Morning Session of Public Hearing on Home Equity Lending
July 27, 2000
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Morning Session of Public Hearing on Home Equity Lending |
FEDERAL RESERVE PUBLIC HEARING
JULY 27, 2000
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1 TABLE OF CONTENTS
2 MORNING SESSION
PAGE
3
OPENING REMARKS BY MODERATOR LONEY . . . . . . 6
4
OPENING REMARKS BY GOVERNOR GRAMLICH . . . . . 8
5
6 OPENING REMARKS BY PANELISTS:
7 BY MR. LEHMAN . . . . . . . . . . . . . . 15
8 BY MR. COUDRIET . . . . . . . . . . . . . . 18
9 BY MS. CRAWFORD . . . . . . . . . . . . . . 20
10 BY MR. MAYNARD . . . . . . . . . . . . . . 24
11 BY MR. CREEKMAN . . . . . . . . . . . . . . 27
12 BY MR. EAKES . . . . . . . . . . . . . . . 30
13 BY MS. EGGERS . . . . . . . . . . . . . . . 33
14 BY MR. BOST . . . . . . . . . . . . . . . . 38
15 BY MR. LAMPE . . . . . . . . . . . . . . . 41
16 BY MS. MARKS . . . . . . . . . . . . . . . 44
17 BY MR. BURFEIND . . . . . . . . . . . . . . 47
18 BY MR. STOCK . . . . . . . . . . . . . . . 50
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BOARD MEMBER AND PANELIST DISCUSSION . . . . . 55
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21
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25
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1 P R O C E E D I N G S
2
3 MR. LONEY: Thank you all for being so
4 responsive to my request to begin the session. Good
5 morning, my name is Glenn Loney and I'm the deputy
6 director of the division of consumer and community
7 affairs at the Federal Reserve Board in Washington,
8 and I'm going to act as the moderator for the
9 hearings today.
10 We're happy to be in Charlotte at the first
11 of four hearings the Board is holding this summer on
12 home equity lending. We will be in Boston on
13 August 4, Chicago on August 16, and we will hold the
14 fourth hearing in San Francisco on September 7.
15 Let me first start by introducing the panel
16 of participants from the Federal Reserve. To my
17 immediate right is Governor Edward M. Gramlich, who
18 is a member of the Board of Governors of the Federal
19 Reserve System, and he is chairman of the Board's
20 committee on consumer and community affairs and as
21 such has primary oversight responsibilities for the
22 matters we're discussing today.
23 To my immediate left is Jim Michaels, who is
24 the managing counsel in our division, and Adrienne
25 Hurt, who is an assistant director in our division,
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1 and they are responsible for truth in lending
2 matters among the Board's staff. On Governor
3 Gramlich's right is Jack Blanton, who is the vice
4 president and community affairs officer from the
5 Federal Reserve Bank of Richmond.
6 I would like to thank the Federal Reserve
7 Bank of Richmond for hosting this meeting today with
8 all the logistical and other care and feeding that
9 you've done for this exercise.
10 The Truth in Lending Act requires creditors
11 to disclose the cost of credit for consumer
12 transactions. In 1994 the Congress enacted the Home
13 Ownership Equity Protection Act, or HOEPA as it's
14 called and we'll probably call it for the rest of
15 the day, which added special protections to the
16 Truth in Lending Act for consumers who use their
17 homes as security for loans with rates or fees above
18 a certain percentage or amount.
19 The Congress acted in response to anecdotal
20 evidence about abusive lending practices whereby
21 unscrupulous lenders made unaffordable home-secured
22 loans to "house-rich but cash-poor" borrowers.
23 These cases often involved elderly and sometimes
24 unsophisticated homeowners who were targeted for
25 loans with high rates or high closing fees and with
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1 repayment terms that were difficult or impossible
2 for the homeowners to meet.
3 HOEPA requires creditors to provide
4 additional disclosures at least three days before
5 consumers become obligated for such loans. It
6 prohibits lenders from including certain terms in
7 their loan agreements; for example, balloon payments
8 for short-term loans and from relying on a
9 consumer's home as a source of repayment without
10 considering whether the consumer's income, debt, and
11 employment status would support repayment of the
12 debt.
13 HOEPA also requires that the Board is to
14 hold hearings periodically to keep abreast of the
15 home equity credit market targeted by HOEPA, which
16 is one of the reasons we're here today. We also
17 held hearings in 1997, about two years after HOEPA
18 became effective.
19 I would ask Governor Gramlich now if you
20 would care to make a few opening remarks.
21 GOVERNOR GRAMLICH: Thank you very much,
22 Glenn. It's a pleasure for all of us to be here in
23 Charlotte. This is the branch of the Richmond Fed
24 which is the one that encompasses Washington, and
25 North Carolina is also, as you know, the home of one
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1 of the most significant state laws in this general
2 area.
3 The last few years have seen enormous growth
4 in subprime lending. The statistics indicate that
5 the growth in subprime lending has been roughly
6 twice the rate of growth of normal mortgage
7 lending. This is mainly, surely, a good thing in
8 the sense that this growth in the subprime lending
9 market has brought credit to low and moderate income
10 households that, had the growth not occurred, they
11 probably would have been denied credit, so there are
12 some good things going on out there. But there are
13 also seemingly some abuses.
14 There have been a series of anecdotes, a
15 series of TV programs mentioning some of these
16 abuses, there has been a rise in the foreclosure
17 rate, and these adverse statistics have attracted
18 our attention. This mixed message symbolizes some
19 of the difficulties that we have today. We want to
20 encourage the growth in the subprime lending market,
21 but we also don't want to encourage the abuses;
22 indeed, we want to do what we can to stop these
23 abuses.
24 The Fed has some authority in this area,
25 mainly under HOEPA, the law that Glenn just referred
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1 to; there's also some authority under some other
2 statutes. These hearings are fundamentally about
3 whether we should use this authority or what parts
4 of the authority we should use. We want to keep a
5 relatively analytical focus and focus on specific
6 things that the Fed might do, trying to make sure
7 that, in technical talk, the benefits of what we do
8 outweigh the costs.
9 One thing that we should all keep in mind is
10 that the Federal Reserve can't do it all. If
11 predatory lending is as significant a problem as
12 some people are alleging, there will have to be a
13 lot of types of activities. Other regulators of
14 financial institutions may have to make some
15 changes. The private sector could play a role in
16 checking some of its own practices; say, in the
17 secondary mortgage market or other such aspects.
18 Consumer education is undoubtedly an
19 important facet here because a lot of what we're
20 going to be talking about are people who are taking
21 loans that they probably wouldn't have taken if they
22 had fully understood the implications of all of the
23 transactions. And so the Fed has already started on
24 an effort to improve financial literacy, consumer
25 education, and will keep doing that, as will other
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1 agencies. So a multifaceted approach will be
2 undoubtedly necessary. This should not distract
3 attention from the Fed because there are some things
4 we can do, but just so that nobody has the
5 impression that we can do it all. We certainly
6 can't.
7 As Glenn mentioned, these hearings build on
8 others the Board held back in '97. Those hearings
9 led to a report that we made to the Congress jointly
10 with HUD suggesting a number of legislative options,
11 some of which are still on the table, none of which
12 have been enacted, but some are still on the table.
13 This year both the Treasury and HUD had
14 other hearings and they culminated in a report that
15 was just made jointly by those agencies that had a
16 number of suggestions for the Federal Reserve. This
17 Treasury-HUD report had a lot of suggestions -- only
18 a minority of these were for the Federal Reserve but
19 there were some -- and these suggestions and others
20 that people raise will be the focus of these
21 hearings.
22 So at this point I will stop and again thank
23 you all for attending and for speaking and helping
24 us with what I think is a difficult problem and one
25 on which the Federal Reserve will try to use its
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1 authority wisely. Thank you.
2 MR. LONEY: Thank you, Governor Gramlich.
3 The morning, the way we set this up, is as follows.
4 The morning will be devoted to discussions of ways
5 the Board might use its rule-writing authority under
6 TILA and HOEPA to curb predatory lending practices
7 in home equity lending while preserving access to
8 credit for borrowers with less than perfect credit.
9 I want to emphasize that what we would like
10 to talk about at both this morning and this
11 afternoon at the other hearings that we're going to
12 hold is practical, useful, sensible ways that we can
13 use the Board's authority, as Governor Gramlich
14 said, to try to address this issue, and keep it as
15 constructive and useful as we can.
16 This afternoon, however, we're also going to
17 be discussing alternatives to regulation that might
18 address predatory lending, such as consumer outreach
19 and education, and hear about studies or research on
20 subprime or equity lending that would inform the
21 Board in its deliberations.
22 What we're going to do is, we're going to
23 start each session with brief opening remarks by the
24 participants and follow that with what we hope will
25 be a round table discussion of the various issues.
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1 We've also set aside time to hear from members of
2 the public, and anyone in the audience who wishes to
3 participate in the open-mike session later in the
4 afternoon and is not already signed up outside -- I
5 don't know if it's outside this room or downstairs,
6 there's a sign-up sheet out there -- should do so.
