Morning Session of Public Hearing on Home Equity Lending
August 4, 2000
|
Morning Session of Public Hearing on Home Equity Lending |
1 I N D E X
2 SPEAKER: PAGE
3 INTRODUCTORY REMARKS
4 Dolores Smith 5
5 Edward M. Gramlich 8
6 OPENING STATEMENTS
7 Jennifer Davis Carey: Director,
Consumer Affairs and Business Regulation,
8 Commonwealth of Massachusetts 13
9 Thomas J. Curry: Commissioner of Banks,
Commonwealth of Massachusetts 16
10
Steve Nadon: Executive Vice-President and COO,
11 Option One Mortgage Corporation 19
12 Elizabeth Renuart: National Consumer Law Center 25
13 Howard Miselman: Chairman,
Massachusetts Mortgage Association 27
14
William Gothorpe: America's Community Bankers 31
15
Bruce Marks: Ceo and Executive Director,
16 Neighborhood Assistance Corporation of America 34
17 Pam Kogut: Assistant Attorney General,
Commonwealth of Massachusetts 37
18
Richard Gravino: President,
19 Provident Consumer Financial Services 40
20 Faith Schwartz: Freddie Mac 43
21 Dwight Golann: Professor of Law,
Suffolk University Law School 45
22
Dennis Algiere: Vice-President of Compliance,
23 CRA Officer, Washington Trust Company 48
24
0003
1 I N D E X (Continued)
2 SPEAKER: PAGE
3 EXAMINING POSSIBLE CHANGES TO HOEPA'S SCOPE
4 Dolores Smith 51
5 Discussion 52
6 EXAMINING POSSIBLE ADDITIONAL RESTRICTIONS OR
PROHIBITIONS FOR SPECIFIC ACTS AND PRACTICES
7
Dolores Smith 89
8
Discussion 91
9
James Michaels 133
10
Discussion 135
11
0005
1 P R O C E E D I N G S
2 MODERATOR SMITH: Good morning. I think
3 we're about ready to start. My name is Dolores
4 Smith. I'm the Division Director for Consumer and
5 Community Affairs at the Federal Reserve Board, and
6 I will be the moderator for this hearing.
7 This is the second of four hearings that
8 the Board is holding this summer on home-equity
9 lending. Our first meeting was in Charlotte last
10 week, and we have two more scheduled, one in Chicago
11 on the 16th and the fourth one in San Francisco on
12 September the 7th.
13 We have invited panelists and then we also
14 have members of the public who, as in Charlotte,
15 will be offering a wide variety of views on the
16 possible ways to address predatory lending practices
17 in the home-equity consumer credit market. We look
18 forward to hearing about these issues here in
19 Boston.
20 As in Charlotte, we will be discussing the
21 potential use of the Board's rule-making authority
22 under the Home Ownership and Equity Protection Act,
23 which we refer to as HOEPA. Also, we will be
24 discussing alternatives to regulation, such as
0006
1 consumer outreach and consumer education.
2 First I want to start by introducing the
3 Board Panel. We have Ned Gramlich to my right, who
4 is a member of the Board of Governors of the Federal
5 Reserve System. He also is the chairman of our
6 Oversight Committee for Consumer and Community
7 Affairs of the Board.
8 To my left, we have Adrienne Hurt and Jim
9 Michaels. Adrienne is Assistant Director for our
10 regulations program, and Jim is Managing Counsel.
11 And the two of them are the people who are primarily
12 responsible for Truth in Lending matters at the
13 Board.
14 And then to my right we have Richard Walker
15 from the Reserve Bank, Federal Reserve Bank of
16 Boston. He is a Vice-President.
17 I'll start with a few introductory remarks
18 for the record about the Truth in Lending Act and
19 HOEPA.
20 The Truth in Lending Act requires creditors
21 to disclose the cost of credit for consumer
22 transactions generally, not just for mortgage
23 credit. But in 1994, the Congress enacted HOEPA, as
24 it is called, and HOEPA added special protections
0007
1 under Truth in Lending for consumers who use their
2 home as security for loans when the rates or the
3 fees on the loans are above a certain percentage or
4 amount.
5 HOEPA was a response to accounts of abusive
6 lending practices involving unscrupulous lenders who
7 made unaffordable home-secured loans to consumers
8 who were house rich but cash poor. These cases
9 involved elderly, sometimes unsophisticated
10 homeowners who were targeted for loans with high
11 rates or high closing fees and with repayment terms
12 that were difficult or impossible for the homeowners
13 to meet.
14 HOEPA requires creditors to provide
15 additional disclosures at least three days before
16 the consumer becomes obligated for the loan. It
17 prohibits lenders from including certain terms in
18 loan agreements; for example, balloon payments for
19 short-term loans. It prohibits creditors from
20 relying on a consumer's home as the source of
21 repayment of the debt without considering whether
22 the consumer's income, debt and employment status
23 would support repayment.
24 For the Board, it also requires that the
0008
1 Board hold hearings periodically to keep abreast of
2 the home-equity credit market targeted by HOEPA.
3 And we did hold hearings initially in 1997, about
4 two years after HOEPA became effective.
5 And for now we'll start with Governor
6 Gramlich, who is going to talk to us a little bit
7 about the purpose of these hearings.
8 GOVERNOR GRAMLICH: Thank you very much,
9 Dolores. We're all happy to be here in Boston, and
10 we had a successful hearing in Charlotte last week,
11 and we look forward to another one today.
12 Let me just say a few overall words about
13 the issue here. The last few years have seen a very
14 large growth in subprime lending. It's roughly
15 twice the rate of growth of other mortgage lending.
16 Most of us think that by and large this
17 growth was a good thing, that it generally brought
18 credit to low and moderate income families that
19 previously had been denied credit and opened up
20 credit markets and went along with a number of
21 things that we would put in the general category of
22 equalizing opportunities for groups of all income
23 levels.
24 But by all anecdotes there seem to have
0009
1 been some abuses that have come along at the same
2 time. There have been a series of anecdotes that
3 I'm sure you've all heard, maybe are the source of
4 many of them, and we're trying to track this down
5 now with quantitative data. But there does seem to
6 be some rise in foreclosures that would otherwise be
7 hard to explain.
8 It's this kind of puzzle that leads to the
9 quandaries up here. We would like to encourage the
10 continued growth of subprime lending, the continued
11 opening up of credit markets, but we also want to do
12 what we can within our authority to curb the abuses
13 that are cropping up.
14 The Fed has some authority in this area, as
15 Dolores mentioned. We have some authority under
16 HOEPA. We also have some authority under the Home
17 Mortgage Disclosure Act. And these hearings are
18 fundamentally about aspects within our authority;
19 that is, what the Fed can do. We are trying to keep
20 our focus analytical and to keep our eye on the
21 ball, if you will, and try to find measures that we
22 can take that have more benefits than costs,
23 recognizing that nothing will be perfect.
24 One thing I should mention and that you'll
0010
1 hear today is that our authority in the overall
2 scheme of things is a bit limited. We certainly
3 can't do it all. To make a broad-based assault on
4 predatory lending, it's going to take the combined
5 efforts of all financial regulators, of which there
6 turn out to be nine in Washington. It's going to
7 take a number of private sector efforts. It's going
8 to take a big push on consumer education, and that's
9 why the session this afternoon focuses on that
10 topic.
11 So a multifaceted approach will be
12 necessary. At the same time, the Fed can probably
13 do some good, and that's the kind of thing that we
14 are going to be focusing on.
15 These hearings build on others that we've
16 had in the past that Dolores mentioned. There have
17 also been some Treasury/HUD hearings earlier in the
18 year, and that led to a report that Treasury and HUD
19 made that had a number of suggestions for Federal
20 Reserve action.
21 So this is the more, if you will, the more
22 precise part of that. We're now getting down to
23 business on these recommendations and trying to look
24 at them one by one and see exactly what we should
0011
1 and shouldn't do.
2 So with that I will stop and turn it back
3 over to Dolores so we can continue with the agenda.
4 But, again, thank you for coming, and thank you for
5 helping us with this difficult problem.
6 MODERATOR SMITH: Thank you, Ned. I wanted
7 to talk a little bit about how our agenda is
8 structured. We're going to spend the morning
9 considering ways in which the Board might use its
10 rule-writing authority under Truth in Lending and
11 HOEPA to curb the predatory lending practices, as I
12 mentioned, while preserving access to credit for
13 homeowners who have less than perfect credit
14 records. And then this afternoon we'll turn our
15 attention to alternatives to regulation, such as
16 consumer outreach and consumer education, that also
17 might help address predatory practices.
18 At both sessions we hope to hear about
19 studies or research on subprime or equity lending
20 that would inform the Board in its deliberations.
21 And then we also this afternoon have set aside time
22 for members of the public.
23 For the morning session and the afternoon
24 panel, we have invited panelists. And then we will
0012
1 have, starting at about three o'clock, what we are
2 calling an open mike session, so that members of the
3 public who are interested in presenting their views
4 may sign up at the registration desk outside and be
5 prepared to give us, in about three minutes, their
6 views on the topics we are discussing today.
7 For this morning's session we have some
8 rules of procedure. We will start with opening
9 statements by the invited panelists. Each person
10 will have three minutes. We have a timekeeper in
11 the audience, if you will raise your hand. We have
12 two of them, and they will give you, I believe, a
13 one-minute warning, and then they will tell you when
14 your time is up by saying, "Please finish." So that
15 if you're in the middle of a sentence, perhaps you
16 can get to the end.
17 But it's important to try to keep an eye on
18 the timekeeper. I know that the inclination will be
19 to look toward the Panel, but if you will just kind
20 of be mindful. I will also say that because
21 sometimes the attention is focused over here, what I
22 plan to do, when I see the signal, is do this
23 (demonstrating). This is not time out; this is time
24 up.
0013
1 There will be an opportunity for you to
2 sort of extend your remarks in several ways, both in
3 the dialogue in the general discussion that will
4 follow our opening statements. Also, some of you, I
5 know, have prepared written statements. We will
6 include those in the record if you will give them to
7 us, please.
8 So with that, I think we are ready to
9 start, and we are going to -- oh, let me just
10 mention as far as the schedule generally, we expect
11 to take a ten-minute break sometime around 10:30,
12 and then we will reconvene. We will break for lunch
13 at one o'clock.
14 So with that we will start with Jennifer
15 Davis Carey, and if you will each just start with
16 your name and continue with your organization and
17 identify yourself. I can't see all the names from
18 here, so you just do your own thing. We're going to
19 go clockwise, so we'll just keep going.
