Public Hearing on Home Equity Lending
September 7, 2000
Transcript
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Public Hearing on Home Equity Lending |
BEFORE THE
BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
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PUBLIC HEARING |
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PREDATORY LENDING PRACTICES IN THE |
HOME-EQUITY LENDING MARKET |
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Garden Conference Rooms A and B
Federal Reserve Band of San Francisco
101 Market Street
San Francisco, California
Thursday
September 7, 2000
PRESENT:
EDWARD M. GRAMLICH, Member, Board of Governors, Federal
Reserve System, Chairman, Committee on Consumer and
Community Affairs.
FOR THE DIVISION OF CONSUMER AND COMMUNITY AFFAIRS,
FEDERAL RESERVE BOARD, WASHINGTON, D.C.:
DOLORES S. SMITH, Director, (Moderator, Afternoon Session)
GLENN E. LONEY, Deputy Director (Moderator, Morning
Session)
JAMES A. MICHAELS, ESQ., Managing Counsel
JANE E. AHRENS, ESQ., Senior Counsel
SANDRA BRAUNSTEIN, Assistant Director and Community
Affairs Officer (Afternoon session)
FOR THE FEDERAL RESERVE BANK OF SAN FRANCISCO:
JOY HOFFMAN MOLLOY, Director, Community Affairs and Public
Information Federal Reserve Bank, San Francisco
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I N D E X
Opening Remarks Glenn Loney, Moderator 5
Opening Remarks Edward M. Gramlich, Governor 7
Federal Reserve System
Chairman, Committee on
Consumer and Community Affairs
SPEAKER: PAGE
PANEL NO. 1
PEGGY L. TWOHIG Assistant Director 13
Division of Financial Practices
Bureau of Consumer Protection
Federal Trade Commission
ELENA DELGADO President, 17
Irwin Home Equity Corporation
ROBERT GNAIZDA Policy Director & General Counsel 20
The Greenlining Institute
ANN CARLTON BOSE President, Estate Funding, Inc. 24
MARY LEE WIDENER Chief Executive Officer 27
Neighborhood Housing Services
of America, Inc.
DAVID H. SANDS Partner, Troop Steuber Pasich 30
Reddick & Tobey, LLP
NORMA P. GARCIA Senior Attorney, Consumers Union 34
SANDOR E. SAMUELS Managing Director, Legal 36
General Counsel & Secretary
Countrywide Home Loans, Inc.
JOHN L. BLEY Director, 40
Department of Financial Institutions
State of Washington
DANIEL J. MULLIGAN Partner, Jenkins & Mulligan 43
MICHAEL A. RANKINS President & CEO 45
Rankins Mortgage Corporation
JOHN A. COURSON President & CEO 47
Central Pacific Mortgage Company
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PANEL DISCUSSION 50
AFTERNOON SESSION
Opening Remarks Dolores S. Smith, Moderator 164
PANEL NO. 2
ALAN FISHER Executive Director 167
California Reinvestment Committee
FRANCINE MCKINNEY President 170
Home Buyer Assistance Center
CHESTER CARL Chairman, Board of Directors 172
National American Indian Housing
Council
CHRIS LAMBERTI Board of Directors 177
American Association of Retired
Persons
STEVEN HORNBURG Executive Director 179
Research Institute for Housing
America
PANEL DISCUSSION 183
PUBLIC COMMENT:
TERRY MACKEN 216
STEPHEN COGSWELL 219
BARRETT R. BATES 221
GEORGE DUARTE 224
LOUIS BRUNO 227
MILTON HODGE 231
LINNIE COBB 233
HOWARD BECKERMAN 236
SHANELLE COLEMAN 240
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P R O C E E D I N G S
9:00 a.m.
MR. LONEY: If we could begin, please. First,
let me introduce myself. I'm Glenn Loney, and I'm the
Deputy Director of the Division of Consumer and Community
Affairs at the Federal Reserve Board in Washington. I'm
going to acting as the moderator for this morning's
session.
The San Francisco hearing is the last of four
hearings that the Board is holding this summer on
home-equity lending. We had very interesting and useful
meetings already in Charlotte, Boston and Chicago. The
invited panelists and the members of the public at those
hearings offered a wide variety of views on possible ways
to address predatory lending practices in the home-equity
consumer market, and we expect the same here. We look
forward to hearing about these issues in San Francisco
today.
Like our earlier hearings, we will be discussing
the potential use of the Board's rule-writing authority
under the Home Ownership and Equity Protection Act and
also alternatives to regulations, such as consumer
outreach and consumer education.
Before I go too far, can everybody hear me? Can
you hear me, Margaret? Good.
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First, let me introduce the panel, the Federal
Reserve Panel. From the Board, to my immediate right, is
Ned Gramlich, who is a member of the Board of Governors of
the Federal Reserve System, and chairman of the Board's
Committee on Consumer and Community Affairs.
From the Board's Division of Consumer and
Community Affairs, we have Jim Michaels, Managing Counsel,
and Jane Ahrens, who is Senior Counsel, who both work on
Truth In Lending matters at the Board.
From the Federal Reserve Bank of San Francisco,
we have Joy Hoffman Molloy, who is the director of
Community Affairs and Public Information.
Let me just make a few introductory remarks
about what we are about here.
The Truth In Lending Act requires creditors to
disclose the cost of credit for consumer transactions. In
1994, the Congress enacted the Home Ownership and Equity
Protection Act -- or HOEPA, as it's called -- and HOEPA
added special protections to Truth In Lending for
consumer's who use the home as security for loans with
rates or fees above a certain percentage or amount. HOEPA
was a response to accounts of abusive lending practices
involving unscrupulous lenders who made unaffordable
home-secured loans to house-rich but cash-poor borrowers.
These cases often involved elderly, sometimes
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unsophisticated homeowners, who were targeted for loans
with high rates or high closing fees and with repayment
terms that were difficult or impossible for the homeowners
to meet.
In brief, HOEPA requires creditors to provide
additional disclosures at least three days before
consumers become obligated for such loans. It prohibits
lenders from including certain terms in loan agreements,
for example: balloon payments for short-term loans. It
prohibits creditors from relying on consumer's home as the
source of repayment without considering whether the
consumer's income, debt and employment status would
support repayment of the debt. It also requires the Board
to hold hearings periodically, to keep abreast of the
home-equity credit market targeted by the HOEPA. The
Board held hearings in 1997, about two years after HOEPA
became effective, and now it is conducting this series of
hearings.
Governor Gramlich will start us off with a few
remarks about the purpose of these hearings.
Governor Gramlich.
GOVERNOR GRAMLICH: Thank you very much, Glenn.
First off, we're happy to be here in San
Francisco, and thank the San Francisco Fed for putting on
the meeting this morning.
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The last few years has seen an enormous growth
in subprime lending. The rate of growth in subprime
lending has been roughly twice that of prime mortgage
lending. Subprime lending has gotten to be a significant
share of overall mortgage loans; and, by and large, this
is a very positive development. Indeed, the growth in
subprime lending has brought credit to millions of people
who have earlier been judged to be poor credit risks and
would not have gotten the loan. So this has enabled
millions of people to buy homes and start really going on
their piece of the American dream. But with every good
thing, there may be some bad that come along in their
wake. One of those may be subprime lending, or predatory
lending. We hear stories of abuses that have cropped up.
The basic goal of the hearings, and for every
agency that has any kind of authority for predatory
lending, is to try to, in effect, clean up the subprime
market, to make sure that the good subprime lending
proceeds and the abuses are stopped. This mixed message
symbolized the difficulty of this issue. That there are
many practices that might be good most of the time, but
end in abuse some of the time, so it's difficult simply to
ban practices. I think everyone agrees that, if consumers
really understood the properties of the loans, much of
this problem would go away. But, first off, there's the
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difficulty in getting information to the community;
secondly, there may be competition problems, just like the
market. So, as regulators, we're treading a narrow line
here, but we do what we can to stop the abuses. But we
don't want to stop the good part of subprime lending.
The Fed has some authority in this area. As
Glenn has mentioned, or might have, under HOEPA, in
addition to holding these hearings, The Fed does have
authority to change the scope of HOEPA a bit, and to
declare certain practices fraudulent and deceptive. The
basic purpose of the hearing is to try to figure out just
exactly what part of this should be used. We want to make
sure that anything we do has benefits that outweigh cost.
One thing that I should say, and probably others
will say, is that The Fed can't do it all, but there are
things that they can do and we are considering them. But
there a broad assault on this issue I think is necessary.
We are already meeting with nine federal regulators, who
have responsibility in this area. We're already meeting
with them back in Washington. In most states, there are a
number of state statutes that also have bearing. So we
want to make sure that all of the regulators are on the
same page. Purchasers of secondary mortgages can play a
role by also doing due diligence on the mortgages they
purchase. There are efforts at community education that
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are underway. The afternoon part of the hearings are
going to focus on those.
So a broad gauge approach to the problem is
presumably necessary. At the same time, the focus of
this morning's hearing are clearly on what The Fed ought
to be doing. So we will be structuring the efforts to
bring out some of the delicate issues in that hearing.
These are not the first hearings that have been
held. There were an earlier round of hearings back in
1997. Treasury and HUD has had a number of hearings on
predatory lending this year. This is now the fourth of
the hearings, or the last of the hearings, that we are
holding under HOEPA.
At this point, I'm going to quit. We'll let the
panelist talk about the issues. We're here mainly as
listeners. But, again, I would like to thank everybody in
San Francisco for having us out here and hopefully we'll
have a successful meeting that develops some sensible and
effective policies.
Thank you.
MR. LONEY: We're going to spend the morning
considering ways in which the Board might use its
rule-writing authority under the Truth In Lending Act and
HOEPA to curb predatory lending practices and home-equity
lending, while preserving access to credit for borrowers
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with less-than-perfect credit. This afternoon, we will
discuss alternatives to regulation, such as consumer
outreach and education, that might help address predatory
practices. At both sessions, we particularly hope to hear
about studies or research on subprime or equity lending
that will inform the Board in its deliberations. We're
very interested in hard data that anyone has on these
issues.
In addition, we have set aside time to hear from
members of the public. Anyone who, any of the members of
the public who want to can sign up to participate in the
open-mic session later this afternoon. The order of
appearance at the open-mic session will be based on the
list. The sign-up will also help us gauge the length of
time participants may be asked to observe in expressing
their views. The expectation, based on the experience at
the earlier three hearings, for people who have signed up
for the open-mic session can expect about three minutes.
I think the sign-up is downstairs at the lobby
where we came in, the west entrance. So, any of you who
want to sign up for the open-mic sessions, please do so.
I need to talk briefly about the rules of
procedure we're going to use at the meeting today. These
are the same rules of procedures that governed in our
preceding three sessions in Charlotte, Boston and Chicago.
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What we're going to do is: We're going to ask
the panelists assembled here and this afternoon, the
second panel, to limit their prepared remarks to about
three minutes. We have a timekeeper, sitting right there
in the middle. Raise your hand, please. Her name is
Georgette Bhathena. She is going to give you a one-minute
warning, and then a time-is-up warning. If we are going
to get through this in any orderly way, it's going to be
incumbent upon us all to observe the time constraints.