7 This list will be used to order the appearances and
8 will help us gauge the length of time the
9 participants may be asked to observe in expressing
10 their views.
11 Let me start by just pointing out a few
12 simple, I hope, rules of procedure for this
13 morning's session. We are asking -- because of the
14 fact that time will be very tight, we're asking that
15 the panelists confine their prepared remarks to
16 about three minutes, and so therefore you should be
17 thinking about really what's the important point you
18 want to make about this matter as you prepare to
19 speak. We are going to have a timekeeper, this
20 gentleman over here, and he's going to give you the
21 high sign at about one minute to go. I would ask
22 that you be considerate of the others who are
23 speaking and observe the time constraints as best we
24 can.
25 When I call on you, I would ask that you
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1 introduce yourselves and indicate the organization
2 that you represent. We do have a very varied panel;
3 I think it'll be a very useful discussion because of
4 the fact that it is so varied.
5 What we will do is we'll start with
6 Mr. Lehman over here when we get ready and proceed
7 to his left around the room, and each panelist will
8 present prepared remarks if they wish to do so.
9 There will be a few questions maybe for
10 clarification at the end of your individual
11 statement, but a general discussion, hopefully,
12 again, in the form of some kind of a round table,
13 will follow.
14 We'll discuss the possible changes to
15 HOEPA's scope from about the end of the panelists'
16 introductory remarks to about 10:30, then we'll
17 break for about ten minutes, and then reconvene to
18 discuss possible additional restrictions or
19 prohibitions for specific acts or practices under
20 HOEPA for the rest of the morning until lunch.
21 Again, let me emphasize that we're
22 particularly interested in concrete, practical
23 suggestions about how the Board can use its
24 authority under HOEPA and we would like for the
25 period after the prepared remarks to be in the
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1 nature of a give-and-take discussion, taking into
2 account time constraints. We do want to try to get
3 to as many of the questions the Board posed in the
4 notice of these hearings as possible.
5 I would also point out that the proceedings
6 are being recorded as we speak, and the young lady
7 has asked that everybody try to accommodate her by
8 speaking one at a time. Is that good enough? Okay.
9 So with that introduction, and assuming
10 there are no questions about the procedures,
11 Mr. Lehman, if you would begin.
12 MR. LEHMAN: Thank you. I'm Phil Lehman,
13 I'm an assistant attorney general in the consumer
14 protection section of the North Carolina Department
15 of Justice. I'm here because I participated
16 extensively in the drafting and legislative advocacy
17 for North Carolina's predatory lending law.
18 As Governor Gramlich noted, North Carolina
19 was the first, and I believe is still the only state
20 to have enacted comprehensive legislation dealing
21 with predatory lending. I would like to briefly
22 describe how we got to where we did and what model
23 we tried to follow to focus on this problem.
24 The process that we followed in ending up
25 with this legislation was one of consensus and
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1 negotiation and compromise among most of the players
2 in the lending marketplace, including banks,
3 mortgage bankers, mortgage brokers, consumer
4 advocates, and government regulators. It was a
5 long, involved process but we were focusing -- what
6 we were trying to do was to focus on specific
7 problems of predatory lending and to restrict those
8 specific practices so that responsible lenders would
9 not be affected or would not be unduly burdened by
10 the law and without restricting the flow of
11 reasonable credit to the subprime marketplace in
12 North Carolina.
13 I think the end result was a careful
14 balancing act and I think we succeeded in large
15 part. Most of the provisions of the law did not
16 take effect until July 1 of this year, so it is
17 really too soon to comment on what has happened and
18 what specific effects it has.
19 When we drafted the legislation one of the
20 first models that we looked at was HOEPA, and there
21 was some suggestion that North Carolina could simply
22 enact the provisions of HOEPA as state law and then
23 add some remedies to that. But on closer analysis
24 we found that HOEPA was seriously deficient in
25 several respects and I want to show how our law
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1 differed from HOEPA. Specifically, we felt that
2 HOEPA was primarily a disclosure statute and we
3 believe that disclosures in this sector of the
4 marketplace simply do not work, that more
5 substantive provisions are necessary, that the real
6 estate closing process is already document-heavy and
7 disclosure-intensive.
8 We added specific prohibitions such as a
9 prohibition on financing fees on high-cost loans, a
10 prohibition on all balloon payments in high-cost
11 loans, and a requirement that borrowers undergo
12 credit counseling before loans are closed.
13 We also believe that the fees threshold in
14 HOEPA was too high. We arrived at the figure of
15 5 percent of points and fees versus 8 percent in
16 HOEPA. We added a separate threshold for prepayment
17 penalties, for high prepayment penalties, because in
18 North Carolina law prepayment penalties have been
19 disfavored and we believe that it can be an abusive
20 practice for borrowers.
21 Finally, we added some general protections
22 that apply to all consumer home loans, including a
23 prohibition on the financing of prepaid lump-sum
24 credit insurance, which we feel is very, very
25 important and something the Board should look at.
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1 Thank you.
2 MR. LONEY: Thank you very much,
3 Mr. Lehman.
4 I'm afraid I would butcher your name, sir,
5 so if you'll introduce yourself.
6 MR. COUDRIET: I'm Charles Coudriet. I'm
7 president of the National Home Equity Mortgage
8 Association and I'm also chairman of Saxon Mortgage,
9 which is a lender in the subprime market.
10 The modern home equity industry is a
11 relatively new phenomenon fueled by capital market
12 innovation and entrepreneurship at many levels of
13 the delivery process. Subprime home equity loans
14 were previously made by private, totally unregulated
15 lenders, some of which still operate below the
16 surface of the economy. The legitimate market has
17 provided widespread access to credit to the people
18 who need it most. We need to be mindful of the
19 strides that have been made in favor of the consumer
20 as we seek solutions to the problem. There are
21 abusive lending practices occurring on an isolated
22 basis in the U.S. today. Some of these abuse
23 borrowers, others abuse lenders through fraud and
24 misrepresentation. The home equity industry
25 addresses a broad spectrum of borrowers, including
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1 lower and higher income families. The subprime
2 sector is similar and its clients share the
3 condition that they are credit-impaired in some
4 fashion. The largest percentage of these loans are
5 refinancing versus purchase. Care must be taken not
6 to disenfranchise a greater group of borrowers who
7 only in recent years have gained access to credit.
8 These families are the ones who need credit most to
9 restructure the family financial picture and avoid
10 catastrophe. Many solutions to the issue of
11 predatory lending involve tactics that sound good
12 initially from the consumer's point of view, but
13 upon further analysis work against the true
14 interests of a cash-strapped family. Not all
15 balloon mortgages are good for every consumer;
16 however, there are cases where balloon usage
17 perfectly fits the family's predicament as the best
18 way out of trouble. Prepayment penalties sound
19 terrible until you peel back the onion and you find
20 that lenders hope they never collect them and their
21 existence helps hold down mortgage rates to the
22 consumers. If HOEPA's triggers are left as is, we
23 would be fine with including prepayment penalties in
24 the refinance calculation. Prohibitions on
25 financing closing costs don't sound good to anyone
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1 who is in need of cash. If the borrower could come
2 up with out-of-pocket closing expenses, he probably
3 wouldn't need to refinance.
4 HOEPA is good law as written. It
5 establishes today a threshold which protects
6 consumers without restricting their access to
7 credit.
8 My company very rarely buys or originates
9 HOEPA loans today because we feel the necessity of
10 an expensive legal review to avoid inadvertently
11 transgressing its stipulations. This extra caution
12 usually makes these loans uneconomic for us.
13 Lowering HOEPA's triggers would
14 significantly decrease access to credit for most
15 lenders, including our company. Changing the
16 covered points and fees would have the same effect
17 on exclusion. Let's enforce HOEPA.
18 MR. LONEY: Thank you. Ms. Crawford?
19 MS. CRAWFORD: My name is Kate Crawford and
20 I am the legislative chairperson for the North
21 Carolina Association of Mortgage Professionals. I'm
22 a past president of the association and I am a
23 working mortgage broker with First Financial
24 Services, which is headquartered in Charlotte, and
25 my branch is in Burlington.
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1 I have been in the mortgage industry for
2 over 24 years and been a mortgage broker for over
3 20. The mortgage brokerage industry has enabled
4 Americans to purchase and remain in homes. Home
5 ownership is up. We originate over 60 percent of
6 all the home mortgages. Prospective borrowers call
7 our offices all the time shopping for the rate and
8 program that suits their needs. Mortgage brokers
9 offer extremely competitive rates, creative
10 programs, and great service.
11 The main question the borrower wants to know
12 is how much is it going to cost me. Mortgage
13 brokers who specialize in conventional and
14 government lending can consistently offer the
15 consumer lower rates than they receive at other
16 lending institutions. The wholesale lending market
17 has become a viable entity for most large lending
18 institutions.