20 MS. CAREY: Good morning, everyone. My
21 name is Jennifer Davis Carey, and I'm Director of
22 Consumer Affairs and Business Regulation for the
23 Commonwealth of Massachusetts.
24 Thank you for this opportunity to speak
0014
1 about predatory mortgage lending and how we can
2 further combat its attendant abuses. Let me begin
3 by assuring you that my office and the Division of
4 Banks, one of the nine consumer protection agencies
5 under my supervision, are deeply committed to
6 protecting Massachusetts residents against
7 unscrupulous rogue lenders who engage in abusive and
8 unconscionable lending practices.
9 Predatory lending has no place in this
10 Commonwealth. We pledge to do everything within our
11 existing authority to stop this form of white-collar
12 mugging that robs people of the equity in their
13 homes, places them on a cycle of debt, jeopardizes
14 the sustainability of home ownership, destabilizes
15 neighborhoods, and thwarts the transfer of the hard-
16 earned wealth of working people to succeeding
17 generations.
18 This unconscionable practice preys on the
19 elderly and virtually assures that financially
20 unsophisticated working people and the poor, whom
21 these lenders target, consign themselves to long-
22 term, if not permanent, financial distress.
23 I commend the Federal Reserve for
24 maintaining continued focus on the issue of
0015
1 predatory lending. As you consider this issue, I
2 urge you to consider its definitional, legal and
3 regulatory complexity. I also urge you to weigh
4 carefully how predatory lending, which is illegal
5 and clearly immoral, differs from other legitimate
6 forms of lending.
7 For example, flexible loan mortgage
8 programs under the Massachusetts and Federal
9 Community Reinvestment Acts and responsible forms of
10 subprime lending have resulted in the extension of
11 credit to countless numbers of creditworthy people
12 who in the past did not fit easily into conventional
13 loan underwriting standards.
14 Let me articulate what we believe to be
15 important governing positions. There must be clear
16 and meaningful disclosure. The extension of high-
17 cost credit should be only made to borrowers based
18 on the ability to repay and not on collateral
19 values. Financing of points or single-premium
20 payment insurance should be prohibited. Points that
21 deviate from industry-wide standards should be
22 prohibited. Loan modification and deferral fees
23 should be prohibited. And there are a number of
24 others, but in the interests of time, I will keep it
0016
1 short.
2 One of the things that we are doing is I
3 have asked our Commissioner of Banks to look at our
4 regulation, and we are also creating an advisory
5 committee in our Division of Consumer Affairs to
6 work with the industry and with the advisory and
7 watchdog groups on this matter. Thank you.
8 MODERATOR SMITH: Thank you very much.
9 Mr. Curry.
10 MR. CURRY: Good morning. For the record,
11 my name is Thomas J. Curry, and I am the
12 Massachusetts Commissioner of Banks. I do have a
13 written statement, which I believe has been
14 submitted for the record, but I would like to make
15 some brief oral remarks.
16 The Federal Reserve's reexamination of
17 Truth in Lending's HOEPA provisions is truly timely
18 and appropriate after six years. During this
19 period, we have observed the development and
20 marketing of new nonconventional mortgage products,
21 increased levels of consumer debt, and significant
22 appreciation of residential property values here in
23 Massachusetts, particularly in the Boston area.
24 From a regulatory perspective, my office
0017
1 has also gained significant additional practical
2 experience with these new mortgage products and this
3 segment of the mortgage lending industry.
4 As you may know, the Commonwealth also has
5 a State Truth in Lending law, which is enforced by
6 my office. We too have looked at whether the
7 Commonwealth's HOEPA or Section 32 requirements are
8 adequate. Many of these same questions that were
9 raised by the July Federal Register notice have been
10 considered at the state level here and in other
11 states such as North Carolina and New York.
12 Given our licensing and examination
13 experience with nonbank mortgage lenders and
14 brokers, we believe that many of the specific
15 questions referenced in the public hearing notice
16 should be actively considered and pursued by the
17 Federal Reserve.
18 For our part, we have recently proposed
19 comparable changes and amendments to our state
20 regulations governing high-cost mortgage lending.
21 After collaborating with Director Carey's office, we
22 are proposing, one, to expand the coverage of the
23 Commonwealth's HOEPA regulations; two, to strengthen
24 its existing disclosure, limitations and prohibited
0018
1 act provisions; three, to add a new provision
2 listing a series of high-cost loan unfair practices;
3 and four, to strengthen the penalties for high-rate
4 loan violations under the Commonwealth's mortgage
5 lending licensing and consumer protection rules.
6 The text of these proposed changes,
7 including an official summary, are found in our
8 proposed regulations which are attached to our
9 testimony. However, I would like to briefly
10 highlight some of the specific proposed changes.
11 We think existing HOEPA thresholds are too
12 low and underinclusive. We are proposing to reduce
13 the interest rate trigger from 10 to 8 percent, 9
14 percent for junior mortgages, and to reduce the fees
15 or points trigger from 8 to 5 percent, excluding
16 bona fide discount points.
17 The proposed regulations also govern junior
18 mortgage loans as well as first mortgages and
19 clarify the treatment of adjustable rate mortgage
20 products.
21 We also believe that our proposed new
22 section on unfair practices is significant. This
23 section addresses abusive high-cost mortgage loan
24 practices, such as the financing of excessive
0019
1 points, fees and third-party fees; loan flipping;
2 loan packing; improper encouragement of default;
3 deceptive advertising; unconscionable rates, fees
4 and third-party charges; oppressive arbitration
5 provisions; selective credit history reporting; and
6 a prohibition on single-premium credit insurance
7 sales, as well as arbitrary loan call provisions;
8 and credit counseling.
9 We hope that our proposed state regulations
10 will be a resource to the Federal Reserve as it
11 considers any future changes to its own Truth in
12 Lending regulations. Thank you.
13 MODERATOR SMITH: Mr. Nadon.
14 MR. NADON: My name is Steve Nadon. I'm
15 the Chief Operating Officer of Option One Mortgage
16 Corporation. Option One has been in the subprime
17 business since late 1992. Our core business was
18 then and remains today the underwriting, funding and
19 servicing of subprime loans. As one of the largest
20 subprime wholesale originators in the nation, we
21 appreciate the opportunity to be heard on this issue
22 of what action, if any, the Federal Reserve Board
23 should take on HOEPA reform.
24 We are submitting written comments to the
0020
1 Board which go into much more detail than I am going
2 to today, but for the purposes of this morning's
3 discussion, there are three important points we
4 would like to make.
5 The first is that subprime lending is not
6 the same thing as predatory lending. Second, we
7 need to take great care not to write new rules that
8 cause legitimate lenders to stop lending to
9 consumers in large parts of the subprime market.
10 Third, the best way to reduce predatory lending is
11 to create a better informed consumer.
12 First, again, subprime lending is not the
13 same thing as predatory lending. Option One is just
14 one of many responsible subprime lenders in the
15 industry today. We do not make high-cost loans. We
16 do not write credit insurance products onto our
17 loans. We do not solicit our servicing portfolio to
18 flip our customers into new refinances.
19 Our prepayment penalties are optional and
20 always come with reductions in rates and/or fees to
21 the borrower. We report loan performance to the
22 three major credit bureaus. We do not offer loan
23 products with short-term balloon payments. Our
24 loans have no negative amortization, nor do they
0021
1 include any arbitrary lender call provisions.
2 Second, we believe it is important to keep
3 our eyes on the big picture. While we certainly
4 agree that the business practices of a few in our
5 industry are intolerable, we should all be very
6 careful to avoid writing rules that limit how any
7 lender can make loans in the hope of protecting
8 borrowers from the true predators. A likely result
9 of such rules is that the nonpredators in the
10 subprime market today may decide to stop making
11 loans, subject to the new restrictions.
12 As an example, Option One made a decision
13 in 1994 that we would not make loans that exceeded
14 the HOEPA triggers and voluntarily extended that
15 prohibition to all loan submissions, not just those
16 covered by the letter of the law. We were not alone
17 in that decision, and it has resulted in a segment
18 of the market that companies like Option One will
19 not serve.
20 If the Board decides to lower the triggers,
21 it will cause those of us who have been trying to do
22 the right thing to make a very tough decision: Do
23 we stay with our current policy or give in and make
24 a statement to the market that we've changed our
0022
1 mind and being a high-cost lender is okay?
2 Going back to the big picture I spoke of,
3 if good, well-intentioned companies like Option One
4 further limit the loans that they will make, who
5 fills the void? These borrowers will still have
6 credit needs, but the only lenders that would be
7 left to help them may be the exact lenders that you
8 find to be the most aggressive and likely to engage
9 in predatory practices.
10 My sense is that the original intention of
11 HOEPA was not to drive more people into the hands of
12 predatory lenders, but rather to make an effort to
13 ensure that borrowers were provided good information
14 upon which to base a decision to borrow.
15 The third and final point I would like to
16 make again of the big picture. Why are we all in
17 these discussions about predatory lending in the
18 first place? It is not the result of whether we
19 classify borrowers as prime or subprime or whether
20 the loan is under or over the HOEPA triggers. I
21 have not heard any claim or seen any evidence that
22 indicates that predatory lending only takes place on
23 loans that fall below the HOEPA trigger.
24 If I am accurate on this, it begs the
0023
1 question, why would we believe that lowering HOEPA
2 triggers, thereby expanding the number of
3 transaction covered by HOEPA, would reduce predatory
4 lending?
5 MODERATOR SMITH: Thank you.
6 GOVERNOR GRAMLICH: Could I ask Mr. Nadon a
7 question. You indicated that you had taken a number
8 of what I'll call policing measures on your own, but
9 you more or less seemed to be cautioning us against
10 policing the whole market.
11 Are you concerned that you would lose
12 competitive advantage if you corrected some things
13 on your own and these practices weren't corrected in
14 the whole market?
15 MR. NADON: Well, we certainly did give
16 some business up when we elected, back six years ago
17 now, to not do anything that went over what were
18 going to be the established HOEPA triggers, which
19 was okay. The question becomes, at what point does
20 that competitive advantage begin to cost the company
21 too much? And it's a tough question.
22 As HOEPA triggers come down, we probably
23 will continue to take the stand that we are not
24 going to be making HOEPA loans, so the more that
0024
1 those triggers are reduced, the bigger the
2 population that we're just not going to be able to
3 serve.
4 And probably more than the competitive
5 concern that we have is that there are some good
6 lenders out there that do not do a lot of the things
7 that get talked about as being predatory practices,
8 and we do that for a reason, because we don't
9 believe in doing those things. If we are serving
10 less of the market, then the people that will serve
11 those people are the ones that we don't want to be
12 helping those people. That's probably our bigger
13 concern than the competitive piece.
14 MR. MARKS: Since we're asking questions --
15 MODERATOR SMITH: I'm sorry, Mr. Marks,
16 we're not asking questions. Governor Gramlich has a
17 special status here, so he may ask questions. The
18 discussion will not start until after all the
19 opening statements have been completed.