I just want to assure the panelists that, after
that, we're going to have a more open session discussing a
number of issues that the Board raised in its notice of
this hearing. We will -- there will be time for everybody
to express their views on the various issues that the
Board has expressed a particular interest in.
What we're going to do is, is we're going to
start with my friend and colleague, Peggy Twohig, and
proceed clockwise. Each panelist will present their
opening statement. Then, after all the panelists have
made their opening statements, there will be a general
discussion among the panelists and among us from the
Federal Reserve. Although, I will say that, after making
your opening statements, the Federal Reserve panelist may
want to ask questions.
During our first segment, following the opening
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statements, we'll discuss possible changes to HOEPA's
scope from 9:50 to 10:30. Then we will break for about
ten minutes at 10:30, and reconvene for the rest of the
morning session to discuss possible additional
restrictions or prohibitions for specific acts or
practices under HOEPA.
So, without further ado, I will ask the
panelists to introduce themselves, where they're from and
their title, and affiliation. So, Peggy, if you will.
STATEMENT OF
PEGGY TWOHIG, ASSISTANT DIRECTOR
DIVISION OF FINANCIAL PRACTICES,
BUREAU OF CONSUMER AFFAIRS
FEDERAL TRADE COMMISSION
MS. TWOHIG: Good morning. My name is Peggy
Twohig. I'm the Assistant Director for Financial
Practices, Federal Trade Commission.
I appreciate the opportunity to appear at this
hearing on behalf of the Federal Trade Commission and
discuss a serious problem of abusive lending practices in
the subprime market. The Federal Trade Commission is
looking at a number of ways to address these practiced,
primarily through law enforcement and consumer education.
The Commission has made halting predatory
lending practices a top enforcement priority. The
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Commission has brought action against large and small
subprime lenders for various legal practices. In the
interest of time, I will mention a few of these actions.
Other Commission actions are discussed in the full written
statement that has been submitted to the Board, and it's
available both here and is available on the Commission's
web site.
A number of these actions have involved
allegations of lenders violated the Home Ownership and
Equity Protection Act, which we call HOEPA. Last year, as
part of Operation Home Inequity, the Commission settled
cases with seven subprime mortgage lenders for violations
of HOEPA, as well as other law violations.
The HOEPA violations included failure to provide
required HOEPA disclosures, illegal asset-based lending,
and use of prohibitive loan terms. The Commission
obtained substantial remedies, including redress of over a
half-million dollars. These involved a total of several
loans. In the case of one lender, a ban against any
future involvement in high-cost mortgage loans. More
recently, the Commission settled a case of this type
against a Washington State lender. That case included an
additional allegation that the lender made direct payments
to home improvement contractors in violation of HOEPA.
That settlement required, as part of the settlement of
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the case, more than $150,000 in consumer redress.
In March, the Commission announced the
settlement, along with the Department of Justice, and
Department of Housing and Urban Development, with Delta
Funding Corporation, a national subprime mortgage lender.
The Commission alleged that Delta violated HOEPA by
engaging illegal asset-based lending.
Other cases involved different violations of
law, including deceptive lending practices. Last month,
the Commission settled a case involving deceptive
advertising and marketing practices of the now-bankrupt
First Trust Financial, which involved both claims of the
amount of money you would save against the foundation
loan. And, of course, we're still litigating our case
against Capital City Mortgage Corporation. This one
involved allegations that that company, and its owner,
deceived consumers in just about every stage in the
lending process.
I see I'm already running out of time, so I'll
just mention that we also have many consumer brochures
that address home-equity lending that are available on our
web sit. We distributed about 200,000 copies of them so
far.
While some of the predatory lending practices we
have seen can be addressed through the current laws and
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regulations, the Commission recommends that the Board make
several regulatory changes to strengthen the protections
in the high-cost market. The Commission recommends that
the Board further restrict acts and practices under HOEPA
and change the HOEPA triggers. We believe a very small
percentage of subprime mortgage loans are currently
covered by HOEPA, and the Commission has observed
problem-lending practices in subprime loans where the
rates and fees falls far below the current trigger. As a
result, this protection offered by HOEPA will help those
few borrowers unless HOEPA is expanded to cover more
loans. More particularly, the Commission recommends the
Board change the HOEPA triggers by both lowering the HOEPA
APR trigger to 8 percent, and including lump-sum insurance
premiums in the HOEPA fee trigger.
The Commission also recommends that the Board
address the problem of loan packing by prohibiting the
financing of lump-sum, single-payment credit insurance and
other products sold with HOEPA loans. The Commission
believes that a prohibition of this type is necessary
based on its long enforcement history in credit term
packing and given the nature, complexity and highly
unequal bargaining position involved in these
transactions, disclosures alone would not be adequate to
protect consumers.
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In addition, the Commission recommends that the
Board prohibit mandatory arbitration clauses in HOEPA
loans. Mandatory arbitration agreements undermine the
consumer's ability to exercise the statutory right to
protection in the credit marketplace. Consumers, in this
very high-cost market, particularly need those
protections.
The Commission's full statement include other
recommendations. And, since I've run out of time, I'll
stop here. Thank you for the opportunity to appear.
MR. LONEY: Thank you, Peggy. I'm sure you'll
get to finish some of your thoughts later. Sorry.
Ms. Delgado.
STATEMENT OF
ELENA DELGADO
PRESIDENT, IRWIN HOME EQUITY
MS. DELGADO: Good morning. My name is Elena
Delgado. Can you hear me? I'm the president and founder
of Irwin Home Equity. I'm pleased to have the opportunity
to participate in this panel.
Irwin Home Equity -- otherwise known as IE --is
a subsidiary of Irwin Financial Corporation, an Indiana
state-chartered bank holding company. IHE originates home
equity loans and line of credit which are funded by its
affiliate, Irwin Union Bank and Trust Company, an Indiana
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state-chartered, Fed member bank. IE offers its products
in 28 states and is subject to regulatory oversight in all
of these states. As you can see, we are subject to a fair
amount of regulatory scrutiny.
IE is a direct-response lender targeting
credit-worthy but underserverd borrowers. Our home-equity
loans are generally secured by a second mortgage on the
borrower's residence. We are a debt consolidation lender
and our loans enable our borrower's to pay off high-rate
debt and credit-card debt.
Our customers generally have A-plus or A credit
and are never lower than B plus. Because our borrowers
carry high-credit balances and are looking for a high LTV
loan, they are precluded from obtaining credit from
conventional banking sources. Therefore, our
products/borrower combinations are a higher risk than most
banks and we price adjust for this increased risk. We
offer applicants the option of choosing to reduce their
rate by the inclusion of pre-payment penalty or by the
payment of discount points and fees. We feel that the
ability to use these loan terms gives our borrowers the
option to choose a product that best fits their needs.
We are not in the foreclosure business. Since
the inception of our business six years ago, we have
originated over 50,000 loans and have completed the
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foreclosure process on only 34. We do make money on our
foreclosures and, in fact, our total losses due to
foreclosures approximates $370,000.
We are here because today a small number of our
loans fall under HOEPA and we want to share our
experiences on HOEPA with you. We also would like to
offer some suggestions on how to make HOEPA more
effective. We don't believe HOEPA is accomplishing its
primary objectives. Our belief is that the disclosures
required by HOEPA haven't been either particularly helpful
nor well understood by the borrowers. We are not aware of
any borrower changing their mind about a loan based on the
information contained in these disclosures.
We believe that HOEPA is having an adverse
affect on the cost of doing business and has curbed access
to credit to higher risk market segments because of the
increased risk associated with these loans. In addition,
the industry has defaulted to using HOEPA as a proxy for
predatory lending. This has created a reputational risk,
as well. Because of these risks, we believe that lowering
the HOEPA triggers will further accelerate the flight from
HOEPA loans which will further limit the availability of
credit to the needier market segment. Already we've
learned from our Wall Street financiers that there is
waning interest on the part of investors and underwriters
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in paper secured by HOEPA loans. This is because all of
the parties involved in the transaction can't guarantee
the adequacy of the process, but are forced to bear the
liability. Also, we are reading news articles daily about
lenders refusing to make HOEPA loans. If The Fed elects
to reduce HOEPA triggers, more of our loans will fall
under HOEPA. At that point, we also will need to decide
whether or not it makes business sense for us to continue
to make HOEPA loans. We have pulled out of North Carolina
due to passage of their high-cost loan legislation.
We are here to propose responsible ways to
revamp HOEPA such that it can accomplish it's purpose. We
look forward to your insights to our proposal and some
enlightened discussions.
Thank you.
MR. LONEY: Thank you, Ms. Delgado.
Mr. Gnaizda.
STATEMENT OF
ROBERT GNAIZDA
POLICY DIRECTOR & GENERAL COUNSEL
THE GREENLINING INSTITUTE
MR. GNAIZDA: Good morning. I'm Bob Gnaizda,
the general counsel for the Greenlining Institute.
Before I begin my prepared remarks, I wanted to
make just some introductory observations. Firstly,
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Governor Gramlich, all of the community groups we
represent want to thank you for your very special
commitment for this community reinvestment. We'd also
like to thank Joy Hoffman Molloy, of the Federal Reserve
Bank here, for being an outstanding counselor/adviser and
so helpful to community groups.
There are three procedural matters I want to
discuss before I go into my prepared remarks. First, the
key outside player is not here and was apparently not
invited; and that is: the investment houses responsible
for the ten-fold increase in predatory lending over the
last five years, through their $300 billion in financing.
Secondly, these hearings are far too narrow.
Ninety-five percent of the potential problems are excluded
from the coverage of these hearings.
Thirdly, the Federal Reserve is in the best
position to be the leader in resolving this problem.
These hearings are only a very partial and narrow solution
to that leadership.
And now my prepared remarks.
I'd like to make brief substantive observations.
The first is Wall Street. Wall Street must be brought to
the table. In the last five years, they have provided
financing of $300 billion in the subprime lending, which
is an increasing amount for predatory lending. They have
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failed to exercise due diligence, and they must be forced
to do so. The first solution is for the Federal Reserve
Chairman, Alex Greenspan, to call that to Washington, much
as he called that to New York, to save the multi-million
dollar hedge fund.
Secondly, we must recognize that up to half of
all persons securing subprime loans are actually eligible
for prime loans. Fannie Mae and Freddie Mac are in a
leadership position in doing that conversion.
Thirdly, there is no substitute for honest
competition. Predatory lending will continue unabated
unless there is effective regulated, scrutinized
competition that cares for the consumer. And the Federal
Reserve is in the best position to make that happen.
Fourthly, the Federal Reserve can begin that
process by refusing to permit any mergers where there is
predatory lending. That will send a message immediately.
Five. The Federal Reserve can require or
encourage corporate codes of responsibility, what I would
call a consumer bill of rights for regulated institutions.
That's the way to encourage them, by providing incentives,
by giving them additional CRA credit, since there should
be a moratorium on foreclosures. HUD has begun that
process in LA, New York, with FHA loans.
I'm now going to move to my ninth and tenth
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points because my time is almost up. We cannot address
this problem without at least looking back a few years.