19 This system allows for brokers to act as the
20 origination, processing, and closing department for
21 their mortgage products, without incurring the
22 expensive overheads of bricks and mortar, equipment,
23 employee salaries, benefits, workmen's compensation,
24 payroll taxes, et cetera. Wholesale lenders do not
25 have to incur as much overhead so competitive rates
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1 can be passed along through the wholesale mortgage
2 channels to the broker. All this has done to
3 agency, lender, and industry guidelines supplied by
4 our lenders, GFC, FHA, and VA.
5 All these goods and services clearly meet
6 the test provided by RESPA and the HUD policy
7 statement concerning yield spread premiums. This
8 subject has been studied for years. In 1999 HUD
9 issued a lengthy statement of policy stating that
10 yield spread premiums were not illegal per se.
11 With the advent of automated underwriting
12 engines more borrowers are becoming homeowners. The
13 mortgage brokerage industry is a consumer-oriented
14 industry. We help and counsel potential borrowers.
15 There have been statements that borrowers were
16 qualified for an agency loan but were given a
17 subprime loan. Being qualified and being approved
18 do not mean the same thing. If the applicant cannot
19 meet the conditions of the approval, then the loan
20 is not given a final approval. When this is the
21 case, the borrower has to look at other options for
22 home financing.
23 The subprime market arose from the emergence
24 of a stop-gap form of lending which allowed
25 consumers who do not meet the criteria of agency or
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1 government loans to fulfill their need for home
2 ownership.
3 Mortgage brokers have filled the void left
4 by banks and savings and loans. I believe that all
5 people should be treated fairly and equally;
6 however, all credit histories cannot be treated the
7 same. The mortgage market is built on the premise
8 that the borrower has the ability to repay their
9 loan. If an individual does not pay their bills,
10 they will not qualify for certain types of loans.
11 The subprime market is a definitive substitute for
12 people who have credit problems or who do not meet
13 the underwriting guidelines set forth by the
14 agencies.
15 Subprime and predatory are not
16 interchangeable terms. All types of businesses and
17 groups have bad and unscrupulous people. There is
18 no place for this in the mortgage market. The North
19 Carolina Association of Mortgage Professionals
20 supported the consensus approach taken in the
21 drafting of the North Carolina predatory lending
22 bill and the National Association of Mortgage
23 Brokers have been proactive in bringing to the House
24 of Representative the Consumer Mortgage Protection
25 Act. Thank you.
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1 MR. LONEY: Thank you very much.
2 Mr. Maynard?
3 MR. MAYNARD: Thank you. My name is Mal
4 Maynard, I'm an attorney in a small town in
5 southeastern North Carolina and I'm here today to
6 ask the Board for help on behalf of my clients.
7 We are facing an unprecedented rate of
8 foreclosures among moderate-income borrowers in
9 southeastern North Carolina. In most cases they
10 have very little access to any remedy, and in
11 instances where they do have access to lawyers, the
12 lawyers there find that they in many cases are
13 stripped of North Carolina consumer protections by
14 AMPTA preemption or that the HOEPA protections do
15 not reach enough of these transactions.
16 I want to take a minute to share with you
17 the experience that we've been through down in
18 southeastern North Carolina. In my hometown a
19 mortgage broker originated nearly $200 million worth
20 of loans over a three-and-a-half-year period through
21 approximately 4,000 loans. These fees ranged from
22 5 to 12 percent, nearly all of them were refinances,
23 they had very high percentage rates, and a very high
24 percentage of these loans were flipped within one
25 year. While holding itself out as a mortgage
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1 broker, it had a secret exclusive deal with a
2 subprime lender to whom more than 90 percent of the
3 loans were directed at rates typically in the range
4 of 14 percent.
5 At the sale of these mortgages, the lender
6 and the mortgage broker split the premiums that were
7 earned from the sale to the secondary market. At
8 one point in time the president of this mortgage
9 brokerage corporation was earning $200,000 to
10 $300,000 per month in the premiums that were
11 garnished from the sale at the secondary market.
12 All of the capital was extracted from the mortgage
13 brokerage corporation. They filed for bankruptcy
14 protection shortly after they were sued for these
15 abuses. The only recovery in sight is against the
16 assignees. They created the market for these
17 practices and there's no other remedy for our
18 clients.
19 Only about half of these loans meet the
20 HOEPA guidelines. For those other borrowers there's
21 very little prospect of any recovery for these
22 borrowers. They are facing an economic disaster and
23 to a large extent there is no remedy.
24 Another phenomenon that we see growing daily
25 is the capacity of lenders to craft transactions
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1 that avoid applicable North Carolina laws because of
2 the AMPTA preemption. The balloon payment
3 provisions and the prepayment penalties that might
4 otherwise be prohibited by North Carolina law are
5 evaded by lenders who have learned how to qualify
6 for the AMPTA preemption. It's a very serious
7 problem in our area. We believe that there should
8 be concurrent application of these laws, not
9 preemptive rule by Washington that avoids North
10 Carolina law for these borrowers.
11 I look forward to seeing some help with
12 HOEPA with regard to the level of fees that would
13 invoke the HOEPA jurisdiction. Thank you.
14 MR. LONEY: You kept saying AMPTA
15 preemption. What is that?
16 MR. MAYNARD: The Alternative Mortgage
17 Parity Transaction Act is a piece of legislation
18 that the federal Congress passed which otherwise
19 avoids applicable state law. It primarily is
20 targeted toward mortgages that are structured with
21 balloon payments and in other creative financing
22 sorts of arrangements.
23 GOVERNOR GRAMLICH: I have a question as
24 well. I'd like to go back to Mr. Coudriet. You
25 ended by saying, let's enforce HOEPA, as if -- the
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1 implication was that it wasn't being properly
2 enforced. Is that your meaning, and if so, what do
3 you have in mind?
4 MR. COUDRIET: No, I don't think it's being
5 improperly enforced. What I'm saying is it's good
6 law as written. The triggers are in place and are
7 effective to discourage most lenders from even
8 writing a loan that comes under HOEPA. So I don't
9 think -- once you start changing that I think you're
10 going to bring about a situation where access will
11 be severely denied to people who really need the
12 money. And HOEPA itself -- any transgression of any
13 regulations, we find, is generally enforced by the
14 bar in particular jurisdictions that transgressions
15 are found.
16 GOVERNOR GRAMLICH: So when you say let's
17 enforce HOEPA, you're really saying that present law
18 is just fine?
19 MR. COUDRIET: Yes, sir.
20 MR. LONEY: Mr. Creekman?
21 MR. CREEKMAN: My name is Jim Creekman. I
22 serve as in-house counsel with First Citizens Bank,
23 a midsize bank which has operations -- which is a
24 multistate operation. Prior to that I was engaged
25 in the general practice of law as a small-town
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1 practitioner in a town in western North Carolina and
2 was principally a dirt and death lawyer. In that
3 capacity I handled literally thousands of consumer
4 residential mortgage loan transactions, so I come to
5 this table with two different perspectives.
6 I have two basic observations. First, we
7 need to start over. Second, we need to combat
8 predatory lending with precision and on a national
9 basis.
10 The history of Regulation Z, RESPA, and the
11 other regulations which govern residential lending
12 is one of layering. Over the years the regulations
13 have been revised, amended, and tweaked. Additional
14 layers of regulations have been added to address
15 each new concern. This is the approach that we're
16 being asked to endorse today. How do we add onto
17 the existing regulatory structure to curb predatory
18 lending practices. I urge us to resist this myopic
19 approach. The rules which govern residential
20 lending are already second in complexity only to the
21 federal tax code. There aren't four people in this
22 room today who truly understand the existing
23 regulations. They're all lawyers and they
24 disagree.
25 The purpose of the disclosures is to permit
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1 a consumer to make an informed decision.
2 Disclosures are now so numerous and so complex that
3 they no longer fulfill their purpose. Sophisticated
4 borrowers don't understand or rely on them. To an
5 unsophisticated borrower the disclosures are
6 meaningless, complex, and confusing. Lenders are
7 lost in the morass of regulations and have pleaded
8 for simplicity, objectivity, and safe harbors.
9 Adding another layer to the regulatory
10 structure to address predatory lending practices
11 will only further complicate an already intolerable
12 situation.
13 It's time to step back, take a new look at
14 residential lending, and start over; to develop
15 meaningful disclosure requirements for those few key
16 elements which will permit the average consumer to
17 make an informed decision, to ensure that the
18 regulatory burden is both comprehensive and
19 comprehensible. And it must be objective. Lenders
20 need safe harbors. In other words, we need to
21 reevaluate and simplify. And we can do this, still
22 addressing the issue of predatory lending.
23 My second observation deals specifically
24 with predatory lending. If a problem is pervasive,
25 it needs to be treated as a pervasive problem. If
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1 the problem is limited to a few key players, the
2 remedies need to be precisely targeted to those few
3 bad apples. We need to attack the problem with a
4 rifle, not with a shotgun. Consumers come in all
5 shapes and sizes; some are young, some are old, some
6 are credit worthy, some are less credit worthy.