20 MR. MARKS: Just on the record, we would
21 like to know what the rates that you charge are.
22 MODERATOR SMITH: We will discuss that
23 later, Mr. Marks.
24 Ms. Renuart.
0025
1 MS. RENUART: Thank you. I'm Elizabeth
2 Renuart. I'm with the National Consumer Law Center
3 here in Boston. We are an advocacy organization
4 that has a national perspective on the problems of
5 low-income consumers in this country.
6 The impact of predatory lending on the
7 human side has been great. We saw it in the
8 mid-1980s. It led Congress to have a series of
9 hearings in the early 1990s that led to the
10 enactment of HOEPA, which we're discussing today.
11 Since that time, there has been a series of
12 additional hearings that have illuminated and
13 highlighted this problem. Hopefully this afternoon
14 there will be actual homeowners and others present
15 from the community that can talk about the human
16 face of what has happened to them as a result of
17 predatory lending.
18 Senator Grassley held hearings in 1997.
19 HUD and Treasury held hearings around country
20 earlier this year. There is ample evidence at this
21 point that there is a serious and growing problem
22 that, while HOEPA has been helpful to address, it
23 has not sufficiently addressed this problem that's
24 been growing since 1980.
0026
1 The impact on minorities and the poor and
2 the elderly has been greatest. HUD came out with
3 studies earlier this year called "Unequal Burden"
4 from several cities showing the impact of predatory
5 and subprime lending, and the targeting of those
6 communities has been quite great in those large
7 cities, Atlanta, for example, Baltimore, New York,
8 Los Angeles and Chicago.
9 The Board is in a unique position at this
10 point. The Board has been delegated, although not
11 unlimited, certainly wide authority by Congress to
12 deal with this problem on its own and not have to
13 seek Congressional authority to go further.
14 It can, as we've heard, lower the annual
15 percentage rate trigger to at least 8 points. It
16 can add into the points and fees trigger any number
17 of points and fees that it chooses to do so, and
18 could in fact, under Congressional authority, adopt
19 an all-inclusive points and fees trigger, which we
20 would support.
21 In addition, Congress specifically
22 addressed refinancing, and as testimony in other
23 arenas have shown, it's the refinancing and the
24 inclusion of high points and fees which strips the
0027
1 equity out of people's homes. So later, during the
2 panel discussion, I know we will reach the issue of
3 refinancing, and I will be happy at that point to
4 address some specific proposals.
5 The most important problems that we see are
6 the refinancing and charging of points and fees that
7 suck the equity out of the home. We are going to
8 ask the Board to limit the amount of points and fees
9 that a lender can finance to no more than 3 percent,
10 and that the interest rate and fees triggered should
11 be reduced.
12 We have evidence that we will be submitting
13 in written testimony that will show that lenders
14 like Option One and others can make loans, still way
15 below a lower trigger, and cover any losses as a
16 result of foreclosure. And finally, HOEPA must
17 apply to open-ended credit. Thank you.
18 MODERATOR SMITH: Mr. Miselman.
19 MR. MISELMAN: Good morning, everyone. My
20 name is Howard Miselman, and I'm President of
21 Continental Funding Corporation, located in
22 Stoughton, Massachusetts. We're a full-service
23 mortgage brokerage company serving the community
24 since 1989. We handle all types of financing
0028
1 transactions, including conventional, government,
2 and the topic of today's discussion, subprime
3 lending.
4 Currently, I serve as Chairman of the
5 Massachusetts Mortgage Association, which is the
6 professional trade association representing mortgage
7 brokers, lenders and wholesalers throughout the
8 Commonwealth of Massachusetts. As professionals in
9 the mortgage industry, I can say confidently that we
10 are committed to ending abusive lending practices
11 throughout the country.
12 First of all, I would like to thank the
13 Board of Governors for extending me this invitation
14 to participate in the discussion on this very
15 important topic. I hope my comments and thoughts
16 help in the discussion.
17 The Massachusetts Mortgage Association
18 applauds the effort of the Board for convening this
19 discussion panel and scheduling similar public
20 hearings throughout the country. I welcome the
21 opportunity to discuss different ways to stop
22 abusive lending practices which target specific
23 consumer groups, including those with less than
24 perfect credit ratings.
0029
1 As a long-standing member of the mortgage
2 community, I have personally seen the chaos in
3 people's lives that resulted from predatory lending,
4 and I would like see them stopped. Myself and all
5 other reputable firms conducting business in the
6 subprime arena are also hurt by the small number of
7 firms practicing predatory lending.
8 Recent public hearings conducted by the
9 Massachusetts Joint Committee on Banks and Banking
10 on this subject point clearly to a solution that
11 will involve initiating tighter enforcement of
12 existing regulations, as well as considering
13 amendments to these regulations.
14 Such an approach has been advocated and is
15 being pursued in the Commonwealth by Commissioner
16 Curry of the Massachusetts Division of Banks, and a
17 draft of proposed amendments to regulations is
18 expected shortly to be available for public comment.
19 Effective responses to abuses, using regulation to
20 fight predatory lending, are better suited to the
21 urgent needs of consumers.
22 Like the Commissioner, we are also
23 concerned that any legislative or regulatory
24 measures clearly acknowledge the difference between
0030
1 abusive lending practices and appropriate lending
2 practices that serve the legitimate needs of
3 borrowers utilizing the services of subprime
4 lenders.
5 The subprime side of financing has come
6 about from a definite need by the public, and
7 consequently, any regulatory reform will need to
8 tread the line between stemming abusive lending
9 practices and keeping legitimate channels of credit
10 open to low-income borrowers and those with impaired
11 credit histories.
12 The most effective weapon against predatory
13 lending practices is a well-informed and educated
14 consumer. To that end, we will work with any group
15 or government body to establish a predatory-lending-
16 free environment so consumers can go out into the
17 marketplace and shop with confidence.
18 The Massachusetts Mortgage Association
19 maintains a proactive role on the issue of ending
20 predatory lending practices by engaging in specific
21 consumer outreach efforts. In 1999, for instance,
22 the Mass. Mortgage Association participated as a
23 contributor and active sponsor of the Massachusetts
24 Community Banking Council's "Don't Borrow Trouble"
0031
1 campaign.
2 This well-thought-out education campaign
3 put effective information in front of the homeowner
4 who may be looking for a home equity loan. Just as
5 a conforming or prime borrower shops for the best
6 possible deal and knows the right questions to ask,
7 with the proper information and guidance, a subprime
8 borrower can do the same.
9 We are united in support of the Board of
10 Governors' efforts to address the issue of predatory
11 lending and ending abusive lending practices. Thank
12 you very much.
13 MODERATOR SMITH: Mr. Gothorpe.
14 MR. GOTHORPE: Good morning. I'm Bill
15 Gothorpe, President and CEO of Dedham Institution
16 for Savings in Dedham, Mass. I appreciate the
17 opportunity to testify today on behalf of America's
18 Community Bankers. They are preparing a formal
19 comment letter in response to your request, so my
20 remarks today will just highlight some of the
21 points.
22 Let me start by giving you some perspective
23 about my bank and other ACB members. We work hard
24 to help the average American become and remain
0032
1 homeowners. We're permanent fixtures in our
2 communities. We have been in Dedham since 1831. I
3 would like to think that we will be there another
4 couple hundred years. And we depend on the economic
5 health of our borrowers for their success and for
6 ours.
7 Predatory lending that causes homeowners to
8 lose their homes and ruin their credit ratings
9 undermines our communities and damages potential
10 customers. So we want to help you and other
11 agencies eliminate predatory lending practices,
12 without damaging our ability to offer prime and
13 subprime loans to our customers.
14 Dedham Savings is not only not a predatory
15 lender, we don't do any subprime lending. We do
16 everything we can to make prime-rate borrowers out
17 of anybody who walks through the front door. As a
18 locally oriented community institution, we have the
19 flexibility to do that, but not everyone can operate
20 as we do.
21 There are many legitimate subprime lenders
22 that perform a valuable service by providing credit
23 to borrowers who cannot qualify for prime loans. At
24 the same time, we all know that predatory lenders
0033
1 are also active in this market. Unfortunately, it
2 has been stated, the information is anecdotal, and a
3 good reason for that is that many of the predatory
4 lenders don't come under the net of a lot of the
5 regulatory agencies.
6 I'm here to urge you to take steps to make
7 sure that unsupervised nonbank lenders undergo more
8 strict supervision. The Federal Trade Commission
9 and the states could play a key role here. Without
10 better supervision, regulations will be imposed only
11 on banks, leaving the door wide open to nonbank
12 predatory lenders.
13 Believe me, a bank like mine wouldn't dream
14 of engaging in predatory practices, because it is
15 totally contrary to our mission and philosophy. In
16 any case, our federal and state examiners clamp down
17 hard on violations of consumer protection laws and
18 ask tough questions about the quality of the loans
19 on our books. This is why everyone recognizes that
20 banks are not part of the predatory lending problem.
21 We know the Federal Reserve understands the
22 risk that overregulation can discourage responsible
23 lenders from making legitimate subprime loans.
24 Drawing the line between subprime and predatory
0034
1 lending has become increasingly difficult,
2 comparable to the problem faced by the Supreme Court
3 in a different context. Justice Potter Stewart
4 declined to define pornography but wrote, "I know it
5 when I see it." I think we all feel the same way
6 about predatory lending.
7 America's Community Bankers is recommending
8 the Federal Reserve lower the high-cost loan trigger
9 under HOEPA from the current 10 points over Treasury
10 to 8 points. We believe very few legitimate loans
11 would be adversely affected by this change and that
12 useful consumer protection will result.
13 I can see that my time is up. The rest of
14 the comments will have to be in written form. Thank
15 you.
16 MODERATOR SMITH: Thank you very much.
17 Mr. Marks.
18 MR. MARKS: I'll try to do it within three
19 minutes. My name is Bruce Marks, and I'm the CEO of
20 the Neighborhood Assistance Corporation of America,
21 NACA, and I'm also an ex-employee of Federal Reserve
22 Bank of New York. Let me try to summarize my
23 comments.
24 Let's go back in history to understand
0035
1 where the Home Equity Protection Act law came from,
2 where the legislation came from. We started in
3 Massachusetts with a campaign, a four and a half
4 year war against Fleet and its predatory lending
5 subsidiary Fleet Finance.
6 And when this organization, NACA, had over
7 500 people go to Washington and testify in the
8 Senate Banking Committee on May 17, 1993, when
9 Alphonse D'Amato, Senator from New York State,
10 sponsored the legislation, the HOEPA legislation, it
11 was opposed by the Federal Reserve Board. It's been
12 opposed by the Fed from day one.