There must be restitution for victims. There is none in
any form.
Lastly, and probably the most important,
leadership by the Federal Reserve. It has been absent.
The Federal Reserve should be the leader for protecting
the consumers while encouraging, as you have said,
Governor Gramlich, competition in subprime lending. And
that is why we have given, in our report card, the Federal
Reserve a C minus.
And, lastly on leadership, Governor Davis,
governor of the seventh largest economy, has three
government agencies that have responsibility in predatory
lending, banking, corporations and real estate. They are
totally absent, and I note they are not here. I
congratulate the state of Washington for sending their key
regulator.
I want to just end with this because we don't
have enough time. Greenlining and the former banking
commissioner from California, and Fannie Mae and CRC, will
be holding a press conference at 10:30 in the next room.
Thank you very much.
MR. LONEY: Thank you.
Ms. Bose.
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STATEMENT OF
ANN CARLTON BOSE
PRESIDENT, ESTATE FUNDING, INC.
MS. BOSE: My name is Ann Bose, and I'm probably
the only person sitting at this table that originates
these types of loans we're talking about: the subprime
loans. I'm a mortgage broker. I own Estate Funding.
My credentials are, just so you know: I was
president of the LA County Association of Mortgage
Brokers. I sat on the California Association of Mortgage
Brokers for more than five years. I'm currently the
director of the National Association of Mortgage Brokers,
since 1995, and was the treasurer of that group last year.
I have been honored by my peers as Mortgage Broker of the
Year in 1994 and 1991. I also was a member of the
California Mortgage Bankers Board for two years.
In 1981 I was a teacher. I taught high school
history and government. I got a divorce. In 1983, I
founded this business. I was the mother of four and eight
-- not four children, a four-year old and an eight-year
old. Teaching wasn't going to do anything for me. I had
no alimony or child support. I found tremendous
opportunity in the mortgage broker industry. Within two
years, I was able to support my family they way we were
living before the divorce.
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There is no glass ceiling in this business. And
it is a business of tremendous opportunity for people that
come to it with a sense of integrity and want to learn it
and want to work hard. I think brokers make a tremendous
difference in the lives of the people with whom they
interact. I think we help more people realize that deal
of home ownership than any other segments of this
industry. We listen to our customers' long- and
short-term financial goals and construct loans that meet
their specific needs. We educate them to their options.
We have tremendous options.
As mortgage brokers, we have a tremendous
opportunity to support for 100 percent financing. We have
five or six different loan options. We have subprime. We
have government. We have first-time home-buyer options.
We have lines of credit. How about 80 percent to a
million dollars? We have no-income documentation loans,
and subprime as well.
Brokers help keep prices down. There are a lot
of us. We're a highly competitive business. Because we
keep prices down, we help keep the competition honest.
Subprime is becoming almost the same level of commodity as
the first-risk C business and the conventional business.
Because subprime has been securitized, it is very close to
becoming the same type of commodity that the conventional
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loans are. Which means you have standardized underwriting
procedures and much less opportunity to abusive practices.
If prices are closed, what do we sell? We sell service,
education, integrity and options. We are an efficient
marketing channel for a variety of loan products for the
lenders.
Regarding proposed regulations, I'd like to
suggest that we enforce the regulations we have on the
books before we assume that the legislation that we have
now is not working. I don't believe there is sufficient
enforcement to make that evaluation. I think that the
current HOEPA regulations have, in effect, eliminated an
entire class of loans that, from my experience as a broker
and originating loans, I cannot find small second trustees
for subprime borrowers. I can't find lenders that want to
do them due to the fact of the high cost to lenders in
terms of regulation, disclosures and risk, and there is no
profit to do all that. It's a narrow profit for me
because I can't make enough money on $10,000 or $20,000
loans to do the loans. So we've already eliminated a
class of loans. I can't find comfort in that.
I think industry self-regulation is very
important. The best business practice is a proposal that
has been put forth by the NBA and NAMB to register all
originators, not just brokers. To isolate problem
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originators, you need to register all originators. If you
charter your brokers by themselves, then the bad eggs will
just go to work for banks, and they have enough bad eggs
themselves. So I think industry self-regulation and more
enforcement and consumer education is where we belong.
Lastly, I believe, as Senator Graham said in his
hearings that he is not sure what predatory lending is. I
think you need to define that before you try to control
it.
MR. LONEY: Thank you, Ms. Bose. Sorry I
mispronounced your name. I'm sure it's not the first
time. I hesitate to call you Ms. Widener, but go ahead.
STATEMENT OF
MARY LEE WIDENER
CHIEF EXECUTIVE OFFICER
NEIGHBORHOOD HOUSING SERVICES OF AMERICA, INC.
MS. WIDENER: My name is Mary Lee Widener, Chief
Executive Officer of Neighborhood Housing Services of
America. We are a special-purpose, nonprofit, secondary
market for the community loans bank in the Neighborhood
Network.
We applaud these hearings, both for their
content and the message. The Board is the preeminent
point of guidance with regard to financial practices in
America. So the message of these hearing is very
28
important.
The Board asked for comments on a number of
specific items. I'd like to submit as my response the
model statutes against abusive home loans, as developed by
the Community Center for Self-Help, in Durham, North
Carolina. We've tried to establish whether or not these
have been submitted, but I really want to be sure they are
on the record, and they are all the specifics called for.
With regard to the details, I support all of them.
In addition, I'd like to comment on and support
the report the Greenlining Institute's 10 Point Plan. I
think the expansion of looking at where the investment
dollars come from, in particular, to support predatory
lending. It's an extremely important point. You've just
got tto cut this off, and should be adopted by the Board.
The other objective that I feel should be
included in my primary remarks would be that there does
need to be a clear and more expansive definition of
"predatory lending," so that the whole industry,
non-profit and for-profit, know what we're trying to
avoid. And some very good work was done by the National
Association of Consumer Advocates on this point. And I'd
like to provide that to the Board, as well.
Another objective should be to establish the
legal right of non-profits to protect the hard-fought
29
gains in improving the financial condition of low-wealth
borrowers. The best example are work of Habitat for
Humanity and the Neighbor Works Network. When these
groups pull together as volunteers and partners around the
country to help families who otherwise wouldn't have
opportunity to see which way runs the risk of making this
a way to continue to get the kind of support that we're
able to provide to low-wealth borrowers. And we should
not have to include those protections in these
restrictions, because so much of that work has already
been done ahead of this predatory lending kind of
experience. And it would be impossible to check all that
work in these restrictions. So we feel encouraging the
general legal right in some form, whether by regulation or
by statute.
And, then, finally, I think it's very important
that the Board succeed in sending a solid message to the
financial industry that, with regard to predatory lending,
it's bad to be a part of the problem, and it's good to be
a part of the solution. And I would really encourage the
most stringent use of regulatory power, especially in
mergers and acquisitions to send this message.
With regard to concerns about subprime lending
and damages in that market, I have to say that I applaud
your concern there, but our -- my impression is that --
30
MR. LONEY: Your time is up, but finish your
thought.
MS. WIDENER: My impression is, to a large
degree, people who need subprime lending, to the point
that it is unclear whether or not it is moving over into
predatory, probably need to stay out of the game. And
there needs to be a great deal more pressure on the
non-profit sector, the for-profit sector, local government
sector, and the conventional market to try and regulate
borrowing.
MR. LONEY: Thank you. Mr. Sands.
STATEMENT OF
DAVID H. SANDS, ESQ., PARTNER
TROOP STEUBER PASICH REDDICK & TOBEY, LLP
MR. SANDS: Thank you, Mr. Loney.
My name is David Sands, and I'm a partner in the
law firm of Troop Steuber Pasich Reddick & Tobey. My
practice principally involves representation of lenders,
servicers and the investment community, like companies of
some who are here. And they're big organizations, clients
in corporate matters.
I'm honored to be invited to speak here and to
share my perspective through my practice over the years.
I hope I can contribute a little bit to the Board's
deliberative process on these very important issues.
31
I want to open my remarks by noting that, much
of what I read in the other hearings and transcripts of
those hearings, and I read in the press, it clearly
troubles me. Because, as Governor Gramlich said, we
really need to base our decisions in the process on what
the facts are and what the studies show. Clearly, the
anecdotal evidence shows -- and I'm sure the studies show
-- there are many situations where unscrupulous brokers
and lenders have taken advantage of borrowers, and
misrepresented them, mislead borrowers.
This predatory lending activity, and I would say
the predatory lending and not subprime lending, is clearly
deplorable. And, on the other hand, subprime lending has
been extremely beneficial. Nobody can argue -- I don't
think anybody is arguing that. As Governor Gramlich
correctly pointed out that subprime lending has greatly
increased the flow of credit into communities that have
been typically underserved or not served. In many cases,
may be served by payday-advance companies. That's
probably the last place they want to go to for a loan.
So, hopefully, if you think about all these
discussions and, again, as Governor Gramlich has pointed
out, I hope we always keep in mind the fact that, whatever
we talk about, whatever we do, we try to keep in mind that
we want to keep more credit available, for the lowest
32
cost, for as many people as possible.
Turning to specific issues to be discussed
today, which are principally three: Whether the Board
should consider lowering the triggers; whether to change
the various elements points, indeed to test; and whether
it should prohibit certain practices. I think we have to
ask ourselves, before we think about the isolated issues,
has HOEPA had the effect of reducing predatory lending
practices? Based on anecdotal evidence and discussions, I
don't know, but it sure seems to be that these have,
perhaps, increased. I'm not sure why, in the last six
years, HOEPA has had the effect that is hoped, that people
hoped it has, and why changing a law that may not prohibit
the practice people are concerned about is the right thing
to do.
One thing I did want to talk about, at least in
my practice, is not so anecdotal, but at least based on
actual practice, we have been involved in abusive lending
cases. Those are cases really that we are suing brokers
and lenders for violations of contracts, for violations of
law, because they were engaged in abusive lending
practices, making loans that my clients didn't realize
they were buying. As a result of them buying the funding,
once they did their diligence -- which, in hindsight, may
they should have done earlier -- but once they've done
33
their diligence, they turned around and took the loans
back to the lenders or brokers and often made restitution
to the borrowers. Meaning: There are effective
enforcement mechanisms out there. Things are happening.
There are three points I'd like to make for the
Board to think about, which I think everybody agrees upon
what we need to do, at least at a minimum, for the time
being. And, again, this is based on what I've been
involved with.
Education --
MR. LONEY: Your time is up. If you can finish
that thought --
MR. SANDS: This will be quick. No. 1 is
education and counseling. An educated consumers typically
is a consumer we don't see a problem with. Secondly is
simpler notices. I'm not going to go into that. It's
been talked about a lot at this hearing. And, three, is
enforcement. I'm very happy to hear that the Federal
Trade Commission has been active in enforcement. There
are a lot of laws on the books right now, including Fair
Lending Laws, elder abuse statutues in California, which
will go very far to prohibit the practice people are
concerned with. I hope we can keep these issues in mind
as talk today.
MR. LONEY: Thank you. Ms. Garcia.
