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




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

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               ----------                              

                             APRIL 23, 2009

                               ----------                              

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-25





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

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 23, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-25



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51-584 PDF                WASHINGTON : 2009
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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

                              ----------                              
                                                                   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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