It essentially says if you're caught defrauding the
    lender, well, you can't sue him. That is the extent on dealing
    with predatory borrowing.
        Also, I question, in the middle of a national credit
    crisis, not unlike what we did yesterday when people are
    struggling to refinance their homes, why, why would we want to
    make credit more expensive and less accessible? What is the
    national policy here?
        And finally, I must admit after a lot of wailing and
    gnashing of teeth in yesterday's mark-up regarding a requested
    study by the Federal Reserve of the impact of that legislation,
    lo and behold, we find a commission, a study commission by the
    GAO to report to us on the impact of this bill on availability
    and affordability of credit. Now which is it?
        With that, Mr. Chairman, I yield back the balance of my
    time.
        Mr. Watt. The gentleman from Pennsylvania, Mr. Kanjorski,
    is recognized for 3 minutes.
        Mr. Kanjorski. Thank you, Mr. Chairman. Mr. Chairman, as we
    begin today's hearing, I want to discuss several issues
    concerning H.R. 1728, the Mortgage Reform and Anti-Predatory
    Lending Act, which I helped to write and to introduce.
        First, I have heard suggestions from some that the skin in
    the game requirements found in the bill constitute a war on
    securitization. Such thinking is entirely wrong. At a hearing
    in September 2007, I cited the fact that few players had any
    real skin in the game helped to contribute to the implosion of
    our financial markets. If they had contained some risk in the
    game, I believe that they would have made better decisions.
    Since then, others have joined my thinking. So the skin in the
    game provisions of H.R. 1728 are about prudent underwriting,
    not about ending securitization, as some have maintained.
        This issue, however, is a difficult one. Like Chairman
    Frank, I admit that the 5 percent retention requirement now in
    the bill needs some work. Rather than hearing more complaints
    about it, we need suggestions to perfect it. I hope that our
    witnesses will do just that.
        Second, I have focused my attention in recent weeks on the
    bill's considerable mortgage servicing and appraisal
    provisions, which I wrote and added to the legislation during
    our debate on the Floor in November of 2007. Much has happened
    in these fields since then, including the adoption of new rules
    by the Federal Reserve on escrowing, credit payments and
    appraisal independence, as well as the appraisal reform
    agreements of New York Attorney General Andrew Cuomo with
    Fannie Mae and Freddie Mac. In moving forward, we should codify
    much of their good work, and we must also take bolder steps to
    provide greater protections for consumers and improve industry
    responsibility.
        As such, I am preparing a comprehensive amendment that
    will, among other things, provide all subprime borrowers with
    access to a written appraisal, improve independent standards so
    appraisers can operate as honest referees, free of
    interference, and enhance confidence in the results produced by
    automated valuation models.
        We must also further augment the powers of the appraisal
    subcommittee to monitor and assist State appraiser agencies.
    Moreover, we must establish oversight for appraisal management
    companies. They now touch 64 percent of written appraisals, but
    they are subject to little supervision.
        Going forward, we cannot allow anyone to play in the dark
    corners of our markets. We must ensure that everyone who
    operates in our financial system is subject to appropriate
    oversight, whether they are a hedge fund, a credit rating
    agency or an appraisal management company.
        Before closing, Mr. Chairman, I ask unanimous consent to
    submit into the record a letter from the Title Appraiser Vendor
    Management Association that makes some observations about the
    regulation of appraisal management companies.
        Mr. Watt. Without objection, that will be admitted. And as
    the chairman indicated yesterday, virtually anything that
    anybody wants to put in the record will be admitted without
    objection. The gentleman yields back, and the gentlelady from
    West Virginia, Mrs. Capito, is recognized for 2\1/2\ minutes.
        Mrs. Capito. Thank you, Mr. Chairman. I would like to thank
    you for calling this hearing today. Almost 2 years ago, I
    worked with Chairman Frank, Ranking Member Bachus, and many
    Members on both sides of the aisle on a bipartisan compromise
    to address the challenges posed in the housing market by
    subprime mortgages. At that time, many Americans were facing
    mortgage resets on adjustable rate mortgages, resulting in
    higher payments that would be beyond their abilities to pay.
        The housing market continues to struggle, however. I do
    have concerns that this legislation before us could potentially
    do harm, do greater harm to a housing market that is already
    unstable. Any action this body takes should be to encourage
    positive growth and strength in the mortgage markets.
        I do have some specific concerns. First, H.R. 1728
    effectively relegates any home loan which is not a 30-year
    fixed-rate mortgage into the category of a subprime mortgage.
    Even loans backed by the FHA, Veterans Affairs, and the Rural
    Housing Service would be considered subprime and assumed to be
    predatory if they do not conform to the narrow definition of a
    qualified mortgage set forth in H.R. 1728.
        While I believe we must take steps to regulate the
    nontraditional products like interest only or no income
    verification lending practices, there are a number of
    traditional lending products in addition to 30-year fixed-rate
    mortgages that belong in the safe haven because of their good
    safety record. I fear that excluding these standard, more
    traditional products other than this 30-year mortgages from the
    safe harbor will serve to place more stress on the housing
    markets and the overall economy's ability to recover.
        Second, while there is general agreement for the need for
    originators to have skin in the game, it is important that we
    address this issue in a thoughtful and deliberate manner. I am
    concerned that the risk retention provision in H.R. 1728 has
    not been fully vetted and could have some unintended
    consequences.
        Finally, as introduced, the bill permanently alters
    contract law by requiring participation in the Section 8
    Program for all purchasers of foreclosed properties with
    Section 8 tenants. And the bill does not include important
    safeguards on the $140 million legal assistance grant fund. It
    is my hope the committee will proceed with caution with this
    legislation, as we do not want to inflict further harm on an
    already struggling market. Again, thank you for presenting this
    hearing, and I look forward to hearing the witnesses. Thank
    you.
        Mr. Watt. I thank the gentlelady. And in an effort to kind
    of keep the time balanced, we will now yield 1 minute to the
    gentleman from Delaware, Mr. Castle.
        Mr. Castle. Thank you very much, Mr. Chairman. I don't
    think any of us would question the need to reform predatory
    lending practices in the mortgage industry, and many of our
    colleagues, as has already been indicated, supported the
    previous iteration of this, the Mortgage Reform and Anti-
    Predatory Lending Act when it passed the House the last
    Congress. But I do think we need to approach this carefully.
    And I am aware--first I'm aware that this bill intends to
    increase accountability by requiring creditors to keep a 5
    percent share of the credit risk on each loan they make, but
    how does that affect smaller lenders who typically do not hold
    onto a large amount of capital? Will this affect their ability
    to participate in mortgage lending and selling? And I don't
    even understand the mechanics of how you would do that. So we
    need to look at that carefully.
        Additionally, I think it would be beneficial to consider
    that some other types of loans in the qualified safe harbor
    under Section 203 of H.R. 1728 aren't FHA and VA loans, which
    are guaranteed by the Federal Government, and aren't adequately
    regulated safe enough to qualify.
        Those are just a couple of the questions which I have. We
    have a lot of witnesses today, and hopefully we're going to
    learn a lot more about what we could and should be doing. It's
    the right concept, but we need to get the details right. And I
    thank you, Mr. Chairman. I yield back the balance of my time.
        Mr. Watt. The gentleman's time has expired. The gentleman
    from North Carolina, Mr. Miller, is recognized for 3 minutes.
        Mr. Miller of North Carolina. Thank you, Mr. Chairman. The
    finance industry's explanation of our financial crisis is that
    there was a weird, unpredictable combination of events, a
    perfect storm of macroeconomic forces. With benefit of
    hindsight perhaps they loaned not wisely but too well, but
    certainly none of their business practices were really
    blameworthy. I don't claim to have seen the collapse of the
    whole world's financial system coming, but I knew that the
    mortgages that have proven toxic for the finance industry were
    toxic for homeowners, and I thought that was reason enough to
    act.
        Mr. Watt and I introduced legislation 6 years ago that
    would have forbidden the mortgage practices that have brought
    our Nation's economy to grief. We will hear the same arguments
    today--we already have--that we have heard for 6 years from an
    entirely unrepentant industry.
        All the mortgage terms that may appear abusive or predatory
    to the unsophisticated were really based on risk, they argue.
    And without those practices, lenders would not be able to make
    credit available to people who needed it. We know you mean
    well, the industry said, but your legislation will just hurt
    the very people you're trying to help. And they said we needed
    to be careful we didn't pass well meaning but poorly crafted
    legislation that would have unintended consequences. It's hard
    to argue in favor of sloppy, careless legislation, but the
    Nation and the world would have been better off if Congress
    passed a bill that we drafted on a napkin.
        During the subprime heyday from 2004 to 2006 when the toxic
    mortgages were made, profits in the finance industry
    metastasized to more than 40 percent of all corporate profits.
    That's after the vulgar compensation and all the perks that
    we've heard so much about in the last few months. Maybe the
    industry's margins were not really so tight after all. Maybe
    some of the mortgage terms that appeared predatory on their
    face really were.
        This committee will soon consider legislation to address
    systemic risk in the financial industry, to protect the
    industry from getting itself into such trouble again, but we
    need to do more than just keep the masters of the universe from
    running with scissors again in the future. We need to reform
    consumer lending practices that have trapped millions of
    working and middle-class families hopelessly in debt, practices
    that have pushed millions of Americans out of the middle class
    and into poverty.
        I yield back.
        Mr. Watt. The gentleman yields back the balance of his
    time. The gentlelady from Illinois, Mrs. Biggert, is recognized
    for 1 minute.
        Mrs. Biggert. Thank you, Mr. Chairman, and I'd like to
    thank Chairman Frank and Congressman Miller for their work on
    this bill, which at its core aims to tackle some of the unsound
    practices that got us into this housing mess. In particular,
    I'd like to thank the chairman for including my bill, H.R. 47,
    the Expand and Preserve Homeownership through Counseling Act. I
    think it elevates housing counseling within HUD by establishing
    an Office of Housing Counseling, expands the availability of
    HUD-approved housing, counseling services, offers grants to
    States and local agencies, and launches a national outreach
    campaign as well.
        And I'd also like to commend the Fed for updating mortgage
    standards under HOEPA and TILA, which I think will enhance
    protections and transparency to benefit consumers and restore
    integrity to the mortgage process. The new appraisal rules are,
    I think, particularly important. On this note, I'd like to
    thank Congressman Kanjorski and Congresswoman Capito for
    working with me on Sections 5 and 6 of H.R. 1728. Some of these
    mirror the Fed's work and all are aimed at improving mortgage
    services and appraisal practices to benefit consumers.
        I look forward to examining the viability of some of the
    new provisions in H.R. 1728 that weren't in last year's
    mortgage reform. With that, I yield back.
        Mr. Watt. The gentlelady's time has expired. The gentleman
    from New Jersey, Mr. Garrett, is recognized for 1 minute.
        Mr. Garrett. I thank you, and I thank the chairman, and I
    thank Chairman Kanjorski as well for holding this hearing, and
    the members of the panel. I want to take a moment just to focus
    my remarks specifically on a section of the bill and I look
    forward to your comments. That's Section 213 of the bill, the
    Credit Risk Retention provision. As the chairman knows, based
    on my recent actions and attention on covered bonds, I am very
    supportive of lending institutions retaining some credit risk
    or skin in the game. And so I applaud the chairman and
    Congressman Miller for their attempt in the underlying bill to
    address this issue. However, I and many others have serious
    concerns of the way the provision is presently crafted.
        I do believe that there are significant questions as to how
    this provision is actually going to work, how capital
    provisions and positions of struggling lending institutions
    would be affected, and how small lending institutions would be
    able to comply with this, and the negative market affairs that
    would occur. And so knowing of our common interest in this
    matter that Chairman Frank has indicated in the past, I would
    like to work with the chairman and Chairman Kanjorski as well
    to craft a more feasible alternative that can help facilitate
    sound mortgage underwriting while not reducing the much needed
    market liquidity.
        And with that, I yield back.
        Mr. Watt. The gentleman's time has expired. The gentleman
    from Idaho, Mr. Minnick, is recognized for 2 minutes.
        Mr. Minnick. Mr. Chairman, in order to prevent another
    subprime mortgage meltdown, loan originating companies should
    be required to keep a certain percentage of any loans they make
    and take the first loss on any contract that goes bad.
        I want to thank Chairman Frank and Congressmen Miller and
    Watt for including my bill, the Credit Risk and Retention Act,
    into their broader mortgage reform bill. Credit risk retention
    is a way to avoid some of the worst problems which
    undercapitalized risky loans that have crippled the financial
    system.
        The company making a loan has to keep some skin in the game
    and to take the first loss. It is important to put into the
    underwriting process an incentive that keeps institutions that
    write a loan or underwrite a mortgage-backed security from
    being able to shed all responsibility. This bill makes the
    originator retain at least 5 percent of any loan made.
        I am open to ideas on how to implement and prudently
    enforce this concept in a way that protects consumers but also
    makes sense for banks and other loan originators. This is not
    meant to be punishment for a lending institution. Rather, it is
    a preventive measure to improve underwriting and avoid another
    financial meltdown.
        I yield back the balance of my time.
        Mr. Watt. The gentleman yields back the balance of his
    time. The ranking member of the full committee, Mr. Bachus, is
    recognized for 1 minute.
        Mr. Bachus. I thank the chairman. I have laryngitis, so I'm
    going to be brief. This bill, first let me point out, is
    different from the bill that we passed last year with broad
    Republican support. The goal ought to be to address problems in
    mortgage origination and in our subprime mortgage system, not
    create new problems. And I'm afraid this bill, unlike the bill
    last year, creates a lot of new standards. They're vague and
    they're narrow, and I think ultimately this bill would restrict
    access to credit and probably cause people to turn to payday
    lenders and other type of financing.
        Let me just close by saying all of us have recognized that
    the originate to distribute model has problems, and so I will
    say that just like Mr. Garrett and just like Chairman Frank, I
    agree we ought to look at the credit risk retention
    requirement, and originators should have skin in the game. I
    don't think what we're doing here is the way to solve that.
        Thank you.
        Mr. Watt. I thank the gentleman. Everyone who has made an
    opening statement has addressed an issue that is of importance,
    and that's why we're having this hearing today. I just want to
    encourage on behalf of the chairman of the full committee, for
    those who have raised the issues related to risk retention,
    safe harbor, preemption, the whole--all of those issues are
    still being looked at very carefully, and it would be helpful
    in advance of next Tuesday's mark-up if we have constructive,
    concrete ideas about how to address the concerns that have been
    raised as opposed to just, we don't like what has been written.
    So--
        Mr. Bachus. Mr. Chairman?
        Mr. Watt. The chairman wanted me to encourage that, because
    this is a work in progress, and not a finished product.
    Otherwise, we wouldn't need to have the hearing.
        Mr. Bachus. I very much appreciate that. In fact, my
    opening statement contains some of that, but I agree with you.
    If we're going to successfully resolve this, we need dialogue.
    We need deliberation, and we need to work with the regulators.
    Actually, the Federal Reserve and others have--they've made
    their own proposals and we'll hear some of that today on how to
    address these problems, but we will tell you that we would like
    to be partners in this effort.
        Mr. Watt. All time for opening statements has expired. I
    will now introduce this panel of witnesses. The first witness
    for today is Ms. Sandra Braunstein, Director of the Division of
    Consumer and Community Affairs of the Board of Governors of the
    Federal Reserve, and the second witness is Mr. Steven L.
    Antonakes, Commissioner of Banks for the Commonwealth of
    Massachusetts, on behalf of the Conference of State Bank
    Supervisors. Each witness will be recognized for 5 minutes.
    Without objection, your written statements will be made a part
    of the record in their entirety.
        And, Ms. Braunstein, you are recognized for your opening
    statement.

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

        Ms. Braunstein. Thank you, Mr. Chairman, Ranking Member
    Bachus, and members of the committee. I appreciate this
    opportunity to discuss the important issue of mortgage reform,
    the Federal Reserve's actions in this regard, and potential
    legislation to address remaining challenges.
        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, many homeowners and
    communities are suffering today because of lax underwriting
    standards and unfair or deceptive practices that resulted in
    unsustainable loans.
        Moving forward, it is important to achieve both clarity for
    the marketplace and strong consumer protection. We do not think
    those goals are mutually exclusive. In fact, those were our
    objectives last July when the Board issued final rules to
    establish new regulatory protections for consumers in the
    residential mortgage market.
        The Board's rules contain four key protections for a newly
    defined category of higher priced mortgages. 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 borrowers face payment shock.
        And fourth, creditors are required to establish escrow
    accounts for property taxes and homeowners insurance for all
    first lien mortgage loans.
        Recently, the Mortgage Reform and Anti-Predatory Lending
    Act was modified and reintroduced in this committee. There have
    been many changes in the market since the original version of
    this bill was passed by the House in 2007. We commend the
    committee's work on the new iteration of the bill, which
    addresses some important issues for the mortgage markets.
    Although some of the details differ, both the pending bill and
    the Board's rules set minimum underwriting standards for higher
    priced loans.
        A major addition to the new legislation is a provision to
    address the problem of misaligned incentives through credit
    risk retention. The lack of skin in the game has been widely
    recognized as one cause of the lax underwriting that was
    widespread in the subprime mortgage markets. However, this is a
    very complex issue, and risk retention could have unintended
    consequences of constraining credit. Therefore, we recommend
    that Congress consider additional discretion for rule writers
    in defining credit risk and other critical terms.
        Board staff have worked closely with the committee staff to
    furnish both technical and substantive comments on this bill.
    We are available to continue that work as the legislation moves
    forward.
        I would now like to offer a few additional comments. The
    Board's HOEPA rules take effect on October 1, 2009. Given the
    time required for the legislative process, the rule writing and
    comment period that will follow, it would be difficult to have
    new legislative provisions implemented by that date. We
    respectfully request that the committee clarify that the
    legislation does not alter the effective date of the Board's
    regulations. This would ensure that consumers will receive
    these important protections in the interim period from October
    2009 until any new legislation takes effect.
        I would also like to comment on the bill's delegation of
    rule writing. Many provisions of the bill would be implemented
    by regulations that are promulgated jointly by the Federal
    banking agencies. In our experience, interagency 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, and compromises
    often occur to bring rulemaking to closure. This can result in
    weaker consumer protections than would be achieved in a single
    agency.
        The mortgage markets have undergone considerable change in
    the past few years. Current conditions are certainly not
    normal, and we cannot be certain how the markets will
    ultimately reset. Therefore, we recommend that Congress provide
    sufficient rule writing flexibility in the new legislation so
    that regulations can be adjusted over time to address new
    marketing conditions and new mortgage products.
        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 166 of the appendix.]
        Mr. Watt. We thank you for your testimony.
        Mr. Antonakes is recognized for his opening statement.