34
STATEMENT OF
NORMA P. GARCIA, SENIOR ATTORNEY
CONSUMERS UNION
MS. GARCIA: Good morning. I'm Norma Garcia,
Senior Attorney, with Consumers Union's West Coast
Regional Office in San Francisco. Consumers Union, as you
know, is a non-profit publisher of Consumer Reports
Magazine, incorporated in the state of New York in 1936.
Thank you very much for this opportunity to be
here with you this morning. I appreciate the fact that
the Board of Governors has called this hearing and has
gathered all of these interesting individuals at the same
table to discuss these very important issues.
In the interest of time, I want to second the
comments offered by Ms. Twohig, by Mr. Gnaizda, and Ms.
Widener, and offer a few of my own observations.
I heard a comment made earlier that one of the
things we want to do to preserve subprime lending because
it has provided a valuable service to the public by
increasing the number of people who have been able to buy
homes with subprime loans. I want to narrow the focus
here a little bit, because my understanding of this
problem -- and we have studied this extensively -- is that
the issue is not about purchase money mortgages. The
issue and area of abuse comes more in the
35
home-equity-based mortgage lending. So, to the extent
that the subprime lending industry has assisted more
people to become home owners, I applaud the industry for
that. But to the extent that the industry has been
involved in abusive lending that has undermined the home
ownership dream for many homeowners, on that note, I want
to say that there is a lot of work to be done.
I want to emphasize that if self-regulation were
effective, we wouldn't be here today. There wouldn't have
been the multitude of hearings that has happened in the
last three years on this issue. If self-regulation were
working, we wouldn't have increasing numbers of stories of
homeowners who have lost their home, and all of their
American dreams, to fraudulent and abusive lending
practices.
I think consumer education is a necessary
component to attacking the problem; but, yet, cannot be
looked at alone as a solution, or as an alternative to
more enforcement and better regulation. We need to be
very careful about this. I don't think it's the answer.
It doesn't stand alone as a solution, just like
self-regulation doesn't stand alone as a solution.
Very briefly, I want to say that Consumers Union
supports the notion of adjusting the HOEPA trigger, to
lower the trigger to extend HOEPA's protections to a
36
broader class of transaction and borrowers. We also think
that the points and fees triggers should be adjusted so
that more fees are added to the calculation, particularly
credit insurance, prepayment penalties and points when the
same creditor finances a loan.
We have given further comment in our written
testimony about the other points you've asked us to
address, so I will pass the mic on now. Thank you very
much. We look to forward to the discussions with you.
MR. LONEY: Thank you, Ms. Garcia.
Mr. Samuels.
STATEMENT OF
SANDOR E. SAMUELS
MANAGING DIRECTOR, LEGAL; GENERAL COUNSEL & SECRETARY
COUNTRYWIDE HOME LOANS, INC.
MR. SAMUELS: Thank you.
My name is Sandy Samuels. I'm the general
counsel for Countrywide Home Loans.
I would like to begin my remarks by looking at
what I believe to be the root causes of predatory lending:
Lack of choice, lack of knowledge, and lack of
enforcement.
The past year has seen a dramatic increase in
the amount of attention focused on predatory lending
practices, not unlike 1994, when Congress enacted the Home
37
Ownership and Equity Protection Act in responce to similar
press articles on abusive lending in Atlanta and Boston.
For that matter, it's not unlike 1968 when Congress
enacted the Truth In Lending Act to safequard the consumer
in connection with the utilization of credit by requiring
full disclosure of the terms and conditions of credit.
Interestingly, the problem seems to be the same every
time: Bad actors engaging in deceptive, if not
fraudulent, behavior that exploits the consumer's lack of
knowledge and lack of choice. The fact that we are
meeting on this topic 32 years after enactment of TILA
only serves to highlight that it's something outside of
the federal box.
Disclosures, in and of themselves, are
meaningful tools for many consumers. But disclosures do
not stop bad actors from preying on consumers on consumers
who either don't understand the information conveyed, or
who never received disclosure in the first place. These
bad actors engage in a variety of fraudulent practices.
Examples of fraud upon consumers have been documented in
the various articles and hearings this past year. From
home contractors, who have lied to consumers, to lenders
who have affirmatively used Truth In Lending Act
disclosure terms to mislead consumers about the true terms
of their loan. Yet every state the union has statutes
38
that address fraud. Most, if not all, have statutes that
address unfair and deceptive practices that fall short of
common law fraud. What seems readily apparent is that
there are many fraudulent acts being committed that are
already clearly illegal under existing state and federal
law -- usually TILA and its HOEPA provisions. In other
words, no new law or modification to existing law is
needed to address what is already illegal.
When a neighborhood reports an increased number
of burglaries, the first response is not simply to pass
tougher burglary laws. The response is to increase the
police patrolling the beat. And we believe that that must
be the fist step taken now. Congress and the states must
increase financial support of the agencies charged with
enforcing these laws so that lenders, brokers and
contractors that engage in this sort of activity will know
that there is real risk of detection and punishment.
Funding must also be increased to agencies, such
as legal aid services and counseling organization, to give
those most often preyed upon accessible resources to call
upon before one of these tragedies occurs.
The Board has asked us to address whether there
are regulatory and/or statutory changes to HOEPA that
would more effectively curb predatory lending. Let me
make clear that we do not believe lowering the HOEPA APR
39
trigger is an effective way to enforce the law. We
believe that enforcing the HOEPA provisions, and other
applicable law -- I'm sorry. We believe that enforcing
existing HOEPA provisions, and other applicable law, is an
effective way to stop predatory lending.
Most of the recent testimony has reported
striking increase in the amount of subprime lending in
recent years. One of the most important and positive
developments in subprime lending has been the emerging of
some of the largest national lendings in this market,
lenders in this market. This has clearly increased the
availability of credit to many Americans and has, in turn,
lowered the cost of subprime credit because of increased
competition.
I've got much more to say, and I see my time is
up. Let me just say that we believe that increased
competition is the key. We think that the lowering of the
HOEPA triggers will have the opposite effect. It will
reduce competition, it will reduce choice, and I'll have
more to say during the discussion.
MR. LONEY: Thank you. Mr. Bley.
//
//
//
//
40
STATEMENT OF
JOHN BLEY, DIRECTOR
DEPARTMENT OF FINANCIAL INSTITUTIONS
STATE OF WASHINGTON
MR. BLEY: My name is John Bley. I'm the
director of the Department of Financial Institutions in
the state of Washington.
We think the way to effectively address
predatory lending is, first, simplify disclosure,
establish prohibitive practices, and enforce the two.
I want you to think about Ms. Bose's comments.
Among other things, she said that she sells trust. In our
view, based upon our years of experience in regulating
mortgage lending for a non-bank, predatory lending is the
use of deceptive or fraudulent sales practices in the
origination of the loan secured by real estate.
The federal disclosures are too complex for many
borrowers and borrowers turn to loan officers to explain
the terms of their loan. Thus, predatory lending is an
abuse of misplaced trust. Predatory lending becomes
possible when a borrower trusts the loan officer to
explain the terms of the loan and the loan officer commits
deception by abusing this trust. The deception may
include hiding the high fees or points; variable rate loan
instead of a fixed-rate loan; unneeded insurance, or
41
prepayment penalty, and may take the form of selling a
consumer a subprime mortgage loan when they could qualify
for a lower-cost loan.
I have attached as Exhibit A of my comments a
memorandum authored by the Department's chief mortgage
investigator, Chuck Cross, which describes the deceptive
practices we have observed in the state of Washington.
Mr. Cross has spent the last five years on the front lines
fighting predatory lending practices. We believe that his
memorandum provides a comprehensive discussion of the
practices that are causing the problem.
I know you have asked us to address a series of
questions regarding the Federal Reserve System's authority
to make certain amendments to the regulations enforcing
HOEPA, enforcing the Home Ownership and Equity Protection
Act amendments to the Truth In Lending Act. I am afraid
that our experience in Washington is that the HOEPA
amendments have had very little impact on predatory
practices in mortgage lending, and that any amendments the
Board of Governors might make to those regulations are
also unlikely to have a significant impact on the problem.
Over the last three years, the Department has
brought, among the hundred other administrative action,
administrative cases against Nationscapital Mortgage
Corporation and First Alliance Mortgage Company. In both
42
of those cases, many consumers told us that they received
high-rate, high-fee, variable-interest rate loans when
they thought they were getting fixed-rate loans and did
not know about the high fees. In most if not all of these
cases, it appears that consumers "received" their Truth In
Lending Act disclosures to no substantive effect.
Our view in Washington is that the problem of
predatory lending should be dealt with surgically,
I see my time is up. I'll -- we recommend
simplification of the disclosure. Attached as Exbibit B is
an example of how we think TILA should be simplified. We
think that prohibited practices should be established.
And, in terms of enforcement, this Department encourages
harsh penalties for acts of predatory lending. Such
penalties should include should include restitution,
monetary fines, permanent injunctions from lending, and
criminal convictions for individuals. In cases egregious
enough to convince a prosecutor to accept them, violators
should be constitutionally deprived of their personal
liberty.
Thank you.
MR. LONEY: Thank you.
Mr. Mulligan.
//
//
43
STATEMENT OF
DANIEL J. MULLIGAN, ESQ., PARTNER
JENKINS & MULLIGAN
MR. MULLIGAN: Thank you. Can you hear me?
Since we've been given a limited time, I'd like
to first endorse two of the statements, written
statements, made to the Board. The first was by the
American Association of Retired Persons. The second, that
presented by the National Association of Consumer
Advocates. We, as litigators, support both of those
comments and the statutes.
I'd like to state that my experience here and my
comments are based on what Mr. Sands called "anecdotal
evidence," that is ten years, or more, of experience
litigating against lenders, foreclosure companies on both
an individual and class basis. I've also had the
opportunity to lecture and meet with litigators around the
country and gathering more anecdotal evidence.
I'm going to have a comment on what would in
another arena, the medical arena, be called, I guess,
clinical evidence, and there's a tendency to ignore these.
Because we know that there were cases, but we really end
up representing those patients that have died in the hands
of these lenders. So we have some method by comparing
around the country, now at least, to see what is going on,
44
on a general basis.
Given that, I'd like to focus on four areas that
we see. I'd like to first agree with Mr. Samuels -- this
may be a first for me and Countrywide. But I would like
to say that disclosures, all of these disclosures, at
least by themselves, are completely ineffective in our
experience. It's constantly amazing to us that we can
have two people running for the presidency and campaigning
primarily on education reform. And, yet, when you go
into object or litigate or any of these issues, everyone
ignores the fact that a good percentage of the people
simply can't read a simple form, let alone complex forms,
that are given. I have some examples, but, since I don't
have much time here, I'll go on.
Secondly, as far as the point is concerned of
what we would like to see, among other things, is the
correction of data. We really don't know what is going on
in the marketplace. For example: We do not know what the
differential is, really, in a foreclosure between subprime
and prime lending. We have no idea on a nationwide basis.
The result of this is: We cannot even know, the Board
cannot know, if, in fact, these increased rates and cost
charges to the so-called subprime group has any economic
justification. The default rates are not higher. If the
default rates are not higher, why are the costs higher?