7 Sometimes the economy is good, sometimes it's
8 chaotic. Whatever is done to combat predatory
9 lending should not limit the ability of a
10 responsible, market-driven lender to deal flexibly
11 with a wide range of consumers in different economic
12 circumstances.
13 The rules need to be on a national basis.
14 At this point we can't tell what rules apply. From
15 state to state multistate lenders are in a morass.
16 There needs to be a national standard which preempts
17 virtually all state laws on the subject.
18 MR. LONEY: Thank you, Mr. Creekman.
19 Mr. Eakes?
20 MR. EAKES: Good morning. My name is
21 Martin Eakes. I come to you as the CEO of
22 Self-Help, which is the largest community
23 development financial lending organization in the
24 country. With $550 million in assets, that makes us
25 about the size of one of Jim Creekman's branches, to
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1 put it in perspective.
2 I will also tell you that Self-Help is one
3 of the oldest and longest subprime mortgage lenders
4 in the nation. For the last 17 years we have been
5 making loans to credit-impaired individuals,
6 primarily minority families, and have provided about
7 $700 million of loans to 11,000 families. During
8 that time we have had virtually no defaults and no
9 foreclosures. So subprime lending can be done
10 responsibly, but often it is not.
11 I also was the spokesperson for the
12 Coalition of Responsible Lending in North Carolina
13 which helped, along with a lot of panelists here,
14 put together the bill in North Carolina.
15 The first point I want to make is to say
16 that predatory lending or loans that have abusive
17 characteristics are not anecdotal as the Federal
18 Reserve notice and your opening comments mentioned.
19 We've documented that in North Carolina there are at
20 least 10,000 borrowers per year who have
21 single-premium credit insurance financed into their
22 loan. Most people agree that that is -- I know Bill
23 doesn't but most people agree that that is predatory
24 per se to have credit insurance financed into the
25 loan. So 10,000 per year at a minimum in North
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1 Carolina.
2 Regarding HOEPA, there are really three
3 different components: There's what Congress passed,
4 there is what the Federal Reserve has the authority
5 to issue as regulation, and then there's the
6 enforcement, primarily by courts and by borrowers.
7 I believe there is no problem with either the first
8 or the third, that Congress passed sufficient
9 authority and that borrowers can enforce, that the
10 real problem has been that the Federal Reserve has
11 not acted to flesh out the regulations under HOEPA.
12 I cite the authority under HOEPA that says
13 the Board, by regulation or order, shall prohibit
14 acts or practices in connection with mortgage loans
15 the Board finds to be unfair, deceptive, or designed
16 to evade provisions of this section. It's not
17 discretionary, it's mandatory; it says you shall
18 come up with regulations for acts you find to be
19 unfair.
20 The fact that the Federal Reserve in 1997-98
21 recommended to Congress that we prohibit the
22 financing of credit insurance and recognized the
23 potential abuse there seems to me to put the duty on
24 the Federal Reserve to actually put in regulation
25 form the prohibition that Congress clearly granted
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1 authority for.
2 There are five areas we'd like for you to
3 look at. Credit insurance should be prohibited for
4 all home loans across the board in single-premium
5 format. Number two, prepayment penalties should be
6 prohibited, or at a very minimum, included in the
7 definition of points and fees for subprime loans.
8 Number three, yield spread premiums paid to brokers
9 should be included in the points and fees definition
10 under HOEPA. Number four, there should be a
11 prohibition against flipping of loans for all home
12 loans under the general discretionary authority that
13 I just mentioned. And number five, there should be
14 a provision that says the first purchaser of a loan
15 is held accountable for any abuses by the broker
16 that originated that loan. We agree with Kate that
17 most brokers are extremely honorable, but for the
18 ones that create loans that are not, the very first
19 lender who purchases those loans should be held
20 accountable for whatever abuses so that there can be
21 self-policing take place in the marketplace. Thank
22 you very much.
23 MR. LONEY: Thank you very much,
24 Mr. Eakes. Ms. Eggers?
25 MS. EGGERS: My name is Helen Eggers and I
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1 am the president of EquiCredit Corporation, which is
2 a subsidiary of Bank of America. EquiCredit is the
3 largest bank-owned subprime lender in the
4 marketplace today.
5 As a context for the discussion today, we
6 want to make one point as a starting point for our
7 thinking. And that is, it is critical to recognize
8 that responsible subprime lenders cannot and should
9 not be confused with predatory lending practices.
10 There are abuses in the home-equity lending
11 industry. We are committed to working with all of
12 you to find solutions that actually benefit the
13 consumer and maintain the availability of credit in
14 the marketplace.
15 We urge the Board to focus on three things
16 in particular: Enforcement of existing consumer
17 protection laws and regulations; secondly, the
18 simplification of disclosures, and finally, consumer
19 education and awareness.
20 A challenge that we share as we face these
21 priorities is that we are working in an environment
22 that is confusing and hampered with rash conclusions
23 and multiple labels. For example, predatory
24 lending, high-cost loans, subprime lending, and
25 threshold loans are all use synonymously when they
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1 are very different things. This kind of language
2 has led to an unfair indictment of the entire
3 subprime home-equity lending industry. Predatory
4 lending involving unfair or deceptive practices or
5 fraud of any kind is engaged in by a minority of
6 unscrupulous lenders and it should be stopped. But
7 why is subprime lending necessary in the marketplace
8 today? Until a decade ago consumers with credit
9 problems or those who wanted to finance
10 nonconventional properties faced little hope of
11 finding mortgage financing. Now responsible
12 subprime home-equity lending meets the needs of this
13 important consumer market. It legitimately serves
14 borrowers who otherwise would be unable to find
15 credit. This market, by the way, is estimated to be
16 about 20 percent of the mortgage market today.
17 EquiCredit is primarily a wholesale risk-base
18 subprime lender that sources for mortgage brokers
19 and correspondents. We are subject to the same
20 lending regulations and use substantially the same
21 documentation as the conforming industry.
22 Bank of America is the industry leader in
23 fair and responsible lending and we are committed to
24 serving the subprime lending market in a fair and
25 ethical manner. Our subsidiaries and Bank of
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1 America do not condone or engage in unfair or
2 deceptive practices. As a subsidiary of Bank of
3 America, EquiCredit has established standards of
4 operation to ensure that we maintain Bank of
5 America's highest standards of fair and equitable
6 lending. EquiCredit loans are originated to the
7 same high standards of agency loans with appraisals,
8 title insurance, income verification, and
9 debt-to-income ratio consideration. The loan
10 documents and disclosures provided to borrowers are
11 actually very similar to those used by Fannie Mae
12 and Freddie Mac.
13 This brings us to our first area of focus.
14 We strongly believe that existing laws and
15 regulations, if consistently enforced across the
16 entire industry, are sufficient to combat abusive
17 and deceptive lending practices. Increased
18 enforcement of existing laws and regulations is
19 needed for those in the industry who have not been
20 as highly regulated or supervised as banks. If
21 additional legislation is enacted we stand at risk
22 of containing credit availability in the market. As
23 an example, EquiCredit volumes are likely to
24 decrease by almost 30 percent due to the North
25 Carolina legislation. That translates to about
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1 $9 million in credit availability in a six-month
2 period of time, or think about 500 families that
3 need to find a new source of financing for their
4 credit needs. And in Chicago, where the city is
5 looking at its own ordinance, our preliminary
6 figures indicate that our business could be impacted
7 by as much as 60 percent. That's $125 million in
8 financing over a 12-month period of time. That's
9 1500 families that have to find a new source of
10 financing.
11 The demand for credit will not disappear.
12 The question is, without federally regulated
13 providers who will meet the consumer's need; who
14 will be there for them? We urge the Board to
15 spearhead an effort working with the Federal Trade
16 Commission and state attorneys general to increase
17 the enforcement of existing laws and regulations,
18 both state and federal, to ensure that those that
19 don't comply with the law are put out of business.
20 We agree --
21 MR. LONEY: Could I ask you to wrap up.
22 MS. EGGERS: Yes. We agree with the need to
23 simplify disclosures. We'd just like to reinforce
24 our commitment and participation to consumer
25 education. Thank you.
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1 MR. LONEY: Thank you. Mr. Bost?
2 MR. BOST: My name is Bill Bost and I'm a
3 member of the Ragsdale William law firm in Raleigh,
4 North Carolina, and I serve as general counsel to
5 the North Carolina Association of Mortgage
6 Professionals. In that role I participated as a
7 member of the working group of industry participants
8 who drafted the North Carolina Predatory Lending
9 Act. In my legal practice I also represent mortgage
10 brokers, mortgage bankers, and other financial
11 services providers.
12 As an initial matter, North Carolina
13 mortgage brokers and lenders agree with regulators
14 and consumer advocates that lending practices that
15 use deception to take advantage of a customer's
16 ignorance and circumstances are intolerable. The
17 North Carolina mortgage industry applauds the
18 efforts of the Board, legislators, and regulatory
19 agencies to eliminate predatory lending.