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

        Mr. Antonakes. Good morning, Mr. Chairman, Ranking Member
    Bachus, and distinguished members of the committee. My name is
    Steven Antonakes and I serve as Commissioner of Banks for the
    Commonwealth of Massachusetts. It's my pleasure to testify
    today on behalf of the Conference of State Bank Supervisors in
    support of the objectives of H.R. 1728.
        First, however, I would like to update the committee on
    what I believe is an important and complementary reform of the
    industry. The States have been working to develop a more
    coordinated system of oversight to enhance supervision of the
    residential mortgage market. The hallmarks of reform should be
    high minimum standards, robust regulation and strong
    enforcement. Moreover, the most effective system of supervision
    and consumer protection is not purely Federal. The better way
    is a coordinated system that draws on the responsiveness and
    innovation of State regulation and the ability of the Federal
    Government to set high minimum standards. These unique State
    and Federal strengths should be complementary. For the benefit
    of consumers, Congress must forge a more cooperative
    federalism.
        The model for this cooperative federalism is the CSBS AAMR
    Nationwide Mortgage Licensing System and the S.A.F.E. Act. The
    States began developing NMLS back in 2003. It was successfully
    launched in January 2008, and by this January, 43 States, the
    District of Columbia and Puerto Rico will be on the system.
    This effort was recognized by Ranking Member Bachus, and this
    committee, as you enacted the S.A.F.E. Act, requiring all
    mortgage loan originators to be licensed or registered through
    the NMLS. Within weeks of the Act's passage, the States
    developed a model State law to implement its requirements. As
    of today, 20 States have passed legislation to become compliant
    with the S.A.F.E. Act, and an additional 29 States are in
    process.
        The S.A.F.E. Act and NMLS are vital to protecting consumers
    in battling abusive lending practices. Combined, these
    initiatives establish a broader regulatory reach, enhance
    accountability of loan providers and give regulators powerful
    tools to bring enforcement actions against bad actors.
        Relative to H.R. 1728, CSBS supports the establishment of a
    Federal predatory lending standard that allows the States to
    address abusive practices as they evolve. But the Federal
    standard should be a floor for all lenders and not stifle a
    State's ability to protect its citizens through State
    legislation or enforcement actions. It is difficult to
    legislate when State law applies only to a minority of the
    loans.
        State supervisors welcome coordination with our Federal
    counterparts to promote responsible lending. Because of
    congressional action, Federal regulators are working much more
    closely with the States through the FFIEC. The FFIEC can be an
    invaluable forum for State and Federal authorities to
    coordinate our efforts to provide seamless and comprehensive
    supervision of financial service providers. To harness the
    expertise of State regulators, CSBS recommends that H.R. 1728
    require rulemaking to be coordinated through the FFIEC. While
    the largest banks may be federally chartered, the States
    supervise the majority of banks and also have responsibility
    for credit unions, mortgage banks and mortgage brokers. The
    Federal rulemaking process would benefit from the breadth of
    this perspective. And if we are to have broad application of
    Federal standards, there will need to be State enforcement.
        CSBS also recommends the committee and Congress end
    regulatory preemption of State consumer protection laws. The
    States have been and continue to be the front line guardians of
    consumer protection and at the forefront in the battle against
    predatory lending. Congress should reinstate the ability of
    States to develop the sort of standards that have been the
    models for Federal law.
        Finally, we believe that H.R. 1728 provides many important
    improvements in consumer protection. We do have some additional
    concerns and recommendations outlined in detail in my written
    testimony.
        CSBS recognizes the challenges of balancing consumer
    protection and product innovation in your efforts to strike
    this balance in the liability and safe harbor provisions. We
    do, however, oppose the preemption of State law in this area
    and believe that if a safe harbor is to be established, that it
    must be very narrow.
        Additionally, any Federal standard should be enforceable by
    State regulators and attorneys general. The mortgage industry
    has proven itself to be innovative and dynamic. A static
    solution will simply not be able to keep pace with the market
    without the involvement of State authorities. CSBS commends the
    work of this committee to protect consumers and the financial
    system. We urge you to develop legislation that builds upon and
    does not inhibit the efforts of State authorities.
        Thank you for the opportunity to testify today. I look
    forward to answering your questions.
        [The prepared statement of Mr. Antonakes can be found on
    page 112 of the appendix.]
        Mr. Watt. I thank both witnesses for their testimony. We
    will now recognize members for questioning for 5 minutes each.
    Let me reemphasize the statement made at the outset of the
    hearing. We have three panels, and in accordance with the
    chairman's practice and instructions to me, we're going to be
    pretty tough on the 5 minutes. So if you have a question that
    you want an answer to as opposed to a written response, please
    ask it sufficiently in advance of the end of your 5 minutes to
    give the witnesses an opportunity to answer it, because we have
    three panels and a lot of members to get to. So, I'm not trying
    to be hard on anybody, I am just trying to move the hearing
    along.
        Mr. Kanjorski is recognized for 5 minutes.
        Mr. Kanjorski. Thank you very much, Mr. Chairman. You may
    not want to be hard on us, but you put the fear of God in me.
        Mr. Antonakes, appraisal management companies are largely
    unregulated now except in two or three States that have passed
    laws in recent weeks. Yet these companies touch 60 percent-plus
    of the loans, and their importance will grow with the Cuomo
    agreement being implemented.
        We have previously provided for State regulation of
    appraisers. Can States undertake this responsibility if
    mandated, is 36 months a sufficient amount of time to do this?
        Mr. Antonakes. Congressman I believe 36 months of time
    would be a sufficient period of time to do this. I draw upon
    our experience implementing the S.A.F.E. Act, which has been a
    heavy lift for State regulators. We have met on a weekly basis
    simply on implementation issues relative to the S.A.F.E. Act,
    and as described in my oral testimony, we now have 49 out of 50
    States well on the way to pass implementing legislation by the
    July 1st timeframe. So I believe it can be accomplished, and we
    would welcome the opportunity, my colleagues and I, to work
    with you in this regard.
        Mr. Kanjorski. Very good. It seems like we are moving
    along, does it not?
        Mr. Antonakes. I believe we are, Congressman.
        Mr. Kanjorski. That is very good. What other things would
    you suggest from the State level that are not included in this
    Act that would make it a better Act? You heard the invitation
    of the Chair. We are looking for perfecting the Act to be more
    responsive. Do you have any suggestions that you could give the
    committee?
        Mr. Antonakes. The key takeaway that we would provide,
    Congressman, is to ensure that a Federal standard, which we do
    support, is a floor and not a ceiling, and that States continue
    to be able to innovate and address issues as they occur within
    their jurisdictions to enact more protective laws as need be.
    The Truth-in-Lending Act was passed by the Federal Government
    in 1968. It was passed in Massachusetts in 1966. It became the
    model for the Federal law. States have to be able to innovate.
        Also, given the breadth of expertise that we do have, we're
    the only regulators that oversee the banks, the credit unions,
    the mortgage lenders, the mortgage brokers. I think States have
    to be involved in a rulemaking process and maintain their
    ability to enforce a Federal standard as well as State law.
        Mr. Kanjorski. Very good. May I pose a question to the
    Federal Reserve? Do you have any suggestions or perfections
    that could be made in your opinion to the legislation that
    would make it a better piece of legislation?
        Ms. Braunstein. We applaud a lot of what is in the
    legislation, and in fact a lot of it mirrors what we did with
    our HOEPA rules. We feel that there should be some rule writing
    discretion. One of the things we would keep in mind is that the
    markets currently are not in a normal state, and we are not
    really sure where they're going to reset and how they'll
    normalize in the future.
        So it would be helpful to not be as prescriptive and to
    allow some discretion in the future to make modifications to
    deal with the new markets, and we know that the industry is
    very innovative and that there will be new mortgage products
    that are going to evolve once the markets open up again, and
    there needs to be the flexibility to deal with consumer
    protections for those products.
        Mr. Kanjorski. The question all of us were working, the
    skin in the game question, the 5 percent, you seemed to
    indicate that may have been a little harsh, and you would like
    some discretionary authority there. How would you structure
    that?
        Ms. Braunstein. Well, I don't have an exact answer for you
    on that. I mean, I think that's something we would have to look
    at closely. We do acknowledge the fact that there were
    misaligned incentives in the previous markets and that was a
    cause of some of the problems. I think that issue needs to be
    looked at closely in a way to make sure that people do have
    skin in the game. I don't have an exact answer for you as to
    how that would work, but I think that's something that we have
    suggested. Again, there would need to be some discretion in
    terms of working that out now and working that out in the
    future.
        The current provision provides some issues for depositories
    in terms of capital retention against that 5 percent, and it's
    also unclear how that would work in nondepositories in terms of
    them having something put aside to deal with that 5 percent
    risk. There's a lack of clarity right now as to whether that is
    5 percent in first position, you know, where does that fall in
    terms of risk? I think there's a lot of unanswered questions at
    this point about it.
        Mr. Kanjorski. Thank you very much. Mr. Chairman, I yield
    back my time.
        Mr. Watt. The gentleman's time has expired. Mr. Castle from
    Delaware is recognized for 5 minutes.
        Mr. Castle. Thank you, Mr. Chairman. Ms. Braunstein, just
    along the same lines, and I raised this in my opening
    statement, I really don't understand the 5 percent business at
    all, and I've tried to read it and that has not helped clarify
    it. But as you read the bill or at least your understanding of
    any discussions you've had about it, does the originator of the
    mortgage have to keep 5 percent of its total mortgage portfolio
    or 5 percent of each mortgage it originates? Can you explain
    that provision to me? I just--I'm having trouble grasping it.
        Ms. Braunstein. Well, I'm not sure I'm the expert to do
    that since we didn't craft it.
        Mr. Castle. I realize you may not be.
        Ms. Braunstein. But my reading of it is that it's not the
    originator, it's the creditor. So it's whoever--which would
    differentiate the originators could be brokers, but that this
    applies to creditors. So this is who makes the initial loan, as
    opposed to being able to sell off the entire loan, there would
    have to be a 5 percent retention. And as I said before, it is
    not clear to us either as to whether that would be a first
    position, second position, how exactly that would work. I don't
    think that kind of clarity is in there right now.
        Mr. Castle. Okay. The other thing that concerned me that I
    raised in the opening statement are the safe harbor provisions,
    which I think are quite narrow, perhaps too narrow. Should
    there be discretion to adjust the safe harbors to guarantee
    that credit remains available to creditworthy perspective home
    buyers, and do you have the necessary tools to expand or
    constrict the safe harbor?
        Ms. Braunstein. I think that's right, that there needs to
    be some discretion on that. We have provided some comments to
    the committee staff on this issue. There are some loans that
    would probably be safe prime loans, for instance, right now the
    way the safe harbor is written, an example is that the term
    would have to be 30 years. And we know that there are some
    people in the market who are getting 15-year loans that may be
    very safe, sound loans. That would not fall into that safe
    harbor right now, nor would for affordability's sake, some of
    the loan modifications that are being done, people are being
    taken to 40-year loans. Those would not be, even though they
    may be very affordable loans, safe loans. They would not fall
    into that safe harbor.
        So, again, I think there is a need to retain some
    discretion to look at these criteria. And of course we don't
    know what new products are going to come on the market. So I
    agree that there probably needs to be some discretion.
        Mr. Castle. In asking this next question, I'm not trying to
    scuttle this legislation, and I'd like to improve it and see it
    pass if possible, but I was wondering if you think that this
    legislation is necessary or are the new HOEPA rules sufficient
    to limit unfair predatory mortgage practices? Should we have
    the legislation or can you do without it?
        Ms. Braunstein. Well, one of the things that the
    legislation addresses are issues that we did not have the
    authority to address in HOEPA in regulations. For example, the
    legislation will increase remedies for consumers. It provides
    assignee liability, which is something that we are not able to
    do by regulation. So there definitely is a role for
    legislation.
        Mr. Castle. Okay. Mr. Antonakes, in your testimony, you
    mention that the Federal law prohibiting predatory lending
    should not interfere with the States' efforts. What in your
    view is the best way to balance the State efforts, which are
    ongoing, as I understand, a number of States have done things,
    others are in the process of doing things. But what we're
    trying to do on a Federal level so that we keep a good balance.
        Mr. Antonakes. Sure. Well, Congressman, I do believe it's
    important to have a Federal standard and a Federal predatory
    lending law I think is very important. I think again the key
    here is to ensure that whatever standards enacted by the
    Federal Government are not ceiling, allow States the
    flexibility locally to move beyond that standard if they so see
    fit to protect their individual consumers.
        Also, if there is a Federal law, you have to provide the
    ability for State regulators to enforce that Federal standard
    as well. I think that would be again the key issues from the
    State regulator perspective.
        Mr. Castle. In reading this legislation, do you feel that
    provision is there to afford the States the flexibility that
    they need?
        Mr. Antonakes. I think we may need a little bit more in
    terms of ensuring that we have a role in enforcement and
    rulemaking as well.
        Mr. Castle. Good. Thank you. I yield back, Mr. Chairman.
        Mr. Watt. The gentlelady from California is recognized for
    5 minutes.
        Ms. Waters. Thank you very much, Mr. Chairman. I thank our
    witnesses for being here today. I'm concerned about the bill's
    preemption provisions. The bill would potentially be read to
    preempt claims regarding an assignee's own illegal actions as
    well as the more common claims in which liability is related to
    the assignee's standing in the shoes of the originator or
    creditor.
        An example of such primary liability occurred in the First
    Alliance case, which I mentioned when this bill was marked-up
    in 2007. This case was brought by the attorney general of my
    home State of California, which has very strong laws in this
    regard. In this case, Lehman Brothers was an assignee but also
    actively participated in the illegal activity. The current
    preemption clause insulates assignees from liability for their
    own conduct if it is not under the rubric of fraud.
        I'm concerned about how the bill will affect the ability of
    States with strong consumer protection laws to protect
    borrowers. In your opinion, how does the bill's preemption
    provisions affect States like California, Ms. Braunstein?
        Ms. Braunstein. Well, my understanding is that the current
    bill as drafted, and Mr. Antonakes could probably address this
    better than I can, does preempt State laws. I will add that
    when we wrote our HOEPA rules, purposely our HOEPA rules do not
    preempt the States from going further and protecting consumers.
        Ms. Waters. Would you like to add anything?
        Mr. Antonakes. Congresswoman, I would agree with you that
    there are preemptive matters in this legislation that from the
    State perspective we would rather not see, because we do
    believe it would inhibit our ability to provide maximum
    protection for our consumers.
        Ms. Waters. Okay. Let me ask you, since I have a little bit
    more time, it appears that we do not eliminate all prepayment
    penalties in the bill. Is that your understanding?
        Ms. Braunstein. Yes. I think that's true. I think they're
    eliminated for mortgages that don't fall into the qualified
    mortgage bucket.
        Ms. Waters. I'm sorry. Would you say that again?
        Ms. Braunstein. They're eliminated for mortgages which do
    not fall into the safe harbor.
        Ms. Waters. Okay. And could you comment on the mortgage
    brokers and the yield spread premiums? What is your
    understanding about what happens in this bill? It appears that
    it is kind of business as usual, that there is no attempt to
    eliminate the kickbacks.
        Ms. Braunstein. My understanding of the bill is that there
    is an attempt to limit yield spread premiums in the sense that
    they cannot be given to originators for moving somebody to a
    higher priced loan in order to prevent the steering to higher
    priced mortgages.
        I would also add that yield spread premiums have been a
    very difficult issue for us. When we proposed HOEPA rules, we
    issued some proposed rule around that, and a lot of it dealt
    with disclosure and increasing transparency. We did consumer
    testing and found that consumers did not understand these
    concepts at all, that it was not going to be effective, so we
    dropped that idea. And I think the bill does have some
    disclosure elements to it that concern us because of that. We
    are currently looking at them, because we're rewriting closed-
    end rules and we are planning to address yield spread premiums
    in upcoming rules, and we are looking at things other than
    disclosure in order to address them.
        Ms. Waters. Thank you. And I would like very much to see
    your original attempt at addressing the issue. Do you have that
    in writing?
        Ms. Braunstein. Yes. We have a report from the testing
    company. It's up on our Web site. We can forward it to you.
        Ms. Waters. Would you make that available to my office?
        Ms. Braunstein. Yes.
        Ms. Waters. All right. Thank you, Mr. Chairman. I yield
    back the balance of my time.
        Mr. Watt. I thank the gentlelady. The gentlelady, Mrs.
    Biggert, is recognized for 5 minutes.
        Mrs. Biggert. Thank you, Mr. Chairman. Ms. Braunstein, in
    your testimony you mentioned your work under TILA and on
    mortgage disclosure forms and also HUD's work on RESPA. Do you
    think that HUD's new RESPA rule should be suspended until the
    Fed and HUD can work together to develop a single form that
    creditors could use to satisfy the requirements of both TILA
    and RESPA? As you stated in your testimony?
        Ms. Braunstein. Back in the 1990's, we made a
    recommendation that there should be a single form. We still do
    believe that. We have made some attempts to reach out to HUD to
    talk to them. We are still working on that and we hope that
    there is a way that we can work together.
        Mrs. Biggert. Do you think that's possible if they go ahead
    with their form and then you haven't completed--
        Ms. Braunstein. I don't think anything is impossible and I
    am still hopeful.
        Mrs. Biggert. Okay. Then, the bill that we're considering
    today has a provision that was not part of the Congress'
    mortgage reform bill in the past, in requiring the mortgage
    lenders to retain the percentage of credit risk for all non-
    qualified mortgages. And it also prevents institutes from
    hedging that retained risk. Does the Fed believe that the
    limitation on hedging is wise?
        Ms. Braunstein. We think that the limitation on hedging,
    for one thing, as it's currently written, is a bit unclear to
    us as to exactly how that would work. We know that hedging
    portfolios is something that is done to promote prudential,
    safe and sound lending within financial institutions. We think
    that provision would need to be looked at more closely.
        Mrs. Biggert. Do you believe that such a provision against
    hedging would be enforceable?
        Ms. Braunstein. At this point, I am not sure how that would
    be done but, you know, we would have to explore that.
        Mrs. Biggert. Well, it seems like the authors of the bill
    believe that hedging eliminates incentives to prudently
    underwrite loans. Do you agree with that?
        Ms. Braunstein. Well, it is caught up in the whole risk
    retention provisions and those are provisions that we need to
    look at very closely. I will say that in the past, there were
    financial institutions that were retaining even 100 percent of
    some loans on portfolio, even though they turned out not to be
    very safe and sound loans. So, I think that needs to be looked
    at, too, in terms of how effective it might be.
        Mrs. Biggert. How would the accounting for this risk
    retention work?
        Ms. Braunstein. Well, in depositories, if there is risk
    retention, there would have to be some capital held for that. I
    am not sure how that accounting would work in non-depository
    institutions.
        Mrs. Biggert. Okay. Well, then we don't know what the
    consequences for bank capital requirements would be.
        Ms. Braunstein. Not until there's more specificity on how
    this provision will work. It is not clear whether the 5 percent
    is in a first position.
        Mrs. Biggert. Okay. And who would decide that?
        Ms. Braunstein. Well, it depends how the statute ends up
    being written, whether that decision would be left to the rule
    writers or whether that will be further defined in the statute
    itself.
        Mrs. Biggert. Okay. Thank you, I yield back.
        Mr. Watt. The gentlelady from New York, Ms. Velazquez, is
    recognized for 5 minutes.
        Ms. Velazquez. Thank you, Mr. Chairman.
        Ms. Braunstein and Mr. Antonakes, there is a sector of the
    residential mortgage market that has been overlooked and that
    is multi-family housing. Cases of multi-family mortgages
    defaulting are occurring all over the country. New York City,
    Phoenix, Washington, D.C., San Francisco, and Philadelphia are
    just some of the places where renters are feeling the effect of
    this crisis. If responsible lending practices driven by the
    ability of banks to shed the risk exposure through the sale of
    inflated loans to Wall Street triggered this debacle, what in
    the writing standards should be applied to these multi-family
    mortgages to ensure that future loans do no carry the same
    reckless risks?
        Ms. Braunstein. Well, multi-family properties are obviously
    different, a little bit different in terms of underwriting. I
    would agree that these are issues, important issues, and I know
    that in our office, through our community affairs program, we
    have been having conversations with providers of multi-family
    housing to talk about these kinds of issues and try to get a
    better handle on what the risks are, what the issues are, and
    what can be done going forward.
        Ms. Velazquez. So, are there any contingency plans in place
    in cases where these loans are going to default or foreclosure?
        Ms. Braunstein. I am not aware of any.
        Ms. Velazquez. So, are you all confident that there is no
    threat to those loans?
        Ms. Braunstein. No, I'm not confident about that.
        Ms. Velazquez. In New York City alone, we have identified
    over 80,000 units of affordable housing that have been
    purchased at inflated prices by speculative real estate
    investors. These units are occupied by working families who do
    not have the resources to find adequate housing if displaced.
    So, do you think that you're going to start assessing this
    potential risk? This is a looming crisis.
        Ms. Braunstein. As I said, we are having conversations with
    a number of experts in that field to try to get a better handle
    on what's going on in the multi-family housing markets.
        Ms. Velazquez. Okay. Do you have anything to add to that,
    Mr. Antonakes?
        Mr. Antonakes. No. I would agree with my colleague. It is a
    serious problem that we're concerned with and we're looking at
    and working on, at least in the Commonwealth, with our housing
    agencies as well as we try to determine solutions for what is
    going to become and is becoming a very difficult problem.
        Ms. Velazquez. So, let me ask you, often overlooked are the
    tenants who are the real victims here. H.R. 1728 contains
    tenants' protections. Are there ways we can build on those to
    ensure that residents in multi-family buildings are also
    protected?
        Ms. Braunstein. I think that is something for the committee
    to decide, but I do think that those provisions that are in
    H.R. 1728 that deal with tenants are very important provisions
    and that we have been hearing for quite some time stories, even
    in single family homes, where tenants are unaware that their
    landlords are facing foreclosure. They've been paying their
    rent on time and they find themselves being evicted for
    basically no reason, no fault of their own and that is a very
    serious issue that needs to be addressed.
        Ms. Velazquez. Okay, let me ask you another question. Do
    you think that multi-family mortgages should be part of TILA?
        Ms. Braunstein. I think that's a question for Congress to
    decide.
        Ms. Velazquez. But you don't have any opinion?
        Ms. Braunstein. No.
        Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
        Mr. Watt. Mr. Posey is recognized for 5 minutes.
        Mr. Posey. Thank you, Mr. Chairman. Same question for both
    of you. Shrinking the safe harbor is certain to increase
    mortgage originators' litigation risk and it would appear also
    to severely limit the origination of any loan other than a 30-
    year fixed-rate mortgage. Do you think that this bill, if
    enacted, would limit consumer choice? And do you think it would
    limit the origination of any loan other than a pure vanilla 30-
    year mortgage?
        Ms. Braunstein. I think that's one of the things we've been
    looking at and I do think that the bill, the way the structure
    is, it seems like it's somewhat intended to drive the market
    into 30-year fixed loans, not necessarily fixed, it doesn't
    specify fixed, but 30-year loans. That could have the
    consequence of very much limiting the kinds of products that
    become available when the markets reset. But some of that is
    very difficult to predict, because, as I said in my opening
    testimony, the markets are not in a normal state right now and
    we're not sure how they will normalize in the future.
        Mr. Antonakes. Well, Congressman, we're generally in
    support of the concept of a safe harbor, but I think it has to
    be very carefully defined. I think the way it's written, we can
    see in some aspects, that it's too strict. Certainly 15-year
    rate fixed mortgages, 20-year fixed mortgages that the
    applicant demonstrates an ability to repay could receive
    consideration. There's also a traditional ARM products in
    which, at the fully indexed rate, the applicant the can
    demonstrate the ability to repay that could be considered.
        By the same token, we have concern that it could be too
    broad. And that given the interest rate caps that exist right
    now, some subprime loans conceivably could get the protection
    of the safe harbor. So, there could be an impact on the
    availability of credit. I think it's hard, as my colleague
    indicated, it's hard to predict. We're generally supportive of
    the safe harbor, but I think it has to be very carefully
    crafted.
        Mr. Posey. Follow up, Mr. Chairman. The bill contains some
    pretty rigid criteria for qualifying people for mortgages, the
    ability to pay, employment. Right now, just as an analogy,
    there are 10 ways people can buy a home, when you reduce it
    down to 1 way, don't you this will hurt the housing recovery
    more than it would help it? Just by limiting the resources
    people have to stay in their homes or refinance their homes, or
    to buy a home?
        Mr. Antonakes. Well, I think a lot of the bad underwriting
    at this, you know, that is intended to be cured here, doesn't
    exist right now, so again, I don't think we have a normal
    market and I think there is limited means of refinancing a home
    or purchasing a home at this point in time, right now. Again, I
    think, you know, there should be restrictions on some of the
    underwriting difficulties that we've experienced over the past
    several years. This is a means of doing it but it's going to
    have to be carefully crafted.
        Mr. Posey. Now, are you both confident that this is not
    over-reaching?
        Ms. Braunstein. I don't know that we can answer that. As I
    said, it's hard to judge in today's market. There isn't much
    available now--
        Mr. Posey. Your gut reaction. You're the experts and you're
    the ones that we rely on for guidance so if you don't have a
    clue, then we're going to feel awfully bad doing something if
    you think it might be over-reaching, if you're not sure whether
    it is or not.
        Ms. Braunstein. Well, what I can say is that when we
    crafted the HOEPA rules, we did not feel that what was
    contained in those was over-reaching. We felt that we were
    addressing the most egregious practices that we saw that caused
    a lot of the problems in the marketplace. And that those kinds
    of practices should not be allowed to come back into being even
    when the markets normalize. So, we do think that it's very
    consistent to have safe and sound lending.
        There needs to be clarity for the industry as to what the
    rules are so that the industry can function. That's very
    important and that there needs to be a balance so that there's
    still can be credit available and people will have some
    options. But again, they need very strong consumer protections.
    And that is a balance that is sometimes difficult to achieve,
    but I think we need to strive for that.
        And that's one of the reasons that I've asked for
    additional flexibilities in the rules, in the legislation, so
    that when the market does re-emerge there may be new products
    that we're not even thinking of today that will need to be
    addressed.
        Mr. Posey. You say, when the market re-emerges. Do you have
    any idea what decade that might be?
        Ms. Braunstein. I wish I could say that.
        Mr. Posey. Thank you, Mr. Chairman.
        Mr. Watt. The gentleman's time has expired. The gentleman
    from Kansas, Mr. Moore, is recognized for 5 minutes.
        Mr. Moore of Kansas. Thank you, Mr. Chairman. I have
    concern with the product known as Adjustable Rate Mortgages or
    ARMs, which usually start with a lower monthly payment, but
    which may reset to a much higher monthly payment that
    homeowners can't afford. Instead of the typical 30-year fixed-
    rate mortgage that has the same monthly payment and is easier
    to understand, it seems that these different mortgage products
    were sold to individuals who, in many cases, did not understand
    what they were signing up for.
        I want to ask the witnesses, what role do you think ARMs
    have played in the current housing crisis?
        Ms. Braunstein. Well, I think that ARMs, in particular the
    hybrid ARMs and the option ARMs, were very significant players
    in the current crisis and created a lot of problems. The ones
    that had the 2-year and the 3-year, the 2/28's, the 3/27's, as
    well as the option ARMs that ended up with negative
    amortization. Those were a real problem.
        Mr. Watt. Do the witnesses have any comments?
        Mr. Antonakes. I would agree with that, but I would also
    say that I think the traditional ARM products that have been
    around for a long time, the 5 and 1, 7 and 1, ARM products that
    had limitations on how much the interest rate could swing were
    not the primary problem here. It was the hybrid products, it
    was the newer, interest-only products that were the driver.
        Ms. Braunstein. I would agree.
        Mr. Watt. All right.
        Mr. Moore of Kansas. Do you believe H.R. 1728 adequately
    addresses these concerns regarding the role ARMs and other
    complicated mortgage products played in creating this financial
    crisis? Does this proposed bill, does this proposed law, is it
    going to address the problem and solve the problem in your
    estimation?
        Ms. Braunstein. I know we submitted some technical comments
    along this line. I think there was some concern that the former
    iteration of this bill actually banned negative amortization as
    one of the provisions for the safe harbor. And that is no
    longer present in the safe harbor. I think that was a concern
    of ours and there were some other technical corrections that we
    did submit through staff.
        Mr. Moore of Kansas. Thank you. Any comment sir?
        Mr. Antonakes. Well, I think the key provisions here are
    the safe harbor and the credit risk retention. And I think,
    again, we're generally supportive of both concepts, the safe
    harbor and the credit risk retention. The issue that has been
    discussed today at length has been the concept of skin in the
    game and certainly we can see that there should be, you retain
    greater risk for making higher risk loans. I think the only
    concern would be, was there were many companies, mortgage
    companies and banks that had considerable skin in the game,
    consider risk but failed anyway. It didn't prevent them, from
    in all cases, making bad underwriting decisions. So, I think
    that's going to have to be reconciled as well, as you continue
    to work through this process.
        Mr. Moore of Kansas. Thank you. This week, Congress
    received a quarterly report from the Special Inspector General
    for TARP. In the report, the SIG TARP states that one of the
    most common features of traditional mortgage fraud is that
    applicants falsely inflate their income and support those lies
    with fraudulent documentation and employment verification. To
    address this potential fraud, SIG TARP recommends Treasury
    require that verifiable third party information be obtained to
    confirm an applicant's income before any modification payments
    are made. Do you agree this is an important element of this?
    Should we pursue that?
        Ms. Braunstein. Absolutely. In fact, our HOEPA rules ban
    stated income loans. For high-cost loans, we require
    verification of income and assets and I think that is a very
    important aspect going forward.
        Mr. Moore of Kansas. Sir?
        Mr. Antonakes. I agree, absolutely. We have issued hundreds
    of enforcement actions and the majority of the cease and desist
    orders and the referrals to law enforcement have involved
    fraud, unstated income loans. It's very easy to do and we
    routinely find it during our examination process. What is
    concerning to us is, it seemingly permeated every level of the
    origination through securitization process.
        Mr. Moore of Kansas. Thank you. Mr. Chairman, I'll just
    finish by stating that next Monday, Congressman Cleaver and I
    will be hosting an event in Kansas City with the State
    Attorneys General from Kansas, Missouri, and an FBI agent,
    encouraging our constituents to be vigilant and report any
    suspicious or illegal actions by fraudulent companies. I would
    encourage other Members of Congress to do the same and I yield
    back my time, sir.
        Mr. Watt. The gentleman from Minnesota, Mr. Paulsen, is
    recognized for 5 minutes.
        Mr. Paulsen. Thank you, Mr. Chairman. I have some
    additional questions regarding the skin in the game provisions
    of the bill, in particular, Mr. Antonakes, if I could ask you,
    as a State regulator, are you at all concerned that the bill's
    provision requiring lenders to retain that 5 percent of the
    credit risk for non-qualified mortgages will put smaller, non-
    depository financial institutions completely out of business?
    Does it hamper them additionally? I mean, do you see this
    provision, in essence, leading to decreased competition,
    greater consolidation over time of larger depository
    institutions?
        Mr. Antonakes. Congressman, that's certainly possible. The
    alternative would be for these lenders, if they didn't seek to
    have a 5 percent holdback to make traditional mortgage loans
    that fit within the safe harbor. So, that opportunity for small
    businesses would still be available, to make those traditional
    loans if they didn't want to maintain this increased risk or
    retention of the credit. You know, we have, in Massachusetts, a
    substantially increased net worth and bonding requirements for
    our non-bank lenders and brokers over the course of the last
    several years. So, there are other efforts as well, to ensure
    that, you know, adequate resources are on hand, as well as
    would be complimentary to that effort.
        Mr. Paulsen. And then, Ms. Braunstein, if I could ask you,
    if the lenders that the Federal Reserve regulates were required
    to retain also that 5 percent threshold of the risk of the non-
    qualified mortgages they originate, how much additional capital
    are they going to have to have on hand or keep in reserve? I
    mean, how is that going to affect the safety, the security and
    the soundness which is really, I think, primarily the focus
    we're all interested in having in the banking system, given the
    trouble we've had.
        Ms. Braunstein. That is one of the things that we're
    looking at and is of some concern to us in terms of moving
    forward with the 5 percent retention. I don't have specific
    answers for you because there's not enough clarity or detail
    yet around that 5 percent and what position it would be in. We
    do know that for depositories, if they're retaining 5 percent,
    there's going to have to be some capital held for that, but the
    details of that, we would need more information about how
    exactly that 5 percent would work, what position it would be in
    how that would work before we could be specific about capital.
        Mr. Paulsen. And also, do you anticipate or can you foresee
    then, would they, and these banks have to increase,
    essentially, interest rates to account for the additional risk
    that they're going to have to carry, potentially, having those
    capital requirements?
        Ms. Braunstein. Well, it is speculation going forward, as I
    have said before, I think that this bill would have the outcome
    of moving a lot of people into that safe harbor to avoid this,
    and for those who choose to still work in the space where the
    loans were not in the safe harbor, they would price them
    accordingly, so most likely they would be very high-cost loans.
        Mr. Antonakes. Well, I'll just ask, in a little different
    take, but you know, the bill, H.R. 1728, dramatically expands
    the reach of HOEPA, however, because of the nature of HOEPA
    restrictions, my understanding is that few such loans are
    actually ever made, you know, is a better approach, one that's
    taken by the Federal Reserve, you know, in recent HOEPA rules
    in general. Is it better to offer great, in essence,
    protections to loans outside of HOEPA instead, rather than
    expanding HOEPA itself to cover more loans?
        Ms. Braunstein. When you're talking about the original
    HOEPA carve out, that is one of the reasons why we said that we
    think this will push people out of that space because, in fact,
    that is what happened in HOEPA. When we tightened those
    triggers up in 2000, we found that there were very few loans
    being made in that space and we started counting them. I know
    there was 1 year where there were just millions of mortgage
    loans and there were approximately 30,000 HOEPA loans in the
    whole country. So, there is not much going on. And now of
    course, there's not much going on anywhere but there was not
    much going on in that space. And that could happen again with
    loans that are outside this safe harbor.
        Mr. Paulsen. Okay. Thank you, Mr. Chairman. I yield back.
        Mr. Watt. The gentleman from California, Mr. Baca.
        Mr. Baca. Thank you very much, Mr. Chairman. Mr. Antonakes,
    in your testimony, you urge Congress to eliminate the Federal
    preemption of State consumer protection laws from the State
    because, as you put it, the States have and continue to be the
    front line guardian of consumer protection. That isn't always
    the case. But according to recent 2009 CRL reports, over 1.5
    million homes have already been lost through subprime
    foreclosures and another 2 million families with subprime loans
    are currently delinquent and are in serious dangers of losing
    their home. And in my area, in the LN Empire, we have the third
    largest foreclosure in the United States. I don't think these 2
    million families feel very protected. They don't feel very
    protected right now. How can you justify the continuance of the
    system that has led us to where we are now?
        Mr. Antonakes. Well, Congressman, I would say, that the
    preemption of the OCC and the OTS blunted State efforts. We had
    predatory lending laws in certain States, North Carolina,
    dating back to 1999, that were gutted by Federal preemption. As
    a result of which, only certain lenders had to be compliant
    with those laws. And that the laws, even during the rule making
    process, assignee liability provisions that would have
    prevented many of the things we deal with today, were gutted,
    as well. We have done, I think, as well as we could with one
    hand tied behind our back over the last several years. I guess
    our point here today is, let's work together. Let's not
    eliminate State--
        Mr. Baca. What are you going to do to correct it? What are
    you going to do for those people who have lost those homes
    right now? What kind of protection do we have as safeguards so
    we have in the future that we don't have the same things
    occurring right now, because we have these predators every day
    calling, we have these marketers calling individuals that are
    very gullible, very naive, and they're preying right into the
    subprime bodies or people that says, hey, you know what, I
    guarantee you, you can buy a home and get into a home.
        Mr. Antonakes. I believe that, you know, that there is a
    legitimate role today for the Federal Government to pass a
    Federal law to enhance protections. States also have the
    opportunity to pass laws, as well. We have passed laws in
    Massachusetts dating back several years, most recently in 2007,
    which significantly increased protections for consumers facing
    foreclosure problems today, as well as with the areas in the
    future. States have an active role to play. Certainly some play
    it more actively than others. There's no denying that, but
    there is a real role today to work together, the States and the
    government, the Federal Government, not to be opposing each
    other, but to be working collaboratively to provide
    protections, meaningful protections for those people facing
    trouble today, right now, as well as provide protections in the
    future.
        Mr. Baca. Yes, but how do you tell someone who is losing
    their home, I mean, you have to look someone in the face who
    says, you know what, I really don't have that kind of
    protection, I'm losing my home, what kind of guarantee do I
    have, I really don't trust the system anymore? And that's
    basically what's happening with a lot of the people who got
    into this kind of a situation. How do we tell them that they
    are about to become homeless?
        Mr. Antonakes. Again, in Massachusetts, we've held forums
    throughout the State, foreclosure prevention forums. We have
    taken, similar to what the bill is ``proprieted'' today. We
    have granted several million dollars to nonprofit entities to
    establish regional foreclosure prevention centers across the
    Commonwealth. There are meaningful ways to help people in
    trouble right now. I'm not saying that there's going to be a
    solution for everyone. Unfortunately, there can't be. But, we
    cannot give up. We can provide assistance and hope for these
    folks, the people on the ground. The States are well-positioned
    to do that. And I think what we're asking today is to allow us
    to continue to do that, enhance our ability to do that and
    don't tie us up as we try to do that now and in the future.
        Mr. Baca. Well, we'll only tie you up because we need
    accountability and oversight regulations. But let me ask either
    one of you, or both of you, since minority groups were unjustly
    targeted for subprime lending, they are now suffering
    disproportionately from foreclosures and mortgage delinquency
    rates. Do you think H.R. 1728 will prevent this racial
    targeting of subprime lending?
        Ms. Braunstein. I am not aware of any provisions that
    particularly address the issue that you raise other than the
    fact that it will help everybody in the mortgage market and
    that would include minorities because there are some provisions
    in there about steering and keeping people away from high-cost
    loans and from loans that could potentially be abusive and
    predatory.
        Mr. Baca. What can be done to improve this area or do you
    have any suggestions, especially as we look at individuals who
    are targeted within our communities. And people know which of
    the individuals to target, which ones are naive, which ones
    don't have the knowledge and there's certain individuals out
    there. Do you have any suggestions?
        Ms. Braunstein. Well, one thing that we're trying to do is,
    we're working very hard to increase efforts on financial
    education for people. In addition to substantive protections
    and to make people aware, especially today, some of the people
    who are facing foreclosure, the people you talked about who are
    feeling somewhat hopeless at this point, have an even bigger
    problem facing them and that is the mortgage foreclosure scams
    that are operating. And we have been very visible in trying to
    get the word out to people as to how to avoid getting caught up
    in these foreclosure scams.
        Mr. Baca. What is one--
        Mr. Watt. The gentleman's time has expired. And we're
    operating a very tight 5 minutes here, as I announced earlier,
    before you arrived. The gentleman, the ranking member of the
    full committee.
        Mr. Bachus. Thank you.
        When we were growing up, I think our fathers and mothers
    always told us if you can't afford it, don't buy it. And I
    think if we would all remember if you can't afford a house,
    don't buy it, we would all be better off. And part of this, and
    if you're a bank, don't loan to people who can't pay it back.
    But what we're getting into here, all of this, and I think
    there is a need for legislation, but you're substituting the
    government's for individual's decisions on whether they can
    afford it or for the bank's decision on whether and how to loan
    it. And I think when you do that, where do you stop? It's a
    real problem.
        Mr. Antonakes, let me commend you and your organization,
    because there already have been some very important steps taken
    to prevent these subprime lending debacle that we've witnessed
    over the past few years and this national registration and
    licensing, which you all have proposed. The Congress passed
    that, and as you said, 20 States have instituted it; and you
    said 49 States are well on the way of betting it. What is the
    one State that isn't?
        Mr. Antonakes. We don't have any information at this time,
    and where the State of Minnesota is with regard to implementing
    legislation, so we will continue to communicate with them.
        Mr. Bachus. And that was really a bipartisan effort of this
    Congress to institute, and that's not meant to substitute our
    opinion for home buyers or for banks. But it will go a long
    time. Had that been in place? A good percentage--you might want
    to comment on that--of these loans wouldn't have been made. But
    what is your view of how that's going to help?
        Mr. Antonakes. I think it's going to help significantly,
    Congressman, and we greatly appreciate your leadership on this
    issue. The Safe Act and the Nationwide Mortgage Licensing
    System is a complete database that attracts everyone involved
    in the mortgage origination of the lending process. The key
    here is every individual from the originator to the brokers to
    the lender has a unique identifying number which follows them
    throughout their careers, even if they move from State to State
    or from company to company. It also provides a complete
    database of a disciplinary action as well.
        So if a company gets into trouble in one State, they can't
    simply change their name and move to another jurisdiction as
    well. So that information follows them, also provides access to
    the States for very complete FBI criminal background check
    information as well. It is truly a very robust system, and in
    addition to being this uniform portal for licensing, in many
    ways it's also the foundation for coordinated supervision among
    the States.
        And now with our Federal colleagues as well with the
    registration with loan originators that work for banks and for
    credit unions, you know, I've been in this business nearly 20
    years and to me it is truly the most extraordinary and
    significant developed in the area of mortgage supervision
    during that point in time.
        Mr. Bachus. All right, and I don't think that in the press
    or the media that you have been given the credit in your
    organization for what you've done in this regard.
        Mr. Antonakes. Thank you, Congressman.
        Mr. Bachus. I very much appreciate it.
        Let me ask you this, Ms. Braunstein. Does the Federal
    legislation or does the Fed--I'm sorry--believe that the
    limitation on hedging is wise?
        Ms. Braunstein. Does it? I'm sorry?
        Mr. Bachus. The bill in just reading it that requires
    mortgage lenders to retain a percentage of credit risk for all