45
Third, I've been urged to say this. I'm not
directly banning anything. But I have to say, from our
experience, we'd love to see you place an absolute ban on
repayment penalties, which are the curse of God among the
elderly and the minorities that we see. There is no
economic justification for it.
Lastly, I'd like to endorse the FTC's comments,
that the biggest single impetus to enforcement is
arbitration agreements. We also ask not to observe the
ban.
Thank you.
MR. LONEY: Mr. Rankins.
STATEMENT OF
MICHAEL A. RANKINS
PRESIDENT AND CEO,
RANKINS MORTGAGE CORPORATION
MR. RANKINS: First of all, I would like to say
that it's a privilege and an honor to be here before you,
Governor Gramlich. The Federal Reserve is to be commended
for its national efforts to ultimately enhance all
consumers. Additionally, I'd like to thank Jane Ahrens,
who is requested all this data from our office. Lastly, I
would like to thank Rod Howard, of the Mortgage Bankers
Association -- he's doing a great job -- which includes
all mortgage bankers like -- I don't think I can go
46
through them in three minutes.
MR. LONEY: That'll be nice.
MR. RANKINS: Secondly, I'd like to endorse Ms.
Delgado, for all her experiences. We've experienced the
same thing.
Rankins Mortgage is located in Oklahoma City.
We're four-years old, the only African-American prime
mortgage banker/lender in the state of Oklahoma. A lot of
brokers are minority, African-American brokers, but we're
the only pure lender. We're located in Oklahoma City,
Tulsa, Fort Sill, Lawton. All these offices, all three,
are located in the heart of the African-American
community. Rankins Mortgage customer base is 90 percent
African-American. For four years, we have loaned and
brokered over $18 million to individuals in these
communities. Seven out of ten of our clients have been
turned down by national or state banks, or federal and
state chartered credit unions prior to coming to us. The
other three, out of ten, are just intimidated by banks and
credit unions. In other words, these people feel their
credit is so poor, so derogatory, that they will not go
into the banks. Rankins Mortgage is a high-cost mortgage
lender. We are high cost. We are high cost.
Rankins Mortgage would encourage the Board to
approach the new regulations very carefully. Lowering the
47
trigger and/or new regulations could result in less
participants in the subprime market. Last year, when Bank
of America bought a bank who had been one of our original
investors, they changed the rules and decided they didn't
want to be what they call a high-cost investing arm. That
investor had very, very good rates. Seventy percent of
those customers that we were brokering, or in the case of
corresponding loans, we lost that investor. We don't use
that investor anymore.
I think, if the Board does consider new
regulations and lowers the trigger, it's going to result
in -- we dominate in our market right now; but we will
become a monopoly. We don't think that's in the best
interest of the citizens of Oklahoma, or any other
citizens. We don't want to be a monopoly. We want to be
a good competitive mortgage banker. But it will dominate
the market and brokers will get out of the business,
investors will get out of the business.
MR. LONEY: Thank you, Mr. Rankins.
Mr. Courson.
STATEMENT OF
JOHN A. COURSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CENTRAL PACIFIC MORTGAGE COMPANY
MR. COURSON: Good morning. My name is John
48
Courson, and I am the president and chief executive
officer of Central Pacific Mortgage Company. We are a
mortgage company that has 93 retail originating branches
in 24 states. I also serve as the vice president elect of
the Mortgage Bankers Association. What was advertised as
a one-year job has turned into a three-year career of
chairing their mortgage reform task force.
I must say that I certainly applaud the hearing
we're having today, and, in particular, working with the
Federal Reserve, as we did with the Department of Housing
and Urban Development in the effort of comprehensive
mortgage reform that we dealt with as part of the mortgage
reform working group over the last two years.
Obviously, it's been said before, and I would
echo the thought that HOEPA, as it exists today, begs the
issue that, if it's effective, why are we here today? And
it has not been effective. It is not the tool that
clearly has solved the practices that we're here to
discuss, the predatory lending, in the different venues
throughout the country.
As we all know, there are many legislative
proposals, both federal and state, that have been actively
pursued, both currently on the federal level and in state
legislatures throughout the year; and, in addition,
regulatory efforts, now even at the city level, being
49
pursued to combat the predatory lending. However, in all
these efforts, the same approach is to tinker, if you
will, with the terms and conditions of HOEPA loans. And I
would submit to you that tinkering will not solve the
practice. Predators will be predators. If, in fact, we
tinker with terms and conditions that are already
confusing to consumers, if in fact we continue to have
unintended consequences by having the tinkering, what
we're going to find is that all we've really done is make
the process much more confusing for consumers today who,
albeit, do not understand the process.
I would submit to you that the answer lies not
just nibbling around the edges of one piece of the
predatory piece, but it lies in comprehensively looking at
the entire mortgage loan process. How can you combat
predatory lending by legislating or regulating terms and
conditions without, in fact, looking at reforming the
entire process, the disclosures that they get. An
opportunity for consumers to shop for the right mortgage.
Being told in simple terms, albeit, the annual percentage
rate is one of the great mysteries of life for consumers.
One of the great mysteries of life for lenders. Let's
make it simple.
MBA has put forth a comprehensive reform plan
that we're working on diligently now. It has seven points
50
-- and I'm sure we'll have the opportunity to discuss it
later -- to look at the entire picture as opposed to just
one piece of a much larger problem.
Thank you.
MR. LONEY: Thank you, Mr. Courson.
There were a number of issues that the Board
specifically asked for the participants to address. One
of those had to do with the issue of changing the HOEPA
trigger. Jane Ahrens will lead the discussion on
examining possible changes to these triggers.
Jane.
MS. AHRENS: HOEPA has two independent triggers.
One is based on the annual percentage rate, and the other
is based on cost paid by the consumers. Let's discuss the
rate trigger first.
A loan is covered by HOEPA if the APR is paid by
more than 10 percentage points, the rate for Treasury
securities, with the comparable maturity. And HOEPA
authorizes the Board to adjust that 10 percentage point
differential up to 2 percentage points. Do any of you
have any data on the number of loans that are covered now
by HOEPA and would be covered, for example, if the Board
lowered the trigger to 8 percent?
When asked this question at other hearings, one
large creditor said that its portfolio is about 10 percent
51
HOEPA covered now, and would go to 20 percent if we
lowered the rate to 8 percent. And we've also heard that,
really, the rate trigger changes is kind of much ado about
nothing because the points, the fees that capture loans
under HOEPA, not the rates. So moving from 10 to 8
wouldn't make much difference.
Do any of you have any -- have you done any
analyses?
Ms. Delgado, had your company?
MS. DELGADO: Well, we do have analysis. I am
just somewhat concerned because the issues are sensitive,
in particular because we pay our financing to Wall Street.
MR. LONEY: Would you get near a mic?
MS. DELGADO: The issue is very sensitive one.
We do know what percentage of our loans fall under HOEPA
right now. It's a small number. That number would
increase significantly if the triggers were lowered. I'm
just reluctant to disclose information publicly. I would
make it available confidentially.
MS. AHRENS: Anybody else?
MR. GNAIZDA: Two observations: One, the
National Committee, the Investment Coalition, has
estimated that, by lowering your trigger, you would cover
change from one percent, with a subprime loan to five.
And they base that on the Treasury-HUD Report. My
52
question is this: Why has the Federal Reserve failed to
gather that information?
There's no way for community groups to gather
that information. Every mortgage broker contends it's
confidential. The Federal Reserve should gather it
confidentially for each company, but not confidential
overall. Then we could understand the scope of the
problem. On it's face, it sounds like a good idea, to
lower the trigger. I'm not sure that is is, and I'm not
sure that, if we do that, it will make that much
difference.
Greenlining would tend to side with the
regulators in Washington in terms of their suggestions
about how to address the problem. It may be, by focusing
on this trigger, the narrowness of that, that we are
losing sight of the larger problem.
MS. TWOHIG: Let me a disclaimer out of the way
before we proceed here. The statement that was submitted
to the Board by the Commission is the Commission's
statement. And the remarks I gave earlier where a summary
of that statement. Anything I say in response to
questions are my own views and do not necessarily reflect
the views of the Commission, or any individual
Commissioner. With that said --
MR. LONEY: That's okay, Peggy. We like your
53
views.
MS. TWOHIG: I can't tell you that in our
enforcement experience, we don't believe that there that
many loans that are covered by HOEPA now. It's a very
small percentage. We don't have specific data. We have
limited resources, and, so, we do what we can do in the
enforcement area. But based on what we have seen to date,
it's a very limited percentage.
I will say that, because of the other reasons
I've mentiond, we do think that the APR trigger should be
lowered as much as the Federal Reserve has reported to do,
combining with that more substantive prohibitions. It's
also the case, though, that most of the times we do HOEPA
loans, it is because of the trigger. So that is a very
important part of the task. We also, as I said in my
comments, think that more fees should be included in that
trigger, particularly if there is a lump-sum credit
insurance premium.
MR. SAMUELS: I agree with Mr. Gnaizda and Mr.
Bley, in that lowering the triggers we believe will not
have any benefit. But, in addition, we also believe that
it will have a significant detriment. Because one of the
things, as I said, that we are looking to is the increased
competition. And we have very specific examples of banks
who are worried about two things: reputational risk and
54
compliance risk. And because of the severe penalties,
even an inadvertent HOEPA violation.
There are a number of companies who are just
saying: I'm not going to do it. We're going to get out
of the business. And we heard from Mr. Rankins about
that, and that is not just anecdotal. That's documented
all across the country. So, what we're trying to do is,
we want to increase competition, we want to increase
choices for the consumers. This is not the way to do it.
MR. MICHAELS: Can I follow up with a question?
Because you've heard from a number of companies,
let me put this directly to you. In terms of
Countrywide's own experience, do you make HOEPA loans?
MR. SAMUELS: Yes.
MR. MICHAELS: So what percentage of your
funding is HOEPA covered?
MR. SAMUELS: It's small, very small.
MR. MICHAELS: What percentage would it be?
MR. SAMUELS: We are actually looking at that
issue. It's hard to come up those, those numbers, for a
lot of reasons. No. 1, it is not clear, you know. A lot
depends on what happens with these, whether they're going
to covered by the fee issue. I would agree with you that
the fee issue is probably more important than the rate
issue. But both of them are important, again, in terms of
55
covering the loans under HOEPA.
However it's extended, what you're going to find
is that different lenders are going to make different
decisions. Some are going to say: Okay, we have the
systems. We have the technology, and we have the
willingness to bear this risk. It may be that after we
have some experience in their bearing this risk, we may
decide it's not worth it and we're going to get out. We
don't know at this point. So far, you know, we've had
little problem with HOEPA.
We're concerned that, as it expands, we could
have significantly more problems with HOEPA. But, more
importantly, we're concerned that there are other
institutions who are just going to say that, expanding
HOEPA, we're going to get out of that business as well.
MR. MICHAELS: Let me follow up with two
questions. One, without trying to pin you down to precise
figures, which I understand your reluctance to do, but
orders of magnitude, were you talking double digits,
single digits?
