[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
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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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Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
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20402-0001
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
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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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