13 So let's just listen to a few of the quotes
14 that were said by, let's see, Governor Lindsey. In
15 fact in a hearing on the legislation in the Senate
16 Committee on Banking, Housing and Urban Affairs on
17 May 19, 1993, Federal Reserve Governor Lindsey,
18 representing the Fed Board of Governors, criticized
19 HOEPA, claiming that it overly restricted credit
20 contract terms and "could create a risk that credit
21 could be shut off altogether to marginal borrowers
22 who happen to need credit due to special
23 circumstances." He went on to state, "I'm sure that
24 we want to avoid the unintended consequences of
0036
1 making loans more difficult to get, and we believe
2 the bill currently runs this risk."
3 He then recommended that the Congress raise
4 the threshold for each of the criteria for a high-
5 cost mortgage that would trigger the bill's
6 provisions. He further cited the widows who would
7 be deprived of the chance to do home improvement due
8 to HOEPA's income tests. He went on to claim that
9 an 8 percent limit on points or fees is, quote,
10 unduly restrictive. We're talking about a 17
11 percent, 18 percent trigger. That, by definition,
12 is predatory.
13 At NACA we do prime loans for subprime
14 borrowers. That means that someone who is B and C
15 credit can purchase or refinance a house with no
16 fees, no points, and an interest rate of 7.5 percent
17 fixed. So it's prime loans for subprime borrowers.
18 Brenda Williams, who is in the audience,
19 she had an 18 percent GMAC loan. She lost her home,
20 and yet now she was able to get a new home through
21 NACA, as did her brother, her three nieces, and many
22 of her friends.
23 So let's call it what it is. If any lender
24 here is saying that somehow a 17 percent trigger is
0037
1 somehow a subprime loan and not a predatory loan,
2 that is outrageous on the face of it. And no one in
3 this audience would agree that that makes any kind
4 of sense and that's not predatory. That's not
5 subprime. So we should have it.
6 (Applause)
7 MODERATOR SMITH: Thank you. Ms. Kogut.
8 MS. KOGUT: I'm Pam Kogut. I'm an
9 Assistant Attorney General in the Attorney General's
10 Office in Massachusetts, and I want to thank you for
11 inviting our office to be here today. We've
12 historically been interested in protecting consumers
13 where they have experienced problem mortgage loans.
14 We receive a fair number of consumer complaints
15 every year from consumers who are experiencing
16 problems with their mortgage loans.
17 And I wanted to just highlight one case our
18 office has been working on for a bit of time to
19 highlight problems that a law enforcement office
20 like ours sees in an area where the laws aren't
21 necessarily as tight as they could be.
22 Our office filed a lawsuit against First
23 Alliance Mortgage Company a couple of years ago
24 after Commissioner Curry's office referred the
0038
1 matter to us. Their examiners were in the field,
2 saw that borrowers were paying more than 20 points
3 on a routine or consistent basis, and referred the
4 matter to our office.
5 Now, when we heard about the facts of this
6 case, we thought that it would be -- it was
7 obviously an important case to bring, there wasn't
8 any question that we were going to file the lawsuit,
9 but we also thought that it would be, you know, a
10 fairly easy, quick case, that we would get a result
11 in short order.
12 And that has turned out to be the farthest
13 thing from the truth. We are still in litigation
14 with the company now, and they've filed for
15 bankruptcy, and the end is not in sight.
16 But let me just highlight a couple of the
17 things that we learned from the case. We, in
18 discovery, obtained the 300 loan files of every
19 single Massachusetts borrower. Of the 300 loans
20 made, in 36 percent of the cases borrowers paid
21 points in excess of 20, and in two cases paid more
22 than 30 points.
23 We believe that the industry-wide standard
24 for point charges in Massachusetts is that borrowers
0039
1 shouldn't be paying more than 5 points for these
2 kinds of loans, and in 96 percent of the loans the
3 First Alliance borrowers paid more than 5 percent.
4 Of the 300 consumers, 20 percent of them were
5 actually rated A or A- and could have gotten
6 conventional loans from other lenders, and their
7 credit rating didn't define the number of points
8 that they paid.
9 In every single one of the loan files there
10 was a mandatory arbitration agreement, and in every
11 single one of the loan files there was a prepayment
12 penalty, and borrowers were assessed prepayment
13 penalties every time they tried to refinance in
14 cases where First Alliance had the documentation to
15 support their ability to do so. So this is a lender
16 charging more than 20 points and charging prepayment
17 penalty.
18 From our point of view -- I'm just going to
19 wrap up, because the time people are telling me to
20 do that -- we really think that the more definite
21 the laws are in the area, the easier our job. As I
22 said, we thought this would be a simple case to wrap
23 up, and we are still in litigation with the company.
24 We would urge points to be limited. We
0040
1 would urge the trigger to be lowered. We would urge
2 any laws that would eliminate flipping. 28 of our
3 borrowers, also their loans were flipped. So this
4 is a significant problem. And we would urge any
5 regulation to prohibit mandatory arbitration
6 agreements. And I could go on and on, but I won't.
7 MODERATOR SMITH: Mr. Gravino.
8 MR. GRAVINO: I'm really going to try to do
9 this in three minutes. Good morning. My name is
10 Dick Gravino. I'm President of PCFS, which is a
11 division of Provident Bank in Cincinnati.
12 I appreciate the opportunity to speak, be
13 here, and also to demonstrate our opposition to
14 predatory lending and loan-sharking. As part of my
15 comments, I want to address a concern of both myself
16 and from our colleagues over tinkering with the
17 HOEPA laws as currently written until we can answer
18 some questions:
19 What have been the real results of HOEPA
20 legislation? What are the meaningful by-products of
21 the law? What changes have taken place in the
22 consumer marketplace? Has HOEPA accomplished its
23 mission? Has the at-risk consumer's behavior --
24 what has been the behavior of at-risk consumers
0041
1 resulting from this legislation?
2 Many legitimate lenders will not make or
3 purchase loans considered to fall under the HOEPA
4 guidelines, PCFS included. But where have those
5 consumers gone that would have been serviced? Their
6 choices certainly have been limited. They can't
7 shop around. Who has picked up the slack and filled
8 up the void? We all know that, when legitimate
9 businesses exit, the need still exists, the void is
10 filled.
11 Compliance with HOEPA today is difficult.
12 As currently written, there is room for a lot of
13 subjectivity. For instance, a $5,000 miscalculation
14 and a one cent miscalculation have the same penalty.
15 No legitimate subprime lender will endorse
16 practices which are predatory. We believe there are
17 many positives that are going to result with the
18 recent public awareness of predatory issues, but we
19 also believe the correct way to approach the problem
20 is through continuing education programs. We need
21 real education, education directed at the consumer
22 in advance, so that she can make a choice prior to
23 committing to a particular lender.
24 We also need enforcement of current
0042
1 legislation. Very few of the predatory practices
2 you see in the paper here and on TV are legal.
3 We're for new legislation where needed, but only
4 after a rational analysis of the problem is
5 determined and we clearly understand what is
6 predatory, and we act only after a clear, well-
7 thought-out, rational solution is obtained, one that
8 creates a win-win environment.
9 Many legitimate subprime companies are no
10 longer in business today, and they're falling by the
11 wayside very fast. New entrants are few. The risks
12 are too great.
13 I think Mr. Marks mentioned the law of
14 unintended consequences. You could have unintended
15 consequences as a result of tinkering. You could
16 have the virtual elimination of loans under $60,000,
17 elimination of second mortgages as a borrower
18 choice, and also, believe it or not, having to send
19 a customer to two different lenders to get what they
20 need.
21 We all know that changes in business
22 products come after sufficient analysis, research
23 and testing and consumer focus groups have taken
24 place. These processes normally are void of emotion
0043
1 and political content. We should treat the change
2 to HOEPA in the same way. Thank you.
3 MODERATOR SMITH: Ms. Schwartz.
4 MS. SCHWARTZ: Thank you. Good morning.
5 My name is Faith Schwartz, and I'm here representing
6 Freddie Mac today. I'll be very focused on my three
7 minutes.
8 The focus for us to be here is to update
9 the Board of Governors of the Federal Reserve System
10 of our efforts to expand the range of low-cost
11 financing into the subprime segment of the mortgage
12 market and in particular our efforts to combat
13 predatory lending.
14 From the overview from the secondary
15 mortgage market, please note we are not an
16 originator in this marketplace, but we do create a
17 secondary mortgage market by offering and packaging
18 loans in the low-rate environment and having them
19 sold into investors through securities.
20 The secondary mortgage market rates, of
21 course, in the conforming mortgage market have
22 improved substantially with our type of involvement
23 in the secondary market. We are looking forward to
24 bringing those efficiencies into the subprime
0044
1 segment of the mortgage market. One of the ways to
2 do that is by combatting this predatory lending
3 issue.
4 We have a three-pronged approach. One is a
5 public education initiative. We have raised the bar
6 and increased standards on what we will invest in as
7 a corporation. And finally, we have introduced new
8 products to add competition and borrower choice, all
9 of which we believe will bring down rates and add
10 value to this segment of the mortgage market.
11 From a public education initiative, we
12 think informed decision-making is one of the most
13 important tools for a consumer to use to avoid
14 predatory practices. We are proud to have
15 collaborated with Mayor Menino in the City of Boston
16 in the "Don't Borrow Trouble" campaign. That is a
17 series of ads that will be run on billboards, Web
18 sites, and public service announcements in English
19 and Spanish for those consumers to educate them
20 about predatory lending. That's one of the many
21 actions we've taken in the public arena.
22 The standards we've added are these: We
23 have required full-file credit reporting from any
24 institution we do business with on the borrower's
0045
1 credit to the three repositories on a monthly basis.
2 We have banned HOEPA loans. We will not purchase or
3 add liquidity to the current version of the HOEPA
4 loan. We all know what that is; I won't describe
5 it.
6 What was our objective? We wanted to send
7 a strong signal that we do not like high rate and
8 fee lending. So we do urge caution when reviewing
9 what will go into the HOEPA limits, because it is
10 our job to keep liquidity in the secondary mortgage
11 markets, so this will be a good analysis.
12 Finally, we did ban credit insurance
13 front-end premium where it's attached to the
14 mortgage loan and financed over the life of the
15 loan. The objective there was strong signaling
16 regarding front-end practices. It is our interest
17 that financing should be a wealth-building tool, not
18 a wealth-stripping tool. We have done many other
19 things. I'll finish. Thanks.
20 MODERATOR SMITH: Mr. Golann.
21 MR. GOLANN: I'm Dwight Golann, and in
22 addition to teaching consumer law, as the bio notes,
23 I've been chief of the Consumer Protection Division.
24 I've also, I should say, counseled and represented
0046
1 lenders, both regulated and unregulated, some of
2 whom were accused of some of the practices involved
3 here.
4 I have some thoughts, particularly about
5 education and better enforcement as alternatives to
6 regulation and why I think regulation is required.