MR. SAMUELS: I would hate to give you that.
It's not huge because that's just not our business. But,
obviously, we are mostly a prime lender. We do have a
subprime unit that we deal with both in our retail and
wholesale division. But HOEPA is not a large part of
56
that. Certainly, depending on how low it goes, then one
of the issues that we also have in terms of these we will
get to. If you open the door for it, we are concerned
about our having to include affiliate fees. When we have
an appraisal company, a credit reporting company, and
title company, we have to include those fees. So our
triggers are a lot lower than, say, another company who
uses third-party fees even though, when we combine those
fees, we can give a better deal to the customer, both in
terms of cost and in terms of efficiency. But it operates
to our detriment.
GOVERNOR GRAMLICH: I wonder if I could jump in
on this? The numbers that we have seen, as were mentioned
by the Federal Trade Commission, indicate that HOEPA loans
are actually a pretty small share of subprime loans,
whether single or double digits, whatever. And if you
just look at the kinds of disclosures and prohibitions,
and so forth, under HOEPA, they don't seem all that
onerous. And, so, one wonders what is the problem? Is
the problem really in the stigma of HOEPA? I mean, is
that why everybody is shying away from the trigger? What
is the problem with HOEPA?
MR. RANKINS: Governor Gramlich, let me try to
expand and respond to some questions, several of the
questions that Ms. Ahrens asked.
57
Ninety percent of the loans that we make are
under HOEPA. We act merely as a broker in our community.
And it's based upon who we broker, the investor that we
sell the loans to. For the most part, to try to respond
to that question, we are overly disclose to the client.
The client, why am I signing all these papers? Well, it's
because of the documentation, disclosures, the points, the
fees. We overly, overly, overly disclose.
GOVERNOR GRAMLICH: You don't think the points
and fees, things like that, should be disclosed?
MR. RANKINS: Yes. We overly disclose. That's
not an issue with us. Our issue is if the trigger is
lowered, we're going to have investors that are -- right
now, we have good, competitive rates. Those investors are
probably going to get out of the business and subprime
lenders --
GOVERNOR GRAMLICH: That's what I'm asking:
Why? If all that is going on is that they can't give the
balloon payments for the first five years, and reverse
amortization mortgages, and they have to disclose the
points and fees, what is the problem?
MR. RANKINS: The stigma of high cost.
GOVERNOR GRAMLICH: So it is the stigma?
MR. RANKINS: It is the stigma.
MS. AHRENS: Ms. Bose, then Mr. Bley.
58
MS. BOSE: As an originator, we have done three
loans in the last two years. And the reason that we don't
do them is that (a) the lender discourages us from doing
it. They don't like the regulatory burden and they don't
like the risk. It has nothing to do with the fact that
it's a high-cost loan. It's simple for us, but for them
it's not possible. We can't make enough money to cover
our costs. And I know profits are a word you don't hear.
But I need to pay my mortgage, too. So if I can't make a
profitable loan, and the investor has to spend so much
time and effort with disclosures and the regulatory
burden, and the potential that they may rescind this thing
in three years because they made a ten dollar mistake,
they're not going to do the loans, period.
So it's not just one thing. The point is that
what you are doing is eliminating the whole class of loans
for credit-challenged people who need them. And we can't
do it for a variety of reasons. But the point is we'll be
eliminating a source of financing for people in an area
that can't go anywhere else.
MR. BLEY: We asked this question several times,
and I think we made an interesting observation. First of
all, when the test is created, it has to be applied to all
refinancing and second-mortgage transactions to determine
the section has been triggered. We don't think that
59
lowering the trigger point, it does not create a greater
cost. And making the test on the margin, you already have
tests. You have to test each of the loans. The
calculation is the same with the changed variable.
There is another interesting observation that
our field examiners have made, which is that many subprime
lenders appear to automatically make HOEPA disclosures --
just talking about the disclosure now -- on all of their
loans. They do see that it is cheaper and safer, and
we're talking about regulatory risk, that to make the
disclosure rather than taking the time to check and
risking the possibility of having erred on the test.
Giving that it is cheaper to comply on all loans, rather
than test all loans, lowering the trigger should have no
greater cost or less availability.
MR. COURSON: I'd like to respond to Governor
Gramlich's question. We're talking about a small slice of
the market. And I don't think there's any data that
really determines at what rate level abusive and predatory
lending practices take place. There seems to be this
assumption that predatory lending is somehow ties to HOEPA
loans. I would submit to you that moving the rate
trigger, if you will, or any of the terms or conditions in
HOEPA, is not going to. If it's that small a piece of the
market, the predators out there, the abusive practices,
60
are much more widespread than just that slice of the loan.
And the issue there, therefore, as the gentleman
from Washington said, is to really look at prohibitive
practices and try to zero in on those, as opposed to terms
and conditions.
GOVERNOR GRAMLICH: But that is essentially a
part of the point. Because there are some practices that
are prohibitive by HOEPA, and not prohibited for
non-HOEPA. So, if you change the trigger, then some
practices become prohibited. I mean, that's exactly the
point of all of this.
MR. COURSON: I understand that, but the
prohibition, I mean, those are prohibited today. Yet we
still have -- we're here talking about predatory lending
practices, and those have been prohibited since HOEPA has
been around, and it hasn't solved the problem. So I don't
think it's a prohibition.
GOVERNOR GRAMLICH: That's actually what we're
asking. Within the HOEPA sector, I mean, everybody is
worried about the changing of the trigger because more
loans will come under it. What we're trying to figure out
is that, within the HOEPA segment where some things are
prohibited, are those prohibitions effective?
MS. TWOHIG: I would just encourage the Board to
be very careful about overreacting to the notion that,
61
well, we can't lower the trigger because that means more
people would leave the market. I think that there are
practices -- our enforcement experience shows that there
are practices going on out there that are very troubling.
We have found HOEPA violations. In our law enforcement
actions, we have found lenders that had loan provisions
that had increased, an illegal increase, after default and
clear asset-based lending, had short-term balloons and
direct payments to home contractors. We have seen just a
about everyone of those conditions violated, but it's a
very small slice of the market. We believe that more
coverage of HOEPA is appropriate to get at a few more
loans. We don't think that increased coverage, so that
those very important protections and prohibitions that
really are just inappropriate for this segment of the
market, with these variable consumers, are or would -- we
think it would do much more benefit than harm.
And I'll just stop there.
MR. SAMUELS: I'm glad reasonable minds can
differ on this issue because there are a couple of things.
As a national lender, we have to look at, we have been
looking at, federal, state and even local attempts to
regulate this area. One of the things that we have seen
when we take a look at the triggers is, okay, we see the
triggers, what's the impact of that? And I'll give you a
62
couple of examples. And I do need to disagree with my
colleague regarding repayment penalties, because that's a
big issue for us.
We think it's a very, very good thing to give
the consumer a choice because it allows us to think that
they are going to stay in the house for five years. They
get a fair rate and we think that's a very good thing.
Now, are there abuses with prepayment penalties? Of
course. I'm not going to say that there aren't. But we
have, in our experience, a lot of people who are very
happy with prepayment penalty because they get a lower
rate, and that's what we are about. We are about lowering
costs and giving consumers choices. If the consumer
thinks he's only going to be in the house for three years,
we don't them to take a prepayment penalty for five years
because, then, they are going to have to pay it. But it
gives the borrower a lower rate, and it also gives the
investor some degree of certainty that that loan is going
to be around.
So, if you're going to talk about lowering
triggers, the lowering of triggers, in and of itself, we
have to look at them to see what comes along with it. If
you're going to prevent us from being able to offer
prepayment penalties and we're not --- we are very
careful. We want the industry to be very careful about
63
providing a choice along the lines of Fannie Mae come out
with last April. We think that that's a good thing, not a
bad thing. We think that that's fine.
We are not in favor of asset-based lending. We
are not in favor of the predatory practices that has
somebody pay $500 a month for their mortgages, and have
them have a monthly paycheck come in for $500. That is a
predatory practices and those people should be strung up
by their thumbs. We have no issue with that. What we are
trying to prevent is we do see legitimate choices for
consumers and keeping the good guys in the business to be
able to make these kinds of loans available.
GOVERNOR GRAMLICH: Could I just -- so, I think
you're saying that you don't have any problem with the
current prohibitions under HOEPA. But you don't want us
to expand those.
MR. SAMUELS: Frankly, we prefer not to have
some of those prohibitions, again, on prepayment penalty.
Many of the prohibitions we have no issue with at all,
absolutely. But extending them, again, the reputational
risk -- and it's there, because we've heard it -- and also
the compliance risks, it's there. We are concerned about
increasing costs that result from a lot of these
compliance concerns. Resulting from inadvertent
violations of HOEPA.
64
MS. AHRENS: Let's have --
MR. MULLIGAN: Two quick points. One as to
competition. It seems to us that the largest generator of
HOEPA in the last four years, First Alliance, who is now
in bankruptcy, absolutely no problem in getting funding
out of Wall Street for its loans, for years, until the
moment they filed. Lehman Brothers was buying their stuff
day in and day out.
Second point is, in fact -- on the triggers now
-- if, in fact, lenders are willing, as everyone seems to
be, fees up front, discounts for interest rates, and that
prepayment penalty is the cost of that loan. There's no
way around it. Even if you could justify the prepayment
loans, on some economic grounds, you have to include it in
the cost of the loan.
MS. AHRENS: Prepayment penalties. Just let me
say that we can go back to it.
MS. DELGADO: Can I make a point about the
triggers? Part of the problem that we see is that, again,
in the disclosures. We don't believe the disclosures are
well understood by our borrowers. We don't seem to pass
the connection. That's one thing. Lowering the triggers
is only going to subject more borrowers to a lower
threshold. We're just lowering the threshold.
I wanted to speak to the compliance issue,
65
because it can't be taken lightly. Some of us, the
financial institutions that rely on secondary markets for
financing, the secondary markets don't want to assume the
pass-through liability because they have no way of
controlling whether those disclosures are sent out on
time; and, yet, they bear the full liability. So it's
really difficult for us to go out there and obtain
financing from these sources if they're just reluctant to
proceed with us.
MR. GNAIZDA: Could I just add something on the
trigger? I don't think we're dealing with the real world.
The attorney general in California submitted to the
California Public Utilities Commission, in the case we're
involved in, the following statements. Twenty to
twenty-five percent of all Californians are functionally
illiterate. Now, if that's even close to the case, that
means, for predatory lending, you're talking about 50
percent or more. That's why we have to go back to what
John Bley has talked about, which is effective, powerful
enforcement.
That's why we also commend Dan Mulligan and his
law firm for what they're doing with Lehman. Lehman
Brothers, they shouldn't have to do it. It should have
been done by the regulators, including the SEC.
MS. AHRENS: Turning now to the point of fee
66
triggers. A loan is covered by HOEPA if the point of fees
paid by the consumer exceed the greater of 8 percent of
the loan and the dollar figure, which is adjusted annually
at $451. For this purpose, points and fees include all
items that are included in the finance charge, all
compensation paid to mortgage brokers, and it specifically
excludes reasonable closing costs paid to unaffiliated
third parties. HOEPA also authorizes the Board to add
such other charges that we may deem appropriate.