    non-qualifying mortgages, it also prevents institutions from
    hedging that retained risk. And do you believe the limitation
    on hedges is wise? The authors of the bill have stated that
    they believed hedging eliminates incentives to prudently
    underwriting loans. I mean, do you agree?
        Ms. Braunstein. Congressman, that entire section of risk
    retention is something that we have sent up some substantive
    comments and technical comments on. And we would like to get
    more detail. The current bill, the way it is worded, does not
    give a lot of clarity on that, so we are a bit concerned about
    the hedging part of it in terms of how exactly that would work.
    It's not clear to us, and we know that hedging in general with
    portfolios is something that is commonly accepted as a safe and
    sound way to deal with risk in an institution. So the
    prohibition, until we get more clarity on that, it's hard to
    comment specifically.
        Mr. Bachus. Or how you would enforce it?
        Mr. Watt. The gentleman's time has expired.
        The gentleman from North Carolina, Mr. Miller, the co-
    sponsor of the bill, is recognized for 5 minutes.
        Mr. Miller of North Carolina. Thank you, Mr. Chairman.
        Since this is a 5-hour hearing, I hadn't really intended to
    ask questions of this panel, but I do have a question based on
    the earlier questions. Please try to hide your disappointment.
    The question earlier was whether this was the right time for
    this legislation, that credit is now constricted and that this
    legislation might constrict it further. So whatever the merits
    of the legislation, this is not the right time to do it.
        A couple years ago, I recall industry argued that
    homeownership is going up and whatever our drawbacks may be for
    some subprime lending while homeownership is going up, this is
    not the time to restrict credit and restrict homeownership. Do
    you recall a time that the industry said was the right time to
    adopt consumer protection legislation? Ms. Braunstein?
        Ms. Braunstein. No. I don't know that I can say. I do think
    that this is definitely the right time to add consumer
    protections to the mortgage market considering what we saw in
    the past. We do believe that. We believe that very strongly,
    which is why we issued the HOEPA rules that we did.
        Mr. Miller of North Carolina. Mr. Antonakes, do you
    remember any time that they thought was the right time? Or do
    you think that the complaints about timing or not really their
    objections, they will oppose regulation until the end of days?
        Mr. Antonakes. I believe that's generally true,
    Congressman. I believe the bill is overdue and recognize the
    reference and those of many others to pass it previously. The
    key I think is, you know, to recognize that the market can
    change and to the extent some flexibility can be provided in
    the rulemaking process will, I think, continue to ensure. It's
    as robust and protective as it needs to be.
        Mr. Miller of North Carolina. I yield back my time.
        Mr. Watt. The gentleman from California, Mr. Miller, is
    recognized for 5 minutes.
        Mr. Miller of California. Thank you, Mr. Watt.
        I appreciate the question regarding right time. I think had
    we defined subprime versus predatory 6 or 7 years ago, we might
    not be in the severe housing downturn we are in today, but when
    you have a very viable marketplace as the subprime and you
    allow predators out there to make loans to individuals who
    don't verify income. They don't even verify if the individual
    has a job, and they make that individual a loan knowing that
    when the trigger kicks in, they can't make the payment, that's
    a predatory loan. But the subprime market places a very, very
    viable marketplace. And I think when you do it, we kind of
    strengthen it. But I'm glad we're addressing the predatory
    concepts at least in this bill. But there's a bill's definition
    of qualified mortgage as is defined, limit the organization
    other than the fixed-rate 30-year loan; and, does the provision
    of the bill limit consumer choices?
        Ms. Braunstein. Well, I do think the way the safe harbor is
    designed that it will drive a lot of the market into that safe
    harbor. That is not necessarily always a bad thing, because a
    lot of the practices that we saw that were egregious and that
    caused a lot of the problems would not obviously fit into that.
        Mr. Miller of California. But there are some practices that
    might not fall into qualified mortgage or safe harbor that
    might not necessarily be egregious.
        Ms. Braunstein. Right, and that was the next thing I was
    going to say. But there are some things that it's important not
    to define such that you are eliminating the ability to get
    loans that otherwise would be safe and sound, and good loans
    for consumers, which is why we have recommended that there be
    some flexibility given to the rule writers in terms of being
    able to make adjustments to that safe harbor.
        And in particular that is going to be important when the
    mortgage markets reemerge and redevelop themselves. We don't
    know what kinds of products will be developed in the future and
    we may need to adjust it either way. It's not just loosening
    it, but there may be things that aren't contained now that
    would need to be added to it to protect consumers.
        Mr. Miller of California. Are there any provisions in the
    bill that a loan that's made that doesn't qualify as a safe
    harbor, but yet was a good qualified loan, does any change in
    law occur within the bill that would put you in a situation
    different than you're in today as far as putting a lender at
    risk where he might not currently be today?
        Ms. Braunstein. I'm not sure that I totally understand your
    question.
        Mr. Miller of California. Well, let's say if you made a
    loan today that was very specific and defined that did not
    necessarily qualify for a safe harbor but was an up-front,
    viable loan based on mark of requirements at that point in
    time, is there anything in this bill that would put a lender in
    a more severe situation as far as litigation than he would
    currently face to day under current law?
        Ms. Braunstein. Well, there would be provisions they would
    have to comply with such as the risk retention. An example,
    that would be somebody making a 15-year mortgage today which
    might be a very good loan. It would not fit into the safe
    harbor as it is currently defined in the bill.
        Mr. Miller of California. But are they in a worse situation
    under the new laws than they would?
        Ms. Braunstein. It would mean they would be subject to
    potential liabilities. They would probably have to up-price
    that loan in order to cover potential liabilities.
        Mr. Miller of California. So they could face additional
    liability that they don't currently face?
        Ms. Braunstein. Correct.
        Mr. Miller of California. That's something I think we need
    to be very cautious of, because market conditions might require
    a lender to make a certain type of a loan that might be very
    popular amongst consumers that does not qualify for safe
    harbor, yet they're putting it in a situation where they could
    be sued very easily, whether they might not be.
        I hope we would address that before we mark the bill up to
    make sure we don't have some unintended consequence that might
    apply against a good lender for making a loan that might be a
    good loan but not qualify for safe harbor. How do you reconcile
    your rule and the HBCC considering your real consumers
    regardless of who orders the appraisal and the HBCC does not?
        Ms. Braunstein. That I do not. I am not familiar with what
    you are--I know that there are appraisal restrictions that we
    put out in our rule in terms of not coercing appraisals. And my
    understanding was that the rule was very similar, that the
    legislation that's on the table is very similar to what our
    rule was.
        Mr. Miller of California. But we're not sure?
        Ms. Braunstein. I thought it was the same. You are pointing
    out something that I am not aware that there's a difference.
        Mr. Miller of California. Can you check into that for me?
        Ms. Braunstein. I will check into that, yes.
        Mr. Miller of California. I'm concerned about that, if
    there is a problem there I think we need to address. Maybe you
    could get back to me on that.
        Ms. Braunstein. Absolutely.
        Mr. Miller of California. Okay. Mr. Watt, I am glad we are
    finally addressing the difference between subprime and
    predatory, but I hope we are not being overly aggressive and
    not considering future market conditions. I would hate to have
    a viable loan made in the future by a lender that might be very
    popular among consumers that puts a lender in a very bad
    situation. We might be sued for doing something right.
        Mr. Watt. The gentleman's time has expired. We will
    reiterate what I said at the outset before the gentleman
    arrived that this is an issue we are aggressively trying to
    work on and would welcome and value input between now and
    Tuesday.
        Mr. Miller of California. I just wanted to bring up my
    concern. Thank you.
        Mr. Watt. Mr. Green from Texas is recognized for 5 minutes.
        Mr. Green. Thank you, Mr. Chairman, and I thank the
    witnesses. And, again, welcome to the committee.
        A series of questions if you will and I would like each of
    you to respond and I shall move as quickly as possible, because
    I have a number of questions. Was YSP, a/k/a yield spread
    premium, a real problem for us prior to--well, maybe it
    continues to be a problem at this time, because we haven't
    completely dealt with it. Do you agree that it was and is a
    problem?
        Ms. Braunstein. Yield spread premiums definitely were a
    problem, in particular because they were used to steer people
    into higher cost loans in order for the originator to make
    greater compensation. Now that there's not much going on in the
    market right this minute, there may not be the same kind of
    problem, but they need to be dealt with for the market to
    reemerge.
        Mr. Green. Do you agree, sir?
        Mr. Antonakes. Yes, I do.
        Mr. Green. 3/27s, 2/28s; were they a problem?
        Ms. Braunstein. Absolutely.
        Mr. Antonakes. Yes.
        Mr. Green. Prepayment penalties that coincided with the
    teaser rates; were they a problem?
        Ms. Braunstein. Yes.
        Mr. Green. Tenants with an excellent payment history who
    are being evicted because property was being foreclosed upon;
    was this a problem?
        Ms. Braunstein. Yes, it is a problem. Did you use past-
    tense?
        Mr. Green. Is a problem?
        Ms. Braunstein. Yes.
        Mr. Green. Does this bill seek to address what we clearly
    have as problems? Does it seek to address them?
        Ms. Braunstein. Yes.
        Mr. Green. And more specifically with reference to the
    yield spread premium, do you agree that it is difficult to
    explain the yield spread premium to the average person who has
    not had an opportunity to study some of these issues as we
    have?
        Ms. Braunstein. It is extremely difficult. As I've said,
    we've tried that with consumer testing. We tried it several
    times and we were not successful. Disclosure was not
    successful.
        Mr. Green. For edification purposes so that people can
    understand, the yield spread premium allows an originator to
    raise the interest rate that the person will receive in the
    loan qualifies for 5 percent. Give the person a loan at say, 8
    percent, and not tell the person that he or she has been placed
    into a higher interest rate than he or she qualified for. Is
    this correct?
        Ms. Braunstein. It's similar. It's more something that's
    supposed to be added to allow people to finance the cost of
    their loan through their interest rate, but it also is used--
    it's compensation for the broker--and it is also used to put
    people with higher prices.
        Mr. Green. I understand. Hold it just a moment if you
    would, please, ma'am. We'll get to the broker. That's called a
    kickback. But let's talk right now about how it functions. It
    functions by virtue of the interest rates moving a person into
    a higher interest rate than he or she qualified for. Is this
    true?
        Ms. Braunstein. Correct, to cover cost of the loans.
        Mr. Green. Yes, okay. Well, for whatever reasons there were
    many people who were placed into loans that were higher than
    what they qualified for. Is this true?
        Ms. Braunstein. Yes, that's our understanding.
        Mr. Green. Yes. Empirical evidence supports it and they
    were placing these higher loans. And as a result many people
    found themselves having to pay mortgages that they could not
    afford that they may have been able to afford. For example,
    some people went into subprime who were really qualified for
    prime. Is this true?
        Ms. Braunstein. Correct.
        Mr. Green. Okay. Now, we can get to the second phase of
    this. The person who did this, the person who pushed into this
    high interest rate, this person received a lawful kickback. We
    are not going to demean the kickback by saying it was a crime,
    but we will say it was what it was. It was a kickback, true?
        Ms. Braunstein. It was compensation, yes.
        Mr. Green. Would you not call by definition this act a
    kickback?
        Ms. Braunstein. Yes, I suppose you would.
        Mr. Green. Okay, it was a kickback. You know, sometimes you
    have to call a thing what it is and this is one of those days.
    It was a kickback and it was a lawful kickback, but it was
    still invidious. It was harmful. It was hurtful. This bill
    attempts to deal with that type of invidious behavior. Do you
    agree?
        Ms. Braunstein. Yes.
        Mr. Green. And finally my comment because my time is
    running out, my comment is this: Sometimes when all is said and
    done, more is said than done. We don't want to allow that to
    happen at a time when there is great need.
        Thank you, Mr. Chairman. I yield back.
        Mr. Watt. Ms. Bachmann is recognized for 5 minutes.
        Mrs. Bachmann. Thank you, Mr. Chairman, and thank you too
    to the panelists.
        I've enjoyed listening to the discussion and to your
    remarks today. And as we are looking at this bill it really
    does impose harsh penalties on the lenders, and, so, I am
    wondering if they are being censured for violating vaguely the
    fine effects, some people might say undefined lending
    standards.
        I was just wondering if you could explain criteria or how
    one would truly define the concept of net tangible benefit,
    what that means to the consumer, or what a reasonable ability
    to repay really means. Because I am thinking if I am a lender
    or if I am a consumer trying to make out that loan, it's
    difficult for anyone to make that determination of what does
    net tangible benefit mean. What does reasonable ability to pay
    mean, because it looks like this will be left up to the banking
    regulators to make that ultimate decision to determine. But how
    can they possibly define those terms when every person's
    financial situation is completely different? And in reality it
    seems like any definition will just open the door for a barrage
    of law suits, and it doesn't seem that we have any shortage of
    those.
        So it seems like it would be an extraordinary waste of
    resources if that's what we do, create just one more cause of
    action that would ultimately result, I think, in restricting
    access to credit for a lot of families. So I understand we want
    to retain this balance to be able to offer secure loans, but at
    the same time we want to make sure that we have the free flow
    of credit.
        Can you help me with both of those definitions? Who is
    going to be making that determination and how will we ensure
    what's fair without just opening up the flood gate for a brand
    new tide of litigation?
        Ms. Braunstein. Well, the way the statute is currently
    written, the rule writers would be further defining both of
    those terms and I think it would be very important to add as
    much clarity as possible, because the lenders will need to be
    able to do due diligence to know that they are not running
    sideways of the law, so that clarity will be important.
        Mrs. Bachmann. In reclaiming my time, one thing that I have
    seen in various areas of the law, when we leave writing that
    definition up to people who are tasked with that assignment is
    oftentimes that doesn't bring clarity either and that it
    remains a malleable definition. And usually the ones who make
    the definitions then are attorneys who take these suits to
    courts and then judges end up writing what the parameters are.
        Oftentimes, when it's left to the bureaucracy, the
    definition is obfuscated, and so we are being asked as Members
    of Congress to vote for something that is obfuscated with no
    promise that clarity will be brought to the situation. Perhaps
    the only promise is that it will create new causes of action
    and tying up the legal system. How has anyone benefitted by
    that?
        Ms. Braunstein. Well, I think of the two terms, the one
    that will be most challenging is net tangible benefit. There
    are so many different kinds of loans with characteristics out
    there. There are so many different kinds of reasons why
    borrowers choose to take loans. It will be a challenge to
    narrow that down and put something very clear into regulations,
    but certainly we would attempt to do that because we do feel
    that it's important that credit keeps flowing and that there be
    as much clarity as possible.
        Mrs. Bachmann. And I would agree with you on that, but it
    seems that the bill does impose very stringent assignee or
    assignee liability on the assignees and the securitizers for
    any loans that would violate these big standards. So what I'm
    wondering is, does the pool of people who could face litigation
    maybe grow even larger because of that? It seems to me that it
    would and then it seems like that gift that this bill would be
    giving to trial lawyers would be even sweeter.
        Mr. Antonakes. Well, I believe the rules can be written and
    defined very tightly. A lot of States have experimented and
    have pushed the ability to repay standards as well as net
    tangible benefit standards. It has to be tightly defined so
    that people can understand the bright line exists to provide
    banks, lenders, the ability to comply with those rules. I think
    it can be accomplished. It has to be done in a robust,
    meaningful process, whereby the regulators can get meaningful
    comment from all of the stakeholders involved.
        Mrs. Bachmann. But I am sure you understand this has
    happened before, many, many, many, many times. We have a lot of
    history to look to.
        Mr. Watt. The gentlelady's time has expired.
        Mrs. Bachmann. If I could just end my sentence, and I will.
        Mr. Watt. The gentlelady's time has expired, but she can
    end her sentence.
        Mrs. Bachmann. The example in previous times that the
    bright line test occurs in the courtroom and that's my concern.
        Mr. Watt. The gentlelady's time has now expired on her
    second sentence.
        The gentleman from Missouri, Mr. Cleaver, is recognized for
    5 minutes.
        Mr. Cleaver. Thank you, Mr. Chairman.
        I won't take 5 minutes. I have one question and it's a
    philosophical one. Ms. Braunstein, you are always one of the
    more frank and candid witnesses we have and I appreciate it,
    but this is not technical at all. It's philosophical for both
    of you. Do you think that the terms ``survival of the fittest''
    and ``capitalism'' are synonymous?
        Ms. Braunstein. That is not a question that I can just
    answer on the fly.
        Mr. Antonakes. No. I don't.
        Mr. Cleaver. No, you don't?
        Mr. Antonakes. I don't believe they're the same.
        Mr. Cleaver. That is the argument with this legislation,
    that capitalism is survival of the fittest and if people are
    too dumb, too ignorant, too stupid to figure out what damage is
    being done to them in a mortgage then that's exactly what
    should happen to them. You've answered the question.
        Thank you, Mr. Chairman. I yield back the balance of my
    time.
        Mr. Watt. The gentleman from California, Mr. Royce, is
    recognized for 5 minutes.
        Mr. Royce. Yes, I'll ask Ms. Braunstein a question here.
    What do you believe the effect will be on the secondary
    mortgage market if Congress passes legislation without
    adequately clarifying the terms by which players in the
    secondary mortgage market would be legally liable for failures
    at the origination level? Could you give me your view on that?
        Ms. Braunstein. Given the fact that the markets are not
    functioning well now, it's hard to predict accurately what the
    impact would be. But, certainly, the more clarity that is
    there, the better they will function when they come back. So
    again I would argue for great clarity in what the rules are so
    that they are able to do the due diligence they need to do
    before purchasing loans.
        Mr. Royce. If capital fails to come back into the secondary
    mortgage market, what will that do to the availability of
    credit at the origination level in your view, if you could
    share that with us?
        Ms. Braunstein. That would be a severe outcome for the
    ability to have credit available in the market. I do not think
    though that having strong consumer protections in place
    necessarily means that there would not be capital flow. I don't
    think they're mutually exclusive.
        Mr. Royce. Going to another question, should Congress fail
    to pass mortgage reform legislation, how willing do you believe
    investors will be to purchase mortgages from institutions with
    lax underwriting standards?
        Ms. Braunstein. I would hope that investors would not be
    willing at all to purchase homes from institutions that lack
    good underwriting standards. One would hope that that lesson
    has been learned, but that does not preclude the need for rules
    to make sure that happens going forward.
        Mr. Royce. In your opinion, to what extent have private
    investors shied away from the secondary mortgage market in the
    United States since the housing downturn? Can you quantify that
    for us?
        Ms. Braunstein. No. I am not prepared to do that.
        Mr. Royce. Pardon?
        Ms. Braunstein. No. I cannot do that. I don't have that
    kind of data with me.
        Mr. Royce. What do you suspect has happened there? Or
    without the data, can you give us a kind of broad overview of
    what you think has happened?
        Ms. Braunstein. I really am not prepared to discuss that.
    It's not my area of expertise.
        Mr. Royce. Well, I'll ask the other witness for his views
    on that.
        Mr. Antonakes. Well, I think certainly the private
    investors have shied away from that market without strong
    evidence to demonstrate it other than what we see, just based
    on the uncertainty that's occurring at this point in time. But
    like my colleague before me, I also daresay that we heard these
    arguments before when assignee liability was discussed in the
    past, and I think the market would be in far better condition
    today if State provisions, relative assignee liability, had
    held up.
        Mr. Royce. Yes, I think the secondary mortgage market
    outside of the reach of the Federal Government is all but
    evaporated from what I've seen; and so I didn't think it was
    too tough to come to that conclusion. And I think private
    investors in this market, many of whom originally endured
    significant losses when the housing bubble burst on us, I think
    what they're suffering here is a crisis of confidence.
        And I think the actions that we are taking that we need to
    take are to re-instill that confidence. And to the extent that
    we make mistakes in terms of the policies that we push that
    create the blowback of even greater lack of confidence and the
    judgment either of Congress or the regulators that that
    compounds the problem going forward, would you agree with that
    assessment?
        Ms. Braunstein. I think that it would be important to re-
    instill confidence in the markets, that there be some kind of
    rules in place that will help re-instill that. I think that
    having rules rather than no rules would instill more
    confidence.
        Mr. Royce. I agree with that, but I think we also though
    have to caution the members on this committee against moving
    legislation that would discourage the very essential private
    capital from coming off of the sidelines and back into the
    private market, because that's what we need right now.
        Mr. Watt. The gentleman's time has expired.
        Mr. Royce. Re-instill that confidence. Thank you.
        Mr. Watt. The gentleman from Colorado, Mr. Perlmutter, is
    recognized for 5 minutes.
        Mr. Perlmutter. Thank you, Mr. Chairman. Ms. Braunstein and
    Mr. Antonakes, thank you for your testimony today.
        You two are knowledgeable in some very complicated areas.
    The products you know, change every day, seem to be more
    elaborate, more complex every day and not quite sure where
    they're going.
        Which sort of brings me to my point number one. My point
    number one is we're trying to address a lot of products, a lot
    of issues, a lot of consumer--you know, can the customer really
    understand what it is that they're getting when it comes to the
    loan that's being made?
        And the desire is to make sure that the buyer is aware.
    Buyer beware. Let's start with Caveat Emptor, Buyer Beware.
        But we need to make sure, because these things are getting
    so complex. And you know, I had last year's version of this
    bill which pushed me pretty far. I come at it more from a
    creditor's standpoint than some of my colleagues on this side
    of the aisle.
        But I do feel that customers have been bowled over by some
    of the terminology. So let's just get to ``a bright line.'' And
    this is more of a theoretical question. But maybe we should
    just be saying: The companies can do anything they want, so
    long as it's under ``X'' interest rate. To get back to the old
    usuary laws that existed, whether it's for first mortgages,
    junior mortgages, credit cards.
        Can I have your reaction to establishing just plain old
    bright-line usuary laws that everybody works within?
        I stunned you, because I'm coming at from such a different
    direction--
        Ms. Braunstein. No. I think that while there may be some
    appeal to that, that would very much restrict choice in the
    markets, and restrict availability of credit to a number of
    people.
        I do think that it should not be just Caveat Emptor. I
    don't believe in that. I think that these products have become
    very complex and that disclosure alone is not adequate to deal
    with many features on these products. And that's why there is a
    need for substantive regulation around products and features,
    but that the regulation should still allow some innovation in
    products to make credit widely available and to give customers
    some choice in the products they choose; but the customers
    should be protected at the same time, and I think both can
    happen.
        Mr. Perlmutter. All right. Mr. Antonakes?
        Mr. Antonakes. Well, I think this bill tries to do that in
    some respects by limiting the types of bills and the interest
    rates, which would be covered by the safe harbor.
        So I think that is one of the goals of this legislation.
        Yes, we've done something similar with a different approach
    in Massachusetts, in terms of subprime loans. We've required
    now a mandatory opt-out of a customer. They have to
    affirmatively opt out of a subprime loan, if it's not a fixed-
    rate product. And if they choose on their own volition to move
    into a subprime loan that's an adjustable rate mortgage, then
    mandatory in-person counseling kicks in to provide that type of
    education, so they can then make hopefully an educated decision
    as to whether or not this is the best product for them.
        You know, a cap on interest rates would simplify matters,
    especially with the fixed-rate products, certainly. My guess is
    that that's, you know, part of the goal of these legislation.
    The more simplified loans, with, you know, market interest
    rates get the safe harbor. The more complex loans, they can
    still be made, but there's going to be greater restrictions and
    greater penalties for the companies, conceivably.
        Mr. Perlmutter. Well, and I guess where I'm coming from is
    we've talking about bright lines a lot, and I have to agree
    with my colleagues on this side about the complexity of these
    loans and sometimes the borrower doesn't really know what
    they're getting until it's too late.
        But I agree with some of my colleagues on the other side of
    the aisle that we're going to have some consequences from net
    tangible benefits and thing like that, that I'm not quite sure
    where we're going.
        In Colorado--and it's before both of your times--but back
    in the early 1980's, we did have limits for first mortgage. We
    had limits for junior mortgages. We had limits for credit
    cards. And things seemed to work pretty well.
        But then we had that huge spike in interest rates in the
    early 1980's, and Congress basically lifted the lid on all
    interest rates, as it applied to customers.
        And I don't know whether we need to go back to those old
    days--and I'm just sort of speaking, you know, to two experts
    out loud, and I appreciate your responses.
        A couple other points--
        Ms. Braunstein. Can I just say that--
        Mr. Perlmutter. My time is up.
        Ms. Braunstein. Oh.
        Mr. Watt. The gentleman's time has expired.
        The gentleman from New Jersey, Mr. Lance, is recognized for
    5 minutes.
        Mr. Lance. Thank you very much, Mr. Chairman. Good morning
    to you both, and thank you for being here. And I certainly rely
    on your expertise. I want you to know that.
        Mr. Antonakes, many States have voluntarily passed SAFE
    implementation legislation, and some of those States' standards
    are higher than the standards that are contained in this bill.
        And do you think that this bill should have been more
    restrictive, or was it written properly to give you at the
    State level enough participation in what you want to do across
    the United States?
        Mr. Antonakes. Well, Congressman, thank you.
        I believe that ideally, a Federal predatory lending law is
    a floor, not a ceiling, allows States to enact laws more
    protective to their customers, if they choose to do so. And
    also whereas the rules are going to be such an integral part of
    the implementation of this law, there as to be a mechanism for
    State involvement in the rule-making process and also a
    mechanism for State enforcement.
        Mr. Lance. Thank you. And when you were here before--and I
    certainly was very interested in your testimony before--you
    stated that regarding ARMs, that you didn't think necessarily
    that they were the problem, and that you'd hate to cut those
    products out of the marketplace.
        Some critics of the legislation believe that the safe
    harbor provisions aren't so safe for prime ARMs. What is your
    view regarding that in this legislation?
        Mr. Antonakes. Well, I think that safe harbor is a good
    concept. I think it has to be drafted very carefully. We've
    discussed that I believe there are fixed-rate products out
    there, beyond a 30-year rate product, which is a safe and sound
    loan if it's underwritten appropriately, and the customer
    understands it and they can afford it.
        Likewise, a traditional ARM product, not the interest only
    loans, not the loans with the teaser rates; your traditional
    7(1), 10(1) ARM products are sound products, and they are
    limited on how much the interest rate can swing, as well as the
    underwriting and the ability to repay is taken into account.
        I believe, you know, we're fortunate to be in a low-
    interest rate environment now, but those are products that are
    more important as rates increase, and would hope that if it is
    truly understood product, a vanilla product, a well
    underwritten product, that it could conceivably fit within the
    safe harbor as well.
        Mr. Lance. Thank you.
        And Ms. Braunstein, good morning to you. I also rely on
    your expertise and always enjoy your testimony.
        Obviously, we don't want to throw the baby out with the
    bath water and this is a subtle matter. Generally speaking, do
    you believe that the legislation strikes the right balance? Not
    all the particulars, but just generally speaking. Obviously, we
    want as much available to the American public as possible, with
    the appropriate safeguards, so that the public is not being
    abused.
        Just generally, do you believe that an appropriate balance
    is being struck here?
        Ms. Braunstein. Generally, I would say that is true. Our
    staff has worked closely with committee staff to submit a
    number of comments on it, and there are some pieces that I
    think still need further clarity for us to get a sense of.
        But generally, a lot of it mirrors what we did with the
    HOEPA rules, and we think that those struck the right balance.
        Mr. Lance. Thank you very much. I yield back the balance of
    my time.
        Mr. Watt. Mr. Minnick is recognized for 5 minutes.
        Mr. Minnick. My question is for Ms. Braunstein. Consistent
    with Chairman Watt's opening remarks that this is still a work
    in progress, and we all share the similar objective of, ``Let's
    improve underwriting by having some risk retention as a
    principle.''
        And listening to Ranking Member Bachus and some of my
    Republican colleagues, concerns that the 5 percent retention
    when compounded, would simply chew up a lot of the capital and
    reduce the capacity to make loans, particularly for long-term
    loans over an extended period of time--concerns which frankly
    have been expressed by financial institutions in my State when
    I've discussed the concept with them.
        What would you think if we were to pass a bill that allowed
    100 percent alienation if you could sell the entire loan, but
    you retained a contingent liability for 5 percent of the
    exposure for the first loss, and then grant to your or other
    bank regulatory institutions the power to establish regulations
    that would decide how to value, that retained a contingent
    interest and set that up as the reserve against capital?
        And of course, you'd have independent auditors, who would
    make their judgment with respect to financial statements. But
    as a way of basically not incurring more capital than was
    actually needed to retain the risk that in fact is retained,
    based on the underwriting of these institutions.
        Ms. Braunstein. I think as with all methods of doing this,
    the devil is always in the details for these things. But I
    would--
        Mr. Minnick. This is why I want to give the authority to
    you.
        Ms. Braunstein. Right. Well, and I think that that would be
    helpful, and I would want to have our capital experts back at
    the office take a look at what you're suggesting.
        Mr. Minnick. Thank you.
        Mr. Antonakes, do you have any reaction to that
    conceptually?
        Mr. Antonakes. No. I think it's an interesting concept, and
    I think it merits review and study. And it may, you know,
    conceivably could alleviate some of the concerns. We would have
    to take a look at it, but we would be happy to do so.
        Mr. Minnick. Thank you, Mr. Chairman. I yield back the
    balance of my time.
        Mr. Watt. I yield myself 5 minutes. Oh, I'm sorry, Mr.
    Ellison has arrived. I thought I was going to be last. But Mr.
    Ellison is recognized for 5 minutes.
        Mr. Ellison. Thank you, Mr. Chairman.
        I have had a busier morning than usual. This is a very,
    very important hearing for me. And I want to thank the
    panelists for being here.
        Ms. Braunstein, could you indicate what you think the
    benefits would be of requiring mortgage originators to adhere
    to their fiduciary duties, including the basic one that they
    act in the best interests of the buyer?
        Ms. Braunstein. Well, I think that one of the problems that
    we have seen in the current crisis has been that customers
    often do not understand how mortgage brokers function, and that
    they're not necessarily in all cases looking out for the
    benefit of the customer, that they are looking to their own
    compensation, and that that is not something that consumers
    often understand.
        So I think that having a duty of care might help to
    alleviate some of that. I think there may be some, again, the
    devil is in the details in terms of enforcement of that and how
    exactly that would work. But--
        Mr. Ellison. Well, on a common-sense level, I'm a 45-year-
    old person who bought a home back in 1991 with my wife. I have
    purchased a home exactly once. But if you're a mortgage
    originator, you can't survive if you're only doing one deal per
    morning. So you're doing them all the time.
        There is clearly an asymmetry of information and
    experience, so that duty might be beneficial.
        Do you agree with that, Mr. Antonakes? Or what do you
    think?
        Mr. Antonakes. I agree conceivably that--yes. And I
    certainly agree that a lot of folks, regardless of whether they
    went to a broker or lender or even banks in some instances,
    were put in loan products that were not the best product for
    them.
        Mr. Ellison. Yes. And in my view it doesn't matter what
    your level of education is. If you don't do mortgage
    origination, you don't know it as well as somebody who does it
    every single day.
        Ms. Braunstein, you expressed concern about the ability of
    investors to comply with the prohibition against making loans
    without a ``net tangible benefit.'' Could you discuss your
    thoughts on this issue, and just kind of more clearly explain
    your views on this subject?
        Ms. Braunstein. Yes. The concern with that is really the
    definition of net tangible benefit. And I know that there have
    been States that have worked on this.
        It is a very difficult term to define.
        It would need to be clearly defined, on the one hand
    because the lenders and assignees, moving forward, or
    securitizers, would need to be able to do the due diligence
    necessary to decide whether or not they're buying a loan that
    was within the bounds of the law.
        On the other hand, trying to narrow net tangible benefit,
    there are so many products and features of those products, and
    there are so many reasons why people take out mortgage loans,
    and refinance, that it would be difficult to narrow that down
    and not end up excluding circumstances where there is a loan
    that was in the best interest of that person, but didn't make
    the list.
        So I just think it would be a challenge. I'm not saying
    it's impossible. But it would be a challenge to do that.
        Mr. Ellison. Thank you.
        Mr. Antonakes, could you talk about your views on this
    subject? During the mortgage crisis, we've seen that States
    often can move quicker than the Federal Government can. In
    fact, we have yet to pass an anti-predatory lending bill, so
    that's evidence that can happen.
        With that in mind, do you think that it's important that
    Federal legislation be a floor and not a ceiling for the
    benefit of customers, that we keep 50 pairs of attorneys'
    general eyes on the problem?
        Can you talk about this idea?
        Mr. Antonakes. I'd be happy to, Congressman. I believe it's
    vital that the law be a floor and not a ceiling, allow States
    the ability to continue to innovate, pass laws that are more
    consumer protective, if they so desire, keep the attorneys
    general and the banking departments that have examiners and
    investigators that can go into a place the day after an event
    has occurred, and keep them working.
        In Massachusetts, we have a predatory lending law dating
    back to 2004. We had regs in place in 2001. We have State CRA
    for non-bank mortgage lenders now.
        Mr. Ellison. Can I just ask you all this question in my
    last remaining moments. I've heard some people in the industry
    say that well, ``You know, the worst of the predatory loans is
    out, all the people making the bad predatory loans are out of
    the business now. So we don't need to legislate.''
        Can you respond to such an opinion? I don't hold that view.
    But what is your view? Do we still need anti-predatory
    lending--
        Ms. Braunstein. Well, right now we're not in normal markets
    and there's not much going on, predatory or otherwise.
        But the markets will recover at some point, and I think it
    is important to put good protections in place for the future,
    which is why we wrote the HOEPA rules. And I do think that's an
    important piece.
        Mr. Watt. Thank you. The gentleman's time has expired. I
    will recognize myself for 5 minutes, and then recognize the
    chairman of the Full Committee finally afterwards, since this
    is a continuation of where Mr. Ellison was going anyway, on
    this State preemption issue.
        Our intention on writing the preemption provision was to
    preempt States only insofar as they had laws specifically
    relating to the ability to repay, or net tangible benefit. And
    we're still working on the language. The question I want to ask
    is: If we found the right language to do exactly that, is there
    anything else in this bill that would preempt you from doing
    the kinds of things that you've described to Mr. Ellison that
    you think States ought to be not preempted from?
        Mr. Antonakes. Yes, Congressman. I believe some of the
    provisions relative to assignee liability are preempted. Also,
    I believe strongly that--
        Mr. Watt. Preemptive but preemptive with respect to ability
    to repay and net tangible benefits, as I understand it. Do you
    understand it to be something beyond that?
        Mr. Antonakes. Well, I understand that some of the
    penalties that exist in State law for violations in those areas
    would also be preemptive as well.
        You know, I guess again what we're asking today is we
    support, and we have supported for a long time, a concept of a
    Federal law. We really believe it needs to be a floor, not a
    ceiling; allow States to continue to collaborate with our
    Federal colleagues, and insure maximum consumer protection
    throughout.
        And I believe that also, if we're going to have a Federal
    standard, that we have to be involved in some fashion, be it
    consultation of whatever the case may be, in the rule-making
    process as well.
        I believe we have--
        Mr. Watt. That actually leads me to my second question, and
    that goes to Ms. Braunstein. Mr. Antonakes has made that
    comment in his testimony and repeatedly in answers to various
    questions. Can you react to the notion that States might be
    allowed to be part of the rule-making process?
        Ms. Braunstein. Well, as I've commented in my testimony and
    in my oral statement today, we think that when rule-making
    becomes inter-agency, it is not as efficient or timely as it is
    when done by a single agency.
        However, we do think it's very important to get input and
    consultation from everybody who's involved in the issue, and
    that would include the other agencies and definitely the State
    regulators. That doesn't mean that they have to hold the pen.
        Mr. Watt. All right. That actually leads me to the third
    question I had, which was your comments in your original
    testimony about it would be more efficient to have one rule-
    maker as opposed to multiple rule-makers as we formalized in
    this bill, because sometimes you have to compromise down to
    satisfy all of those parties.
        How do you address the concern that we have that those
    parties might also make you compromise up? Whomever the
    ultimate rule-maker is.
        Ms. Braunstein. Well, that's certainly a possibility. I'm
    not precluding that. But I can tell you from our experience
    with interagency rule-makings, that is generally not the
    direction in which it goes.
        Mr. Watt. Mr. Antonakes, finally, you mentioned State
    enforcement, and I actually asked the staff as you were saying
    that, what the status of that was in the bill. And they
    acknowledged that might be a concern.
        So would you please, as quickly as possible, give us some
    language on what might be being proposed there, so we can look
    at it?
        Mr. Antonakes. I'd be very pleased to do so.
        Mr. Watt. Okay.
        With that, I yield back the balance of my time, and
    recognize the chairman of the Full Committee, Mr. Frank.
        The Chairman. Thank you, Mr. Chairman, and thanks to two of
    our very reliable witnesses.
        I was at the Senate Banking Committee, being very noble. I
    was urging them to confirm as the new Assistant Secretary for
    Congressional Affairs my Chief of Staff, an idea which I hate,
    but could not think of a decent way to sabotage. And that's
    where I was.
        But I did hear in the question from the gentleman, I know
    one of our most thoughtful members, a point which we may have--
    in the bill. As I understood it, the concern raised by some
    was--I'm talking now about the securitization and the risk
    retention that 5 percent at every level would accumulate pretty
    much.
        And it was never my intention to go above the first level.
    That is, I think the importance here is with the originator. My
    own sense is that the problem is when the homes were
    originated--and I believe that--and maybe the language was
    ambiguous in what we drafted--I think it is important to do a 5
    percent retention, or whatever we decide is appropriate, for
    the originator.
        I don't think you need it after that. That is, it's the
    originator who makes the loan or doesn't make the loan, and my
    view is if there are too many bad loans, you have a problem.
        So as to the problem of accumulating, yes, I think that
    would be a problem. I think the major public purpose if served
    by putting this on the originator, because it really is the
    originator who decides whether it's a good loan or not.
        I would yield to my friend from Idaho.
        Mr. Minnick. Mr. Chairman, I had not intended it to
    accumulate either. But the accumulation issue was one mentioned
    by institutions--
        The Chairman. No, I appreciate that. I'm glad the gentleman
    brought it our attention, because let me ask him, if we were to
    make it explicit that it was not an accumulating thing, but
    just that the originating level? Would that alleviate some of
    the concerns--
        Mr. Minnick. No, it would not, Mr. Chairman, because the
    concern was 5 percent on this loan accumulated with 5 percent
    on the next loan. After you make 20 loans, you've used up your
    lending capacity, or potentially if--or 100 loans. At some
    point, you would have all of your capital tied up in this
    cumulative--
        The Chairman. Well--
        Mr. Minnick. Of loans that you have made over--
        The Chairman. All right. I would respond--then the question
    is: Do we want people who are so thinly capitalized to be
    originating all these loans? That's the issue. I mean, you do
    get 95 percent of it right back. And you can, as people start
    to repay, get some money back.
        I understand that. I thought it was going up the chain.
    Then the question is, if people are so thinly capitalized--I
    would also note that it is the case that there wasn't any
    securitization at all. That didn't stop people from lending.
        But I appreciate that clarification.
        I would yield to the gentleman.
        Mr. Minnick. Mr. Chairman, I might add that the concern was
    particularly expressed by mortgage brokers and others that do
    not have a deep pool of capital available for this purpose. And
    the thought was if they could retain on a contingent
    liability--
        The Chairman. Well, I would look at that. But again, I want
    to say, the purpose of legislation is to create a system in
    which people can get mortgages. It's not to provide employment
    for any particular business that offers mortgages.
        We often--in this committee, where we deal with the
    intermediation function, where the means becomes the ends in
    the minds of some people. And the purpose is to have a good,
    reliable system providing mortgages.
        People are saying, ``Well, you know what? I don't have that
    much money, so if you put in some of these rules, I may not be
    able to issue as many originations.'' Well, maybe that's not
    such a bad thing.
        But I understand that, and if a contingent liability works,
    okay. But I mean, if the argument is: ``You know what? We want
    to get in the business of lending money, but we don't have any,
    so would you please allow us to have a system in which we can
    make a lot of loans, given the fact that we don't have any
    money?''
        I think that may be partly how we got into the problem. But
    I thank the gentleman for the clarification, and I would yield
    back.
        Mr. Watt. I thank the Chair for his intervention. And just
    for the Chair's information, one other possibility that's being
    floated is perhaps the possibility of maybe either reducing or
    eliminating the retention requirement for safe harbor loans.
        So I've asked the Chair to think about that as a concept.
    I'm not asking you for a--
        The Chairman. No, I appreciate it. And the details have to
    be there.
        But I did just wonder if the gentleman would give me back
    some time, is that the notion that if we do something that we
    think makes the system work better, some people won't be able
    to make a living out of it, I mean, the purpose of the system
    is to get well-run loans. And if there are other ways to deal
    with it, that would be reasonable. To the extent that that
    encouraged more of the kind of safe-harbor loans, that would be
    reasonable.
        Mr. Watt. I think I want to express the committee's full
    thanks to these two witnesses. I think you've edified us, and
    gotten us off to a great start, and laid a foundation for
    further discussion.
        Ms. Braunstein. Thank you.
        Mr. Watt. And you are excused.
        I would invite the second panel to come forward, as I
    invite the Chair to come forward to assume leadership.
        Can I encourage the transition to take place as rapidly and
    as quietly as possible?
        Let me thank the next panel of witnesses for being here,
    and introduce them promptly and briefly without elaborating on
    all of their credentials, so that we can expedite getting to
    their testimony. Mr. John Taylor, president and chief executive
    officer of the National Community Reinvestment Coalition, Mr.
    Mike Calhoun, president of the Center for Responsible Lending,
    Ms. Margot Saunders, Of Counsel at the National Consumer Law
    Center, Mr. Eric Rodriguez, vice president of public policy of
    the National Council of La Raza, and Mr. Hilary O. Shelton,
    vice president for advocacy and director of the Washington
    bureau of the NAACP.
        Each witness will be recognized for 5 minutes to provide
    testimony. Your full written statements and any materials you
    wish to submit with it will be made a part of the record in
    their entirety.
        Mr. Taylor is recognized.