7 Better education is a response. Since this
8 is Boston, let's remember that the average target of
9 predatory lending is inevitably, being credit
10 impaired by having built up equity, going to be
11 middle-aged or elderly. That means they went to
12 school in Boston before 1970.
13 Before 1970, as the Federal Courts have
14 found, Boston ran an intentionally segregated school
15 system. Minority students had no decent chance for
16 a decent education. Even the white student didn't
17 have much of a chance, because those who have been
18 here a long time will remember at least one member,
19 maybe more, of the School Committee was indicted for
20 larceny, and many of them seemed more interested in
21 serving themselves than the school system.
22 I think there is something to be said for
23 warning people against predatory lending, but anyone
24 who really wants to replace what people lost in the
0047
1 school system of the '50s and '60s has a major job
2 in front of them.
3 Better law enforcement. I read Governor
4 Gramlich's testimony, and some of you confirmed that
5 predatory lending -- not predatory lending, but
6 subprime lending has mushroomed in the past five
7 years. I have seen no mushrooming in the staffs of
8 the Federal Trade Commission or the State Attorney
9 General's Office or anybody who's going to be doing
10 the enforcement in this area, and I am personally
11 not terribly optimistic that Congress is going to do
12 so in the next couple of years.
13 Private litigation, the record is somewhat
14 mixed. I guess I would like to say one thing in
15 particular. I think you can help enforcement
16 greatly by having clearer rules. My personal
17 experience counseling lenders, enforcing rules, and
18 lawyers for regulated institutions who have come
19 into my class and talked to my students have made it
20 clear that, if the rules are unclear, a couple of
21 things happen.
22 The Option Ones, the Dedham Savings may not
23 lend at all, and other people push the envelope to
24 its limits. Some of them in fact ask the question,
0048
1 "How likely am I to get caught, and what are the
2 penalties if I get caught?", rather than where the
3 limit is. It is also, in my experience, much more
4 expensive to enforce the law.
5 The implication is, it's best to have a
6 clear rule, even if it doesn't work perfectly, it
7 doesn't fit the situation perfectly. You have some
8 false positives, some uncovered negatives. I would
9 encourage you to establish clear rules for the
10 benefit of both sides. Thank you.
11 MR. ALGIERE: Thank you. My name is Dennis
12 Algiere. I am Vice-President of Compliance and CRA
13 Officer at the Washington Trust Company, a midsize
14 community bank located in southern Rhode Island.
15 We've been in business since 1800. I would like to
16 thank the Board of Governors for inviting me to
17 participate in this very, very important discussion.
18 We all understand the importance of
19 reasonable, responsible and prudent subprime lending
20 and the dangers of unethical, uncaring predatory
21 lending. Subprime lending is a practice which
22 largely benefits consumers with less than perfect
23 credit history, but the financial damage wrought by
24 unscrupulous, fraudulent lenders has raised serious
0049
1 concerns.
2 I am pleased to see that the attention
3 being focused today is on this issue. These
4 hearings have the potential to identify reasoned,
5 balanced actions that may greatly benefit consumers,
6 bankers, lenders in our communities.
7 As a banker, I am troubled that there are
8 consumers being victimized by dishonest, fraudulent
9 lenders. This situation begs an important question:
10 Why do consumers with less than stellar credit
11 histories choose predatory lenders rather than
12 legitimate lenders? This answer is critical in
13 finding a solution. I believe serious research and
14 not simple anecdotal-based hunches is required.
15 I suspect there are more than one or two
16 answers or reasons. Certainly some assume they will
17 not qualify for traditional loans. Some seem more
18 comfortable seeking the services of other lenders,
19 despite the fact that there are banks offering loan
20 products which could meet their needs. Is it a
21 matter of better educating the public on financial
22 issues? Is it a matter of marketing? Why are
23 consumers overlooking banks and risking their assets
24 with lenders who aren't reputable?
0050
1 I believe that if the banking industry
2 joins with the Federal Government and consumer
3 advocates to address this issue, we will find a
4 multifaceted workable solution. New restrictions
5 and additional disclosures are being proposed.
6 Deceptive lenders will always find new ways to
7 victimize vulnerable consumers. Term-specific laws
8 simply cannot anticipate every scheme of the
9 imaginative unscrupulous lender.
10 I would first suggest that the unregulated
11 lenders be required to be licensed and examined as
12 depository institutions are. In many cases
13 reported, there are clear violations of existing
14 laws. Licensing and examination will augment
15 enforcement of existing laws.
16 However, laws, even when aggressively
17 enforced, cannot alone prevent predatory behavior.
18 Only knowledge and a minimum level of financial
19 savvy can truly protect consumers from deceptive,
20 unfair lending practices.
21 Private industry, community groups and the
22 government can serve an important role in education
23 and outreach counseling programs. The industry,
24 community representatives and government can help
0051
1 consumers learn to protect themselves. This, I
2 believe, will be the most effective weapon.
3 However, such efforts will require imagination and
4 new ideas to get the message out.
5 I look forward to a productive meeting
6 today and thank you once again for the opportunity
7 to contribute to this discussion.
8 MODERATOR SMITH: Thank you very much.
9 With that, we will move on into the discussion
10 phase, and we're going to start by examining
11 possible changes to HOEPA's scope of coverage.
12 First, HOEPA covers mortgage loans that
13 meet one of the two high-cost triggers. A loan is
14 covered if the APR exceeds the rate for Treasury
15 securities with a comparable maturity by more than
16 10 percentage points, or if the points and fees paid
17 by the consumer exceed the greater of 8 percent of
18 the loan amount or $400 indexed, which now is $451,
19 I believe.
20 HOEPA authorizes the Board to adjust these
21 triggers, to adjust the rate trigger by 2 percentage
22 points. So for the Board, the question is, what
23 basis should we use for pegging a change in that
24 rate? Is 8 percent the right number? Are there any
0052
1 data that suggest how many loans are in fact covered
2 by HOEPA and how many more would be covered if the
3 APR trigger were lowered to, say, 8 percentage
4 points?
5 On points and fees, the test is, as I
6 mentioned, the $400 or 8 percent. For this purpose,
7 the points and fees include all items that are
8 included in the finance charge and the annual
9 percentage rate, except interest, and all
10 compensation paid to mortgage brokers.
11 The act specifically excludes reasonable
12 closing costs that are paid to unaffiliated third
13 parties. The act also authorizes the Board to add
14 such other -- to add other charges to the points and
15 fees test as the Board deems appropriate.
16 In the notice that the Board published
17 about these hearings, we identified three possible
18 fees that could be added: credit life insurance
19 premiums, certain prepayment penalties, and points
20 on refinanced loans.
21 So with that, I would like to have the
22 discussion start, and ask either Ms. Carey or Mr.
23 Curry to start us off on this discussion, if you
24 would, please.
0053
1 MR. CURRY: Thank you. As you know, we are
2 proposing a lowering of the thresholds under our
3 State Truth in Lending regulations. I think what
4 we're relying on in terms of the economic impact of
5 lowering is really the public hearing and comment
6 process. We would be very interested in hearing
7 from the industry themselves. I think that's the
8 best barometer.
9 My concern -- this is really from practical
10 experience, and Ms. Kogut mentioned this -- on the
11 fees, given the existence of an APR system, the true
12 cost of credit, it amazes -- I question the economic
13 or risk-pricing practices of having excessive number
14 of fees, other than to confuse the consumer in the
15 marketing of what the real interest rate is.
16 My suspicion is that since my examiners
17 can't be there when loans are being marketed or
18 closed, that there is an overemphasis on contract
19 rate costs, rather than APRs. So I'm most
20 interested in seeing a lower fee threshold.
21 MODERATOR SMITH: Thank you. Any questions
22 from the Panel first before I open it to other
23 discussion?
24 MR. MARKS: It would be nice to hear from
0054
1 the industry about what is so unconscionable about a
2 trigger of 17 percent. I would like to hear the
3 argument of why 17 percent is such an unreasonable
4 rate and why that shouldn't be lowered.
5 MS. RENUART: Can I add right here, as some
6 data that we're submitting in our written report,
7 there was a study done by Cathy Lesser-Mansfield, a
8 professor at Drake University, being published in
9 the South Carolina Law Review, and she examined,
10 since there is no collection of data about subprime
11 lenders in any uniform way, she examined
12 prospectuses and filings with the SEC.
13 And her data, over looking at several
14 subprime lenders, shows that only about 25 percent
15 of the loans made generally by subprime lenders are
16 over 15 percent. And she also collected information
17 showing the loss rates, and we've collected some and
18 put it into our written testimony as well, showing
19 the loss rates of similar subprime lenders. And
20 their loss rate over their portfolio, either on an
21 annual basis or projected over the entire life of
22 the loan, was about 3 percent.
23 So there is no reason why, first of all,
24 you can't lower the interest rates and still not --
0055
1 you're not going to affect very many loans that are
2 being made, less than 25 percent.
3 And we should make the point from the
4 consumer's perspective that some loans ought not to
5 be made, that it is a good thing to cut off bad
6 credit, because it only leads to foreclosure.
7 That's not a positive result from the idea of saying
8 everyone should get credit all of the time. That's
9 thrown out there as a mantra, but it has resulted in
10 devastation in neighborhoods.
11 So given that information that is more
12 fully spelled out in our written testimony, it shows
13 that you can lower the trigger and only affect a
14 small portion of the loans, and those loans are
15 being made at such high rates anyway, there is no
16 justification for the risk level of that borrower.
17 MR. NADON: I'll try to answer, but it's
18 probably coming from a little different perspective,
19 because we don't have anywhere near that kind of
20 percentage of our loans that are in that kind of a
21 price range.
22 For us, the 8 percent trigger would affect
23 about 3 1/2 percent of the business that's booked,
24 so it wouldn't affect us, the 8 percent trigger
0056
1 wouldn't really affect us.
2 My question on lowering the trigger is
3 only, is that really going to get to the root cause
4 of the problem? And I'm not convinced that it is,
5 because I haven't seen any data other than anecdotal
6 stories; I haven't seen any data that says that
7 since HOEPA was put into effect that it has had a
8 positive effect on reducing predatory lending
9 practices, which would then help build an argument
10 that further lowering it would have an even greater
11 impact on reducing it. So I'm not sure that's the
12 answer.
13 Our answer, from an Option One standpoint,
14 is that probably the biggest thing that can be done
15 is to improve what's done to educate the consumer so
16 that they know what kind of a loan they're getting
17 into and they know what the right questions are.
18 One quick way to get there is to change the
19 way we have all of the documentation and all the
20 disclosures done, which, as you all know, are a
21 rather thick pile of documents. They're written in
22 a certain way that the average person is not going
23 to be able to understand exactly what is there, so
24 it can be intimidating. And if you walk into a
0057
1 closing and the average person is intimidated by
2 what they see, they tend not to ask questions in the
3 first place.