The Board's notice of this hearing talks about a
couple of fees: prepayment penalties paid on loans
refinanced by the same creditor, and single premium credit
insurance for couples. Let's start with prepayment
penalties on loans refinanced by the same creditor and
affiliates. We've heard, in prior hearings, that some
people never impose prepayment penalties. Yet, we hear
from consumer advocates that it happens all the time.
Would someone like to address the effectiveness
if the Board proposed keeping the financing by the same
creditor affiliate so that -- is it a common occurrence or
does HOEPA's restrictions really make it a minimal --
MR. MULLIGAN: My experience is twofold: One is
the state law is now becoming ineffective, and any lenders
are hiding behind that. We have commented to the OTS
about that. California has the experience. For example,
67
Texas moved in prepayment penalties. There's an open
question as to whether or not those have all been
preempted by the OTS regulations.
Second point is: Many lenders do waive, in
fact, prepayment penalties on their own loans. I know
that Household, Beneficial, Associates often does, not
always. I've never seen Countrywide. So that doesn't
occur. Where it occurs is in the attempt to refinance out
of loans for people, and there is something that they
really didn't remember, didn't know about in the first
instance.
And interesting practices come up. We
understand the term in the industry called "biking." That
is biking, where a lender does not even send out demand
statements on loans in the refinancing because they know
that the old lender will come in and offer a better deal
and want a new loan, and, surprisingly, they'll close.
All of this time they thought they were paying off taxes,
credit cards and suddenly they can't be covered because
they forgot to add in the prepayment penalties. That's
becoming more common, as well.
MS. AHRENS: David.
MR. SANDS: On prepayment penalties, and we're
really talking about the prepayment penalties for loans by
the same lender. It would include prepayment penalties in
68
that situation and the points and fees. I guess what I
don't quite understand this, because we're talking about
situations where, as Mr. Mulligan said, where there's
biking. Where a new lender comes in and basically
refinances the borrower out with the penalty you're
suggesting, which includes the prepayment penalties,
points and fees in that situation. The new lender, the
existing lender, comes in, as Mr. Mulligan said, and wants
to make a better deal, but knowing they can't, because
they have to put the prepayment penalties in there, but
the new lender doesn't. So the borrower gets these two
statements, one says that the new lender, you're going to
charge me X, and the old lender is charging me X plus Y
because old lender has to include the prepayment
penalties. So the borrower says: I don't really
understand these disclosures, but one looks a heck of a
lot more expensive than the other. I didn't realize that
one gets to include the prepayment penalties and one
doesn't. So I'm going to take the new lender's loan, even
though it's vague and more expensive.
So, I don't know why including the prepayment
penalty, which creates an uneven playing field and unequal
disclosures would make a lot of sense on the surface.
MS. AHRENS: We're running out of time for this
portion, but I do want to touch on premium credit
69
insurance and similar products. Why should these fees be
added to the point fees? Anyone have any comment on that?
MR. RANKINS: I just want to make one point on
penalties. For Rankins Mortgage, that's a dichotomy. We
want the benefit of this, as Mr. Samuels said; but, on the
other hand, we bring our borrowers to our credit. They
have to live with the 12 percent interest rate. Then, in
two years, we bring them back to 9 percent. That's the
dichotomy. We experience -- we don't know. We're right
in the middle.
On credit insurance, we would say that that
should probably be added into the fees. We don't sell it.
We think it's a terrible product. We think it's a
disservice to our consumers.
MR. BLEY: If I can make a comment?
First of all, I think you know our theme is that
predatory lending occurs when as a result of the manner in
which loans are originated, that there's a breach of
trust, and that the consumers don't understand the
disclosures because they're too willing, too complex, and
they turn to the loan officer and say: What does this
mean?
In that context, I think we need to make an
observation about what we hear in consumer complaints. We
hear about prepayment penalties. Far and away the
70
greatest consumer complaint we hear about prepayment
penalties is that they were unknown. Not that they exist,
but that they were unknown and there was no opportunity to
include that in the consumer's decision. So the
bargaining part goes away, along with the prepayment
penalties.
So the key here I think is clear disclosure of
the prepayment penalties but in a simple one-page
disclosure which, again, we have attached to our comments.
I hope you get a chance to read Mr. Cross' memo. I can't
emphasize that enough. Again, it has significantly
influenced me on this issue and has really turned my mind
around, not focusing on terms, which I think are
inherently neutral if they are understood, but to the
manner in which these loans are made.
MS. AHRENS: Dan, and then Norma.
MR. MULLIGAN: Prepayment penalties and credit
insurance is probably the worst products that was ever
involved, at least in the way it is sold. And rather than
including them in the trigger, we would recommend that it
simply not be allowed to be sold at the time the loan is
originated. I know the Board, or anyone else, says we
can't sell credit insurance. But if you make the lender
come back after the fact, and in that way let the borrower
exactly see what they're buying or paying for, some of it
71
is unbelievably bad. At least that throws it all in the
pot at the same time and hiding those costs.
MS. WIDENER: I would absolutely agree that it
should not be allowed. I think there should be some
special effort to clarify between private mortgage
insurance and credit insurance. Because I think some
consumers are being confused about that. We really want
to say credit life insurance, and all those credit
products, absolutely should not be allowed. I'm aware of
-- sorry, we don't have studies -- totally aware of
borrowers being forced to take the credit product as part
of doing the loan. It's just ripping off their equity.
I'd like to also say that, in general, on all of
these issues, I did not say it in the testimony, as
represented in the model statute, I think the trigger
should be lowered, the prepayment should not be allowed.
All of these types of things, anything you can do to
communicate the message that this behavior has to stop.
It needs to happen, it just needs to happen.
If the Board is going to err, it should err on
the side of protecting this very vulnerable client group
that's really suffering from predatory lending. People
who absolutely can't read, don't understand what's going
on.
I have to agree that the disclosures have very
72
little effect, even though you have to have them. What we
have to is get at solving the problem of low-wealth
borrowers having their equity totally gone.
MS. GARCIA: Two quick comment, if I may, very
quickly.
One of the things I want to highlight here is
that the assumption is that, in good loan, prepayment
penalties will lower the cost of borrowers by giving them
better interest rate and lower fees. But what we're
seeing with high-cost loans is that the borrowers aren't
getting lower interest rates and they're certainly not
getting lower fees. In fact, the prepayment penalty is
one of several things in a package that makes a loan
extremely unfavorable for the borrower. So I first want
to get to that initial assumption.
The second is that one of the reasons why
Consumers Union believes that prepayment penalties should
be included in the cost factor is because there is a cost
associated with that restriction on the loan. There's a
cost to the borrower and it's, and it has to be in the
cost factor because all of the prime lenders will allow
the borrower to buy down or trade out of the prepayment
penalties by paying a higher fee, paying higher interest
rates. And the point is to discourage lenders from
loading up unfavorable terms onto borrowers in order to
73
create an impossible situation for the borrower, which
will cause the borrower to refinance; and, therefore, get
deeper into their equity to pay another set of fees. And,
perhaps, even a higher interest rate to refinance the
loan.
With respect to credit insurance, Consumers
Union believes that it is a total rip off for consumers.
We issued a report in 1999 that chronicles our findings
where we believe the consumers group were ripped off to
the rate of $2 billion a year for credit insurance. I
support the comments of my other colleagues who said that
credit insurance had no place in the lending role,
particularly at the point of sale of the loan.
MS. AHRENS: Thank you.
MS. DELGADO: As long as we are on prepayment
penalties remains alive, I want to talk a little bit about
it and take a little different position, because
prepayment penalties do have a practical application for
the consumer. It will cost the consumer anywhere from 3
to 4 thousand dollars to originate a loan. No one seems
to talk about that very much. And the prepayment penalty
is a way to buy down that loan. Because just to -- for a
lender, to make money on a loan, or recoup his acquisition
costs, is going to take from 3 to 4 years on average. So
the prepayment penalty is a way to ask the borrower were
74
they planning to keep the loan on their books for 3 years,
or so, and actually buy down rates significantly by one
percentage point a year, or more than that. Actually,
it's a really good feature.
It seems that we should be focusing on bad
practices. Features, by themselves, are good things.
They're very, very good negotiating tools for both the
borrower and the lender.
MR. LONEY: Okay, Jim.
MR. MICHAELS: Just before we close, I want to
make sure that we gave everybody the same opportunity
here. Mr. Rankins is the other lender on the panel. I
didn't get ask the question and I want to make sure you
have an opportunity.
If you can give us, if you have some idea of
what percentage of your loans are not just subprime, but
also covered by HOEPA and how that would change if the
triggers are lowered by 2 point?
MR. RANKINS: Many percentage of ours are HOEPA
loans. We strictly are all subprime, no prime lending.
Our position is unique because we're the only
African-American mortgage banker. The consumer comes in
and, as a consequence, we do home-equity loans that have
been turned down.
MR. MICHAELS: They're all HOEPA, virtually?
75
MR. RANKINS: They're all HOEPA, with lots of
disclosure.
MR. LONEY: And we're glad to hear that.
We will take a ten-minute break, please, and, by
my clock, be back at 10 minutes to 11:00.
Off the record.
[Recess.]
MR. LONEY: Can we get started? Well, I guess
we can proceed, and the other panelists can trickle back
in as they will.
The next session of this morning's meeting,
we're going to examine possible additional restrictions or
prohibitions for specific acts and practices.
Under HOEPA, the Board is authorized to prohibit
acts and practices in a couple of ways: In connection
with mortgage loans, if the Board finds the practice to be
unfair, deceptive or designed to evade HOEPA; and in
connection with refinancing of mortgage loans, if the
Board finds that the practice is associated with abusive
lending practices or otherwise not in the interest of the
borrower.
The Board's notice announcing these meetings
raises several topics for discussion, and, because we have
limited time, I'd like to focus on four of those topics:
Loan flipping, unaffordable lending, regulating credit
76
insurance, and improving disclosures. We'll start out by
talking a little bit about flipping and getting the
panelist views on some of the issues related to that.
Flipping is the, in common parlance, the first
of the frequent refinancing of home-secured loans,
particularly where the customer derives little or not
economic benefit from the refinancing, and where the
lender receives significant income through fees. These
fees are typically added to the loan amount, thus reducing
the homeowner's equity in the property.
What we'd like to talk about, in a couple of
respects, is what regulatory approach the panelists
believe would effectively curb these kinds of refinancing
that do not benefit borrowers without impairing
transactions that do help borrowers. And, so, it's
important that we kind of make that distinction.
In recent reports submitted to Congress by the
Department of Department of Housing and Urban Development
and the Treasury Department, it was suggested the Board
should prohibit refinancing within a specified time
period, unless there is a tangible net benefit.
What would give the Board, in particular, a
basis for deciding what a particular time period should
be? Should it be 12 months, 18 months, 36 months? What
number should we do, could we use? And how would we
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measure the notion of "benefit" to the consumer? For
example: Would lowering the payment amount and extending
the number of payments actually work out to be a benefit
to the consumer?