20 In their recent report, HUD and the
21 Department of Treasury identified four practices
22 they consider predatory: Loan flipping, excessive
23 fees, lending without regard to a borrower's ability
24 to repay, and fraud. North Carolina's law makers,
25 with assistance from an array of interested parties,
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1 addressed these issues with the passage in 1999 of
2 the North Carolina Predatory Lending Act, which,
3 among other things, made loan flipping unlawful,
4 placed significant restrictions on transactions in
5 which fees and interest rates exceed reasonable
6 levels, prohibited the financing of single-premium
7 credit insurance, and required lenders on certain
8 loans to examine borrowers' abilities to repay
9 them. These measures were accompanied by strict
10 penalties for violations.
11 While the provisions of the Predatory
12 Lending Act have been in effect for only a short
13 time, by all accounts the law has had the effect of
14 limiting the frequency of predatory practices and
15 has driven from the market lenders and brokers
16 notorious for them.
17 The Predatory Lending Act, however, also has
18 some undesirable consequences that should be
19 considered as potential rule changes are discussed.
20 Certain common loan products such as FHA loans and
21 loans involving mortgage insurance are difficult to
22 make profitably under the new laws and nonpredatory
23 lenders and brokers must either forego them or risk
24 the drastic remedies of the Predatory Lending Act.
25 Other nonpredatory lenders have decided that the
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1 risks of litigation under North Carolina's ambiguous
2 law are too great and have taken their capital to
3 more friendly states. Those that remain spend
4 heavily on compliance measures and have become
5 extremely cautious in their underwriting.
6 We have yet to determine the effect of the
7 new laws on the availability of credit to low- and
8 moderate-income borrowers.
9 HUD reports that home ownership is at an
10 all-time high in American history. The rapid rise
11 in the rate of home ownership can be attributed to
12 the change in the number and types of entities that
13 now deliver a wide variety of mortgage products in
14 an increasingly complex regulatory and economic
15 environment. Experts estimate that subprime loans
16 currently constitute approximately 15 percent of the
17 home mortgage market, and everyone agrees that not
18 all subprime lending is predatory.
19 Current regulations under Section 32 of
20 Regulation Z provide adequate protection in any of
21 these transactions. Stringent additional
22 regulations that address anecdotal ills in the
23 relatively small number of remaining loan
24 transactions can unnecessarily and adversely affect
25 a broad range of important mortgage activities and
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1 can stifle competition. Accordingly, the North
2 Carolina mortgage industry encourages the Board to
3 focus its efforts on identifying and limiting only
4 truly unfair practices occurring in the mortgage
5 industry, with an emphasis on educating customers as
6 to the availability of mortgage products, the
7 effects of credit history on their ability to
8 borrow, and the terms and consequences of the loan
9 transactions into which they enter. We strongly
10 discourage any changes to HOEPA's rates or fee
11 thresholds which could hinder competition and choice
12 in a very effective home equity market.
13 We look forward to participating in this
14 process and thank you for having us.
15 MR. LONEY: Thank you, Mr. Bost.
16 Mr. Lampe?
17 MR. LAMPE: My name is Don Lampe and I'm a
18 partner at the Smith, Helms, Mulliss & Moore law
19 firm here in North Carolina. I provided a technical
20 commentary to the predatory lending legislative
21 working group with our new law, and I also served as
22 a public member of the North Carolina general
23 assembly's credit insurance and mortgage credit
24 committee this past year where we looked at
25 reforming and amending certain aspects of North
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1 Carolina's new law.
2 I urge the Fed to move slowly and cautiously
3 into the expansion of HOEPA regulation. There are
4 several factors which show that caution and moving
5 slowly is warranted. No one really knows at this
6 time the effect of expanded HOEPA regulations on the
7 availability of credit. North Carolina now is in
8 effect a living laboratory for the Fed's
9 consideration, as well as New York with its new
10 Part 41 regulations. And of course there are other
11 states and municipalities that are considering
12 HOEPA-like high-cost home loan laws, and of course
13 data from these places will not be available at
14 least until months from now. In fact, in North
15 Carolina, the North Carolina general assembly
16 recognized the importance of measuring the effect of
17 our high-cost home loan statute on the availability
18 of credit by providing for a legislative study
19 committee to look into the issue and to report to
20 the general assembly's future sessions.
21 A related issue is the effect of expanded
22 high-cost home loan laws on the securitization of
23 home loans. It is well known that much of the
24 capital flowing into residential mortgage lending is
25 provided through securitization or secondary market
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1 transactions. Subjective legal standards such as
2 those contained in North Carolina's high-cost home
3 loan statute increase the due diligence burden and
4 magnify legal risk in securitization transactions,
5 again with the potential to adversely affect the
6 availability of loan funds to otherwise deserving
7 mortgage borrowers. An example of a troublesome
8 subjective standard would be, for example, to change
9 HOEPA's pattern and practice test for unaffordable
10 loans to North Carolina's case-by-case
11 determination.
12 Finally, caution is warranted because there
13 can be unintended consequences of even the best
14 intentioned consumer protection regulation which I
15 think everyone at this table would advocate. If
16 there is a rush to regulate in this area we may have
17 similar experiences nationally to the extent we use
18 the North Carolina law as a template. Examples of
19 unintended consequences -- Mr. Bost mentioned
20 broker-originated VA and FHA loans no longer being
21 available in North Carolina. Even though these
22 loans have been specifically designed to target
23 low-income borrowers, those loans probably won't be
24 made in North Carolina because of the broad and
25 ambiguous points and fees test in our law. Also,
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1 payments of closing related fees to affiliates are
2 being discouraged even in a time when the free
3 market and other federal initiatives such as
4 Gramm-Leach-Bliley point the other way.
5 And finally, the compliance burden and risk
6 of noncompliance have become so high in North
7 Carolina, a consequence of lenders leaving our
8 market, which final information on that of course is
9 not known.
10 I thank the Board for permitting me to speak
11 here today and look forward to participating in the
12 process.
13 MR. LONEY: Thank you, Mr. Lampe.
14 Ms. Marks?
15 MS. MARKS: Everybody knows who I am, I
16 hope. Well, I want to thank you for the opportunity
17 to express the views of my company; thank you so
18 much. Fannie Mae has long been concerned about this
19 problem of predatory lending and we commend the
20 Federal Reserve for calling this hearing and
21 gathering information.
22 As you mentioned my name is Fe Morales
23 Marks, and I'm a vice president in Fannie Mae and I
24 run a policy shop. I've submitted a full set of my
25 testimony which is available in the back, but I'd
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1 like to highlight a few things for you this
2 morning.
3 Today I'd like to reaffirm Fannie Mae's
4 determination to be a leader in the housing finance
5 industry and in efforts to stem predatory lending,
6 predatory practices which rob borrowers of
7 opportunity and hard-earned equity. We have
8 approached the issue of predatory lending from a
9 perspective of the consumer but cognizant of the
10 role that we play in the marketplace, being that
11 we're in the secondary market. Our approach aims to
12 bring value to consumers in eight ways.
13 First, we want to expand the application of
14 conventional conforming practices and standards to
15 more borrowers. Second, we seek to advance a
16 mortgage consumer's rights agenda. Third, we are
17 committed to provide innovation and flexibility
18 through new products and services. Fourth, we will
19 use technology to expand markets and reduce costs.
20 Fifth, we will continue to work very hard to keep
21 homeowners in their homes. Sixth, we will continue
22 support for our nonprofit partners in the home
23 counseling industry and in turn rely on their
24 efforts to increase homebuyer readiness. Seventh,
25 we will continue our strong support for the Fannie
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1 Mae Foundation, which is a national leader in
2 consumer outreach for home ownership. Eighth, we
3 are developing and advancing responsible policies
4 for serving consumers with blemished credit.
5 Let me highlight four things for you today.
6 First, we recently announced the DU 5.0, which is
7 the new version of our Desktop Underwriter which is
8 our automated underwriting system. Through this new
9 version, lenders will be able to receive much more
10 information, customize messages around a consumer's
11 profile, which will help inform a consumer as to why
12 they're having difficulty accessing credit and will
13 in turn help them to improve their own credit
14 standing.
15 Secondly, we also recently announced our
16 True Cost Calculator, which is a calculator that is
17 available on our Web site and we're also making it
18 available to lenders so they can use it on their own
19 Web sites. This is a tool that will allow consumers
20 to compare the cost of products that they have under
21 consideration and will also help them avoid
22 predators.
23 Third, we've developed a new product, the
24 Timely Payment Rewards mortgage. This is an
25 alternative to products that are now available to
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1 consumers in the subprime market. It offers
2 consumers an alternative which generally will be
3 about two percentage points lower than the options
4 they now have available. It allows for an automatic
5 one percentage point reduction in rate automatically
6 after -- oops, time is up; let me not tell you the
7 details of my Timely Payment Rewards mortgage.