        STATEMENT OF JOHN TAYLOR, PRESIDENT AND CHIEF EXECUTIVE
           OFFICER, NATIONAL COMMUNITY REINVESTMENT COALITION

        Mr. Taylor. Good afternoon, Chairman Watt, Ranking Member
    Bachus, and other distinguished members of the committee. I am
    John Taylor, the president and CEO of the National Community
    Reinvestment Coalition. I am honored to testify today on behalf
    of NCRC on the topic of H.R. 1728. NCRC applauds the chairman's
    leadership on this issue, and supports H.R. 1728 as a necessary
    measure to address mortgage reform and the need for
    comprehensive anti-predatory lending legislation.
        Predatory lending and other abusive practices have
    destabilized the markets, driven widespread unemployment, and
    brought the economy to its knees. This is not a new problem,
    and Congress must not let another session go by without passing
    anti-predatory lending legislation.
        NCRC has zeroed in on new waves of predatory lending
    practices. Most recently, unscrupulous lenders have migrated to
    the Federal Housing Administration program, FHA, which is now
    experiencing a rapid increase in defaults.
        In addition, the old predators are transforming themselves
    into new predators. NCRC's investigation into foreclosure scams
    shows that formerly abusive brokers are now reemerging as
    foreclosure mitigation consultants. These consultants exploit
    distressed families by charging exorbitant fees, and not
    engaging in any legitimate foreclosure prevention.
        NCRC will be releasing a fair lending audit using mystery
    shopping of more than over 100 for-profit national foreclosure
    prevention service providers in May of 2009. If regulatory
    enforcement is not immediately tightened, the unsafe and
    reckless lending practices of the past will continue to recycle
    into new abuses against consumers, thereby prolonging the
    economic crisis and hampering the recovery.
        In order to effectively purge predatory lending practices,
    an anti-predatory lending law must include comprehensive
    protections against abusive products. NCRC does believe that
    H.R. 1728 could be expanded to include consumer protection
    provisions. However, NCRC also acknowledges the fact that the
    current bill provides several protections banning and limiting
    a number of problematic practices.
        We support the bill's ban on prepayment penalties for
    subprime loans and non-traditional loans, and its ban on
    mandatory arbitration for both closed end and open end loans.
    Like prepayment penalties, mandatory arbitration traps
    borrowers in abusive loans.
        NCRC also supports the tenant protection provisions
    included in H.R. 1728. Tenant protections safeguard the
    interests of all parties, including the neighborhood--the
    lender and the tenant, by ensuring that a foreclosed home is
    occupied until it is sold.
        We support the protections against abusive servicing in
    H.R. 1728, such as the prohibition against force placed
    insurance on borrowers by services. Likewise, we're pleased to
    see that H.R. 1728 will help deter appraisal fraud on high-cost
    loans. But while helpful, we believe that more comprehensive
    measures must be implemented to safeguard against the appraisal
    fraud.
        This committee has diligently sought advice on
    strengthening the bill's provisions, and we are grateful to be
    part of that conversation. We operate a national foreclosure
    prevention program, directly interacting with individuals and
    communities that have been attacked by predatory lending.
        Therefore, we would like to offer the following
    recommendations to strengthen the consumer protections
    contained in H.R. 1728. The safe harbor provision assumes that
    certain loans are not abusive. A presumption of compliance
    means that any consumer alleging a legal violation may prove
    that the loan violated--must prove that the loan violated H.R.
    1728's provisions.
        When loans do not quality for the safe harbor, a lender
    must prove that they are not affordable, or lacked a net
    tangible benefit. A consumer will have much more difficulty
    defending against an abusive loan that slipped through the safe
    harbor than a loan that did not qualify for the safe harbor.
        NCRC therefore recommends the deletion of the safe harbor
    provision, and the use of strong consumer protections to all
    loans. If the committee retains the safe harbor, the legal
    standard for safe harbor loans should be altered to provide
    borrowers with adequate defenses against abusive loans.
        Also, there is no requirement that a residual income
    analysis be used when determining if a borrower qualifies for a
    loan. This analysis ensures that low-income borrowers have
    enough income left over after paying on debts, in order to
    afford the basic living expenses.
        Regarding tenant protections, NCRC recommends modification
    of H.R. 1728 to allow tenants without a lease the rights
    afforded to them under the State or Federal law, whichever is
    stronger in the better interest of the renter.
        Under H.R. 1728, lender securitizers and assignees would
    have limited liability. NCRC recommends that the committee
    reevaluate the limited liability mechanisms, and develop a
    system that would more effectively assure compensation to
    wronged borrowers, while responding to the industry concerns
    about unlimited liability.
        The bill's provision that lenders assume 5 percent of the
    credit risk is a good start to placing responsibility on all
    parties. However, NCRC recommends that the committee consider
    apportioning predictable portions of liability on services,
    securitizers, and investor institutions.
        Mr. Watt. Mr. Taylor, I always hate to do this to
    witnesses, because I know we don't give them enough time, but I
    do have to ask you to wrap up.
        Mr. Taylor. I'll do that. We ask you to reconsider the
    preemption portion of the bill, consider that the fair housing
    laws and CRA laws that apply to the States, and they are able
    to do things on--States on additional level that expand on
    those laws.
        I have to say a word about the regulatory agencies,
    because, you know, you folks, you passed HOEPA, you passed the
    fair lending laws, you passed truth in lending, you passed CRA.
    If you don't have the sheriff, the regulatory agencies
    enforcing these laws, then you might as not waste everybody's
    time. Because that agency that just sat up here, and
    testified--
        Mr. Watt. The gentleman's time has expired. I agree with
    you, but it doesn't relate to the bill, so I--
        Mr. Taylor. Understood.
        Mr. Watt. We are with you.
        [The prepared statement of Mr. Taylor can be found on page
    290 of the appendix.]
        Mr. Watt. Mr. Calhoun, you are recognized for 5 minutes.

    STATEMENT OF MICHAEL CALHOUN, PRESIDENT, CENTER FOR RESPONSIBLE
                                LENDING

        Mr. Calhoun. Thank you, Mr. Chairman, and Ranking Member
    Bachus. Like the Center for Responsible Lending and its lending
    affiliate, Self-Help, I personally come at this issue with feet
    in both the lending and the consumer protection world. I've
    been responsible for legal compliance for a multi-State lender.
    I've sold and securitized home loans on the secondary market.
    I've been a primary drafter of the North Carolina and other
    State predatory lending laws. I've been a private residential
    real estate developer, closed home loans as an attorney, and
    represented borrowers facing foreclosure.
        I would start with three critical numbers, 90, 60, and 50:
    90 percent of subprime borrowers had a home before they got the
    subprime loan; 60 percent of them qualified based on credit
    scores for prime loans; and 50 percent of them will lose their
    homes, lose their homes, not go into default, but lose their
    homes in this crisis. And when you add in the fact that over
    about half of all African-American and Hispanic borrowers were
    getting subprime loans, the impact has been devastating.
        I want to first praise this bill for several areas where it
    substantially improves over the previous bill, the coverage of
    all loans, not just subprime loans. About half of the
    foreclosures will be non-subprime foreclosures.
        Second, the removal of the irrefutable presumption of
    compliance that was in the previous bill. The previous bill
    would have insulated from any legal claim all of the payment
    option ARMs that are bringing down so many financial
    institutions today, for example. And finally, for recognition
    of the effective lack of accountability. And with that, I'll
    segue into the areas where the bill, I believe, can be
    improved.
        First, regarding the skin in the game provision which has
    been discussed. We support that, as we believe lack of
    accountability has been a problem. There are some inherent
    limitations, though, on how much the skin in the game can help.
    It essentially says, ``If this loan goes bad, you share in the
    losses,'' but you run into capital problems and things like
    that, about how much of the loss.
        I mean, 5 percent? Loans today are having 50 to 60 percent
    loss. You're not keeping much of the loss there with the
    originator, and I don't know if you can keep more.
        We think the flip side of that is even more important, and
    that is, how do you make money off the loan, and that should be
    aligned with sustainability. Right now, and what we have seen
    over the last few years, most of the money was made by the
    origination of the loan, rather than the performance of the
    loan.
        Two simple steps would dramatically change that, and would
    go to--Congressman Perlmutter, would be more akin to what--you
    and I both grew up with lending standards in the 1970's--and
    that is, to require that qualified mortgages have no prepayment
    penalty, and have fees of not more than 2 percent lender
    origination fees--is what that would do, would mean that for
    loans to be profitable, they have to perform. You're not
    getting the money for origination.
        It also has the virtue of it's a bright line that people
    can easily comply with at all levels, from origination to the
    secondary market. And it would dramatically change the market,
    and do perhaps more than any other provision that's in this
    bill right now, so we strongly urge that as a protection.
        Let me move next to some of the other areas. There have
    been questions today about the anti-steering provision. It
    currently has weak language and weak remedies, and we have
    urged in our written testimony specifics about how to improve
    that.
        Second, regarding yield-spread premiums, in 2001, HUD gave
    yield-spread premiums the green light, and much of the damage
    that we have seen in recent years is a result of that. They
    need to be reigned in, and the bill needs to be strengthened to
    prohibit the double charging of broker fees that is still
    permitted under the bill, that is you can get front end and
    back end fees, and double charge the consumer.
        Fourth, Wall Street needs to be required to look at the
    loans that it funds. This bill actually removed and deleted the
    due diligence provisions that you had in the prior bill, and I
    know Mr. Watt, that you worked to improve. They were removed
    from this version. We urge that they be put back, and improved
    in the way that you suggested in 2007.
        Finally, you need to strengthen the remedies, while still
    protecting responsible lenders. If there were a crisis of
    speeding-related accidents, I don't think we would respond with
    a general prohibition against excessive speeding, a limited
    number of officers to enforce the law, and remedies that said
    if you're stopped, the penalty is that you're required to slow
    down for that specific trip.
        The remedy provisions in this law, unfortunately, are much
    like that. If you violate the law, and I'll conclude quickly,
    they are generally on the general standards. If you violate
    them, the result is you correct that specific loan, and we
    believe that may not be enough to move the market in the
    direction that I think we all are trying to do.
        [The prepared statement of Mr. Calhoun can be found on page
    179 of the appendix.]
        Mr. Watt. I thank the gentleman.
        Ms. Saunders is recognized for 5 minutes.

    STATEMENT OF MARGOT SAUNDERS, OF COUNSEL, NATIONAL CONSUMER LAW
                                 CENTER

        Ms. Saunders. Chairman Watt, Mr. Lance, Mrs. Capito,
    members of the committee, I am here today on behalf of a long
    list of national and State organizations that are listed on my
    testimony. We, and I speak on behalf of many of--all of these
    attorneys across the country representing low-income consumers
    fighting foreclosures. We respect your continued efforts to
    stop the abuses in the mortgage market. We are grateful for the
    proposed funding in the bill for legal services, which would
    supplement the work of many attorneys around the country, and
    avert thousands more foreclosures.
        We appreciate the improvements to Title I and Title II,
    relating to yield-spread premiums, limiting qualified
    mortgages, the tenant protections, and the change presumptions,
    as well as many of the other positive provisions in the other
    titles.
        But with regret, I am here today on behalf of these many
    low income--I mean, legal services and nonprofit attorneys, to
    say that in its current form, we oppose H.R. 1728. The bill is
    complex, convoluted, and will not accomplish its main goal, to
    fundamentally change the way mortgages are made in this
    country.
        Our chief concern is that the bill will preempt State law
    claims against holders, which are regularly used to save homes
    from foreclosure. Section 208 preempts State law claims which
    are premised on an ability to pay or net tangible benefit
    issues.
        These issues are integral to many of the common law and
    statutory claims that are brought to stop foreclosures or
    affirmatively. For example, proof of the failure to determine
    the ability to repay is a critical part of proof of an
    unconscionability claim, or a breach of good faith in fair
    dealing.
        There are a variety of specific State law common law claims
    that are omitted from the list that's protected against holder
    preemption. The bill also--while preempting State law, the bill
    fails to provide meaningful remedies against holders for
    violating the prohibitions in the bill. Recisions against
    holders would be available only for loans in foreclosure, only
    after the holder has had 90 days to cure the violation, and
    failed to do so, and then only if the holder is not a
    securitization vehicle. This is complex and virtually
    impossible as a mechanism to solve the current problem.
        We would ask that you look at the passage of the FTC holder
    rule in 1975. That rule applied full liability to assignees for
    all claims and defenses that could be brought against sellers
    for loans used to purchase consumer goods such as cars.
        At the time, the retail and finance industries violently
    objected. They said the rule would cause credit to dry up,
    banks to stop purchasing consumer loans, the elimination of
    much of the consumer finance business altogether. The industry
    insisted that they should not bear the responsibility of
    policing sellers, that the rule would interfere with re-
    competition.
        In my testimony, I have a graph from Federal Reserve Board
    information that shows not one of these nightmare scenarios
    materialized. There was no reduction in available credit. There
    was no indication that sellers were hurt. There was no
    discernible increase in defaults.
        This should be a lesson heeded today. Capped and measurable
    assignee liability imposes a market based discipline on the
    industry. The industry will not cease to exist. It simply will
    find a way to operate within the new guidelines, which will at
    the same time protect homeowners and create incentives within
    the industry to comply with the rules. Thank you.
        [The prepared statement of Ms. Saunders can be found on
    page 264 of the appendix.]
        Mr. Watt. You probably heard the bells and whistles that
    are going off. Unfortunately, we have been called to a series
    of votes, seven to be exact, so--and that's the bad news. The
    good news is that these are the last votes of the day. So once
    we come back, we will be able to continue the hearing and
    proceed without being interrupted by Floor votes. So I'm--there
    is a motion to recommit. There are seven votes, so maybe we
    should just set a time by which everybody should be back, and
    that would give you an opportunity to go and maybe grab a bite
    to eat or something of the kind.
        Let's see, 15, 20, 25, 30, plus 10 is 40, 15 more is 55,
    and final passage, 60, 65 minutes of votes, even without lag
    time. So let's shoot to reconvene at 2:00, and that's subject
    to our being able to get back. But plan--if the witnesses will
    plan to be back by 2:00, I think that would serve a very useful
    purpose, and that will allow us to hit the ground running as
    soon as we get back. I apologize, but doing it this way allows
    the final two witnesses on this panel to provide some
    continuity into the question and answer period.
        The hearing will stand in recess until at least 2:00.
        [recess]
        Mr. Watt. The hearing will come to order. I thank all of
    your for being patient. Members will filter in as we continue
    this afternoon.
        And unless somebody is able to represent to me that all of
    the differences have been worked out while the recess was in,
    and that everybody is in agreement, we'll proceed with the
    hearing. If we all have an agreement, then we can all go home.
        Ms. Saunders. Oh, but we--it's great, we'll be great.
        Mr. Watt. Well, we had some.
        [laughter]
        Mr. Watt. I didn't get the unanimous consent. Let me ask
    unanimous consent that Mr. David Berenbaum replace John Taylor
    as the person who will answer questions in his place. Mr.
    Taylor had a plane to catch.
        Now--we're missing somebody else.
        Mr. Shelton. Yes. I believe Ms. Aponte is going to be
    representing Eric Rodriguez. Thank you.
        Mr. Watt. Is she invisible?
        Mr. Shelton. She was here a little while ago.
        Mr. Watt. Okay. I ask unanimous consent that Ms. Aponte
    replace Mr. Rodriguez on the panel, because apparently Mr.
    Rodriguez had another commitment also.
        Without objection, it is so ordered, and we will proceed.
        Mr. Shelton is recognized for 5 minutes.