4 So we would like to try to find a way that
5 we can make that process much, much easier for the
6 average person to understand, with very easy-to-
7 understand documents, fewer documents, so that when
8 they walk in there, they can see very clearly what
9 kind of a loan am I getting, what are the
10 consequences of this loan. And they can take that
11 kind of information and shop around themselves to
12 see if they can get something better somewhere else
13 in the marketplace.
14 MR. MARKS: We will agree with you that
15 absolutely HOEPA has not done what the intent of
16 HOEPA was to do; it has not stopped predatory
17 lending. But we should -- so you're right. But
18 we're here to talk about what the Federal Reserve
19 can do. But we shouldn't be talking about just to
20 reduce the trigger, not to prevent it, the trigger
21 for disclosure from 17 to 15 percent or the trigger
22 of at how many fees does a disclosure kick in, not a
23 prohibition.
24 So we should be looking at what the Federal
0058
1 Reserve -- the Federal Reserve is the problem. They
2 have been, as the GEO study says, AWOL, and the
3 result has been that tens of thousands of people
4 have lost their livelihoods and have not had the
5 American dream of home ownership.
6 But the Federal Reserve can do a lot of
7 things. With Fleet, let's take Fleet as an example.
8 Fleet Finance was the predatory subsidiary of the
9 holding company. The Federal Reserve refused to
10 investigate the subsidiary, the predatory lending
11 subsidiary of Fleet. They could have done that.
12 They tried to prevent the other regulators from
13 doing any kind of investigation. So even without
14 HOEPA, there could be a lot of work that could be
15 done.
16 But let's get past this issue of saying,
17 "Oh, should it be 15 percent?" I mean, how could
18 anybody say that someone should get a loan for 17
19 percent? How could anybody afford that over the
20 long run? How is it that you are buying loans
21 from -- you're buying loans from, let's say, real
22 estate brokers, right?
23 MR. NADON: From mortgage brokers.
24 MR. MARKS: Right. You are buying loans
0059
1 from mortgage brokers. Do you pay a yield spread
2 premium to those mortgage brokers?
3 MR. NADON: No.
4 MR. MARKS: Are you against any lender
5 paying a yield spread premium to those mortgage
6 brokers?
7 MR. NADON: Not per se, no. We just have
8 not been doing that for years.
9 MR. MARKS: Sir, is that true in your case?
10 Are you buying loans -- are you paying yield spread
11 premium to mortgage brokers?
12 MR. GRAVINO: There are a couple of things
13 on the table at once. If you don't mind, I would
14 like to stick with the original question, and then
15 I'll come back to your statement.
16 MR. MARKS: But let's talk about not just
17 lowering the rate to 15 percent or 8 points.
18 MR. WALKER: Excuse me. I just want to
19 make a comment to set the record straight on a
20 comment that Bruce made. It is not true that the
21 Federal Reserve kept any of the federal regulators
22 from going into Fleet Finance, and in fact we did
23 investigate Fleet Finance.
24 MR. MARKS: Richard, you should talk to the
0060
1 OCC about that.
2 MODERATOR SMITH: The OCC is not here
3 today, so we're not going to get off into that.
4 And, Mr. Gravino, did you have a comment?
5 MR. GRAVINO: Yes. Frankly, as I said in
6 my opening comments, and to go along with what Steve
7 said and part of what Bruce said here, the problem
8 with the HOEPA laws as currently written is it
9 captures the law of unintended consequences. The
10 fee and percentages, by using percentages, you
11 affect the smaller loan more than the customer -- or
12 as much as the customer who actually should be
13 impacted by HOEPA.
14 When you start getting into loans, like in
15 North Carolina, you get into loans under $60,000,
16 all of a sudden the economics of the deal start to
17 become in question, so you start making decisions on
18 the economics rather than the needs of the consumers
19 in that state.
20 PCFS, yes, we do pay yield spread premiums.
21 What do they average? I don't know, 1 1/2 to 2.
22 And do we find them conscionable? We also find them
23 a cost of not having a branch network out that there
24 would cost us about the same if we were to originate
0061
1 the loans through our branch network.
2 MR. MARKS: Then how can you -- I mean, I
3 would like to hear a discussion about, if you pay a
4 yield spread premium, you're paying for a higher
5 rate or for more points, right?
6 MR. GRAVINO: We're paying for the cost of
7 originating the loan.
8 MR. MARKS: But you are required to only
9 pay for services that are provided?
10 MR. GRAVINO: That's right.
11 MR. MARKS: So that's what you're paying
12 for. So if you've got a $100,000 loan -- and you
13 pay a percentage, right?
14 MR. GRAVINO: Right.
15 MR. MARKS: So let's take percentage. What
16 percentage do you think on average you would pay to
17 a mortgage broker for a loan?
18 MR. GRAVINO: On a $100,000 loan, probably
19 1 percent.
20 MR. MARKS: So you pay 1 percent, so you
21 pay them $1,000. Certainly we know that the
22 industry is much higher than that.
23 But let's say you pay $1,000. Now someone
24 comes to you with a $200,000 loan; you pay $2,000.
0062
1 Are they doing twice as much services for a mortgage
2 of $200,000 versus $100,000?
3 MR. GRAVINO: First of all, you would find
4 that a $200,000 loan would not get you 1 point.
5 MODERATOR SMITH: I would like to take a
6 little bit of control over this and recognize Mr.
7 Golann.
8 MR. GOLANN: Trying to address the first
9 issue that you posed, I have some conceptual
10 difficulty understanding the disclosure statute,
11 particularly such complex disclosures for people who
12 have, by definition, as much difficulty with complex
13 financial transaction as the group we're trying to
14 serve. So I find myself wondering what the HOEPA
15 disclosures actually do.
16 That said, though, on the question of fees
17 or interest rates, my tendency would be to focus on
18 fees, because that is where I hear more of the abuse
19 has been and more of the uncertainty is. I would
20 tend to favor an all-inclusive definition in the
21 interests of a clear rule, even if that means that
22 the actual level doesn't go down.
23 Actually, I would also favor, if it were
24 possible, some kind of tolerance, because I have no
0063
1 great interest in trapping people who missed the
2 limit by 50 cents or a dollar.
3 We can argue about what should be included.
4 Certainly single-premium credit insurance, if you
5 want to get into that, is something that I would
6 like to see included, even if it's voluntary.
7 I've seen notes in your hearing notice
8 about the possibilities for statutory change. That
9 would be wonderful if it occurred. I don't think
10 that the possibility of a statutory change sometime
11 in the future is a reason not to take action now.
12 MS. CAREY: I have a question for the
13 lenders. I've heard a number of people mention the
14 need for consumer education and the need for full
15 and clear disclosure. I would like to know what the
16 lenders are doing now in that area.
17 MR. NADON: Well, in a session like this,
18 we're asking that consideration be given to make the
19 disclosures a lot simpler than they are today. So
20 that's the first part.
21 The second part would be we're trying to
22 develop a document which is almost finished. We do
23 not do this today, but we have been working on a
24 document, through a lending committee internally,
0064
1 that we would give, in addition to all of the other
2 advanced disclosures that the borrower gives at the
3 time of application, which tells them that credit
4 counseling is real smart thing and that they should
5 take advantage of it. It gives them direction on
6 where they can go with an 800 number or to a Web
7 site so that they can call and get any kind of
8 information they want from an independent third
9 party.
10 The concern that comes out of that is -- we
11 believe that's the right thing to do. The concern
12 that we have is that most of the credit counseling
13 agencies that we're familiar with are good at giving
14 information on purchase money loans. They are not
15 as skilled at giving information on cash-out
16 refinance loans. And cash-out refinance loans are
17 primarily what the subprime lending business does.
18 We are not really a purchase money market.
19 So we are concerned that there is, in
20 today's world, there is probably not consistency
21 among the credit counseling agencies. So if a
22 borrower were to go to one in Irvine, California,
23 where we're based, or went to one in Norwalk,
24 California, about 25 minutes away, I'm not sure they
0065
1 would get the same answers. And I'm not sure if
2 there is a licensing that needs to be done to make
3 sure that all people that are in that practice have
4 been trained properly to give the right information.
5 But those are two things that we think
6 would help a lot to try to give people better
7 information before they commit themselves to any
8 kind of a loan.
9 MR. MARKS: Look, the idea around
10 disclosures and this idea around education, it gets
11 away from the crux of the matter. It's the
12 economics. Let's get down to the economics. If you
13 can push someone from a prime loan into a subprime
14 loan, if you could get someone from 8 percent to 12
15 percent or higher, you're going to do that.
16 Subprime lenders or predatory lenders are
17 not interested in education, and if someone is
18 targeted and someone is desperate to save their
19 home, you know, they're going to be -- they're
20 vulnerable.
21 So the fact of the matter is that just
22 because you have a stack of papers, as you said,
23 that is this thick, and I don't know anybody,
24 whether they make $1 million a year or they make
0066
1 $10,000 a year, who has ever read every document at
2 a closing. It just doesn't happen. That's what you
3 hire lawyers for, and I'm willing to bet lawyers
4 have never read every document in that closing.
5 So let's get past the fact of disclosure;
6 let's get past the fact of consumer education.
7 Let's talk about the economics.
8 The economics say, if you're a mortgage
9 broker, you shop around for a lender, not because
10 they are going to give you the best interest rate,
11 but because they're going to get you the most fees.
12 That's the reality that is out there. That's what
13 you have to focus on.
14 So that's what you have to look at: What
15 are the economics? We've been hearing about all of
16 these subprime lenders that have gone out of
17 business, right? Why have they gone out of
18 business? Because the fact of the matter is you
19 cannot -- these loans are going to go bad at some
20 point.
21 Liz is right that some loans shouldn't be
22 made. This idea that if you don't do this stuff,
23 somehow someone else is going to come in -- those
24 loans are wrong. A loan at 17 percent should not be
0067
1 made, should be illegal. There should be usury laws
2 in this country that say it's not reasonable. Who
3 can afford a 17 percent or 18 percent loan over a
4 reasonable period of time, for a long period of
5 time? It just doesn't make any sense.
6 So this idea that you're going to take the
7 conventional people out of this -- these predatory
8 loans shouldn't happen.
9 MR. ALGIERE: I think the discussion -- and
10 I agree with you, education alone and lowering
11 triggering fees, adding more disclosures, I think
12 the solution is multifaceted, and you have to look
13 at the economics. We're not going to come up with
14 one answer to a question, and we're not going to
15 come up with one solution, but let me ask a
16 question. Making changes that are proposed, is that
17 in itself going to solve the problem?
18 MR. MARKS: No.
19 MR. ALGIERE: Are you still going to get
20 that 17 percent loan being made by a fraud? Sure.