8 Let me go on and tell you that we do have a
9 lender letter that lays out our policies around the
10 business that we will buy. We speak to issues such
11 as steering, excessive fees, and prepayment
12 penalties, which are issues that are under
13 consideration here.
14 I will close by saying that we believe that
15 competition and good money drives out bad money and
16 we're prepared to help bring good money to drive out
17 the bad money and the predatory behavior.
18 MR. LONEY: Nicely wrapped up.
19 Mr. Burfeind?
20 MR. BURFEIND: Good morning and thank you
21 very much. I'm here on behalf of credit insurers.
22 The credit insurance issue is really just one small
23 aspect of the overall issue or issues that are
24 subject to your inquiry today, but I'm probably the
25 only one here best prepared to respond to those
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1 issues. I think the critical policy decision that's
2 already been laid out in one way or another for the
3 Board is whether or not to prohibit the financed
4 single-premium credit insurance in connection with
5 home loans.
6 I would like to first emphasize that credit
7 insurance is not a lending practice. Credit
8 insurance is a product like any other product, and
9 when financed out of loan proceeds or out of home
10 equity, it is financed no differently than any other
11 product. Consider one of the main products, I
12 guess, or forces for which home equity is borrowed
13 against: the consolidation of credit card loans.
14 Think of the things that you and I charge on credit
15 cards -- restaurant meals, oil changes, blue jeans
16 at the store -- all financed out of home equity.
17 Would we prohibit the consumer from financing those
18 products by utilizing their home equity?
19 We the credit insurance companies believe
20 that the availability of the financed single-premium
21 should be retained. Proponents for prohibition
22 point to some particularly egregious examples where
23 borrowers were victimized by a broker or lender that
24 included credit insurance premium financing in the
25 loan package. However, a conscientious examination
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1 compels a distinction between some fraudulent or
2 abusive lending examples and the whole universe of
3 good credit insurance product servicing.
4 Credit insurance is a valuable option that
5 protects home equity from the predators of time and
6 nature, predators like death and disability and
7 accident. The availability of premium financing
8 makes the product more affordable to many more
9 consumers. Mr. Eakes mentions 10,000 borrowers with
10 financed credit insurance premium on their loans.
11 Absent this financed credit insurance premium, many,
12 maybe all, but at least many of these borrowers
13 would have no or substantially no insurance
14 protecting that home equity.
15 Credit insurance critics allege that the
16 borrowers are coerced or otherwise tricked into
17 purchasing the coverage and that the coverage is of
18 little value. Let me just say in the short time
19 allotted here that there have been numerous studies
20 done with respect to credit insurance consumer
21 buying habits. Two of them were done by the Federal
22 Reserve Board, and I do have the findings available
23 to recite into the record at a later time. The most
24 recent one done by the Credit Research Center, and I
25 would just highlight the general conclusion, that
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1 consumer loans, including home equity, that the
2 purchase patterns for credit insurance are readily
3 explainable without reliance on seller coercion as a
4 factor.
5 There's also the allegation of low value.
6 Credit insurance critics embrace a 60 percent loss
7 ratio standard as the measure of value. Well,
8 credit life and disability insurance written in
9 connection with real estate secured loans do meet or
10 exceed that standard.
11 In summation, I would just say that the
12 financed single-premium is a valuable insurance
13 product to many consumers and its availability is to
14 be preserved.
15 MR. LONEY: Thank you. Mr. Stock?
16 MR. STOCK: Governor Gramlich, Mr. Loney,
17 distinguished members of the panel, my name is Paul
18 Stock. I'm executive vice president of the North
19 Carolina Bankers Association. Batting clean up, I
20 wish I had some precise, final, pointed comments
21 that would bring us all to a sharp focus before our
22 panel discussion.
23 MR. LONEY: Me too.
24 MR. STOCK: In lieu thereof, I would like
25 to submit a couple of observations from one of the
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1 participants in our drafting experience here in
2 North Carolina.
3 First, I'd like to say that from the
4 perspective of the banking industry there's been a
5 lot of discussion nationally about what was the
6 banking industry thinking about in North Carolina.
7 We discussed at a policy level with our leadership
8 extensively both the nature of the problem that had
9 been identified and the potential risks and rewards
10 of moving forcefully ahead into this arena. I think
11 that the thousands of person hours that went into
12 the drafting process are testimony to the complexity
13 of the problem with which you deal, which is only
14 magnified by the fact that you're dealing with a
15 tapestry of laws in the various states and the
16 preemptions that have already been mentioned of
17 federal law, and dealing within some pretty
18 meaningful restraints as to what you can do under
19 HOEPA.
20 I think that much like the problem with
21 defining obscenity, a lot of people think they know
22 a predatory loan when they see one, and they
23 identify certain characteristics. Yet these are all
24 very small puzzle pieces, and when put together
25 wrong those puzzle pieces, I think, can lead to a
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1 loan that maybe everybody in this room would say is
2 predatory. When put together in a different fashion
3 for a borrower of different circumstances, you may
4 have a loan that's creative and innovative and is
5 helping a family in a time of real need.
6 In my first 48 years of life I never heard
7 the word "anecdotal" but I've heard it a bunch for
8 the last two years. And I think the time has come,
9 given that we've gotten a law in North Carolina and
10 a regulation in New York, for there to be some
11 scientific analysis and see which of those puzzle
12 pieces at least most often occur in predatory loans
13 and to see if the Board, with its authority under
14 HOEPA, can address those particular pieces.
15 I think that we don't know what we've
16 wrought here yet. I think that we have certainly
17 dealt with some of the most common problems of
18 predatory lending as it's existed in the past. But
19 one thing we've learned is predatory lenders are
20 most creative, and if all we've accomplished in
21 doing this is forcing them to shift their modus
22 operandi and to take a different approach, maybe
23 unsecured loans that are reduced to judgments
24 against homeowners and still homeowners are going to
25 be losing their homes, then we've accomplished
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1 little despite the best intentions and a great deal
2 of effort. So I would encourage the Board as part
3 of this process of analyzing what steps can be taken
4 under HOEPA to analyze what's been done in the
5 jurisdictions that have acted and as scientifically
6 as possible analyze what those effects have been.
7 Thank you.
8 MR. LONEY: Thank you, Mr. Stock. That
9 concludes the prepared remarks, but I'd like to
10 emphasize to the panelists, first of all, our thanks
11 for going to the trouble to do this, and also that
12 if you want to embellish those remarks or give us
13 the complete prepared text, some already have, we'll
14 be glad to have them.
15 What I'd like to do now is start talking
16 about some of the specific issues that the Board
17 raised in the notice of these meetings, and the
18 first issue I wanted to raise with you -- and again,
19 I'd like to emphasize that people can chime in, ask
20 questions, fill in, whatever, as we talk -- but
21 HOEPA covers mortgage loans that meet one of the
22 act's two high-cost triggers. A loan is covered if
23 the APR exceeds the rate for Treasury securities
24 with a comparable maturity by more than ten
25 percentage points, the points and fees paid by the
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1 consumer exceed the greater of 8 percent of the loan
2 amount, or $400, or $451 or something this year.
3 The Board has the authority to expand
4 HOEPA's coverage under both triggers and I'd like to
5 discuss the possible expansion of the triggers
6 first, if we could, then discuss the possible
7 effects of expanded triggers on credit
8 availability.
9 Starting with the APR trigger, HOEPA
10 authorizes the Board to adjust the HOEPA trigger by
11 two percentage points from the current standard of
12 ten percentage points above the Treasury rate,
13 Treasury securities with comparable maturities.
14 Several of you, as you've mentioned, were active in
15 crafting the North Carolina statute which keys off
16 HOEPA's requirements, and under the North Carolina
17 law the points and fees trigger is lower than HOEPA
18 but the rate trigger is the same as HOEPA's. We
19 were wondering what the thinking was in keeping the
20 APR trigger at ten percentage points and whether
21 there was debate about that and was data offered in
22 support of the various positions.
23 One thing that is obvious to us is that the
24 Board must wrestle with the issue of, if it were to
25 adjust the rate trigger, what gives the Board the
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1 basis to peg it to a particular percentage point.
2 The Congress narrowed the range of possibilities to
3 two percentage points, but the question is why would
4 eight be the right number or why would nine or nine
5 and a half percentage points. So if we can start --
6 oh, and one issue that Mr. Stock mentioned that is
7 very relevant I think to this discussion is, does
8 anybody have any data? I think I was almost 48
9 before I heard the word "anecdotal", or knew what it
10 meant anyway, but one of the issues we face is
11 whether anybody can come up with data.
12 We've been looking and I suspect you have
13 too, so I'd like to hear about anything you have to
14 say about the availability of data, especially on
15 how many loans would be covered if we dropped the
16 rate to eight or nine or whatever the number may be;
17 how do we know what the impact would be of dropping
18 that rate on the number of covered loans.
19 I'd like to offer that as a suggested topic
20 for discussion for the next little while. Anybody
21 want to say something? Mr. Lehman, you look ready.