     STATEMENT OF HILARY O. SHELTON, VICE PRESIDENT FOR ADVOCACY &
                   DIRECTOR, WASHINGTON BUREAU, NAACP

        Mr. Shelton. Well, thank you, Chairman Watt, Chairman
    Frank, Ranking Member Bachus, and and all the members of the
    committee for your work on this issue, for this hearing, and
    for inviting me here today.
        The NAACP is deeply appreciative of your interest in our
    views on predatory lending, as it is clearly a crucial civil
    rights issue for the 21st Century.
        For many Americans, the issue of predatory lending has just
    come into focus within the last few years as a disparate number
    of foreclosures are currently rocking our Nation's economy due
    to subprime predatory loans. Sadly, predatory loans of all
    types are nothing new to the African-American community and
    other racial and ethnic minority Americans as well.
        For decades, predatory lenders targeted Americans,
    borrowers of color, with their nefarious products. Studies from
    as early as 1996 clearly demonstrate that many people of color
    could qualify for more affordable loans then they are allowed
    to receive.
        African Americans are 3 times more likely to receive a
    higher-cost subprime loan than our Caucasian counterparts.
    Latinos are 2.7 times more likely to receive a higher-rate loan
    than white borrowers.
        For most types of subprime home loans, African Americans
    and Latino borrowers are more than 30 percent more likely to
    have higher rate loans than Caucasian borrowers, even after
    accounting for differences in risk.
        Let me make it clear that the NAACP recognizes the
    legitimate role that the subprime market has played, and can
    continue to play for hundreds of thousands of qualified
    Americans with spotty credit, or in some cases a lack of
    traditional credit history to pursue the American dream of
    homeownership.
        Unfortunately subprime markets have been abused by too many
    unscrupulous lenders who are willing to ruin people's lives,
    not to mention whole communities, for their own personal gain.
        Predatory lending ruins not only individuals' lives and
    families. It's disastrous impact can be felt by whole
    communities. Sadly, these people and their communities are
    often those who can least afford to lose what little wealth and
    stability they hoped to gain through homeownership.
        Given that homeownership is considered one of the most
    reliable ways for economically disadvantaged populations to
    close the wealth gap, one direct result of these unfair and
    immoral discriminatory predatory loans is that it is harder for
    African Americans and other racial and ethnic minorities to
    build wealth.
        Predatory lending is a direct attack on our financial
    security and economic future, an attack that is targeted on
    individuals and communities in part because of the color of our
    skin.
        Furthermore, given what we know about the impact that these
    predatory loans can have on families, communities, and our
    Nation, it should come as no surprise that once again, African
    Americans feel that we are the canary in the coal mine.
        Financial institutions appear to be willing to see how much
    damage they can inflict on one sector of the population, and
    then we will know what the rest of the Nation can stand.
        And so the NAACP has a strong interest in seeing predatory
    loans outlawed and predatory lenders put out of business
    permanently.
        As such, there are several elements that the NAACP feels
    should be included in any effective comprehensive legislation,
    that will go a long way towards ending the scourge of predatory
    lending.
        These elements include:
        First, a band on compensation tied to the terms of the
    mortgage that often serves as an incentive for steering
    vulnerable borrowers into loans that are more expensive and
    riskier than those for which they may qualify;
        Second, the establishment of a Duty of Care that requires
    originators to present borrowers with loan options which are
    appropriate for their financial circumstances.
        Third, the establishment of a requirement that lenders and
    originators make loans that the borrower can afford to repay.
        Fourth, a prohibition on prepayment penalties in a subprime
    market.
        Fifth, an increase in protection available under the HOEPA
    for high-cost loans.
        Sixth, States and municipalities should be able to do more
    to end predatory lending than what is in the Federal bill,
    especially given the regional nature of some types of predatory
    loans and the fact that predatory lenders have a history of
    coming up with new schemes that bilk homeowners and would-be
    homeowners out of their hard-earned capital, whenever the
    existing scheme is outlawed.
        And finally, no legislation should in any way provide
    immunity for past acts of discrimination or violations of civil
    rights laws and regulation by lenders, mortgage brokers, or
    financial institutions.
        In closing, Mr. Chairman, I'd like to highlight that the
    NAACP supports H.R. 1782, the Fairness for Homeowners Act of
    2009, introduced by Congressman Keith Ellison of Minnesota.
    While some of the provisions in Congressman Ellison's bill are
    similarly addressed in H.R. 1728, H.R. 1782 has a very strong
    and detailed anti-steering provision.
        The NAACP feels strongly that H.R. 1782 is a good start,
    based on proven anti-predatory lending practices that have
    worked very well in Minnesota.
        And finally, a few words about H.R. 1728, the Mortgage
    Reform and Anti-Predatory Lending Act. As far as the NAACP is
    concerned, while this legislation has some definite strengths,
    there are also some areas where we look forward to working with
    the committee to make stronger.
        However, it should be clearly stated that in no way do we
    believe that this legislation as it is now will result in more
    discriminatory lending to racial and ethnic minorities.
        I'd like to again thank the chairman and the committee for
    your sustained longstanding and tireless efforts to address
    predatory lending. And as far as the NAACP is concerned, you
    were on the forefront, trying to end predatory lending abuses
    long before it was a hot topic. And we appreciate all that
    you've done and all that you continue to do.
        I look forward to continue to work with you to ensure that
    predatory lenders are put out of business and that everyone is
    free to pursue the American dream of affordable, sustainable
    homeownership, regardless of his or her gender, age, race, or
    ethnic background.
        Thank you so much.
        [The prepared statement of Mr. Shelton can be found on page
    286 of the appendix.]
        Mr. Watt. I'll let the record show him to go beyond his 5
    minutes, only because he was bragging about my history of being
    involved in the legislation.
        [laughter]
        Mr. Watt. Mr. Rodriguez' appearance has improved
    tremendously since we went into recess.
        And so, we will recognize Ms. Aponte for 5 minutes.

    STATEMENT OF GRACIELA APONTE, LEGISLATIVE ANALYST, ON BEHALF OF
       ERIC RODRIGUEZ, VICE PRESIDENT OF PUBLIC POLICY, NATIONAL
                           COUNCIL OF LA RAZA

        Ms. Aponte. Thank you. My name is Graciela Aponte. I handle
    NCLR's legislative and advocacy work on issues such as
    affordable homeownership and foreclosure prevention.
        Prior to joining NCLR, I worked with constituents and
    community-based organizations on behalf of congressional
    representatives in Maryland and in New York City. And for 4
    years, I worked as a bilingual housing counselor.
        NCLR has been committed to improving the life opportunities
    of the Nation's 44 million Latinos for the last 4 decades.
        I would like to thank Chairman Frank and Ranking Member
    Bachus for inviting me to share our recommendations for the
    Mortgage Reform and Anti-Predatory Lending Act of 2009.
        This year, 400,000 Latino families will lose their homes to
    foreclosure. Rising unemployment has certainly had an impact;
    however, reckless and deceptive lending are the main culprits
    behind our foreclosure crisis.
        We commend members of this committee for their efforts to
    bring forth a stronger anti-predatory lending bill. However,
    there is more work to be done.
        Some have argued that predatory lending legislation is
    unnecessary at this point, that the banks have learned their
    lesson, and everyone will do a better job.
        However, we can see that abuses are still occurring, even
    in a market with tight credit standards. We must make sure that
    this never happens again.
        Here's a glimpse of how this is still occurring: A retired
    vet recently visited El Centro in Kansas City, one of our
    affiliates. He had received a VA loan. After months of trying
    to make payments, he could no longer keep up. The counselor
    discovered that the payments represented 60 percent of his
    monthly income.
        His income had been marked up without his knowledge. He
    could have easily qualified for a mortgage based on his actual
    income. The brokers simply marked up his loan to earn higher
    fees.
        As foreclosure rates rise, these stories continue to
    emerge. Oftentimes, the counselors find the borrowers could
    have qualified for a safe prime product. After helping more
    than 25,000 families purchase a home with a prime loan, we've
    seen that good products make all the difference.
        Housing counselors instruct their clients to wait until the
    right moment to purchase their home, then they connect them
    with the home loan that will set them up for success.
        The following provisions included in H.R. 1728 would have
    made a difference for so many families. We urge Congress to
    protect these provisions: Ability to repay standard; qualified
    mortgage; safe harbor; and tenant protections.
        First, the ability to repay provision would ensure that
    borrowers receive loans they can afford to pay. This reinstates
    a common sense lending standard.
        Through our housing counseling network and our lending
    partners, we've seen the power of good loans. It should be a
    primary goal of this legislation to create the space for sound
    lending products to compete for market share.
        Second, the qualified mortgage standard shifts the
    incentives in the market. Right now, borrowers are steered away
    from practical and affordable home loans. Instead, they are
    directed towards expensive and risky products that earn
    originators high fees.
        Together, these two provisions will help make room for
    positive innovations in the market. Over the past few years, we
    have seen good products, like the Bank of America Community
    Commitment loans, fall by the wayside in favor of risky
    products that pay a higher commission.
        Third, tenants need the time to find a place to live if the
    house they are renting is foreclosed on. This bill provides
    protections for tenants who are trapped in this bad situation.
        Having said that, three areas of the bill must be
    strengthened:
        First, the anti-steering provision does not clearly
    prohibit certain deceptive practices. Legislation should
    explicitly prohibit lenders from steering consumers to loans
    more costly than they deserve.
        Second, the Duty of Care provision does not go far enough
    to reign in mortgage brokers. Borrowers pay mortgage
    professionals to coach them through the largest financial
    transaction of their lives. Brokers should be obligated to give
    customers information they can trust.
        Third, the liability and enforcement standards are not
    strong enough to deter creditors from violating the new law.
    The mortgage system must work, regardless of whether families
    complain.
        We offer the following recommendations to further
    strengthen the legislation and to provide our full support: Any
    effective legislation must prohibit lenders from luring
    unsuspecting borrowers into unaffordable loans; must make
    mortgage brokers accountable for mortgages they give families;
    and must strengthen enforcement to make lenders obey the law.
        Representative Ellison's bill, H.R. 1782, addresses some of
    these concerns. We are ready to work with the committee to
    strengthen H.R. 1728 and provide the protection our families
    need. I would be happy to answer any questions you have.
        [The prepared statement of Ms. Aponte can be found on page
    141 of the appendix.]
        Mr. Watt. I thank each of these witnesses for their
    testimony, and I will now recognize Mr. Miller from North
    Carolina for 5 minutes.
        Mr. Miller of North Carolina. Mr. Chairman, since Mr. Green
    has started to ask the kind of questions that I've asked in the
    past, I'll pass on asking questions.
        Mr. Watt. Okay.
        Then, we will recognize Mr. Maffei while Mr. Green is
    getting organized.
        Mr. Maffei. I could certainly defer back to Mr. Green, if
    he's ready. I don't want--
        Mr. Green. Mr. Chairman, it seems that it is now my turn.
        Mr. Watt. In that case--
        Mr. Green. I will defer to seniority, but would like to be
    recognized--
        Mr. Watt. If we have to recognize Mr. Green, we'll
    recognize him.
        Mr. Green. Thank you. Rarely do I find myself having been
    yielded to by two members. It's a wonderful feeling. Thank you.
        Thank you very much, friends, for being here today and
    giving us your testimony. You've heard some of the previous
    testimony, and I'm concerned about your reaction to some of the
    testimony that you've heard, because obviously we want to get
    the best bill possible.
        So why don't I start on this end. Is it Ms. Aponte?
        Ms. Aponte. Yes.
        Mr. Green. My vision is bad, but it's not that bad. Okay?
    Yes, ma'am. With reference to previous testimony, is there
    something that you would like to respond to that will help us
    with this bill?
        Ms. Aponte. Our key recommendations are the anti-steering
    provision, to strengthen the anti-steering provision, which
    legislation is included in 1782, Representative Ellison's bill,
    which gives explicit and clear direction to lenders to not
    steer consumers into high-cost loans.
        And then also the fiduciary duty for mortgage brokers. Our
    families pay extra money to go to a mortgage broker to help
    them find the best loan product for them. And this is not
    included in 1728, which would obligate them.
        Mr. Green. Is the bill clear enough with reference to whom
    it is the broker represents? I found that many of my
    constituents actually believe that the broker represents them.
    Is the bill clear enough on that point?
        Ms. Aponte. No. We would like it to have an actual
    fiduciary duty, where brokers are obligated to give the clients
    information, the best information that they can trust and not
    giving them higher commissions, so an actual fiduciary duty.
        Just like our families trust their doctors and their
    lawyers and folks like that, we want them to be able to trust
    their mortgage brokers.
        Mr. Green. All right.
        Mr. Shelton, if you would, please? Thank you, ma'am.
        Mr. Shelton. Thank you.
        I would have to agree with everything that Ms. Aponte has
    said very well, and she raised the issue of making sure that
    consumers understand who is representing them.
        As you know, that has been a tremendous problem. Our
    mortgage brokers go into our communities all the time, talk to
    less sophisticated customers about refinancing their homes, and
    before they know it, they find themselves taking out a $20,000
    loan and owing $100,000 as a principal.
        Indeed that means that they assume that the mortgage broker
    represents their interest. There are some helpful provisions in
    the bill that we think help move us in that direction. But you
    cannot do too much to make sure that customers understand this.
        So certainly beyond the protections in the bill, it would
    be very important that we do a number of community education
    programs to provide that kind of assistance as well.
        Mr. Green. Thank you.
        Ms. Saunders?
        Ms. Saunders. Thank you.
        Yes, I can clearly say there are a few things we'd like.
        First of all, there should be no preemption of State laws,
    State remedies in this bill.
        Second of all, there needs to be a simple, clear structure
    that applies to the entire market, with clear, meaningful
    remedies.
        We have tried to propose repeatedly that you draft a simple
    bill that creates market-based incentives for enforcement
    rather than litigation opportunities, shall I say, which this
    bill is full of.
        And for example, we think that if you required a 30-year,
    fixed-rate, full amortizing, no-point-and-fee, no prepayment
    penalty--just the rate goes up and down based on credit risk--
    to be offered to everybody applying for a home loan--just
    require that it be offered, and the homeowner could opt out and
    get another, more exotic loan and have access to good
    disclosure--
        Mr. Green. I'm going to have to ask you to summarize
    quickly, because I'd like for Mr. Calhoun--
        Ms. Saunders. Okay. I'm just about finished. But if you
    required that, it would make everything transparent and clear.
        Mr. Green. Okay. All right.
        Mr. Calhoun?
        Mr. Calhoun. Something similar, but a little different that
    I touched on earlier. One of the key structures in this bill is
    the qualified mortgage safe harbor, because then you don't have
    to have the credit risk retention, which will be a disincentive
    for loans outside the safe harbor.
        Loans inside the safe harbor should not be allowed to have
    pre-payment penalties, and should not have fees above 2
    percent, which accommodates almost all the lending that's done
    today.
        If you put those protections in place, they will add market
    pressure to stop, for example, a lot of the steering, because
    the steering counts on being able to trap a borrower in loan
    and/or either take a lot of money out in fees.
        Mr. Green. I'm going to have to--yes, sir--
        Mr. Berenbaum. Very quickly, I would build upon Congressman
    Kanjorski's remarks about home evaluation and appraisal
    practices. There are current abuses in the area of broker price
    opinions, and also with regard to the unregulated role that
    appraisal management copies are currently playing in the
    marketplace.
        Mr. Watt. The gentleman's time has expired.
        Mr. Maffei is recognized for 5 minutes.
        Mr. Maffei. Thank you very much, Mr. Chairman. Thank you to
    the witnesses for being here.
        I just want to ask a brief question about some of the
    appraisal processes. I know that many of you have had some real
    concerns about how the appraisal process affects consumers.
        I share those concerns, and I wanted to ask specifically
    about ``so called cost appraisals.'' In fact, I do have a
    letter here that's signed by both the National Consumers League
    and the National Community Reinvestment Coalition, which is
    represented here today by Mr. Berenbaum, among others, that
    speaks directly to the issue.
        It states that, ``We need to return to a system in which
    home appraisals are determined using multiple methods.'' And
    the letter suggests that the cost approach would help to
    stabilize the housing market.
        Mr. Chairman, I ask unanimous consent that the letter be
    included in the record. I just want to put the letter in the
    record by unanimous consent.
        Mr. Watt. Without objection, it is so ordered.
        Mr. Maffei. Okay. Thank you.
        I'll start with you, Mr. Berenbaum, and then ask if anyone
    else has a thought. But what are your thoughts on mandating
    that a qualified appraiser use the multiple valuation methods?
        Mr. Berenbaum. We actually fully support the use of a
    qualified valuation professional, an appraiser, in every loan
    situation.
        Now in the marketplace, that is not the reality today. One
    of our areas of concerns frankly has been the pressure that has
    been historically in this marketplace, brought originally to
    push up numbers. Now it's the exact opposite in an environment
    of short sale and foreclosure, to in fact push down numbers.
        We are also very troubled by the inappropriate use of
    inaccurate automated valuation systems, or AVMs, by many
    securitizers, originators, and other players in the marketplace
    right now.
        They unfairly, and inaccurately in many cases, put
    valuations on property that injure communities, the tax base,
    and the consumer and homeowners alike.
        With regard to cost appraisals, we do believe that they are
    a tool, but just one tool. We do have some concerns about their
    use in low- to moderate-income communities. But again, we are
    looking to have in play as many different practices as possible
    to ensure accurate appraisals.
        Let me add one final point. We feel it would be very
    appropriate for the FFIEC Appraisal Subcommittee to play a role
    with this legislation, if we could augment the legislation as
    it has been presented to address problems with AVMs, to address
    problems with in fact the role of appraisal management
    companies.
        Mr. Maffei. Thank you. That's a real constructive idea.
        I do have a minute or two left. Anybody else have a thought
    on this topic? I'll open it up to the panel.
        Mr. Calhoun. I would just add that I think the appraisal
    situation is an example where it shows that generalized duties
    have little market impact, whereas bright lines requirements
    and bright lines standards are much more effective.
        Virtually every State had a law that said it's illegal to
    coerce appraisers, but that was the rule of the day. We need to
    structure market incentives so people make money off performing
    loans, not off originating loans regardless of whether they
    perform.
        Mr. Berenbaum. And Congressman, if I could quickly build on
    that point. This proves the utility of having attorneys general
    have an active role in the marketplace. Andrew Cuomo and the
    New York State Attorney General's Office is to be applauded for
    their role in developing a code of conduct in the IVCC and
    build on a suggestion--community organizations that was very
    similar.
        Mr. Maffei. As a New Yorker, I appreciate your compliment
    of my very able friend and Attorney General, Andrew Cuomo.
        Thank you very much to the panel, and thank you, Mr.
    Chairman. I yield back.
        Mr. Watt. The gentleman from--
        Mr. Posey. Florida--
        Mr. Watt. --is recognized for 5 minutes. Sorry about that.
        Mr. Posey. Thank you, Mr. Chairman.
        Mr. Calhoun, it has been said that the yield spread
    premium, or the YSP language from the last Congress' bill, that
    there would be no possibility of anyone getting higher
    compensation in return for putting someone in a higher-cost
    loan.
        But your testimony here indicates that's a little bit
    different. And I just wondered if you might expound upon that
    for me a little bit.
        Mr. Calhoun. There are two sections in that provision. And
    the first has a general prohibition against bearing
    compensation. But then there's a rule of construction that
    essentially said you can put any fee into the rate, so long as
    it has been disclosed.
        And so if I walk in for a loan, they can either charge me a
    $5,000 broker fee or a $10,000 broker fee, and put it all in
    the rate, and they're just going to get paid more by raising
    the interest rate.
        So that rule of construction opens a loophole that allows I
    think one of the practices that there has been a lot of
    consensus should be prohibited.
        Mr. Posey. And so as a followup, you see that as a fallacy
    in last year's legislation. Do you see any correction in this
    year's legislation?
        Mr. Calhoun. That loophole was carried forward, is what we
    have suggested. And it follows on the testimony earlier this
    morning from Sandy Braunstein from the Fed, their studies have
    shown the customers lose almost every time when there's a mix
    of an up-front fee and a back-end lender-paid fee to the
    broker. They tend to be double fees, not a substitute for each
    other.
        So we have said if you're going to allow yields for
    premiums, say no up-front fee in addition to that fee that's
    being paid by the lender. Studies show that customers at least
    have a chance under that system.
        Mr. Posey. Now that makes perfect sense. Would you be kind
    enough to give me language that would make a change like that?
    Get it to my staff in the next few days? Would that be a
    reasonable request?
        Mr. Calhoun. We can do that this week, yes.
        Mr. Posey. Okay.
        And also for, let's see, Mr. Berenbaum, yes, there you are.
    The committee has been told--or at least I have understood--
    that Mr. Bernanke promulgated rules this year that will make it
    impossible to get those subprime loans. Why are the Fed's high-
    cost loan protections and its new HOEPA regulations
    insufficient, in your estimation?
        Mr. Berenbaum. Well, let me share a conversation I just had
    with a customer yesterday, who is facing an imminent
    foreclosure. They purchased their home from a major national
    home developer in a brand new development. The home was over-
    valued, after we did a forensic appraisal by the tune of
    $80,000.
        On top of that, they had an income which did not qualify
    them for the purchase of that home, which was a half-a-million-
    dollar home. And they were given an option ARM as a first, and
    a second loan that was due in a period of 5 years.
        They are now struggling to avoid a foreclosure, in fact,
    applying to the President's new initiative to try to stay in
    their home. But that issue, in and of itself right there,
    addresses so many of the loopholes that we are concerned about
    that existed in the marketplace, and why, in fact, regulatory
    recommendations are inadequate to solve the problem.
        We need a transparent law that works from Main Street to
    Wall Street to prevent this from happening again.
        Mr. Posey. And how do you think we might best accomplish
    that? I think everybody really wants that. But it has been
    elusive. What would be your recommended treatment of the
    problem--
        Mr. Berenbaum. Well, I think some of the testimony in the
    first panel, particularly from the Commonwealth of
    Massachusetts, was very instructive.
        In my mind, a strong national law that actually allows
    States to work in concert, in partnership with Federal
    officials, would be ideal. And in fact, that law would allow
    States to bring actions that are new, fresh, that are not
    covered by existing Federal law.
        And so there are examples of that, in the Fair Housing Act,
    in the environmental movement, where in fact Federal and State
    regulators work hand-in-hand, and there is a clear bright line
    standard for all.
        The challenge for you on this committee is to find that
    common ground to establish that standard.
        Mr. Posey. In reading the legislation, you know, throughout
    it's pretty clear that nothing is intended to interfere or
    usurp any of the legislation that's enacted by any States. Do
    you see that as being problematic?
        Mr. Berenbaum. I do think that there are inherent
    limitations in the bill, as introduced, and our written
    testimony speaks to that, as did many of my colleagues at the
    table.
        Mr. Posey. Well, thank you. I'm out of time. I'd like to
    have more time, but I understand the restraint, Mr. Chairman.
        Mr. Watt. The gentleman's time has expired.
        Mr. Miller from North Carolina, if you wish to ask
    questions? Or I'll go to Mr. Cleaver.
        I guess it is me then.
        I think I have been in conversation with virtually
    everybody at this table in one way or another about various
    aspects of what they are concerned about, so maybe I should not
    ask questions, and that will expedite moving along. I mean, I
    think various concerns have been raised by various people, and
    we have been in discussions trying to address those concerns.
    I'm not sure we will ever be able to address Ms. Saunders'
    concern that we not preempt anything, but at least I understand
    more thoroughly what her concern is today.
        Mr. Berenbaum. Mr. Chairman?
        Mr. Watt. Mr. Berenbaum?
        Mr. Berenbaum. If I could just make one final thought
    raised earlier by Mr. Taylor, my CEO, and that is we strongly
    would recommend that H.R. 1231, Chairman Frank's and
    Congressperson Moore's bill, the Foreclosure Rescue Fraud Act,
    be considered at the same time as this legislation. As you have
    heard from many witnesses, as you have seen reported in the
    newspapers, consumer rescue scam fraud is endemic right now.
    Thousands of dollars in equity is being lost with little
    service given, and we applaud that legislation and hope you can
    incorporate it into this legislation.
        Mr. Watt. I would just strongly encourage you to press that
    issue with the Chair. That is a decision that is probably above
    any of our pay grades as we sit here. But--
        Mr. Calhoun. Mr. Chairman, as a native Floridian, if I
    could follow up to Congressman Posey's question there on the
    preemption. There is, in addition to the preemption on remedies
    against assignees or just the holder who buys the loan, and
    most of these loans are sold--I think it is important to
    remember that this bill is still being enacted in the context
    of regulatory preemption by the Federal banking regulators who
    have said that the States cannot do anything, essentially, in
    terms of mortgage regulation against anybody--against
    creditors, against brokers, against assignees, securitizers,
    anyone. And just another one--
        I think there are two lessons from that. One, for most
    loans, this bill will be the only standard, and so it needs to
    be strong and comprehensive. In most loans, particularly with
    the consolidation in the financial industry that we are seeing
    recently, they are going to be originated through federally
    preempted lenders, and so the States aren't going to be add on.
    So it is all the more reason to make sure this bill does the
    job and that that preemption by the regulatory agencies does
    not expand.
        Mr. Watt. Ms. Saunders wants to fuss at me, I'm sure.
        Ms. Saunders. No, no. I would never fuss at you, Mr.
    Chairman.
        I just wanted to add that regardless of preemption, setting
    that issue aside, which is hard for me to do, but for the
    moment, setting it aside, it is very important that the
    remedies in this bill be clear and achievable, and the remedies
    are very confusing. First of all, it will be very difficult for
    any homeowner or their local legal aid attorney to find the
    securitizer, so a remedy against a securitizer is not all that
    helpful.
        Mr. Watt. I think we may be in the process of curing that
    problem.
        Ms. Saunders. Well, that brings me to the second issue,
    which is the right to cure throughout this bill. If you have a
    right to cure that imposes simply the requirement that you do
    what you should have done all along, it creates an incentive to
    the creditor to just violate the law because every once in a
    while when they are caught they just get to cure. There has to
    be a heavy penalty for violating the law, and the penalty needs
    to be applicable for the benefit of the homeowner as against
    anyone who owns the loan.
        And if you want to clean up, you want to allow the creditor
    to be the one holding the bag, then make the securitizer or the
    holder sell the loan back to the creditor when a complaint is
    made. But the homeowner has to be able to go against whoever
    owns the loan. Otherwise, the remedy for that problem cannot be
    a loan modification or stopping of foreclosure.
        Mr. Watt. My time has expired, even though I didn't even
    ask a question, I think. But Ms. Bean, do you wish to be
    recognized for 5 minutes to ask questions of this panel?
        Ms. Bean. If I could.
        Mr. Watt. The gentlelady is recognized for 5 minutes.
        Ms. Bean. Thank you, Mr. Chairman.
        I had a question for Mr. Calhoun. I recall when I closed on
    a home or even done a refinancing, the process is very
    confusing with all the documents. Right now, borrowers have a
    right to request and review a draft of the HUD-1 settlement
    statement, but many of them aren't aware of the fact that they
    can get those documents prior to a closing so they would be
    better informed and prepared. Do you believe it would be more
    helpful for borrowers if we required that they were to receive
    those documents in advance of a closing?
        Mr. Calhoun. I think that would be helpful because, in
    addition to the fact that most borrower's aren't aware of it,
    under current law there is no penalty, the borrower has no
    private right of action to take any recourse if they request it
    and the lender denies it. That provision of RESPA does not have
    any penalty.
        At the same time, I think it is important what Ms.
    Braunstein said, that the Federal Reserve has concluded that in
    a number of areas of mortgage lending, the disclosure is
    helpful and should be made as clear as possible, but it is not
    a substitute for strong, clear, substantive protections. When
    you go in to buy a car, we don't say--they are going to tell
    you all of the engineering defects in the car and you figure
    out whether you want to buy it. We make them sell you a safe
    car, at least they are supposed to. And we need something
    similar in the mortgage context since that is most families'
    most important financial transaction.
        Ms. Bean. All right, I have another question to the group
    and whomever is interested in answering. The underlying bill
    has a title establishing an office of housing counseling in
    HUD, which I support. But in talking with mortgage servicers it
    is apparent that many borrowers have debt problems that extend
    well beyond their mortgage. Do you think it would be
    advantageous to create a certification process at HUD for total
    debt counseling?
        Mr. Berenbaum. The National Community Reinvestment
    Coalition is a national HUD counseling intermediary, and I
    think that there are several issues related to the housing
    counseling programs. First, one, they are underfunded, which is
    a major issue. Second, many of the counseling agencies, because
    of the structure of some of the various modification or
    forbearance programs now are not doing full file review, and
    that is a disservice to the consumers who they are trying to
    advocate for, as well as some of the servicers whom they are
    engaging with.
        I think you can't possibly do informed housing counseling
    without looking at the entire budget situation of a consumer
    and recommending appropriate credit counseling or other
    assistance. It also means looking at if their legal rights have
    been violated and telling that consumer, don't sign a waiver of
    liability or lease of claims that many of the servicers are in
    fact requiring today in modifications. But ASA also does money
    counseling.
        Ms. Bean. Yes?
        Ms. Aponte. We are also a HUD intermediary. We have 50
    housing counseling agencies nationwide. This is something that
    our counselors have asked for many times. They do homeownership
    counseling, but we have been asking for financial counseling
    for low- to moderate-income families for many years, so that is
    something that we would support.
        Ms. Bean. Thank you.
        And the last thing I wanted to mention, as a co-sponsor of
    H.R. 1728, I am supportive of the reforms that we are making in
    the lending process, but concerned that we might be overly
    restricting how we are defining legitimate, safe mortgages or
    qualified mortgages. And I would like your comments on whether
    you are supportive of including FHA, VA, rural housing loans,
    Fannie and Freddie confirming loans, and particularly fixed-
    rate loans that may be beyond a 30-year duration, either a 50-
    or 40-year. That is open to the panel, whomever would like to
    comment as well.
        Ms. Saunders. May I comment?
        Ms. Bean. Yes.
        Ms. Saunders. It makes a lot of sense to want to include
    government-sponsored loans like FHA and VA loans, but we should
    keep in mind that FHA loans have been the vehicle for a lot of
    very bad lending. So just because they are FHA loans or VA
    loans by themselves should not, I think, permit them to be
    included in this safe harbor.
        Second of all, 40-year loans should be used very sparingly
    and carefully. The amount of interest that is added to a 40-
    year loan is dramatic, whereas the effect on the payment is
    fairly small.
        Ms. Bean. You are not really establishing the equity. At
    the same time, in what we have done to rework existing loans
    for many homeowners who have run into trouble, what we have
    done particularly through the FDIC programs--and I hope, Mr.
    Chairman, I can just finish this answer--is allow them to
    extend the term, and I think in some way to preclude someone in
    a similar income situation but doesn't have the past problem to
    get payments down to a level that is affordable and provide
    access to homeownership. I think it is at least worthy of
    consideration, recognizing it is not ideal.
        Mr. Watt. The gentlelady's time has expired.
        Ms. Bean. Thank you, I yield back.
        Mr. Watt. I want to express my thanks to this panel of
    witnesses for their input and encourage them to continue to
    stay engaged as we move toward mark-up next week.
        And while this panel is changing to the next panel, I will
    recognize Mr. Posey for a unanimous consent request.
        You all are excused. Thank you.
        Mr. Posey. Thank you very much, Mr. Chairman. I would like
    to ask unanimous consent to enter into the record two letters,
    one from the Consumer Mortgage Coalition and one from the
    United States Chamber of Commerce.
        Mr. Watt. Without objection, it is so ordered.
        And I had a unanimous consent request myself. I ask
    unanimous consent to submit for the record the statement of
    Chris Koster, attorney general of Missouri, a statement from
    the Credit Union National Association, a statement from the
    American Homeowners Grassroots Alliance, a March 17, 2009,
    letter from National Consumer League, NRCR, and the Teamsters.
    Without objection, these things will be submitted for the
    record.
        And if I could encourage this transition to take place from
    the last panel to the final panel of the day as expeditiously
    and quietly as possible, I will proceed as people are being
    seated in the interest of time with the brief introductions
    just to identify the witnesses, not to do justice to all of
    their credentials:
        Mr. G. Gary Berner, executive vice president, commercial
    real estate, First Niagara Bank, who is testifying on behalf of
    the American Bankers Association; the Honorable John H. Dalton,
    President, Housing Policy Council, on behalf of the Financial
    Services Roundtable; Mr. David G. Kittle, chairman, Mortgage
    Bankers Association; Mr. Michael S. Menzies, Sr., president and
    chief executive officer, Easton Bank and Trust Company. on
    behalf of the Independent Community Bankers of America; the
    Honorable Timothy Ryan Jr., President and Chief Executive
    Officer of the Securities Industry and Financial Markets
    Association; Ms. Denise M. Leonard, chairman, Government
    Affairs, National Association of Mortgage Brokers; Mr. Charles
    McMillan, president, National Association of Realtors; Mr. Jim
    Amorin, president of the Appraisal Institute; and finally, Mr.
    Jim Arbury, senior vice president, government affairs, on
    behalf of the National Multi Housing Council and the National
    Apartment Association.
        Each of you will be recognized for 5 minutes for a summary
    of your testimony. Without objection, your entire written
    testimony and any attachments thereto will be made a part of
    the record.
        Mr. Berner, you are recognized for 5 minutes.