21 MR. MARKS: But it's a safety and soundness
22 issue. Let's look at it not just from the consumer
23 point of view, but it is outrageous and it is
24 predatory. And we can have a discussion about what
0068
1 is a subprime and what is a predatory loan, but if
2 you define a predatory loan as a loan that someone
3 cannot afford over the term of the loan, that is
4 straightforward, that is a predatory loan.
5 But let's look at the safety and soundness
6 issue that's out there. You have got institutions
7 who have these loans. The key is, when you're a
8 lender, and the lenders know very well, the key is
9 you want to be the second-to-last entity holding
10 that loan. You don't want to hold that loan,
11 because you know that that loan is going bad. It's
12 only a matter of time that that loan goes bad,
13 because no one can afford that over the term of the
14 loan.
15 So it's safety and soundness. When we say
16 about the Federal Reserve, we say -- let's take this
17 real cynical argument; let's take the cynical point
18 of view that says the Federal Reserve does not care
19 about consumers, they care about -- let me just
20 finish this point, Dolores -- that what they care
21 about is the safety and soundness of the
22 institutions that they regulate.
23 Even on that point, they have got to take
24 action to say these institutions are vulnerable with
0069
1 the predatory lending operations or subprime that is
2 going on.
3 MS. RENUART: To add to that, what we've
4 seen recently is, you know, Wall Street drying up
5 its money in terms of securitizations of subprime
6 lenders whose loans have been found to be faulty,
7 who are going into bankruptcy.
8 And to the extent that that is happening,
9 there is a recognition of that, that Lehman
10 Brothers, who securitized First Alliance's
11 mortgages, is being sued in the First Alliance
12 bankruptcy itself, that consumers are going to go up
13 the food chain to get restitution for what's been
14 done to them, that sounds a big bell on Wall Street
15 that helps to dry up the money.
16 Freddie Mac taking recognition of it so
17 they won't purchase loans under the APR and points
18 and fees triggers, if we lower these triggers, then
19 they will purchase loans that have even lower
20 triggers, and that sounds the bell to the industry
21 that you've got to shape up.
22 We have seen and our testimony provides
23 examples of loans where predatory lenders with the
24 predatory features that we will talk about later in
0070
1 this discussion, balloons, prepayments, et cetera,
2 are making them just under the triggers. So the
3 benefit of lowering the triggers is you're going to
4 capture these predatory loans that, by all
5 definition in this room, are going to be looked at
6 as predatory.
7 MODERATOR SMITH: Thank you. And with that
8 I'll recognize Mr. Walker.
9 MR. WALKER: Ms. Kogut, you mentioned the
10 litigation that you are involved with against First
11 Alliance and made a statement about an
12 identification of part of the portfolio of A and A-
13 people who were in the loans that were in the
14 portfolio. Was there any -- were you able to do any
15 analysis vis-a-vis who those folks were or how they
16 ended up with First Alliance versus a Washington or
17 a Dedham or any of the other more reputable
18 institutions?
19 MS. KOGUT: Yes, it's interesting. These
20 consumers were probably not themselves looking to
21 borrow money; they were solicited like crazy. In
22 fact, the only consumer complaints that our office
23 had on file against First Alliance, at the time when
24 the case was referred to us, were from consumers who
0071
1 were saying, "Get these telemarketers to stop
2 calling me at night. I don't want to hear from them
3 anymore."
4 So these consumers, it didn't occur to them
5 naturally to even think to borrow money. They got
6 these solicitations pouring into their mailbox, and
7 they got telemarketing phone calls at night, and the
8 solicitations were deceptive. They said no
9 out-of-pocket expenses, low monthly payments. They
10 had a variety of very deceptive statements in them.
11 But consumers after a bit apparently did
12 take the bait and made a phone call and arranged to
13 meet with First Alliance. And it didn't mater what
14 their credit backgrounds were, it just absolutely
15 didn't matter. The amount of points that they paid
16 just had nothing to do with their credit histories
17 whatsoever.
18 MR. WALKER: So they were using --
19 consumers then were using these for home improvement
20 loans --
21 MS. KOGUT: Right.
22 MR. WALKER: -- primarily?
23 MS. KOGUT: Right. These consumers, these
24 were typically older borrowers who had been in their
0072
1 homes for a long time -- First Alliance had
2 obviously bought a mailing list -- where the
3 original mortgage loan had almost been paid off, so
4 there was a fair amount of equity left in the home.
5 And consumers had perhaps a lot of credit card debt.
6 That was a typical profile.
7 But otherwise their credit histories
8 weren't -- they weren't terrible. They might have
9 had more indebtedness than would have permitted them
10 to get a prime loan. But as I say, there were some
11 that were A rated.
12 And, I mean, the problem with First
13 Alliance is that they had an extremely deceptive
14 program from start to finish, so when consumers went
15 and met with the loan originator, the loan
16 originator would completely deflect from the actual
17 costs.
18 And, you know, it's interesting, I think
19 consumers are pretty savvy about interest rates.
20 You know, partly because of the credit card
21 solicitations that are pouring out of their mailbox,
22 they know what competitive interest rates are. But
23 they don't know what a point is, they don't know
24 what an origination fee is, and they don't
0073
1 understand, actually, the way the APRs work.
2 So in this case, probably two thirds of our
3 300 borrowers had variable rate loans as opposed to
4 fixed rate loans, and the riser was -- the index was
5 a LIBOR plus a very large margin, so that the
6 interest rates went up, you know, really quickly,
7 really fast, in ways that consumers didn't
8 understand.
9 So we started hearing from consumers when
10 their interest rates were going up. Actually, the
11 Minnesota AG's Office called these exploding ARMs,
12 because the increases went up so fast and so
13 crazily.
14 MODERATOR SMITH: Mr. Algiere.
15 MR. ALGIERE: Yes, thank you. A point was
16 made earlier by Dwight regarding FTC and enforcement
17 efforts. Here is a good example of existing laws
18 that were violated, deceptive advertisements. You
19 know, with the Internet now being used by more and
20 more companies and financial institutions, and more
21 bait and switch is being used, we have existing laws
22 right now that perhaps aren't being enforced.
23 And perhaps, you know, FTC's budget needs
24 to be beefed up a bit to go after some of these
0074
1 deceptive advertising and deceptive techniques being
2 used, bait and switch, let's face it.
3 So I guess the point I'm trying to make is
4 there are existing laws on the books now that
5 perhaps need to be looked at more closely, and if
6 enforcement efforts need to be beefed up, perhaps
7 they should.
8 MR. MARKS: But one of the laws --
9 MODERATOR SMITH: Thank you. I recognize
10 Mr. Miselman next.
11 MR. MISELMAN: I concur also with those
12 thoughts. There are a lot of laws on the books
13 currently, rules and regulations. We're very a
14 heavily regulated industry, and perhaps enforcement
15 -- as was mentioned, there is now a much larger
16 volume of subprime loans, where it's exploded. I
17 don't think the staff to handle regulation on that
18 has exploded with that.
19 But I've been a mortgage broker for the
20 last 11 years. I've seen the mortgage industry
21 change where brokers are now doing upwards of 60
22 percent of the loans in the country. And for the
23 most part, the Mass. Mortgage Association and the
24 people I come in contact with, they do not take the
0075
1 opinion that if they can sell an 8 percent loan and
2 make a certain percentage or get a 12 percent loan
3 and get a certain percentage, that they will
4 automatically go to the 12 percent.
5 They don't find that in the long run that's
6 going to be beneficial, because many of them do
7 referral business. If you give someone a 12 percent
8 loan that can get an 8 percent loan and you're a
9 reputable company, you know that person is never
10 going to come back to you, because they will find
11 out about it.
12 In the mortgage brokerage industry what we
13 do, we've been notified a lot lately from
14 wholesalers, and a lot of it is coming from the top
15 down, they are now telling us what their definition
16 of predatory lending is. It has been a vague
17 concept for a lot of years. Right now it's starting
18 to come down.
19 What I do in my shop is we hold meetings
20 and we educate the loan officers of what to tell
21 people to look for, because we get shopped around to
22 various other companies. And when people call us up
23 on the phone and we give them, you know, a real
24 interest rate and someone else gives them something
0076
1 different, you know, they might think something is
2 up.
3 So we educate the loan officers on how to
4 educate the consumer on a one-on-one basis. And
5 we're not interested in giving someone a 12 percent
6 loan who is eligible for an 8 percent loan, because
7 there is enough profit doing a prime loan from the
8 start.
9 MODERATOR SMITH: I'd like to --
10 MR. MARKS: If I could make one point.
11 There is a regulation that actually has worked very
12 well in Massachusetts, and that is the regulation
13 that mortgage brokers cannot -- that home
14 improvement companies cannot pass and cannot try to
15 be mortgage brokers at the same time.
16 If you look back to the second mortgage
17 scam and that four years that that was in the paper
18 virtually every day, that was one of the biggest
19 abuses out there, where you had contractors going
20 out there saying, "I will do the work. And by the
21 way, here are the papers, and I'm a mortgage broker,
22 and I'll get the financing," and the homeowner never
23 saw the money and the work never got done properly.
24 That has been in effect in Massachusetts
0077
1 and has worked extraordinarily well. You don't hear
2 those abuses here in Massachusetts, and that's a
3 model that can be replicated and should be
4 replicated around the country on the mortgage
5 brokers.
6 There are going to be abusive mortgage
7 brokers out there. We're never going to regulate
8 all the abusive mortgage brokers out of existence,
9 as long as the lenders are willing to pay a fee for
10 that deal. When you talk to lenders, what they will
11 say is, "If I want the business, I've got to be
12 competitive in what I pay the mortgage brokers."
13 And so they are subject to -- because the mortgage
14 brokers shop it around, they shop the deal around.
15 So the fact of the matter is, you have to
16 regulate and prohibit these fees that lenders are
17 paying mortgage brokers, because that's an industry
18 now. We're getting more and more -- Howard is
19 right, we're getting more and more to the fact that
20 mortgage brokers are the way that lenders get their
21 loans. And as long as those mortgage brokers can
22 shop around, not for, you know, the best rate, but
23 for the best kickbacks, you're always going to have
24 this problem out there.
0078
1 MODERATOR SMITH: All right. I would like
2 to turn the discussion a little bit to the points
3 and fees question. We had mentioned three types of
4 fees that could be included in the fee test, credit
5 life insurance premium, certain prepayment
6 penalties, and points on refinanced loans. Do we
7 have views from our invited panelists on any of
8 these particular items?
9 MR. GOLANN: Credit life insurance has been
10 a problem for at least the 30 years that I'm
11 available that I know of and probably for 30 before
12 that. I don't think it's going to go away without
13 regulation. I don't think more or different
14 disclosures are going to help very much. They
15 haven't helped so far.