22 MR. LEHMAN: I'm sure everybody else is
23 too.
24 MR. BLANTON: Can I expand the question a
25 little bit? In effect changing the trigger, how
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1 would that change the availability of credit? I
2 know Ms. Eggers' remarks about the fact that it
3 would reduce the ability of her company to make --
4 if we went to eight how would that reduce your
5 ability to make credit available?
6 MR. LONEY: Mr. Lehman?
7 MR. LEHMAN: I'd just like to address the
8 question about why we ended up with what we did, why
9 the points and fees standard was lowered from what
10 HOEPA has and the APR was not.
11 We discussed these issues at some length and
12 it was I think our general conclusion that points
13 and fees, high points and fees, are more abusive by
14 far than high interest rates, the reason being is
15 that somebody with a high interest rate loan can
16 refinance out of the loan if his position improves,
17 if his credit position improves.
18 Fees, high fees, are earned when the loan is
19 closed. The money is gone, the equity in the
20 person's house is lost to that extent. We certainly
21 had evidence of lots of high-fee loans where the
22 loans had not appeared to be -- the fees did not
23 appear to be justified or fully earned, and I think
24 there was consensus that eight points was more than
25 enough and that five points provided enough room for
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1 reasonable origination costs and reasonable
2 compensation to mortgage brokers.
3 But we definitely focused on the fee
4 threshold more than the APR threshold because we
5 thought that's where the problems were.
6 MR. COUDRIET: I could address availability
7 impact. We at Saxon consider ourselves one of the
8 most highly ethical lenders in the subprime
9 business. We had to exit the state of North
10 Carolina for our refinance products because we were
11 concerned about the suitability standards and dear
12 friends at the bar being able to help us interpret
13 those. So to the extent that we were active, and we
14 are active, in our neighboring state in the
15 refinance business, we had to withdraw.
16 MS. EGGERS: I would add to the
17 availability concerns to address the question asked
18 earlier. Bank of America currently does not
19 participate in the Section 32 loan market for
20 several reasons: The additional liability issues,
21 the additional cost of supporting those loan
22 programs, and importantly the reputational risk
23 because of the unfortunate confusion of the
24 assumption that a high-cost loan is a predatory
25 loan, so we don't participate in that market. We
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1 would need to make a business decision about whether
2 we could participate in the Section 32 market if
3 those triggers were changed.
4 We've also looked at the numbers to get some
5 sense of impact to the marketplace, and when we
6 looked at our production for the first six months of
7 the year and we assumed that the APR trigger drops
8 from 10 to 8 percent, we've estimated an approximate
9 6.2 percent volume impact. In other words, if we
10 maintain our position of not participating in
11 Section 32 loans, that would reduce Bank of
12 America/EquiCredit's production by 6.2 percent.
13 Extrapolate that out, that's half a billion dollars
14 of mortgage availability in a year.
15 I think our key concern, and I think the
16 Board has to wrestle with this in some way, is that
17 the credit demand doesn't go away. So if your
18 supervised, federally regulated lenders are not
19 going to be the ones providing the credit, then who
20 will.
21 MR. LONEY: I just got a note that people
22 can't hear. Is that true, you can't hear where --
23 in the back? I'd ask the panel -- I'm not sure what
24 I can do about it technically myself but if anybody
25 can help me out back in the wall somewhere, but I
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1 ask the panelists to make sure they're speaking
2 clearly into the mike. Thank you.
3 MS. CRAWFORD: I have found that we are
4 losing lenders in North Carolina on a weekly basis.
5 Lenders that have been in our market for years are
6 exiting because they don't understand the law and
7 they're afraid of getting sued. In my family, my
8 husband is a compliance officer and they deal in 23
9 states, and he said this is the most complex of the
10 laws that he deals with.
11 I would just like to ditto what everybody
12 has said, that we need to go slow, we need to think
13 about what we're doing and maybe look at what is
14 going to happen in North Carolina instead of just
15 jumping on this bandwagon. Predatory lending is a
16 problem, it's a huge problem, but I think that
17 before we start denying credit to people and the
18 credit availability is diminished, we need to think
19 about them too. Because North Carolina is going
20 to -- the borrowers are going to have a problem
21 getting loans in North Carolina. I've already had
22 brokers say I'm not doing loans under $50,000, and
23 that excludes a lot of people in North Carolina from
24 getting houses or keeping their houses.
25 MR. LONEY: This law just went in effect
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1 what, a month ago?
2 MS. CRAWFORD: It's been in effect since --
3 part of it's been in effect since last October,
4 really.
5 GOVERNOR GRAMLICH: I wonder if I could ask
6 if those who are pulling out of North Carolina could
7 be a little more specific about what it is that is
8 forcing you to do that. Because we've already heard
9 that North Carolina didn't change the rate trigger,
10 it only changed the points trigger, and there were a
11 few -- Mr. Lehman mentioned a few things that were
12 prohibited. But is it those prohibitions that are
13 bothering you or is it the fact that the effect of
14 HOEPA's net is a little wider or is it something
15 else? Exactly what is it that is the problem?
16 MS. CRAWFORD: I think one of the problems
17 that we're hearing is, what is a net tangible
18 benefit. And that is, we have to prove net tangible
19 benefit and there's no definition of net tangible
20 benefit and the lenders are scared to death to make
21 a loan because of those three words.
22 MR. LONEY: Net tangible benefit to the
23 refinancing?
24 MS. CRAWFORD: To the borrower for a
25 refinance, yes.
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1 MR. LAMPE: The lenders that I have been
2 representing that have been pulling out of North
3 Carolina have explained to me that -- there's two
4 related reasons that I'm hearing. One is that the
5 high-cost home loan statute, coupled with the other
6 consumer protections in the predatory lending bill,
7 which includes the anti-flipping provision, are
8 highly subjective, and I cannot give them -- I
9 cannot design a compliance program for them that
10 they can follow objectively and know that if they
11 followed it they've complied with the law. And that
12 is -- I don't think that would have been a big
13 problem in North Carolina, but for the first time in
14 North Carolina we have unfair and deceptive trade
15 practice with treble damages and attorneys fee
16 shifting built into the new law, so the risk of
17 legal noncompliance has become so much higher in
18 North Carolina, because we didn't have that; we
19 didn't have unfair and deceptive trade practice,
20 treble damage and attorneys fees if a lender went
21 wrong in some way.
22 That's what I'm seeing out in the field. I
23 guess I must say that my experience is anecdotal and
24 I haven't done a scientific survey. I've yet to do
25 a top-to-bottom compliance program for a lender that
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1 wants to make high-cost home loans in North
2 Carolina, and I've been advising dozens of lenders
3 how to stay out of the net of the high-cost home
4 loan statute, which addresses the availability of
5 credit issue in some way.
6 MR. LONEY: What I'm hearing is that it's
7 not the rate trigger or the points and fee trigger,
8 it's these other elements of the North Carolina
9 law. The question that we posed was what about
10 changing the rates and fees. People have argued we
11 ought to change it to eight, the APR trigger. What
12 about that?
13 MR. CREEKMAN: I don't think your
14 understanding is accurate. I think that the rate
15 trigger is not the big issue, I agree with you
16 there. And that was not -- although that was an
17 initial issue that was debated in the ad hoc
18 drafting group, it was not one of the great sticking
19 points in the discussions.
20 I think the two principal problems for
21 lenders, and these include prime lenders as well as
22 subprime lenders, is, number one, the calculation of
23 the points and fees, particularly in the environment
24 that we now face where lenders have been given
25 greater authority under Gramm-Leach-Bliley to engage
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1 in insurance activities. So the issue is, what
2 comes into both the numerator and the denominator in
3 the calculation of the five percentage points. And
4 that is an extremely complex calculation and has to
5 be done on a loan-by-loan basis, and quite honestly,
6 there aren't a whole lot of us -- in fact, we have
7 not figured out yet how to systemize it, and if you
8 can't systemize it you can't engage in bulk lending,
9 as a practical matter.
10 MR. LONEY: That is one of the things
11 that's causing these lenders to leave North
12 Carolina?
13 MR. CREEKMAN: I can't tell you why they're
14 leaving because we're still here and we're staying.
15 I can tell you that that is the experience that
16 lenders are having in trying to deal with the new
17 North Carolina statute. The other is the very
18 nebulous nature of the flipping provision, and both
19 of those are very troublesome.
20 I think Don Lampe's comments as to his
21 discussions with lenders as to exactly why they are
22 leaving is probably the best indication we have as
23 to true reasons.
24 MR. STOCK: I might note that on the idea
25 of changing the triggers, if you change the HOEPA
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1 triggers it requires disclosure on a greater number
2 of loans. And I think -- and Phil and Martin will
3 certainly correct me if I'm wrong, they have been
4 for a long time -- but I think they would say that
5 the design of the consequences for tripping the
6 triggers in North Carolina was intended to be
7 sufficiently draconian that no one would make a
8 high-cost home loan in this state. That's very
9 different from the HOEPA approach. Martin is
10 shaking his head; I think I got a nod out of Phil.