So, to start this discussion off, I would be
interested in knowing any responses you have to the
general question of what regulatory approach would
effectively curb these refinancings that do not benefit
borrowers without impairing transactions that help them.
And, then, if you could address the question of how would
we come up with the time period, if that seems like an
appropriate approach, and how to measure the benefits to
the consumer in any flipping.
So, if anybody has any thoughts on this, I'd
certainly like to hear it.
Yes, Ms. Bose.
MS. BOSE: I don't think it should be the
frequency of refinances that should be regulated by the
Federal Reserve. The idea of flipping is most lenders now
put into their broker contracts that, if we refinance the
loan within 12 months, we give them back our profit. And
because this is very detrimental to the industry as a
whole, I believe the industry has taken very strong steps
to discourage loan flipping throughout the industry, and
it varies on how the penalty works. But basically, if the
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borrower refinances within a year, and they don't go back
to that same lender, the lender penalizes the originator.
And I think the industry takes that very seriously.
I hate to see the Federal Reserve start to
regulate how frequently someone can refinance their house,
or when it would make sense, or when it wouldn't make
sense. I think that's just not the purview of government.
MR. LONEY: Anybody over here?
MR. BLEY: I guess I'll get in my comments in my
prepared remarks, as you predicted.
I guess we think the greatest value of
regulation isn't in micro management terms, as you might
guess with my previous comments. But I think the greatest
value in regulation is its deterrent effect. So how do
you deter a predatory lending?
One observation is that we, at DFI, remain
perplexed at the existence of federal criminal penalties
for any consumer who defrauding a lending institution,
while the penalties against lenders for defrauding
consumers are, for the most part, administrative and
financial in nature. A general worst-case scenario for a
lender receiving a consumer, or deceiving a consumer, is
disgorging the profits associated with the violation, and
an admonishment not to do it again. We know that some
lenders see no downside to the undertaking of mortgage
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fraud. At worst, the penalty is to stop enriching
themselves.
So, we believe that the best approach to this is
to deter predatory lending by establishing certain
prohibited acts. I won't go through those. There's about
8 or 9. I'll just point out that they're attached as
Exhibit C to our comments -- by the way, we're making more
copies of this -- on page 7, and it lists what's in the
state of Washington's Mortgage Broker Practices Act, and
lists out what the prohibitive practices to be in the law
and enforced. Again, it focuses on manner, not on
prohibitive terms.
MR. LONEY: Go ahead.
MR. SAMUELS: Again, I have to applaud Mr. Bley.
He's the kind of regulator we like. Because, because it
really is a manner as opposed to a practice issue here.
And I absolutely agree with Ms. Bose. As a lender, we
hate brokers coming back to us and refinancing loans.
Because, then, we don't -- we've paid a premium for these
loans, and we're going to lose that premium.
I have to say, in my own case, I guess it was in
'93 or '94, I believe I refinanced my loan with
Countrywide twice because I didn't hit the bottom of the
interest rate cycle. And, what we really don't want to do
is inhibit people from benefiting themselves when there is
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a down-interest-rate market.
Now, when we talk about benefit to the borrower,
I mean, I hope -- and I talk to my people about this all
the time -- that every loan we make is a benefit to the
borrower. Because that's what we're in the business to do.
So that, when we talk about a loan that only puts fees in
the pocket of the lender, that's a predatory act unless
you see that there is something that is beneficial to the
borrowers.
So I'm not sure that time frames are relevant
here. Because, as I said, I think that what we need to
look at is to make sure that what is happening is the
borrower is given choices to achieve the borrower's
economic objectives. Whether it's taking cash out, or
medical, educational, home-improvement needs, or taking
advantage of a down-interest-rate cycle, or whatever, the
benefit that they see to themselves, we want, we don't
want to put stumbling blocks in the way to be able to
accomplish that refinance.
One of the things I've seen that troubles me
greatly is a proposal that another lender can refinance
your loan, but you can't refinance it within a certain
period of time. "A Miracle on 34th Street" was a great
movie, but, you know, the Macy's, Gimbels' thing doesn't
work in this situation. We want to be able to refinance
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our borrowers, and we think we could do it in a way that
is more beneficial to the borrower because we can do it in
a more efficient and less costly manner than some of our
competitors. We certainly would not want to be faced with
a law or regulation that prohibits us from doing that.
MR. LONEY: Mr. Courson.
MR. COURSON: We, as part of the process of the
mortgage reform group over a two-year period, debated this
topic extensively, both time periods, net benefit,
measuring benefit. That group included not only lenders
but service providers and consumer groups, and frankly
found ourselves in a quagmire. It was a circular argument
that could never identify all the unintended consequences
when you get into trying to identify the specific acts by
either regulation or legislation that would, in fact,
prevent flipping, and it totally broke down. And,
therefore, I think, when you try to get into that, you
really find yourself never ever able to capture those
precise elements that will stop the flipping. And I think
the answer is, as the other panelists have said, you have
to really look, therefore, at the predatory practices
themselves.
MR. LONEY: Did you --
MR. MULLIGAN: Yes. We've also seen a lot of
flipping, and even though our associates are not here
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today. But we have tried and tried as well to come up
with something that could be regulated in that area and
none of it makes any sense in terms of the ability of the
individual consumer to determine. So we also don't urge
any prohibition on that, or any attempt to regulate, but
rather to increase the enforcement. Perhaps he single
largest issue from our point of view is to eliminate the
pattern and practice requirement for abusive practices
under the code. It becomes a monster to litigate. In
fact, it becomes almost impossible to either bring a
class-wide claim or your own. If that could be removed,
then, the ability to go after the lender for predatory
conduct would be increased enormously on an individual
basis.
MS. WIDENER: I think what the Board -- oh.
MR. LONEY: Go ahead.
MS. WIDENER: I don't have, I can't offer any
specifics with regard to how one might regulate what the
problem is and prevent it specifically. But I think, in
general, the Board has the power of its CRA examination
authority to discourage the feeding of those who do the
flipping. And that is that I believe the CRA credit is
given for the purpose of purchase of subprime loans. And
to the extent that is true -- and I don't know how that
exactly works. I just keep hearing that they are given
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credit.
To the extent that's true, I would encourage the
Board to withdraw from giving credit for the purchase of
subprime loans in the CRA process until there can be a
clearer definition with regard to what is predatory versus
what is subprime. And right now, I think that we're
treading too lightly on the issue of subprime in an effort
to not close down a flow of credit to a certain client
group. But I think, in that process, we're allowing a lot
of low-wealth borrowers to get ripped off.
So, again, I'm suggesting that the situation has
gotten to the point, and I don't have the ability to do a
study, but I know through what we're looking at in the
NeighborWorks Network. I know what I'm hearing through
Habitat for Humanity, folks that I work closely with, that
too many people who have been helped are simply having
their equity ripped off.
It's become an issue of the Congressional Black
Caucus, it's so big, that low-wealth borrowers are
increasingly unable to pass on wealth to family members,
to future generations. And it's getting to a point that
we just need to say, Halt!, and let's see what we can do
to just back off the whole situation of subprime to the
extent it cannot be clarified as not predatory.
MR. RANKINS: May I make a comment?
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MR. LONEY: Sure.
MR. RANKINS: With respect to some of the issues
that Ms. Widener addressed, these borrowers are not as
unsophisticated as some people would contribute they are.
I'd say 30 percent of the homes that we refinance, these
homes are paid for. These people come in for various
reasons: weddings, buy campers. A great deal of them
are seniors who want to buy a RV. They want to put a
grandchild through college. That's what they do with this
equity, and that's what they want 20, 30 years,
respectively, in order to do that.
So, we don't want the Board to be placed in the
position to try to impede some of that, called economic
growth for us. And some of these people, who are on fixed
incomes or retirement, I agree with Ms. Twohig, there
should not be asset-based lending; but there should be, in
many respects these people should be given an opportunity,
if they qualify and there is an ability to repay, they
should have that opportunity to utilize that asset, their
homes.
MR. LONEY: Yes.
MR. SANDS: Just a couple of points on
prohibited practices, generally, and flipping,
specifically.
First of all, it's obivous that time frames
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really are a problem because it really doesn't address the
emergency. You will find a lot of borrowers, who are
credit-impaired, may have emergencies that come up,
medical emergencies. They are suddenly impaired from the
financing and taking money out of their equity to pay for
medical emergencies, and they're left with no choice, or
maybe a worse choice.
Secondly, I think as John Courson pointed out,
coming up with these safe-harbor minimum standards is
probably impossible. In coming up with a amorphous
standards means you're going to end up with as many
different standards as are judicial districts. And I'm
not quite sure why that benefits anybody but me, as an
attorney. So I'm not quite sure how that benefits anybody
else, though.
Just a couple of points on safe harbors as poor
excuses for prohibitive practices. First of all, I'd like
to suggest, and people think about, whether if the
borrower obtains truly independent counseling as part of
any prohibitive practice or term, or whatever it is that
the Board considers safe harbor for truly independent
counseling -- I'm sure what that means, necessarily, in
each case.
I do have a client that sells credit life
insurance and requires the borrower to go to legal aid
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organization in Los Angeles and get independently
counseled before they place insurance. But they don't
have a safe harbor for that. I really think they should
in that circumstance. Secondly, they consider -- and that
was part of the HUD, I can't remember which report, but
have a part up for credited Investors.
One thing which certainly makes me, which I find
most foreign in my practice, is wealthy borrowers who --
and the SEC has, for example, one standard of what a
credit means for very wealthy borrowers who have their
loan negotiated by an attorney, and they come back and
say: Well, you know what? You missed something. We
don't like the loan. We want to do something. And there
will be, in fact, credit investors, even falling under
HOEPA, who may be going through a divorce, have their
credit ruined, and are going through difficult times.
And, in fact, get a Section 32 loan, and then try to take
advantage of the fact that they were sophisticated: they
had been represented by counsel. It's a very small group,
but it's a troublesome group. I'm not quite sure that the
laws would benefit that group. I'd like to consider
whether that makes sense.
MR. LONEY: Governor Gramlich, you wanted to ask
about enforcement.
GOVERNOR GRAMLICH: We'll do that last.
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MR. LONEY: Last?
GOVERNOR GRAMLICH: After we do the next
portion.
MR. LONEY: Okay. One of the things that has
come up in the context of this is the issue of balloon
payments. And we understand that, to avoid HOEPA's
restrictions on balloon payments, some lenders may include
payable-on-demand clauses in HOEPA loans. Is this, in
your experience, prevalent where flipping occurs, this
notion of payable on demand? And should the Board
consider restricting payable-on-demand clauses?
Does anybody have any thoughts on that?
MR. MULLIGAN: We don't really see it as a
problem. The use of balloon payments is very limited. It
does have its pockets, but it's very small, small segment
of the market. And payable on demand is really sort of a
term, which, to me, doesn't make much sense, because
you're paying off, you're flipping anyway. It really
calls into question the disclosure element behind the
problem. There's nothing wrong with balloon payment if
you know it's there. If you don't, it's a real killer.
MR. LONEY: Anybody else want to say anything on
payable-on-demand loans or flipping, generally, before we
move o