16 One core of the problem is the payment and
17 the financing of lump-sum premiums. To the extent
18 you can forbid lump-sum premiums or you can require
19 that credit insurance be sold after the closing, so
20 anyone who wants to buy it can buy it, but it isn't
21 shoved down their throat in the pile of papers
22 that's been referred to, I think that would be
23 enormously helpful.
24 I understand that no regulation or
0079
1 substantive prohibition is perfect and that there
2 will be somebody who would have liked to have it who
3 can't get it, but there will be many more that are
4 helped. And the Federal Trade Commission in the
5 unfairness standards adopted a cost/benefit test,
6 recognizing that regulation has costs and that the
7 issue is whether the benefits exceed the costs, not
8 whether there are no costs, and I think you should
9 apply that standard here. So I would first take aim
10 at credit insurance.
11 MODERATOR SMITH: Mr. Michaels.
12 MR. MICHAELS: Let me follow up with a
13 question, Dwight. I've heard the argument that the
14 sale of credit insurance with the lump-sum premium
15 ought to be banned, I've heard the argument that the
16 sale should be delayed, and I've heard the argument
17 that you should just prevent the financing of the
18 insurance, let them sell it, but just don't let them
19 finance it, which some would argue is just
20 effectively banning the sale.
21 What would be the effect, do you think, of
22 adding the cost of the credit insurance premiums
23 paid at closing to the points and fees trigger under
24 HOEPA? Would that in fact have the effect of either
0080
1 delaying the sale, stopping the sale, or just
2 developing a product where the premiums would be
3 paid monthly?
4 MR. GOLANN: That's a more complex
5 question, and I don't have the empirical data to
6 tell you how many loans would become HOEPA loans if
7 credit insurance were added. For example, when I
8 last knew about this, there was a very low
9 penetration rate in Massachusetts and a much higher
10 penetration rate in other states, so I don't think
11 you are going to find much of that data here.
12 And of course, when you make it a HOEPA
13 loan, you might for Freddie Mac, for Option One, be
14 banning it, but for others you are simply adding a
15 layer of disclosure.
16 MR. MICHAELS: The question I guess I'm
17 raising is, by adding the credit insurance fees to
18 the HOEPA trigger, in effect you might be making
19 more loans covered by HOEPA; but on the other hand,
20 you might be encouraging people to move away from
21 the product where the premiums are paid at closing
22 and would be in the trigger to a product where the
23 premiums would be pay as you go. Is that --
24 MR. GOLANN: That seems like one of the
0081
1 plausible results for a percentage of the market.
2 MS. SCHWARTZ: On the credit life issue, if
3 you look at the way the monthly programs work versus
4 the front premium financed programs for the
5 consumer, there is much lower cost. You can cancel
6 it at any time, and then you are very clear on what
7 the cost to the consumer is. So, in a sense, your
8 question is such that you will know your costs more
9 definitively for that consumer, and if that effect
10 is going monthly, then you've just moved the product
11 into a more attractive product, if that's your
12 question.
13 MR. MICHAELS: Has Freddie seen a lot of
14 loans where the premiums are paid monthly?
15 MS. SCHWARTZ: Frankly, that's an old
16 standard in the mortgage business, that you can
17 solicit credit- and life-related products, any
18 insurance product after the loan is closed, through
19 the servicing portfolio. That's a very standard
20 product in the prime business, less standard in the
21 subprime segment. And I would just urge you to
22 understand both segments of that market before you
23 make any decisions.
24 We have chosen not to buy any assets or any
0082
1 bonds with any front premium credit life, because we
2 were uncomfortable with that product.
3 MR. MICHAELS: Do you have a speculation or
4 do you know why it might be less standard in the
5 prime versus subprime?
6 MS. SCHWARTZ: I don't have a speculation,
7 but what I would share with you is, there is some
8 front premium credit life in the prime market, so
9 don't think it's just a subprime product. So we did
10 affect the base when we announced that.
11 MODERATOR SMITH: Mr. Miselman.
12 MR. MISELMAN: That was kind of the point
13 that I was going to say, that the market, when you
14 are in the prime market, prime borrowers have the
15 option, if they have private mortgage insurance,
16 which is another insurance product that a borrower
17 has to pay when they put less than 20 percent down
18 generally, they do have the option of single-premium
19 up-front at closing.
20 Many of them choose, because they may not
21 be in the house or the loan that long, to take a
22 monthly premium, but they do have the choice. And
23 how you make sure that people in the subprime have
24 all the same educated decision-making process, you
0083
1 know, could be disclosure, but, again, the consumer
2 has a choice in that case, even in the prime market.
3 MODERATOR SMITH: Any other comments, or
4 are we ready for our break?
5 MS. RENUART: One comment. Our position is
6 that you should include all points and fees, as Mr.
7 Golann had mentioned earlier, because that is a
8 bright line test. It's easy for compliance; it's
9 easy for a creditor to know to add them all up and
10 that's it. And so we would suggest that. Also, the
11 effect of that, of course, is going to bring in more
12 loans to HOEPA coverage. We think that's a good
13 thing.
14 In terms of the question about what's the
15 effect of including the single-premium credit
16 insurance into the points and fees trigger, just
17 like we've seen many lenders now bumping up against
18 the triggers that are just below them in order to
19 avoid HOEPA coverage, the same thing will occur. I
20 think that it will have an effect on reducing the
21 sale of that product in the subprime market.
22 And then finally because of the HUD studies
23 on unequal burdens that show that subprime loans are
24 made primarily -- the refinances, I should say, are
0084
1 made primarily in low and moderate income
2 neighborhoods and minority neighborhood, that again
3 the sale of credit life insurance, single-premium
4 credit life insurance, again is sold mostly to those
5 same people. So there is a disparate impact in
6 terms of the sale of that product, which, if it's
7 reduced or eliminated, would be a good thing.
8 MODERATOR SMITH: One more comment?
9 MS. SCHWARTZ: Yes. Just I would offer
10 some thoughtfulness on this issue. If you add
11 prepayment penalties, if you add credit life, I
12 mean, in a sense all of this is making some sense,
13 but we should know the impact on how many loans
14 would become HOEPA loans. 60 percent of the market
15 has prepayment penalties that are legal. That is in
16 this market today.
17 So if you add all of this in, you will
18 create a huge segment of a $100 billion market that
19 will become a HOEPA loan market. I would just
20 suggest we certainly will have to reanalyze our
21 position, which has been largely saying high rates
22 and fees out, but be careful to not mix that with
23 any legitimacy that's in the market, because we all
24 believe there is some legitimacy to this market.
0085
1 So I think it is very important, all points
2 and fee, plus credit life, prepayment penalties, we
3 should all be very thoughtful about what this means
4 to this segment. Maybe it's okay that 60 percent
5 will now become HOEPA loans, or maybe it's not.
6 MR. NADON: I certainly echo that comment,
7 because in today's environment there really is a
8 stigma attached to being a Section 32 lender, and it
9 is not a good stigma, which is a positive thing; we
10 don't want to be that. And so depending on what
11 adjustments were made, we would probably stay with
12 it, but if adjustments are made like that, credit
13 insurance doesn't affect us because we don't believe
14 in that product anyway, so we don't sell it.
15 But on prepayment penalties, which are an
16 integral part of the economics of the subprime
17 business -- they are not in the conventional world,
18 but they are in the subprime world -- we would have
19 to then ask ourselves the question, do we now want
20 to change our story, do we want to go into the
21 marketplace and say being a high-cost lender is
22 okay?
23 And the risk to that is possibly that once
24 people are forced into that decision and they become
0086
1 that, there is almost no barrier at that point,
2 because if you are going to be a high-cost lender,
3 what difference does it make if you're charging 5
4 points or 6 points or 8 points? You are already
5 nailed with the stigma of being a bad guy.
6 So we're still, going back to the big
7 picture here, we're still not convinced that just
8 classifying more people as a HOEPA borrower or HOEPA
9 loan solves the problem. In some respects I have a
10 lot of agreement with what Mr. Marks is saying,
11 because I think he is trying to focus on the broader
12 and the bigger picture.
13 Well, that bigger picture says that that
14 isn't really going to do it, because there isn't any
15 evidence still that we've seen that says that the
16 HOEPA laws as they are today had any effect on
17 predatory lending practices. Simply to be
18 classifying more people to be that is not
19 necessarily going to get you the answer that you
20 want.
21 MR. MARKS: But the point that you said
22 which I think is very important is the economics.
23 You said, if you deal with the prepayment penalties,
24 you're dealing with the economics of the industry.
0087
1 That's absolutely correct, because if a lender is
2 paying a mortgage broker a fee, they don't want that
3 loan refinanced until they can recoup that fee that
4 they paid.
5 So if that's an outrageous fee -- so if
6 you're paying a mortgage broker, if a lender is
7 paying a mortgage broker 5 percent on a $100,000
8 loan, that $5,000, if that person was to refinance
9 in six months, you are losing money. So you want to
10 make it as difficult for that person to refinance as
11 possible.
12 So absolutely, that is exactly why, if you
13 eliminated the prepayment penalties, if you put much
14 more restrictions on the credit issues -- because
15 you're right, that kind of insurance, it's
16 outrageous. I mean, people can go out and get the
17 standard credit life insurance; it's much more
18 affordable.
19 But getting back to the economics, the
20 prepayment, you prevent that, that allows people to
21 say, "Geez, I've got a high-rate loan now, but if I
22 make my mortgage payments on time for three, six,
23 twelve months, I would have the option to go out."
24 Let me just make this one point. Let's
0088
1 just put this in perspective. The subprime and
2 predatory lending area came out of loan-sharking.
3 And the loan sharks, that issue was, if I had a
4 financial difficulty, I'd go to the loan shark on
5 the corner, and I would say, "I need a high-rate
6 loan." And you get it for a short period of time,
7 you bust your butt to make that payment, because the
8 consequences were pretty severe, but you can get out
9 from under it.
10 This whole subprime and predatory lending
11 issue has been corrupted that says, yes, sometimes
12 you have to get a higher rate loan to get past a
13 personal or severe financial difficulty, but you
14 should have the option, when making those payments
15 on time, to get out from under.
16 Prepayment penalties, balloon payments, all
17 those issues prevent you from getting out from
18 under. Once you get that loan, you're on the road
19 to losing your home. It's only a matter of time.
20 You're right. Let's deal with the
21 economics of it.
22 (Applause)
23 MODERATOR SMITH: With that, we're going
24 to take a ten-minute break, and I won't say from
0089
1 when. Just look at your watches, because I'm sure
2 we all have a different time.
3 (Recess)
4 MODERATOR SMITH: We're ready to start with
5 the next segment, which will go from 30 to 40
6 minutes. We're turning our attention to examining
7 possible ad