        STATEMENT OF G. GARY BERNER, EXECUTIVE VICE PRESIDENT,
     COMMERCIAL REAL ESTATE, FIRST NIAGARA BANK, ON BEHALF OF THE
                      AMERICAN BANKERS ASSOCIATION

        Mr. Berner. Thank you. Chairman Watt and members of the
    committee, I am Gary Berner, executive vice president of First
    Niagara Bank, Lockport, New York, which is located just outside
    of Buffalo.
        I am pleased to be here today on behalf of the American
    Bankers Association to testify on H.R. 1728. First Niagara Bank
    is one of many banks that has never varied from traditional
    underwriting standards. Our $2 billion residential loan
    portfolio remains strong with first quarter, 30 day and over
    day and over delinquencies of less than 1 percent and
    chargeoffs running at just 2 to 3 basis points, or almost zero.
        The turmoil in the mortgage markets has been very troubling
    to the banking industry, an industry filled with institutions
    that have existed for decades, and in the case of my bank, for
    over 125 years. It has been primarily the actions of loosely
    regulated non-bank lenders who have steered applicants to
    inappropriate mortgage products that have caused tremendous
    damage for both consumers and the banking industry.
        Banks are already a major part of the solution to our
    housing finance problems. At my bank, over the last 6-month
    time period, we have completed 27 repayment plans or
    modifications and have only had 3 re-defaults. I have just
    returned from chairing ABA's industry meetings on housing
    finance, and almost all banks reporting having similar
    successes with their workouts and modifications. As such, we
    are all the more focused today on reaching out to over-extended
    borrowers before they become past due.
        As the committee considers new legislation, it is critical
    to recognize the significant changes that are already underway
    in the mortgage industry that will provide much greater
    protections to the consumers. Last July, the Federal Reserve
    amended Reg Z to address many issues that lead to the housing
    price bubble and the overextension of credit. The new
    regulations address the use of exotic or non-traditional
    mortgages, require traditional underwriting standards, and
    reduce complexity in mortgage products.
        These new regulations are forcing many banks and non-banks
    to renew their mortgage lending operations, even those that
    have always followed sound underwriting principles. Among other
    things, the new regulations define a new category of loans
    based on its APR as a higher priced mortgage loan. While this
    change was targeted to subprime loans, the standards are so
    stringent that they will include some loans that were
    previously classified as prime. This will curtail banks'
    ability to serve many creditworthy borrowers.
        Further changes, including some proposed in H.R. 1728, have
    the potential to impair economic recovery further and should be
    considered carefully. At a minimum, legislation must ensure
    that non-banks comply with the same duties of care as federally
    regulated banks. In fact, all lenders should follow the same
    conservative underwriting practices.
        While H.R. 1728 does seek to close gaps that still exist in
    the mortgage lending market, ABA has a number of
    recommendations to improve the bill. First, ABA recommends a
    two tier safe harbor. Tier one would create an irrebuttable
    safe harbor which would apply only to fully amortizing fixed-
    rate loans of any duration made by ensured depository
    institutions. The loans would be required to be fully
    underwritten and documented and could not be higher priced
    loans under the Truth in Lending Act regs.
        Tier two would create a rebuttable safe harbor for fully
    documented and fully underwritten loans with well-established
    and traditional characteristics. Garden variety traditional
    ARMs with reset and lifetime caps would fall into this tier, as
    would fixed-rate mortgages originated by non-bank institutions.
    It would not, however, include loans deemed non-traditional
    under Federal banking agency regulation or loans considered
    higher priced under the Truth in Lending Act.
        Second, ABA recommends further modifications to the risk
    retention provisions to provide greater certainty in the
    securitization process. Alternatively, we would suggest
    directing the regulators to set standards to achieve this
    purpose.
        Finally, we recommend that the language giving the States
    additional authority over unfair and deceptive acts and
    practices be deleted or synchronized with similar authority and
    other laws to ensure a consistency of approach and results.
        Thank you Mr. Chairman. We hope these suggestions are
    helpful to the committee.
        [The prepared statement of Mr. Berner can be found on page
    156 of the appendix.]
        Mr. Watt. Thank you for your testimony.
        Mr. Dalton, you are recognized for 5 minutes.

     STATEMENT OF THE HONORABLE JOHN H. DALTON, PRESIDENT, HOUSING
           POLICY COUNCIL, THE FINANCIAL SERVICES ROUNDTABLE

        Mr. Dalton. Chairman Watt, members of the committee, I am
    John Dalton, president of the Housing Policy Council.
        First, I want to acknowledge that many lenders and others
    in the mortgage business have made some serious misjudgments
    and mistakes in the last few years. On behalf of the Housing
    Policy Council, I apologize for those misjudgments and
    mistakes. We want to ensure that these mistakes are not
    repeated. We stand ready to work with this committee to ensure
    that appropriate legislative changes are enacted.
        The challenge is to craft a bill that prevents
    inappropriate practices, yet preserves a vibrant system of
    mortgage finance. There are key provisions that must be revised
    to meet this goal. We urge the committee to consider the
    corrective actions that Federal regulators in the industry have
    already taken to address the practices that contributed to the
    current financial crisis.
        Since 2007, the industry has tightened underwriting
    standards, recalibrated credit practices, and realigned
    incentives. Regulators have issued the 2008 HOEPA regulations
    which implement many of the underwriting reforms that were
    proposed by this committee in H.R. 3915 in 2007.
        The Housing Policy Council supports many elements of H.R.
    1728. For example, we believe new loans should be based on the
    borrower's verified ability to repay and that yield spread
    premiums should be prohibited.
        Other provisions in H.R. 1728 have major flaws. I want to
    highlight three of these provisions: the definitions of
    qualified loans; the 5 percent risk retention requirement; and
    the need for uniform national standards.
        The definition of qualified loans is too narrow. There are
    other mortgage products that are safe and should be included in
    the definition. These include VA, FHA, rural housing loans, and
    loans that meet the conforming loan standards for Fannie Mae
    and Freddie Mac. All of these loans must of course meet the new
    underwriting criteria in the bill and in the 2008 HOEPA
    regulations.
        Good loans of a duration other than 30 years, and with
    adequate rates--adjustable rates, excuse me--should also
    qualify. A fully underwritten 15-year or 40-year fixed-rate
    loan or a traditional adjustable rate loan with caps can be as
    safe a loan as a 30-year loan. The presumption that qualified
    loans under this section are in the safe harbor should be
    irrebuttable.
        We agree that lenders should keep some skin in the game.
    However, the 5 percent risk retention requirement will
    significantly reduce the volume of new mortgage loans, increase
    the cost of new loans, or both. FHA, VA, rural housing loans,
    and the loans sold to Fannie and Freddie should be included as
    qualified loans and thus exempted from this requirement. This
    would focus the risk retention agreement on the type of loans
    that have the greatest risk.
        Regulators should be explicitly authorized to apply the 5
    percent requirement on a pro rata basis. Under a pro rata
    approach, both the lender and the assignee would share
    proportionally in any loss. The risk retention requirement
    should be time limited. As drafted, a lender must retain an
    ever-increasing amount of capital against its mortgage loans.
        An 18-month time limit would avoid this excessive build up,
    yet install appropriate underwriting incentives. The committee
    also should authorize the banking regulators to permit lenders
    to implement alternatives to the 5 percent requirement that
    achieve the same goal.
        Finally, the standards created in this bill should be
    uniform national standards. H.R. 1728 is a strong bill with
    significant consumer safeguards. These safeguards should apply
    to all consumers regardless of where they live.
        The Housing Policy Council supports legislation that will
    improve mortgage lending practices. With some modifications, we
    believe that H.R. 1728 can achieve this goal.
        Thank you very much.
        [The prepared statement of Mr. Dalton can be found on page
    200 of the appendix.]
        Mr. Watt. Thank you so much for your testimony, Mr. Dalton.
        Mr. Kittle is recognized for 5 minutes.

       STATEMENT OF DAVID G. KITTLE, CHAIRMAN, MORTGAGE BANKERS
                              ASSOCIATION

        Mr. Kittle. Thank you, Mr. Chairman.
        MBA shares this committee's commitment to improving
    mortgage regulation. Doing so is the best path to restoring
    investor and consumer confidence and assuring the availability
    and affordability of mortgage credit for years to come. At the
    same time, we caution that if regulatory solutions are not
    well-conceived, they risk worsening a credit crisis that
    trillions of public dollars have yet to resolve.
        Since the last hearing on this subject, MBA was proud to
    offer the Mortgage Improvement and Regulation Act, a
    comprehensive proposal that would ensure Federal regulation for
    the entire mortgage industry and that would establish a strong
    national consumer protection standard. MIRA, as we call it,
    builds on H.R. 3915 from 2007 as well as the Federal Reserve's
    HOEPA rules. It represents our industry's commitment to fixing
    the problems in the market. We know that the current crisis
    requires a bold response and we are proud that MIRA would
    achieve this while ensuring a vibrant credit market in the
    future.
        Our proposal shares the same goals as H.R. 1728, though we
    differ in some critical respects. My written statement
    comprehensively discusses our concerns with the bill, but I
    would like to highlight the most important issues. First and
    foremost, H.R. 1728 does not establish a single strong consumer
    protection standard. By allowing additional State and local
    laws, the bill would perpetuate and expand an already uneven
    and confusing regulatory patchwork where the costs are
    ultimately borne by the consumers. A better approach would be
    to preempt State laws but still provide a pivotal role for
    State regulators. This is the approach we took in our MIRA
    proposal and we think it will better serve all stakeholders.
        We are just as concerned about the bill's mandate that
    lenders retain at least 5 percent of the credit risk presented
    by non-qualified mortgages. Lenders already have skin in the
    game through their responsibilities to investors. When a loan
    fails as a result of bad origination practices, lenders are
    forced to repurchase it. This is an important and extremely
    effective check on bad underwriting.
        The new additional requirement, however, would have far-
    reaching and damaging consequences, particularly to non-
    depository lenders and to banks that will have to further
    increase their capital at a time when taxpayers are the most
    likely source of that capital. Ultimately this idea will narrow
    choices and increase costs for many borrowers.
        MBA believes the definition of a qualified mortgage is far
    too limited. H.R. 1728 as currently drafted would raise costs
    on broad categories of safe mortgage products. They include
    loans with adjustable rates, many jumbo loans, fixed 15-, 20-,
    25-, and 40-year loans, FHA, VA, and rural housing loans, as
    well as some Fannie and Freddie mortgages. We urge the
    committee to provide more flexible standards that will still
    protect borrowers.
        The regulators should have the authority to allow loans to
    be qualified unless they contain higher risk features such as
    negative amortization provisions or no documentation. This
    would ensure that sound credit options are available to the
    full range of borrowers.
        The bill does not contain bright line safe harbors that
    would allow prudent behavior without costly and unnecessarily
    litigation. This will deter lenders and investors from being
    part of the market even for qualified mortgages.
        We believe the prohibitions against steering are ambiguous.
    They could prohibit certain important and legitimate incentive
    based forms of compensation as well as payments to lenders from
    the secondary market.
        Finally, HUD should withdraw its RESPA rule and join the
    Fed to make the mortgage process more transparent and work
    better for consumers. RESPA and TILA disclosures should work
    together to give the borrowers the information they need to
    make the best choices and to make life harder for predators.
    Over half of the House of Representatives echoed similar
    concerns in a letter last year.
        Congress is facing a once-in-a-lifetime opportunity to
    improve the mortgage lending system. H.R. 1728 is an important
    first step in what we hope will continue to be a collaborative
    and ultimately fruitful process. We at MBA look forward to
    working with this entire committee to improve this bill and
    enact strong mortgage reform as soon as possible.
        Thank you Mr. Chairman.
        [The prepared statement of Mr. Kittle can be found on page
    216 of the appendix.]
        Mr. Watt. Mr. Menzies is recognized for 5 minutes.

     STATEMENT OF R. MICHAEL S. MENZIES, Sr., PRESIDENT AND CHIEF
    EXECUTIVE OFFICER, EASTON BANK AND TRUST COMPANY, ON BEHALF OF
              THE INDEPENDENT COMMUNITY BANKERS OF AMERICA

        Mr. Menzies. Thank you, Chairman Watt, and members of the
    committee. My name is Mike Menzies, and I am president of
    Easton Bank and Trust in Easton, Maryland. I am also honored to
    be the chairman of the Independent Community Bankers of America
    and it is my pleasure to speak on behalf of our 5,000 community
    bank members.
        While we do have concerns with some of the approaches to
    reform taken in H.R. 1728, we commend you, Chairman Watt and
    Representative Miller and Chairman Frank, for initiating the
    process of achieving needed reforms for your work on
    comprehensive mortgage reform legislation. Congress and the
    regulators and the financial services industry working together
    must develop strong measures to avert any recurrence of this
    foreclosure crisis. Imprudent and abusive and unethical lending
    practices in the subprime mortgage market produced this
    situation. It is appropriate for Congress to consider
    legislation to improve the regulation of residential mortgages.
        Despite the challenges of the credit market, I am pleased
    to report to you that community bank mortgage originations
    remained steady throughout 2008. We estimate community banks
    originated approximately 800,000 mortgage loans for more than
    $125 billion last year, and Easton Bank and Trust has
    experienced record mortgage volumes in the first quarter of
    this year.
        Policymakers should avoid hindering the flexibility
    community banks use to meet customer needs at different stages
    in their lives. Let me tell you a story about just one of my
    customers. As chairman of our local hospice, I was approached 2
    years ago by a woman who left her job to serve as the hospice
    nurse of her dying husband. She had depleted most of her
    savings, yet only had equity left in her home. I made a 1-year
    interest-only loan to her with the understanding that after her
    husband passed away, she would return to work. Her husband
    survived the pancreatic cancer for almost a year and then she
    returned to work, and re-established her income. We found it
    necessary to extend the loan for 6 months interest only. When
    her income was re-established, we placed her in the secondary
    market.
        This is the type of flexibility community banks need for
    their customers. We do have skin in the game. A flexible yet
    sensible mortgage finance system serves the best interest of
    consumers in the long run. Most community banks are very
    conservative in their underwriting practices and a consumer's
    documented ability to pay is a central part of our underwriting
    standards. Nevertheless, the new lending standards articulated
    in this bill, along with the cause of action provided to
    enforce new standards, raises concerns for community banks.
        H.R. 1728 creates more litigation risk than the bill
    adopted by the House in the last Congress by providing no truly
    clear presumption of compliance for any mortgage product. We
    suggest the legislation provide more certainty by adopting a
    clear presumption of compliance for mortgages meeting interest
    rate caps. Moreover, the presumption should apply to a broader
    range of safe mortgage products that are beneficial to
    consumers, not just 30-year fixed-rate mortgages. Without a
    wider safe harbor, the legislation could cause a rigidity that
    prevents lenders from responding to varying financial
    environments in local markets. We strongly urge the committee
    to remove the 30-year fixed-rate requirement from the qualified
    mortgage definition and to make other changes that preserve the
    choices enjoyed by consumers today, particularly in rural and
    small towns.
        Community bankers believe that regulation of non-bank
    originators must be significantly strengthened. New anti-
    steering regulations must be focused on this part of the
    industry where regulation is most needed.
        We are further concerned about Section 103's restriction on
    compensation. Our interpretation is that it would prevent a
    bank from offering a consumer the opportunity to lower their
    interest rate by paying points. The legislation should exempt
    this standard practice to offer consumers lower rates.
        Mr. Chairman, thanks for this opportunity to testify on
    behalf of the Independent Community Bankers of America. I look
    forward to your questions.
        [The prepared statement of Mr. Menzies can be found on page
    245 of the appendix.]
        Mr. Watt. Thank you, Mr. Menzies.
        Mr. Ryan is recognized for 5 minutes.

    STATEMENT OF THE HONORABLE T. TIMOTHY RYAN, Jr., PRESIDENT AND
      CHIEF EXECUTIVE OFFICER, SECURITIES INDUSTRY AND FINANCIAL
                          MARKETS ASSOCIATION

        Mr. Ryan. Thank you, Mr. Chairman. I am pleased to appear
    before the committee on behalf of the Securities Industry and
    Financial Markets Association and the American Securitization
    Forum. We appreciate the opportunity to highlight just a few
    concerns or considerations that we would like you to focus on
    in your deliberations.
        We believe the 2007 bill that this committee worked on,
    H.R. 3915, struck a reasonable balance, and we are encouraged
    that the committee used that bill as a starting point for this
    year's H.R. 1728. We also understand that the mortgage market
    is vastly different than it was in the fall of 2007. The
    housing GSEs have been placed into government conservatorship,
    a number of major mortgage market participants have gone out of
    business, and the government has taken unprecedented steps to
    stabilize the financial system, minimize foreclosures, and
    encourage mortgage lending. Given these developments and the
    dormant state of the existing securitization and subprime
    mortgage market, we believe that every effort should be made to
    take bold action now to facilitate a functioning and fair
    mortgage market for the future.
        We have three key suggestions for this year's bill. One,
    protect the prime market. We recommend the committee revise the
    current legislation to ensure the continued functioning of the
    prime mortgage market. As currently drafted, the bill would
    impose potential legal liability on secondary purchasers of all
    mortgage loans and provides only a rebuttable presumption
    against liability for qualified mortgages, a narrow subset of
    certain 30-year fixed-rate loans. There are a host of other
    prime loans that provide meaningful benefits to qualified
    borrowers depending on their individual situation and the
    existing interest rate environment. We hope the committee will
    expand and strengthen this safe harbor to help ensure the
    continued availability of a host of different prime loans. In
    particular, expand the definition of qualified mortgages to
    include other prime loans. They have been mentioned by other
    members on the panel, so I will not repeat.
        Two, provide a meaningful safe harbor for secondary
    purchasers of these prime loans by limiting the rebuttable
    presumption to creditors. This language was included in the
    2007 legislation so that secondary purchasers can continue to
    provide liquidity to the prime market and should be added back
    to H.R. 1728.
        Number two, better align incentives in the subprime
    mortgage market. Clearly, there were problems in the subprime
    market that should be addressed legislatively to assure they do
    not happen again. Most bad actors are gone. Regulations have
    been implemented to facilitate stronger underwriting standards.
    Far fewer bad loans are still being made and fewer still are
    securitized. But thoughtful legislation can help prevent
    backsliding when markets turn around.
        One addition included in H.R. 1728 is a minimum 5 percent
    risk retention requirement for creditors of non-qualified
    mortgages. We agree that requiring creditors to have some skin
    in the game may help better facilitate the traditional lender/
    borrower relationship. European regulators are far along in the
    process of developing legislation that would require
    originators to retain skin in the game. Their approach has been
    to include many complex specifics in a piece of pan-European
    legislation that would be relatively difficult to amend should
    they find change to be required once into law. We note that the
    European approach has been to focus on the retention of risk in
    securitization exposures, in other words, in securities as
    opposed to the approach in your bill which is focused on loan
    level risk retention.
        A more effective approach would be for Congress to lay out
    the broad principles for what retention should encompass and to
    designate the relevant regulator to implement those principles
    and to monitor compliance. In addition, we appreciate the
    committees willingness to facilitate an open regulatory process
    by putting such a requirement in place. Accordingly, we
    recommend providing regulatory flexibility to consider, one,
    the duration of risk retention, the size and calculation of the
    retention and circumstances when hedging may be used that
    protects safety and soundness and ongoing business flexibility.
        Last, we think there should be clear and national
    standards. That is key. So we would recommend establishing a
    clear, pre-emptive single national standard for secondary
    mortgage participants related to the ability to repay and net
    tangible benefit test established in H.R. 1728.
        Thank you very much.
        [The prepared statement of Mr. Ryan can be found on page
    253 of the appendix.]
        Mr. Watt. Thank you, Mr. Ryan.
        Ms. Leonard, you are recognized for 5 minutes.

      STATEMENT OF DENISE LEONARD, CHAIRMAN, GOVERNMENT AFFAIRS,
                NATIONAL ASSOCIATION OF MORTGAGE BROKERS

        Ms. Leonard. Thank you. Good afternoon, Mr. Chairman, and
    members of the committee. I am Denise Leonard, chairman of
    government affairs at the National Association of Mortgage
    Brokers. Thank you very much for the opportunity to be here
    today.
        Like most of my fellow NAM members, I am a small business
    owner living in the same community in Massachusetts where I
    work. The mortgage industry is much different than it was when
    I first started in the business over 19 years ago. Today, we
    have a deconstructed market. Origination, funding, selling,
    servicing, and securitizing can occur separately or can all
    fall under one entity. That is why we are especially pleased by
    the all-originator approach taken in H.R. 1728 and its
    comprehensive inclusion of all aspects of the mortgage process.
    We commend this committee's leadership on realizing that
    consumer protections should relate to function rather than
    entity structure. We applaud your response to the current
    problems in our mortgage market and share a resolute commitment
    to protecting consumers throughout that process.
        As you know, a great deal of change has been affected
    already through legislative and regulatory action. We commend
    the all-originator approach as it is paramount to ensuring true
    consumer protection.
        There are many provisions contained in H.R. 3915 that NAM
    supported, most notably the section now called the Safe Act
    that became law as part of the Housing and Economic Recovery
    Act, requiring loan originator standards for licensing and
    registration. Like 3915, NAM is extremely supportive of the
    overall concepts and provisions embodied in Title 1 and Title 2
    of H.R. 1728. However, we remain extremely concerned that
    specific provisions of Title 3 will further harm many
    consumers.
        More stringent standards for all originators is something
    that NAM has consistently advocated for since 2002, and we
    again support the all originator approach to a Federal duty of
    care and believe its value lies in the uniformity of treatment
    of all competitors in the mortgage industry.
        We support the intent of the language contained in Section
    103, which prohibits originators from persuading consumers into
    products based solely on compensation. We believe that the
    anti-steering provision, coupled with the ability to repay
    provision, if interpreted correctly, should be an effective
    means of protecting consumers from being placed into loans
    solely for reasons of higher compensation without completely
    prohibiting consumer choice.
        Fortunately, the global provisions of H.R. 1728 do not
    legislatively pick winners or losers or further disadvantage
    small business or harm consumers in the mortgage industry.
    However, it is important to note that issues remain that can
    and will negatively impact the benefits that the tenets of this
    bill stand to establish, the most notable of which are the Home
    Valuation Code of Conduct and RESPA.
        The Home Valuation Code of Conduct, or HVCC, is an
    agreement that was forced on the government--the GSEs--by the
    New York Attorney General. We are supportive of the concepts
    included in this bill and the Federal Reserve Board's approach
    to appraisal standards as they are applied uniformly to all
    industry parties regardless of who orders the appraisal whereas
    the provisions in the HVCC do not. In addition, the HVCC create
    a de facto regulation that did not go through the public debate
    and open process as required by the Administrative Procedures
    Act and will cause serious harm to consumers, brokers and
    independent appraisers if it is allowed to stand. It is set to
    go into effect in one week, and we encourage you to urge the
    FHFA to withdraw it before its effective date.
        In addition, a significant component of the RESPA rule
    directly conflicts with H.R. 1728 by imposing an asymmetrical
    disclosure provision that unfairly exacerbates the unequal
    treatment of mortgage transactions. We believe HUD should
    withdraw the RESPA rule to work with conjunction with the
    Federal Reserve Board and coordinate its activities.
        NAM appreciates the opportunity to appear before you here
    today, and I am happy to answer any questions you may have.
        [The prepared statement of Ms. Leonard can be found on page
    224 of the appendix.]
        Mr. Watt. Thank you, Ms. Leonard.
        Mr. McMillan is recognized for 5 minutes.