11 But at the very least there are substantial
12 consequences beyond disclosure if you trip the
13 triggers in North Carolina.
14 And I know throughout the discussions --
15 because I would say that our initial perspective was
16 to try to better tailor disclosures to the subprime
17 market when we went into these negotiations and we
18 were told over and over and over again, I think Jim
19 Creekman made the point initially, that another
20 layer of disclosures on top of the huge stack that
21 are already overwhelming to the borrower was not
22 going to solve this problem. So if the result of
23 changing the triggers is just providing more
24 meaningless disclosures to a greater number of
25 people, I'm not sure how it's going to effect the
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1 problem.
2 GOVERNOR GRAMLICH: I wonder if I could ask
3 about that. You've mentioned it and several other
4 people mentioned the disclosures. There seems to be
5 a plea for simplifying the disclosures, and are
6 there -- I'm a novice to this area but are there
7 practical suggestions for how to do that, that
8 matter X really doesn't have to be disclosed, it's
9 just added print and doesn't do anything, or would
10 you want more safe harbors or -- what is the
11 practical guidance about that?
12 MR. STOCK: I think -- I mentioned the
13 Stock theorem, the five disclosures. I think that
14 perhaps what we ought to do is take every disclosure
15 that's currently required, and through groups like
16 this, attempt to prioritize them and then go down
17 the list and just using common sense say, you know,
18 if we have more than this number we've lost the
19 effect of all of them. And it's got to be a much
20 smaller number, in English, with a few numbers that
21 are the important numbers for the consumer to look
22 at to say this is a worse deal than that.
23 Of course that was the whole concept behind
24 the truth in lending when it was enacted. But with
25 the other laws that have been layered onto it and
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1 things like HOEPA, it's absolutely daunting to even
2 somebody that's reasonably proficient in the field.
3 You've got to stop, step back, and think about it
4 again before you even try to explain it to someone.
5 MS. EGGERS: We completely agree with his
6 point.
7 MR. EAKES: A couple of points. Some of the
8 disclosures are actually harmful; for example, APR,
9 which was set up to give you one rate. The fact
10 that APR takes eight or ten points of fees and
11 spreads it across 30 years in the calculation of an
12 APR actually could end up having a consumer think
13 when their rate on the loan was 10 percent and their
14 APR shows up at 11 percent, to misunderstand the
15 timing of when those fees really took effect. So
16 you could have ten points on the front end which
17 attach immediately and are gone, but the APR
18 actually gives you this false sense of security that
19 is misleading.
20 In response to Paul's point about what we
21 were intending to do with high-cost loans, we really
22 had two different categories of high-cost loans in
23 North Carolina just as you do under HOEPA. For a
24 high-cost loan that trips the fee triggers, we
25 essentially had very draconian consequences in the
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1 North Carolina bill. It basically said you can't
2 finance any fees. Well, really that comes out
3 essentially to meaning that you can't make a
4 high-cost loan a high-fee loan because most of the
5 borrowers would need to finance it if they were
6 going to have those high fees.
7 On the other hand, we had the specific
8 philosophy of saying we are not capping in any way
9 the amount of risk premium that can come to a
10 credit-impaired lender, to a lender -- to
11 credit-impaired individuals. So we were basically
12 encouraging lenders to put their pricing in the
13 interest rate. And the interest rate -- if you are
14 a high-cost loan through the interest rate, which
15 under current standards would be about 16 percent,
16 just as HOEPA -- HOEPA does not have anything that
17 is very onerous if you kick in the high cost except
18 for the pass-through liability, and that scares
19 lenders. And we think that that does what it was
20 intended to too, which was say there should be some
21 due diligence and self-policing. That certainly was
22 Congress's intent, and we think that ought to be
23 expanded.
24 In North Carolina, we said if it's a
25 high-cost loan by interest rate, fine, but let's put
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1 everybody on the same playing field. Because what I
2 hear from lenders directly is that I can't eliminate
3 prepayment penalties for my loans unless all the
4 other lenders in my marketplace are eliminated at
5 the same time; if everyone is constrained then we
6 can compete on the same playing field and we will be
7 competing on interest rate.
8 So from the community advocate's point of
9 view, our view was that many of us got into this
10 lending business to help minority borrowers own
11 homes. We felt like that was the only way for many
12 people to enter the middle class, and probably for
13 many of the people who are sitting here who are part
14 of that community, the single most unacceptable
15 economic fact in American society for us is the
16 disparity in wealth between black and white
17 families. You probably know this number from 1990:
18 The median net wealth for black families was $4,000,
19 for white families it's $44,000. What we were
20 seeing that was not -- I guess it was anecdotal, but
21 there were hundreds and hundreds of cases that the
22 black borrowers that we had been helping to get home
23 loans to build family wealth over the last 17 years
24 were losing the entire amount of built-up wealth
25 they had because of the fees that were being charged
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1 and the prepayment penalties that were essentially
2 deferred fees. And so the focus in North Carolina
3 was specifically on trying to prevent the wealth
4 stripping, particularly as it impacted Latino and
5 African-American families.
6 MR. LONEY: Can I take one more shot at
7 trying to focus the question here on the question
8 of -- I'm going to take one more shot at trying to
9 focus the question on what is thought about the
10 Board dropping the trigger rate and why, what basis
11 would we have for choosing one lower number than
12 another, or is that -- I mean, because that is one
13 of the very live issues, we should drop the trigger
14 rate, and I'm not hearing --
15 MR. EAKES: One response: At the banking
16 committee hearings, Assistant Secretary Gensler
17 reported, and I don't know where his data came from,
18 that less than 1 percent of the subprime loans were
19 triggered by the 10 percent APR HOEPA trigger. So
20 the real question is, how many loans do you want in
21 the subprime arena to be subject to the pass-through
22 liability; that's really the significant issue. And
23 if EquiCredit says that for their lending it would
24 be an additional 6 percent in moving from 10 percent
25 above Treasury trigger to 8 percent above Treasury
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1 trigger, my guess is that you would want to drop
2 further than what Congress has enabled you to do,
3 that you really would want to cover, in the subprime
4 arena, 20 to 30 percent of loans under HOEPA.
5 Because it doesn't prohibit them, it simply says
6 that you have some scrutiny and some self-policing.
7 So maybe the question I would reflect back to you
8 is, what level of loans do you want to fall under
9 the HOEPA category.
10 Right now I think we have a chicken and egg
11 situation. Because it's such a small number, you
12 know, 1 percent or less, that fall into the HOEPA
13 trigger, you get the stigma attached to a Section 32
14 loan that wouldn't be there if it were 25 or
15 35 percent. So perversely it may be that the more
16 loans you cover the less cutoff of credit
17 availability that you have. I really believe that's
18 true. There is a stigma that we've had with lenders
19 that said we're not going to do any Section 32 loans
20 because we're afraid of the headline risk. If
21 that's the 1 percent highest cost loans, since
22 that's the only ones that get covered, they're
23 saying we're just going to stay out of it.
24 GOVERNOR GRAMLICH: Could I follow up? I
25 hear what you say, but then it strikes me that it
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1 would have made sense for North Carolina to lower
2 the rate trigger, if what you say is right. I mean,
3 you know, because you expressly didn't -- maybe not
4 you personally --
5 MR. EAKES: I can personally tell you what
6 I think, at least from the coalition, which had
7 three million members, is that we felt that the
8 Federal Reserve would be forced or would consider
9 and would end up lowering the rate to eight.
10 GOVERNOR GRAMLICH: So it's unnecessary for
11 North Carolina to --
12 MR. EAKES: In our early drafts of the
13 North Carolina legislation we had lower thresholds
14 on the interest rate test. In the negotiation and
15 compromise that went back and forth, the community
16 and civil rights folks ended up saying no, we are so
17 much more concerned about the fees that if we have
18 to give up we'd rather give up on the interest rate
19 threshold and tie it. This was -- also, a number of
20 the lenders' attorneys were saying to the extent
21 possible let's track the North Carolina bill to
22 HOEPA so that we only have one standard procedurally
23 to implement.
24 This was one of those places that we felt, I
25 felt, that eventually the standard would get lowered
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1 from ten to eight, and we didn't really want to
2 push. I mean, I have this disagreement with some of
3 my colleagues in Chicago who want to have an
4 interest rate threshold at 6 percent or 5 percent,
5 that's very, very low, lower to the Treasury. Well,
6 that's a simple standard, but what we believe here
7 in North Carolina was that we really need to focus
8 on the wealth stripping, that that is the key
9 problem, particularly for minority communities, that
10 is leading to such great foreclosure rates.
11 MR. CREEKMAN: Let me just add one aspect
12 to that which I think is important, and that is that
13 the North Carolina law is not like Section 32. The
14 North Carolina law is, in essence, a usury law
15 substitute. The decision was made very early on
16 that we could not regulate fees, points and fees, or