    STATEMENT OF CHARLES McMILLAN, PRESIDENT, NATIONAL ASSOCIATION
                              OF REALTORS

        Mr. McMillan. Thank you, Chairman Watt, and distinguished
    members of the committee. Thank you for inviting me here to
    testify on behalf of H.R. 1728, the Mortgage Reform and Anti-
    Predatory Lending Act of 2009. I am Charles McMillan, 2009
    president of the National Association of Realtors, a Realtor
    for more than 25 years, director of Realtor relations and
    broker of record for Caldwell Banker Residential Brokerage,
    Dallas/Fort Worth.
        I testify here today on behalf of more than 1.2 million
    Realtors who are involved in all aspects of the real estate
    industry. Specific to H.R. 1728, mortgage lending reform is
    paramount to our economic stability and a critical step in the
    housing market recovery. We appreciate your tackling this very
    important issue.
        Realtors believe H.R. 1728 is properly focused. However,
    there are some areas of the bill that could result in
    unintended consequences for real estate professionals and the
    consumers we serve. Let me highlight five areas of concern for
    your consideration:
        First, we believe the definition of ``mortgage
    originator,'' as outlined in Section 101 of the bill, is way
    too broad. Everyday, Realtors provide guidance to our clients
    on what information they need to be apply for a mortgage. We
    also may discuss prevailing mortgage rates and products and may
    even recommend a number of loan officers. In providing these
    services, Realtors would be considered originators and
    therefore subject to the requirements currently set forth in
    H.R. 1728. Likewise, home sellers, who provide financing to a
    buyer, would also be subject to the same requirements as
    lending institutions and mortgage brokers. We respectfully
    request that you explicitly exclude real estate professionals
    and consumers who provide seller financing from this
    definition.
        Second, NAR supports requiring originators who refinance a
    mortgage to verify that the new loan provides a significant
    benefit to the borrower. However, we suggest adding specific
    language that requires the lender to weigh the borrower's
    circumstances, all terms of the new loan, the fees and other
    costs of refinancing, prepayment penalties, and the new
    interest rate compared to those of the original loan.
        Third, Realtors believe that the safe harbor criteria in
    Section 203 are too narrow, and we have concerns that
    conditions for rescinding the loan are too broad. We recommend
    you offer more protection to mortgage originators in the
    rebuttal presumption and that you expand the safe harbor
    provision to encompass more than just 30-year fixed-rate
    mortgages. If the safe harbor provision is not expanded, we
    fear that the credit risk retention requirement in Section 213
    could prompt lenders to stop offering products that are not
    covered under the safe harbor. In other words, the impact of
    the credit risk retention requirements depends heavily on what
    is included in the safe harbor.
        Fourth, Realtors support efforts to include taxes,
    insurance, and other homeowner fees in escrow for subprime
    mortgage loans. However, we believe borrowers who make at least
    a 20 percent downpayment should have the option to budget for
    these payments independently.
        And, finally, Realtors believe H.R. 1728 helps strengthen
    the accountability and oversight of appraisers while also
    creating new consumer protections such as allowing borrowers to
    obtain a copy of all appraisers prior to closing.
        NRA applauds the committee's effort to craft comprehensive
    legislation that ensures safe and affordable mortgage lending.
    This bill is a major step in the right direction.
        In conclusion, I would like to reiterate that you consider
    making the adjustments outlined today to ensure that the
    legislation does not cause unintended consequences and unduly
    restrict the marketplace.
        Thank you for this opportunity to present our thoughts. As
    always, the National Association of Realtors stands ready to
    work with Congress and our industry partners to help facilitate
    a full economic recovery.
        [The prepared statement of Mr. McMillan can be found on
    page 239 of the appendix.]
        Mr. Watt. Thank you, Mr. McMillan, for your testimony.
        Mr. Amorin is recognized for 5 minutes.

        STATEMENT OF JIM AMORIN, PRESIDENT, APPRAISAL INSTITUTE

        Mr. Amorin. Thank you. I am honored to represent the
    Appraisal Institute and our industry partners, the American
    Society of Appraisers, the American Society of Farm Managers
    and Rural Appraisers, and the National Association of
    Independent Fee Appraisers.
        Mr. Chairman, H.R. 1728 is a good bill. It builds on H.R.
    3915 from the last Congress, refined in light of our tough
    learning experiences over the last several months. It is a
    back-to-basics approach to plugging many of the holes the
    current crisis revealed in our mortgage finance system.
        We applaud the bill's recognition that greater due
    diligence is essential to extend protections for lenders and
    consumers. H.R. 1728 requires physical property visits for
    high-cost mortgages. We submit that the vast majority of
    transactions merit similar protections, including subprime,
    high loan-to-value loans, and conventional loans. Too often,
    so-called ``drive-by appraisals'' have proven inadequate.
    Indeed, while some lenders are moving away from this practice,
    many appraisals in recent years have been developed without
    even seeing the property. Corruption thrives in the dark. This
    bill protects consumers by bringing the true costs and risks of
    mortgage transactions into the open. Definitions of and
    regulations around new entities, like appraisal management
    companies and BPOs, will bring policy up-to-date with current
    realities.
        America's professional appraisers are particularly pleased
    by this bill's realistic approach to combating the pressures we
    often experience from loan originators and others to skew our
    valuations for their convenience. Making it illegal for anyone
    to seek to improperly influence the outcome of our work goes
    far to close a disastrous loophole that figured in the current
    industry crisis. What good does it do to employ competent,
    trained, and credentialed appraisers, using the most
    sophisticated methodologies, if their conclusions must give way
    to a pre-determined number? To protect the appraiser is to
    protect the consumer.
        H.R. 1728 caulks another gap in our system by giving the
    Federal Appraisal Subcommittee effective tools like rule-making
    authority and authority for interim sanctions to oversee and
    conduct enforcement activities over State appraisal boards.
    Here, the Appraisal Subcommittee gains alternatives to the
    nuclear option of de-certifying a State and halting
    transactions there. This bill also provides much needed
    resources for State and Federal enforcement.
        We suggest that the Appraisal Subcommittee can be further
    improved by adding representatives from other relevant
    agencies, like the Department of Veterans Affairs, the Federal
    Housing Finance Agency, the SEC, and the Federal Trade
    Commission. As an advisory board of stakeholder consumers,
    professional appraisal and real estate finance organizations
    could also contribute to the ASC's effectiveness.
        On a broader note, the single most effective action would
    be to close the glaring loopholes Federal agencies have
    progressively drilled to circumvent crucial appraisal
    requirements. Currently, there are 13 exemptions from the
    requirement for an appraisal, including the $250,000 di minimis
    threshold. This threshold can exempt nearly all homes in many
    communities.
        This legislation can be strengthened by limiting broker
    price options and automated valuation models in mortgage
    origination or mortgage servicing, particularly where markets
    have materially changed, as all too many have lately. Delivered
    by those who lack experience or training in valuations, BPOs
    invite conflicts of interest. Yet, Federal banking agencies
    encourage the use of these cut-rate substitutes for competently
    developed appraisals.
        Another step, a bare minimum, is the regulation of
    appraisal management companies. AMCs charge ``appraisal
    management fees,'' the details of which are not fully disclosed
    to the consumer. Consumers unwittingly believe that this
    includes a quality appraisal when in fact it is typically a
    cut-rate substitute. Because AMCs and lenders cram into these
    fees other undisclosed management charges, consumers are short-
    changed by quick valuations by AMC contractors paid a fraction
    of the normal compensation. Since appraisal fees are
    artificially capped by current Federal policy, this guarantees
    that corners will be cut. To remedy this irrational cap,
    Congress should direct HUD to revisit Mortgage E-Letter 97-46
    and require transparency and full disclosure of appraisal fees
    and any additional management related charges.
        Mr. Chairman, this bill plugs many holes in our mortgage
    finance system, but if we do not plug them all, our economy
    will continue to sink. This is a moment of opportunity to get
    back to the basics.
        Thank you.
        [The prepared statement of Mr. Amorin can be found on page
    103 of the appendix.]
        Mr. Watt. Thank you, Mr. Amorin.
        Mr. Arbury, you are recognized for 5 minutes.

      STATEMENT OF JIM ARBURY, SENIOR VICE PRESIDENT, GOVERNMENT
     AFFAIRS, ON BEHALF OF THE NATIONAL MULTI HOUSING COUNCIL AND
                   THE NATIONAL APARTMENT ASSOCIATION

        Mr. Arbury. Thank you, Mr. Chairman, and members of the
    committee. I would like to thank you on behalf of the National
    Multi Housing Council and the National Apartment Association
    for the opportunity to provide the committee with important
    information about the multi family apartment rental sector as
    you begin debate on H.R. 1728.
        First, I would like to thank Lisa Blackwell, our VP of
    housing policy, who worked so tirelessly on these issues.
        As you take action to address the foreclosure crisis and
    the problems that accompany it, we urge you to carefully
    consider the meaningful differences between the single family
    condo, multi-unit sector on the one hand, such as duplexes and
    four-plexes, and the apartment sector, which we define as
    properties with five or more units. Without a proper
    understanding of those differences, any actions taken to
    address the single family meltdown may cause unintended
    consequences for the apartment sector. Understanding the needs
    of the apartment sector is more important now than ever because
    America is relying increasingly on rental apartments to house
    our citizens.
        The word ``multi-unit'' has been used to encompass not only
    duplex and four-plexes but also multi-family apartment rental
    communities with five or more units. So conveniently people who
    use the word ``multi-unit'' blur the distinction that is
    necessary between the big foreclosure problem that is out
    there, which is primarily single family, condos and maybe some
    duplexes and four-plexes, and apartment rental properties.
        Nobody likes to see people evicted from their homes as we
    saw last year before various lenders announced a moratorium on
    evictions. Before the moratorium, many people who had purchased
    a single family or condominium home during the housing bubble
    could not make their mortgage payments. And since single family
    houses and condos are intended to be ownership housing, the
    lenders were eager to move that housing as quickly as they
    could. This resulted in evictions, but then the lenders found
    out that there were few buyers. Ownership housing is
    fundamentally different from multi-family apartment rental
    housing. We are not in the business of selling. We are in the
    business of renting homes to millions of Americans. In fact,
    there are over 15 million apartment homes in this country.
        If a multi-family apartment rental community goes into
    foreclosure, residents are not evicted. Foreclosure does not
    mean eviction in the multi-family apartment rental sector.
    There is a much more orderly transition. The community
    continues to be managed as a rental community. We want to
    retain residents, not evict them.
        One only has to look at the history of what happened during
    the recession of the late 1980's and early 1990's when a number
    of apartment communities that had been overleveraged went into
    foreclosure. There were no stories about evictions from those
    communities because of the foreclosure. Multi-family apartment
    rental communities, those with five or more units, are
    fundamentally different from where the huge national problem
    with foreclosure/eviction lies.
        I also offer this perspective to help you understand why it
    is critical that any actions you take to address the
    foreclosure crisis not adversely affect the ability of the
    apartment sector to meet the great demand for affordable rental
    housing. We truly understand the committee's desire to protect
    renters who face eviction because they are renting a foreclosed
    property, but the proposed tenant protections included in H.R.
    1728 and the stand-alone bill, H.R. 1257, the Protecting
    Tenants and Foreclosure Act of 2009, could have many unintended
    consequences that could lead to less private investment in
    affordable multi-family rental apartment or housing.
        Therefore, we strongly oppose provisions in these bills
    that would essentially mandate participation in the voluntary
    Section 8 voucher program. Specifically, the legislation
    requires the immediate successor and interest of a foreclosed
    property to be subject to any pre-existing lease Housing
    Assistance Payments, HAP contracts, for Section 8 recipients.
        Through changes in the language to the HAP contract, the
    legislation attempts to subject the new owner to the immediate
    successor and interest to the existing HAP contract that was
    agreed to by the previous owner. There are many problems with
    this provision. First, it is not clear how it would be applied
    considering that the new purchaser is not party to the existing
    HAP contract. Further, the HAP contract is not a recorded
    covenant or lien that passes with transfer of title to the
    property. Finally, it is not clear whether this new requirement
    subjects to the immediate successor and interest to the
    contract violations of the previous owner.
        When Congress created the Section 8 Program, it explicitly
    made the program voluntary because it recognized that there are
    costs and burdens imposed on property owners who choose to
    participate. Now this legislation seeks to mandate that in the
    event of a foreclosure, the immediate successor and interest
    would subject to the HAP contract of the previous owner. In
    other words, Section 8 participation would be mandatory.
        We fully support Section 8. It is a critical program for
    meeting the housing needs of millions of Americans and some
    firms willingly participate in the program. But historically
    the program has been troubled with inefficiencies and
    bureaucratic requirements that make it more expensive to rent
    to a Section 8 voucher holder than to a market rate renter.
    Instead of making participation mandatory, we need to reform
    the program.
        And you should also understand that with a Section 8
    voucher, when there is a foreclosure, the person does not lose
    their voucher.
        Just in closing, in any economic cycle, good or bad, multi
    family foreclosures will occur for a variety of reasons. The
    new owners come and there is an orderly transition to better
    management of the property.
        Thank you.
        [The prepared statement of Mr. Arbury can be found on page
    149 of the appendix.]
        Mr. Watt. Thank you so much for your testimony. I thank the
    entire panel for their testimony. Mr. Miller from North
    Carolina is recognized for 5 minutes for questions.
        Mr. Miller of North Carolina. Thank you, Mr. Chairman. Mr.
    Kittle, Robert Couch testified before this committee on behalf
    of your organization on November 5, 2003. And he said that,
    ``Through innovations in the mortgage finance industry, through
    various financing and risk-enhancing tools created for the
    specific purpose of extending credit to our more needy
    communities, credit-impaired individuals now have ample
    opportunity to obtain loans through this non-prime or subprime
    market.'' He said that, ``A truly amazing mortgage structure,
    based upon an international secondary market, has given the
    American population the best, cheapest and most efficient
    mortgage capital system in the world.'' Mr. Kittle, is there
    any part of that that you will not back?
        Mr. Kittle. Well, Congressman Miller, I was not here when
    he made that testimony, and he spoke for the Association at
    that time in that environment, but I will say that the
    statistics are today that 7 out of 10 of those loans that were
    made are still paying on time, which means 7 out of 10 of every
    customers who got a subprime loan got into a home that they may
    not have been able to purchase before. That would be the only
    answer that I can give you. I did not have the facts in front
    of me that he gave that day and, again, I was not here when he
    made the testimony.
        Mr. Miller of North Carolina. Do you disagree with the
    statistics that I have heard frequently, that more 70 percent
    of subprime loans were actually made to people who already
    owned their homes, they were refinances?
        Mr. Kittle. I do not know how to respond to that. I do not
    agree or disagree with that because I have not seen the numbers
    on it.
        Mr. Miller of North Carolina. Okay. Mr. Dalton, I
    appreciate that you have acknowledged serious mistakes--serious
    misjudgments and mistakes and that you apologized for those
    misjudgments and mistakes. But looking more closely at the
    nature of what you appear to be apologizing for, you say, ``In
    all candor, these actions were well-intentioned and were taken
    as part of an effort to expand housing opportunities for
    Americans.'' The fact that there were intellectual misjudgments
    seems to be beyond argument. The fact that underwriting was
    seriously flawed, the fact that the economic assumptions were
    entirely off seems to be beyond any possible dispute. But do
    you acknowledge that there was any failure not just of
    intellectual analysis but of moral compass?
        Mr. Dalton. Mr. Miller, I think these mistakes were made in
    good faith, but they were mistakes. Our industry made mistakes,
    I represent I made mistakes, and those mistakes contributed to
    the economic crisis that we are currently experiencing. And for
    that, I offer a genuine apology, but let me say that by the
    same token, we want to move forward, and I think you have a
    proposal in this legislation that can be improved, and we think
    will improve the mortgage industry and we are in favor of doing
    that. And that is the reason I am here.
        Mr. Miller of North Carolina. And I have heard that,
    ``let's look forward, not backwards'' many times, in many
    circumstances but, again, ``In all candor, these actions were
    well-intentioned and were taken as part of an effort to expand
    housing opportunities for Americans,'' was the pursuit of
    profits not your principal motivation, your industry's
    principal motivation in mortgage lending?
        Mr. Dalton. Our companies are in business to make a profit,
    and I do not apologize for that.
        Mr. Miller of North Carolina. I am not asking you to
    apologize for that, but you attribute it to an effort to an
    expand housing opportunities. Well, you were not Fannie and
    Freddie, you did not have a dual mission, right? You just had a
    mission of making profits, isn't that correct?
        Mr. Dalton. I would not agree with that, Mr. Miller. I
    think that the people who are in this business do think that
    there is importance to homeownership and do think that
    homeownership is an opportunity for the American people to
    create equity and live the American dream. But the fact is we
    do live in a capital system that I applaud, and I think it is
    good.
        Mr. Miller of North Carolina. My time is expiring. I have a
    question both for you, Mr. Dalton, and for you, Mr. Ryan: 8 to
    10 million families will lose their homes to foreclosure in the
    next 4 years, according to economists' forecasts. During the
    period that those mortgages were made, this financial sector
    was making more than--the 2004 to 2006 period, was making more
    than 40 percent of all corporate profits. You do not think that
    there was any overreach, that there was any moral failing in
    any of your conduct?
        Mr. Watt. The gentleman's time has expired. If the witness
    cares to answer, he can answer very briefly.
        Mr. Ryan. I will answer it very quickly, because I will say
    what I have said here I think 4 times in the last 2 months. At
    least our members, and many of the groups here represent the
    same people, the large financial institutions in this country,
    ours are global. As I have said before, we, especially in some
    of the subprime products and the way they were structured and
    distributed, we pushed the financial engineering to a level of
    complexity that was unsustainable and that was a mistake. We
    all know that. You have heard that from the CEOs of these
    companies too, and we are trying to change it. So we applaud
    your effort to give some symmetry and some sensibility to a
    mortgage market going forward because we all need it. Thank
    you.
        Mr. Watt. The gentleman's time has expired. Mr. Posey is
    recognized for 5 minutes.
        Mr. Posey. Thank you, Mr. Chairman. And I thank each and
    every one of you for your testimony today. We have maybe the
    greatest group of well-credentialed problem-solvers since I
    have been in some of these meetings, and I wish we could lock
    you all up in a retreat for a weekend, and let you put your
    thoughts together. How about let's strike, ``lock up.''
        Mr. Watt. It may be better to lock them up with the last
    panel of witnesses.
        [laughter]
        Mr. Posey. Yes, and I think you all could really help find
    a roadmap to a solution for the crisis that this country is now
    in. We have heard the Fed's game plan and it is basically five
    Hail Mary's. Operate on a crisis de jour, and I know in private
    business, for better or for worse, you all do not work like
    that, you had road maps and you have systematic plans. And so I
    wish I had time to ask each and every one of you questions, but
    I learned my first day on the job here, we only get 5 minutes,
    and most of the witnesses or panelists we had, if you asked
    them what time it is, they would spend 4 minutes and 59 seconds
    describing the clock, the color of the hands, and you would
    never get your answer, so what I have done before, and unless
    there is an objection, I will do today, is spend my remaining
    time asking some questions and requesting your response to the
    committee in writing. Typically, it is about 30 days, I think,
    before these are officially requested and it is expected you
    could get a response in 30 days.
        From that, what I would like to do is request from each one
    of you that you provide a one-page summary of your personal
    observation of how you think we got in this financial crisis.
    And if you think there is some culpability on the part of
    Congress, I hope that you will be candid and say so. And rather
    than ask each and every one of you yes or no, could you just
    shake your head yes if you understand the question. Let the
    record show every head shook yes except Mr. Arbury. Mr. Arbury?
    Yes, and he shook yes. Thank you.
        As I mentioned earlier, I think that you all could have
    some great input with what you bring to the table on a
    potential road map to recovery, so I would also request, and
    the first request and this request are a little bit different.
    I do not care if you discuss the second request among you, but
    I would like the first request to be done without collaboration
    if you would not mind, so it would be your honest opinion and
    nobody else's.
        The second request if you could give us a 5-page summary,
    and you might go over that a little bit, but 5 pages ought to
    do it, of what you personally think should be the kind of road
    map we should look at for recovery, not money, more money, more
    and more money and more and more and more money, but what you
    think systematically, some of the suggestions Mr. Ryan pointed
    out, that would help give us some stability, some of the things
    that would not ruin the secondary market. They might give us
    some immediate satisfaction but would destroy the secondary
    market for the future. But just some of your varied thoughts
    from your professional backgrounds or your associations'
    backgrounds that maybe we could look at and get some good ideas
    for a plan. I think that is what America wants.
        I do not think we are ever going to recover from this no
    matter how much money we throw at it until the people in this
    country believe in their hearts that there is a real plan for
    recovery, that is measurable, that they can see, that we can
    see and only then will the consumers have confidence to begin
    spending money again. Until we have a real plan instead of a
    crisis de jour operation, people are going to hang on to every
    dollar like it is their last dollar. I know I will and probably
    most of you are. But when we can come up with a plan that is
    measurable, where we are, where we want to go, that the public
    can see, and that we hopefully can keep on course without
    bankrupting the next 20 generations, if this country should
    last that long with what we are doing, I think it would give us
    the quickest jumpstart to a recovery that there is, just so
    people could know how to cope with it, the people you represent
    would know how to cope with it, the people you do not represent
    would know how to cope with it, the people you do not represent
    that others represent would know how to cope with it and the
    average guy in the street would have some level of comfort with
    an expectation of what lies ahead in the future.
        And I may have run over, Mr. Chairman, if so, I want to
    thank you very much for your indulgence.
        Mr. Watt. You have 21 seconds.
        Mr. Posey. I will yield back.
        Mr. Watt. The gentleman yields back. What a wonderful
    American.
        [laughter]
        Mr. Watt. Mr. Green is recognized for 5 minutes.
        Mr. Green. Thank you, Mr. Chairman. Mr. Chairman, I must
    say that I think this is one of the most diverse group of
    witnesses that we have had, although I must also say that, Ms.
    Leonard, I think you may be slightly outnumbered. But it may be
    that it takes eight men to offset what one woman is capable of
    doing, so I compliment you.
        Ms. Leonard. Thank you.
        Mr. Green. All of you. Friends, I would like to, while,
    Greg, if you would pass out the information to each member,
    each witness, I will just make some comments while he is doing
    this. I think that even with this group, I think there are some
    things that you can all agree on, and I am going to take a real
    stab at asking a question that I think everybody can agree on.
    Do you all agree that some reform is necessary after the crisis
    that we currently find ourselves in? And the only way that I
    can be sure and not use up all of the time to have your
    answers, just ask you to raise your hand if you agree that some
    reform is necessary? You do not have to, just in your mind
    think of the reform is, and probably some is not necessary. But
    if you agree that some form is necessary, would you kindly
    raise a hand?
        [The witnesses raise their hands.]
        Mr. Green. Okay, everybody agrees, let the record reflect
    that everybody agrees. But I ask this because there are those
    who absolutely believe that we should do nothing and let the
    system sort of work it out. And with a group as diverse as
    this, I think, to have this consensus is meaningful.
        Next question, which may be a little bit more difficult,
    has to do with the yield-spread premium. If you are familiar
    with the yield-spread premium, and I have to assume that you
    are, do you think that what we have in the bill is better than
    having nothing at all as it relates to the yield-spread premium
    or there may be some who are of the opinion that the way it
    worked previously is fine and that we should do nothing about
    it. Do you think that the bill is better than nothing at all as
    it relates to the yield-spread premium? And for those who may
    not know, the yield-spread premium is that fee that is accorded
    an originator for causing a person to go into a higher interest
    rate as opposed to one that the person qualified for. And as
    the law currently is constructed, there is no requirement that
    the borrower be informed that you are going into a higher
    premium. So if you think that what we have is better than--what
    we have in the bill is better than what we have now, which is
    why I have tried to articulate, let me see if you would agree
    that what we had in the bill is better. If so, raise your
    hands. I will for the record--you are not sure on the end? You
    are not impacted by it all?
        Mr. Arbury. We are not, no.
        Mr. Green. Okay, all right, we will exclude you. Let's see
    the hands now.
        Mr. Ryan. Congressman, what we seek is a clear
    understanding of the points only in that sometimes it makes a
    lot of sense for a borrower to reduce their payment by buying
    the mortgage down.
        Mr. Green. I understand, but what I am getting at, I am
    trying to not just weigh. What we are attempting to do, is it
    better than leaving things as they are? Is it better than
    leaving things as they are? Is what we are attempting to do
    better than leaving things as they are? Currently, you get the
    benefit of the yield-spread premium and the borrower never gets
    to know that you actually have put him or her into a higher
    interest rate, literally that is lawful. That is one phase of
    it, there are other aspects of it too. So I just want you to in
    your mind to evaluate, and all I am going to do is call your
    name is say that you have agreed or have not agreed. One more
    question, okay, yes, sir?
        Mr. Dalton. Mr. Green?
        Mr. Green. My time is about up so I better act fast.
        Mr. Dalton. Well, I agree that the yield-spread premium, I
    agree with what is in the bill regarding the yield-spread
    premium, but there are some other things--
        Mr. Green. I have to come back, my time is almost up, I'm
    sorry. If you agree that what we are trying to do is better,
    raise your hand? Okay, I am just going to note hands up for a
    minute. Mr. Menzies' hand, Mr. Dalton and Mr., is it Berner?
    Okay.
        Now, the final thing, I gave you some print that is
    darkened on this page and this deals with Realtors. I think
    that Realtors who happen to do just what they are supposed to
    do, they are Realtors or they are brokers, they are not engaged
    in lending, that they ought not come under the scrutiny of what
    depository institutions come under or originators. If you agree
    with this, would you raise your hand? Is there somebody who
    differs with this? You think a Realtor ought to be sanctioned?
    Okay, Mr. McMillan agrees. Anyone else? Anybody differ with the
    language? I am going to take it if you do not raise your hand
    that you differ. You do not agree with the language?
        Mr. Berner. No, I agree.
        Mr. Green. You agree with it. Anybody differ with it?
        Mr. Dalton. I would like the opportunity to read it.
        Mr. Green. Okay, I am sorry, take the opportunity to read
    it.
        Mr. Dalton. Congressman, the language needs to be improved,
    we agree.
        Mr. Green. All right, if I can improve upon it, I will.
    But, Mr. Chairman, may I ask unanimous consent for just the
    answer to this question?
        Mr. Watt. Yes, sir. Do you want to go down the line?
        Mr. Green. Yes, sir, if I can. We already have Mr. Berner.
    Mr. Dalton, is that language acceptable to you?
        Mr. Dalton. It appears to be.
        Mr. Green. All right. Mr. Kittle?
        Mr. Kittle. We would say that we think the language needs
    to be improved.
        Mr. Green. Okay.
        Mr. Kittle. If that is answering your question, then--
        Mr. Green. All right, is it better than nothing?
        Mr. Watt. Does the committee have a copy of what the
    gentleman is asking for comment on?
        Mr. Green. Yes, sir, I can pass a copy to you, Mr.
    Chairman.
        Mr. Kittle. The term ``servicer'' needs to be taken out of
    here.
        Mr. Green. Okay, you don't want servicers included, all
    right. Mr. Menzies?
        Mr. Menzies. Well, I almost could, but from what I have
    read in bullet, I am fine with that.
        Mr. Green. Okay.
        Mr. Menzies. Bullet two,--
        Mr. Green. The darkened bullet, the one that is darkened.
        Mr. Menzies. Four?
        Mr. Green. Yes, read that one while I go to Mr. Ryan. Mr.
    Ryan?
        Mr. Ryan. I do not have a view but we will get one to you.
        Mr. Green. Okay. Ms. Leonard?
        Ms. Leonard. We would not want to exclude--
        Mr. Green. Just the darkened.
        Ms. Leonard. But I would like to be able to review it and
    get back to you on it.
        Mr. Green. Okay.
        Mr. Watt. Mr. Green, it might be more practical to get a
    quick written response from all of them.
        Mr. Green. All right. Mr. McMillan, is it all right with
    you?
        Mr. McMillan. No, sir, the language is not okay.
        Mr. Green. Okay.
        Mr. McMillan. It needs further clarification, if I may.
        Mr. Green. Okay, well, we will talk about it. Let me just
    get to the last person, yes, sir?
        Mr. Amorin. Mr. Green, this issue does not really impact
    appraisers but to the extent that--we would love to take the
    time to study this issue, we could get back to you in writing.
        Mr. Green. All right, thank you very much.
        Mr. Watt. The gentleman's time has long expired.
        The gentleman from North Carolina, Mr. McHenry, is
    recognized for 5 minutes.
        Mr. McHenry. I thank the chairman. I thank my colleague
    from North Carolina.
        Mr. Kittle, after watching the financial system collapse,
    thanks in part to some shoddy mortgage practices and lending
    standards, obviously, and poor risk management--these are all
    sort of self evident at this point--but there are a lot of
    Americans who wonder why we would not just regulate the heck
    out of mortgage lending to an inch of its life.
        Can you tell us what the consequences might be for
    homeownership if Congress did that?
        Mr. Kittle. It would increase the cost of capital, number
    one. What we really need here, Congressman, is better
    transparency when a customer goes to loan application.
        In my opening oral statement, I asked for this committee to
    look and we request that HUD withdraw its RESPA proposal.
        We have a truth in lending that the Fed is looking at re-
    doing. We have a RESPA law that is going to go into effect at
    the end of this year that is onerous, that added requirements
    and papers to the loan application.
        We need better transparency. More regulation is not the
    key, although we have proposed the Mortgage Improvement and
    Regulation Act before a subcommittee of this committee just
    last month. I testified on this.
        We are asking for more regulation on us but we are asking
    for the right regulation that does not restrict capital.
        Mr. McHenry. Mr. Menzies, in terms of that, what has
    happened in the securitization market over the last year, and
    what would this legislation in terms of liability provisions do
    to securitization going forward?
        Mr. Menzies. Congressman, there is no question that over
    the past year, the underwriting standards have become
    significantly more strict. We see that across-the-board.
        Most community banks are straightforward common sense
    lenders selling conforming product, Fannie, Freddie, Ginnie and
    the like.
        Therefore, lots of this legislation simply increases our
    cost of doing business rather than helping us do a better job
    with our consumers.
        In that regard, the additional expense ultimately will be,
    I guess, passed onto the consumer. That is who ends up paying
    for regulatory burden.
        Those are my off-the-cuff thoughts.
        Mr. McHenry. Mr. Ryan, if you want to touch on that, I do
    have a question for you as well.
        Mr. Ryan. Ask your question and then I will give an answer.
        Mr. McHenry. Go right ahead.
        Mr. Ryan. Go ahead.
        Mr. McHenry. I have limited time. In terms of lowering the
    triggers for what classifies as a HOEPA loan, which this
    legislation does, would it make it more likely the wider swath
    of lending just simply would not be done?
        Mr. Ryan. That is entirely possible. Let me go back to the
    larger issue you raised to Mr. Menzies.
        Mr. McHenry. Can you touch on this?
        Mr. Ryan. Let me just put this in perspective. In 2007, we
    had about $2.8 trillion of securitization. We were tracking
    along in 2008, the first quarter, around that same number, and
    everything dropped off the shelf.
        That business is basically outside of the conforming area
    dormant. I say ``dormant'' because I do not want to say
    ``dead,'' because hopefully it will come back. In fact, it has
    to come back because of credit availability.
        This is true for not only this committee, but also we have
    been saying this to the Europeans, if you go too far in your
    legislative drafting and you push things to a complexity that
    will not afford the opportunity to securitize and distribute.
        We need to find in this industry a massive amount of new
    capital to put into these financial institutions so that we can
    make loans to people so they can buy homes and buy cars.
        Mr. McHenry. Thank you. My time is running short.
        I want to see if Mr. Kittle and Ms. Leonard, if you all
    could touch on the HOEPA elements here. The fact is there are
    such restrictions within that classification of lending that it
    is simply done on a very, very limited basis nationally, and we
    are going to create a larger type of lending that is under
    those standards, and therefore, simply would not be done on any
    major scale basis.
        Ms. Leonard. Correct, and it will have an impact on loans,
    especially loan amounts that are less let's say than $100,000.
        Mr. McHenry. Thank you.
        Mr. Kittle. My answer is that HOEPA should not be expanded.
    For the non-prime loans is what it was there for. It has
    already set up the ability in escrow accounts and things like
    that. To stretch it into the prime market, no, absolutely not.
        Mr. McHenry. Thank you.
        Mr. Watt. The gentleman's time has expired. The gentleman
    from Pennsylvania, Mr. Kanjorski, is recognized for 5 minutes.
        Mr. Kanjorski. Thank you very much, Mr. Chairman.
        Mr. Amorin, recently there have been many rule changes that
    affect professional appraisers. The appraiser independent rules
    issued by the Federal Reserve, new requirements on the
    standardized appraisal forms, and the home valuation code of
    conduct developed by New York Attorney General Andrew Cuomo, to
    name a few.
        Are professional appraisers concerned about how all of
    these changes might affect appraisal quality, and if so, what
    should the Congress do?
        Mr. Amorin. Congressman, we are absolutely concerned about
    it. Professional appraisers are used to rules and we are used
    to playing by the rules. The home valuation code of conduct did
    one great thing in identifying the need for appraisal
    independence.
        Unfortunately, it has opened up the door to unregulated
    activity by AMCs. These appraisal management companies usually
    focus on two things, who can do it the quickest and who can do
    it the cheapest.
        We believe corners will be cut as a result of that. At the
    end of the day, the consumers are going to be getting lesser
    quality appraisals than they should.
        Mr. Kanjorski. What should Congress do about it?
        Mr. Amorin. That is a great question. We think AMCs should
    be regulated. We believe there are some mechanisms in place
    today to do that, either through the State or the Federal
    level.
        To the extent that we can have appraisal management
    companies and the rules focus on quality of the appraisal, I
    think that would be great first steps.
        Mr. Kanjorski. Very good. As you know, I am working on an
    amendment to the bill that would require the registration and
    supervision of appraisal management companies by the existing
    State appraisers certifying and licensing agencies with
    additional Federal oversight of the State system provided by
    the appraisal subcommittee.
        This regime would build on the existing appraisal
    regulatory system. Alternatively, we could have a Federal
    registration and supervision requirement.
        Which system do you prefer and why?
        Mr. Amorin. It is clearly the Wild West right now, and some
    AMC regulation is required. Currently, there is a mechanism in
    place at the State level to regulate appraisers, and we think
    with additional resources to allow the States to do good
    oversight of that, that the mechanism at the State level may be
    the appropriate way to go.
        It is a continuing problem. We think it is going to be a
    continuing problem if Congress does not address it. To the
    extent that the Appraisal Institute has been active in this
    area, we have developed some model legislation for the States
    to use, and we are seeing some success in that area, but to the
    extent that you can help push that along, we would really
    appreciate it.
        Mr. Kanjorski. Thank you. Finally, the Congress established
    Federal appraisal requirements in 1989 with the intent of
    protecting the safety and soundness of financial institutions.
        Have the regulations promulgated by the Federal agencies
    been effective in your opinion?
        Mr. Amorin. I do not believe that the regs have been
    effective, primarily due to the fact that there are 13
    exemptions to the appraisal requirement that exists today.
        Any additional oversight that we can give to the appraisal
    subcommittee to help in that regard would be very helpful. To
    the extent that we can limit the use of alternative valuation
    products such as AVMs, automated valuation models, and broker
    price opinions for mortgage origination, we think those are
    great steps in the right direction.
        Mr. Kanjorski. Do you have any thoughts on what we should
    do on consumer protection mandates or establishing quality
    controls for automated valuation models and limiting the use of
    broker price opinions?
        Mr. Amorin. We do believe that broker price opinions are a
    very useful tool in the market to help set the listing price
    for a home or for a property, but to use a broker price opinion
    or some other alternative valuation model to determine the
    value of collateral we think is misplaced.
        Appraisers are licensed and certified in the States in
    which they operate. We have requirements to meet those license
    certification requirements. We have oversight by State
    appraisal boards. In most cases, automated valuation models
    operate outside of that, and in many States, it is against the
    law for a broker to provide a price opinion for any other
    purpose except to obtain a listing or set a listing price.
        Mr. Kanjorski. Thank you very much. Mr. Chairman, I yield
    back the balance of my time.
        Mr. Watt. The gentleman yields back the balance of his
    time. Mr. Cleaver is recognized for 5 minutes.
        Mr. Cleaver. Thank you, Mr. Chairman.
        No matter how many times we have expert testimony which
    declares without ambiguity that CRA did not cause the crisis,
    there are those who will just continue to say it, and you can
    probably turn on the television on a talk show tonight and hear
    it.
        Do any of you think CRA caused this crisis? Just raise your
    hands if you do.
        You will hear about it if you just turn on a talk show.
        Mr. McMillan, what was wrong with plain vanilla 30-year
    fixed-rate mortgages? Were we having problems? What was wrong?
        Mr. McMillan. Congressman Cleaver, there is nothing wrong
    with plain vanilla 30-year mortgages. The issue is when you
    make that the limit, then that limits the choices of
    individuals.
        We have the ability today to get mortgages originated for a
    term that is customized specific to the borrower. You hear
    mostly of 15- and 30-year loans, but there are 20-, 22-, and
    25-year loans as well.
        To put a range there would be more appropriate as opposed
    to just specifically addressing a choice and amortization.
        Mr. Cleaver. What we are trying to do is to prevent all of
    these exotic products that physicists and major league baseball
    players are developing. I am not even sure where all of this
    stuff comes from.
        Do you not think we have to squeeze that out or do you
    believe we need to squeeze that out so that after the crisis
    has ebbed, we end up with folks coming back with a new group of
    exotic products?
        Mr. McMillan. Congressman Cleaver, with respect to exotic
    products, I do not think they should be legislated out. They
    are appropriate for someone in certain circumstances. They have
    always existed for a young person out of medical school or law
    school whose income is expected to go forward; athletes, highly
    paid athletes.
        The thing for the lender to be concerned with is to make
    sure that on the basis of objective criteria, they make the
    appropriate loan to the appropriate person.
        Outlawing them would be disenfranchising those who would
    benefit and that particular product would operate
    appropriately.
        Mr. Cleaver. Mr. Berner?
        Mr. Berner. I think our feelings as in our written
    testimony is that there certainly should be an expansion of the
    terms within your definition of a 30-year fixed-rate mortgage
    to fall within a 25-year, a 20-year, or a 15-year mortgage.
    Obviously, it is the American dream to own their house free and
    clear, and clearly, a 15-year fixed-rate mortgage for those
    with a dual income who can afford to make the payments and are
    properly qualified should be an alternative within the safe
    harbor.
        It is in our testimony we also believe traditional
    adjustable rate mortgages, such as 5-, 7-, or 10-year ARMs
    which have appropriate caps are extremely important a financial
    vehicle, especially in a normal interest rate yield curve.
        Our portfolio of adjustable rates, five, seven and ten, has
    one half of one percent or a 50 basis point lower rate than our
    fixed rate, and for a first time home buyer and/or low/moderate
    income person, that 50 basis points could be the difference of
    them being able to afford a home or not afford a home.
        Mr. Cleaver. You do not think we will drift back into the
    same deal?
        Mr. Berner. No. Again, we certainly agree non-traditional
    and/or exotics are not the way to go, but garden type ARMs and
    fixed rates of shorter terms are beneficial.
        Mr. Cleaver. Thank you. My final question is whether or not
    you believe that the Federal legislation ought to be the floor,
    and we would give States the authority to move up not down,
    that this would not be the ceiling but the floor.
        How many of you would support that kind of a move?
        Mr. McMillan?
        Mr. McMillan. Yes.
        Mr. Cleaver. Mr. Ryan?
        Mr. Ryan. We think there should be a single Federal
    standard, not a floor or cap, just one standard.
        Mr. Cleaver. Why?
        Mr. Ryan. I think part of the reason we are here testifying
    is that the mortgage market unraveled a bit, and part of the
    reason it unraveled was the State regulation.
        I think a Federal standard is a better standard.
        Mr. Cleaver. Mr. Kittle?
        Mr. Kittle. I agree with what he just said. We have a
    patchwork of laws out there right now. I heard earlier
    testimony where one of the panelists gave an answer and said
    they want each attorney general to be able to look at their one
    State law.
        If we have a ceiling with one national law for everybody,
    then that attorney general only has to look at one law. The
    more laws we have, it makes it easier for predatory lenders. It
    makes it easier for mortgage fraud. We need a ceiling. The
    States can participate. The attorneys general can still go in
    and do their audits. They should come to the table and help
    develop that law. Let them implement the policy. We need a
    ceiling and one law.
        Mr. Cleaver. I think my time has run out.
        Mr. Dalton?
        Mr. Dalton. Mr. Cleaver, just briefly, I agree completely
    with the last two statements and think this is a good bill, can
    be a good bill with the changes, and it is a tough bill, and I
    think it ought to be an uniform national standard. Everybody
    living by the same standard.
        Mr. Watt. The gentleman's time has expired. Mr. Ellison,
    about whose bill, 1782 as opposed to 1728, has gotten a lot
    more praise from some corners in today's sharing. You missed
    all the praise from the last panel.
        Mr. Ellison. As you know, Mr. Chairman, I need all I can
    get.
        Mr. Watt. The gentleman is recognized for 5 minutes. I am
    going to give him that much praise.
        Mr. Ellison. Thank you, Mr. Chairman. I want to thank the
    entire panel and your being here to help inform us on how to
    formulate this legislation late on a Thursday night. It is
    highly commendable. I want you to know I appreciate it.
        Mr. Arbury, I wonder if I might inquire of you. The
    National Low Income Housing Council estimates that about 40
    percent of the families who face eviction due to foreclosure
    are renters.
        Meanwhile, a study conducted by the University of Minnesota
    indicated that about 61 percent of all foreclosures over the
    past 2 years in my hometown of Minneapolis have been renter-
    occupied residences, 61 percent renter-occupied.
        That is why I and a few other members of the committee
    introduced a bill to provide protections to renters in
    properties foreclosed upon. I am very pleased that these
    protections are also provided in H.R. 1782.
        Given that, I am very concerned about certain views that I
    think you have articulated. I certainly respect those views but
    I have some concerns because to not apply some of these basic
    protections to tenants receiving Section 8 assistance and
    particularly you suggested Section 8 voucher contracts cannot
    be applied to the purchaser of a foreclosed property.
        Could you explain exactly why not?
        Mr. Arbury. Sure. Congressman Ellison, we have seen those
    studies. We have seen the studies by the National Low Income
    Housing Coalition and some of the other studies.
        It is true that there are a number of properties out there
    where there are renters and those properties are being
    foreclosed. Overwhelming, those properties are single family
    homes and condominiums, and in some cases, duplexes, triplexes
    and fourplexes, not multi-family. There are some multi-family
    properties. Those are apartment properties with five or more
    units that get foreclosed on, in any economy, good or bad.
        We are in the business of renting. People who own single
    family and condo's are in the business of ownership, so
    evictions occur there. Back in the late 1980's and early 1990's
    when there was a huge problem in multi-family because the
    number of multi-family properties went into foreclosure because
    they had been over leveraged, we didn't see any stories about
    evictions.
        Foreclosures in multi-family do not mean evictions. Second
    of all--
        Mr. Ellison. Let us do one point at a time. With respect to
    your views, sir, could you please offer me some statistical
    support for your position? We are trying to make evidence-based
    legislation.
        Mr. Arbury. Sure. We, for example, went in to analyze what
    happened in Hannapen County, Minnesota, in 2008. There were
    over 7,300 foreclosures. 6,300 of those foreclosures were in
    single family either homestead--I am not sure how you define
    ``homestead'' there--and non-homestead single family homes.
        There were another 600 in duplexes. There were 87--this
    number just jumped off the page at me--87 foreclosures in what
    they labeled as apartments. Almost all of those were either
    triplexes or fourplexes, not multi-family.
        When we called the Multi-Housing Council of Minnesota to
    ask them about what was going on, they said they had not heard
    of any evictions.
        I would be glad to give you the analysis we did.
        Mr. Ellison. Reclaiming my time, has this report you cite
    been published and peer reviewed?
        Mr. Arbury. I do not know. It is from the Hannapen County
    Sheriff Foreclosure Sales by Lien Type, that is on the
    Internet.
        Mr. Ellison. How many of those--you said there 7,300
    foreclosures, 6,300 in single family. If my math is anywhere
    close to being right, that is about 1,000. Am I right about
    that?
        Mr. Arbury. You are right.
        Mr. Ellison. That is 1,000 beyond single family homes and
    your position is there is about 600 that are duplexes; is that
    right?
        Mr. Arbury. Right.
        Mr. Ellison. That would leave about another 400 which would
    be--
        Mr. Arbury. When we got down to the detailed numbers of
    even the 87 so-called apartments that were listed, we are
    saying five or more units is what we classify as an apartment,
    and then we are down to maybe six communities but no evictions.
        Mr. Ellison. How many residents live in these type of
    units?
        Mr. Arbury. I do not know. There were no evictions so we
    did not know.
        Mr. Ellison. You seem to be arguing that if my bill goes
    into place, that it is not going to hurt you because you do not
    have any evictions. It will be there as a protection for the 1
    or 2 or 87 people who might be subject to it, but it will not
    hurt you because the people you represent do not pursue
    evictions.
        If it does not hurt you, why are you against it?
        Mr. Arbury. What it will hurt is the Section 8 Program. It
    is hard to attract private investment into the Section 8
    Program. The more you make it mandatory, the more restrictions
    you put on it, the more mandates you put on it, it makes it
    harder and harder to attract investment in affordable multi-
    family housing.
        Mr. Ellison. Could I ask for unanimous consent to just
    respond before my time is over?
        Mr. Watt. Your time is out, you can ask unanimous consent
    for one additional minute, without objection.
        Mr. Ellison. I will simply say that I disagree with your
    position. The legislation, both H.R. 1728 and H.R. 1247 clearly
    and specifically allow for--this is not additional barriers and
    burdens. The legislation allows for specific assignment of
    lease and a Section 8 voucher contract to the immediate
    successor.
        They do this through the force of law, and Congress has the
    authority to make the law.
        The bottom line is that it will give protections to people
    who need it. It will make sure that we do not have foreclosed
    buildings in our neighborhoods. It will stop these big
    buildings from being an attractive nuisance, and it will
    prevent things like arson and crime and community blight.
        I am willing to continue the dialogue with you, sir. I
    think I am open to your point of view. I am not persuaded. I
    just want to put that on the record.
        Thank you for listening and thank you for responding.
        Mr. Watt. The gentleman's time has expired. I know Mr.
    Arbury wants to respond but I would ask him to respond in
    writing, especially since this is a hearing not about that
    bill.
        [laughter]
        Mr. Watt. Mr. Manzullo is recognized for 5 minutes.
        Mr. Manzullo. Thank you, Mr. Chairman, and to the panel, I
    am sorry, I have been catching bits of your testimony on
    television and other bits of trying to take care of a full
    load, including an office full of constituents.
        I have an observation and a couple of questions. The
    subprime Regulation Z by the Fed takes effect on October 1st.
    That means there is already a Federal regulator who has the
    authority to govern instruments and underwriting standards.
        That person is already in existence. I know many of you
    have testified this is what you want for uniformity, etc. It
    will not take place until October 1st.
        The first question is, do we need new legislation prior to
    that? The observation is, and I am not picking on anybody in
    particular, but if you take a look at the testimony of the
    Independent Community Bankers, Mr. Menzies, and also the
    testimony from the Mortgage Bankers Association, each one
    starts with the statement, well, you know, we herald the idea
    of something to get rid of patchwork but, and then every group
    has their own ``but's.''
        Everybody wants to write exactly what is going to be in
    this bill and that is not going to happen.
        Those of you who want this type of legislation have to be
    prepared for whatever goes in there. I closed probably 2,000
    real estate transactions as an attorney. Some of the stuff I
    see in here is frightening.
        Who is going to take a mortgage? Who is going to securitize
    the mortgage when you have contingent liability? Hello.
        The secondary market is suffering as it is. This makes it
    even worse. The legislation that we will take up next week will
    have a cram down for residential. Who is going to give a
    mortgage if you know the bankruptcy judge is going to go in
    there and change the terms of the mortgage.
        If you guys do not want Federal control, just say this
    thing stinks, we do not need it. We have enough Federal
    regulation on top. We just need the regulators to do what is
    proper.
        Does anybody want to tackle the question on if subprime Reg
    Z takes effect on October 1st, do we actually need this
    legislation? Does anybody want to take a stab at that?
        Mr. Menzies, you are from the Eastern Shore, are you not?
        Mr. Menzies. I was just going to share the observation that
    community banks did not create this train wreck.
        Mr. Manzullo. That is correct.
        Mr. Menzies. Community banks did not create shadow
    corporations on Wall Street to house the Alt-A payment option,
    no doc.
        Mr. Manzullo. 2/28s, 3/27s.
        Mr. Menzies. Community banks have stuck to their knitting
    for decades and decades and decades. We continue to stick to
    our knitting. We make loans to people we know. We make loans to
    relationships, not for transactions. The people we lend to we
    see at the YMCA, at Rotary, on our volunteer boards. We are in
    the relationship business.
        Does this legislation benefit community banking? Only to
    the extent that it prevents the next train wreck. We did not
    create this train wreck.
        Mr. Manzullo. Mr. Ryan?
        Mr. Ryan. My answer is a little bit different. I do not
    know if you were here when I commented to one of your
    Republican colleagues, but certain parts of this bill are also
    pending in legislation in the European Commission.
        They will affect any securitized product that is
    distributed globally, and for that reason, we are supportive of
    legislation here. We have made specific recommendations on how
    this legislation could be modified, where we could be fully
    supportive.
        I would urge you--there are really only three specific
    areas, one of which is kind of expanding the terminology used
    for the safe harbor for giving a regulator some flexibility in
    dealing with the retention requirement.
        Mr. Manzullo. Right, but that is three that you do not
    like. As you go down the line, you find this group--
        Mr. Ryan. I am only answering for our association, not for
    anybody else here.
        Mr. Manzullo. Right. You made the point. There is something
    else that on April 2nd, the President signed the G-20, a
    document that essentially, if you read it carefully, turns over
    control of the financial institutions of this country to the
    Financial Stability Board, which is going to be controlled by
    the European Union, the FSB countries, the G-20, and Spain.
        I don't know if you are aware of that document, if you go
    to G-20--
        Mr. Ryan. I have read the document. We do not necessarily
    agree with what you just said.
        Mr. Manzullo. If you read the document, it is frightening.
    We are signatories to it. It states the common principles. It
    states that prosperity is indivisible. It states the corporate
    social order, whatever the word is, be imposed upon the
    countries that are party of that.
        The reason I raise that is although you have read the
    document and I appreciate that, most people in this country are
    not even aware of what happened at the G-20.
        Mr. Menzies, we had talked a couple of weeks ago when you
    were in here, and you were one of the guys who got caught way
    at the end on the third panel also. I wish they would put the
    good guys up front and let the bureaucrats wait.
        We had talked earlier over the fact that it is true you did
    not cause the problem but you would be subjecting yourself to
    the jurisdiction of the Federal Government under these very
    broad and pervasive powers.
        I just wanted to raise that and thank you for your
    participation, and thank you, Mr. Chairman.
        Mr. Watt. The gentleman yields back. I think that leaves
    only me to ask questions and to thank the witnesses for being
    here.
        Let me just raise a few questions. Let me talk about the
    preemption issue first, just to make it clear that we are
    preempting only in two areas, and we are leaving State law to
    apply in all other areas.
        I take it Mr. Kittle, Mr. Menzies, and Mr. Ryan probably
    would prefer a totally preemptive framework so that it would be
    only a Federal framework, but if we were doing that, I can
    assure you that the standards would be so high that I think we
    could not do it only in the subject matter of this bill.
        I think we have found what appears to be a reasonable
    middle ground here, unless you all are saying something
    different.
        Mr. Kittle, Mr. Ryan in particular, do you have differences
    with that?
        Mr. Kittle. If you go back to it, Mr. Chairman, it is the
    patchwork of State laws that created the environment for
    predatory lending and for bad regulation, and for mortgage
    fraud.
        Mr. Watt. I am not sure I accept that as a proposition.
        Mr. Kittle. What we are saying is we would like the States
    to have a seat at the table, the States to go ahead and
    implement any regulation that comes out. The State attorneys
    general to look at that one law that the other panelists
    earlier said they only need to look at one, we will give them
    one, one national standard.
        Every time you have--my company, which it does, is approved
    to lend in all 50 States--
        Mr. Watt. I understand there are substantial efficiencies
    to the industry.
        Mr. Kittle. I am worried about the cost to the consumer as
    you are. That cost gets passed onto the consumer and it
    continues to drive up the cost of mortgages. We are worried
    about the consumer also.
        Mr. Watt. I think the cost of credit to consumers in
    mortgages is probably lower than the cost of credit to
    consumers in any other area of our life at this moment.
        I grant you at some point that will change, and it may well
    be, but it is hard to convince me that--anyway, we have had
    this discussion.
        I actually think that setting a floor as a minimum standard
    would ultimately drive all States to exactly where you are
    getting to. I have had this discussion with the industry for a
    long time.
        If the States get substantially out of line, lenders will
    just either raise interest rates in that State or they will
    leave that State. They did that in Georgia. They had to adjust
    back.
        There are substantial pressures for any lender in the
    mortgage area to gravitate to whatever the national standard is
    anyway.
        Mr. Kittle. You are right in your assessment, but look at
    what it did to the consumers in Georgia. They had no access to
    credit for several months.
        Mr. Watt. I never have professed to be more brilliant than
    anybody in my State legislature. Those people make decisions.
    They make them in the interest of their States. You either
    believe in federalism or you do not believe in federalism.
        On some issues, I think we should federalize and we have
    done that in our Constitution, but I do not think every issue
    ought to be federalized, and we ought not preempt everything
    that goes on at the State level. Otherwise, we would not need
    any States.
        That is a long-term subject discussion. I have had this
    discussion with various people.
        Let me just go to Mr. McMillan for a little bit. I am a
    little concerned that excluding Realtors from the definition of
    ``originators'' even when they do things that originators do is
    probably not a good idea; right? At least, that is my
    assessment.
        Excluding all sellers who sell finance would ultimately
    attract a bunch of sellers, builders, others to become sellers
    because they then would not be held to the same standards that
    originators would.
        I understand the concept that you are working with and in
    general, I do not think Realtors are considered originators,
    but when they do what originators do, they kind of quack like a
    duck and walk like a duck, they probably ought to be treated as
    a duck.
        When sellers sell finance and they do what originators do,
    they probably ought to be treated like originators.
        Would you agree with that?
        Mr. McMillan. No, sir. I would love with the privilege you
    afford me to address both of those issues, starting with the
    latter with respect to sellers.
        Mr. Watt. Actually, I am over my time. Let me invite you to
    address that to me in writing. I do not want this becoming an
    academic discussion. That is not even my part of the bill. I
    did not draft it.
        It seems to me that going too far in the direction that you
    advocated might create a set of problems, and I would like to
    hear your side. I have explained publicly what my concerns are.
        Give me that in writing and I will not hold up the rest of
    the committee. I do note that members may have additional
    questions for the panel which they may wish to submit in
    writing in addition to those who have been here.
        Without objection, the hearing record will remain open for
    30 days for members to submit written questions to these
    witnesses and all of the prior panels, and to place their
    responses in the record. That includes the ones that have been
    propounded that Mr. Posey requested, if you can get those
    answers to us in the next 30 days, that would be great.
        This has been a wonderful hearing all day. It has added
    immensely to the landscape in which we are operating both from
    the regulator's perspective, from the industry's perspective,
    and from the consumer's perspective, all of which are valuable
    perspectives.
        As I indicated earlier this morning when we started, we are
    trying to accomplish three things here. We are trying to
    protect consumers. We are trying not to burden anybody, and we
    are not trying to chase any capital out.
        Those things kind of, at points, can come into conflict. We
    acknowledge that. That is why we have tried to walk down this
    road as carefully as we can, and we will continue to do that
    not only between now and Tuesday when we mark-up the bill, but
    even after that, we will try to make sure that we find the
    right balance until this process is completed.
        I thank you all for your participation and your wonderful
    testimony, and declare the hearing adjourned.
        [Whereupon, at 4:55 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                 April 23, 2009

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