Public Hearing on Home Equity Lending
1 FEDERAL RESERVE BOARD 2 PUBLIC HEARING 3 ON HOME-EQUITY LENDING 4 August 16, 2000 5 MORNING SESSION 6 7 STENOGRAPHIC REPORT OF PROCEEDINGS had in 8 the above-entitled matter held at the Federal 9 Reserve Bank of Chicago, 230 South LaSalle Street, 10 Chicago, Illinois, MS. DOLORES S. SMITH, Moderator. 11 12 PANELISTS: MR. BRUCE BAKER, Illinois Bankers 13 Association MR. MICHAEL O. BROWN, Sable Bancshares, 14 Inc. MR. TERRY BIVINS, Ficus Financial 15 Services, Inc. MR. DAVID A. BOCHNOWSKI, Peoples Bank, SB 16 MR. BOB BUTLER, Assurant Group MR. ALEX COLUMBUS, Assurant Group 17 MR. WILLIAM A. DARR, Office of Banks and Real Estate, State of Illinois 18 MR. TOM DETELICH, Household Finance Corporation 19 MR. DAN IMMERGLUCK, Woodstock Institute MR. TOM JAMES, Assistant Attorney General, 20 State of Illinois MR. IRA RHEINGOLD, Legal Assistance 21 Foundation MR. MICHAEL SHEA, ACORN Housing 22 Corporation MR. CRAIG A. VARGA, Illinois Financial 23 Services Association MS. MICHELLE WEINBERG, Horwitz, Horwitz 24 & Associates 1 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 (Whereupon, the following 2 proceedings commenced at 3 9 o'clock a.m.) 4 MODERATOR SMITH: Good morning. We're ready to 5 begin with this session. 6 My name is Dolores Smith. I am the 7 Division Director for Consumer and Community 8 Affairs at the Federal Reserve Board, and I will be 9 the moderator for these hearings, for this 10 particular hearing. 11 Chicago is the third in a series of the 12 hearings that the Board is holding this summer on 13 home-equity lending. We've already met, had two 14 meetings, the first one in Charlotte and the second 15 one in Boston, and we will be next meeting in 16 San Francisco on September the 7th. 17 The invited panelists and members of the 18 public at our previous meetings offered a wide 19 variety of views on possible ways to address 20 predatory lending practices in the home 21 equity/consumer credit market. So we look forward 22 to hearing your views on these issues in Chicago 23 today. 24 As in our previous hearings, we will be 2 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 discussing the potential use of the Board's 2 rule-writing authority this morning; and then, this 3 afternoon, we're going to turn our focus to 4 alternatives to regulation such as consumer 5 outreach and consumer education. 6 But let me start by introducing our Board 7 panel. To my right is Ned Gramlich, who is a 8 member of the Board of Governors and who also is 9 the Chairman of our Oversight Committee for 10 Consumer and Community Affairs. 11 To his right is Alicia Williams, who is 12 assistant -- who is a Vice President here at the 13 Reserve Bank of Chicago. 14 To my left, extreme left, is 15 Adrienne Hurt, Assistant Director in the Division 16 of Consumer and Community Affairs; and 17 Jim Michaels, who is managing counsel. Adrienne 18 and Jim are the ones who are primarily responsible 19 for Truth in Lending matters at the Board. 20 I'll start with some introductory remarks 21 for the record. The Truth in Lending Act, which we 22 also refer to as TILA, requires creditors to 23 disclose the cost of credit for consumer 24 transactions. 3 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 In 1994, the Congress enacted the Home 2 Ownership Equity Protection Act or HOEPA as it is 3 called. HOEPA added special protections to TILA 4 for consumers who use their homes as security for 5 loans when the rates or fees are above a certain 6 percentage or amount. 7 HOEPA was a response by Congress to 8 accounts of abusive lending practices that involve 9 unscrupulous lenders who made unaffordable home 10 secured loans to house-rich but cash-poor 11 borrowers. These cases often involved elderly, 12 sometimes unsophisticated homeowners, who were 13 targeted for loans with high rates or high closing 14 fees and with repayment terms that were difficult 15 or impossible for the homeowners to meet. 16 HOEPA requires creditors to provide 17 additional disclosures at least three days before 18 consumers become obligated for such loans. It 19 prohibits lenders from including certain terms in 20 loan agreements, for example, balloon payments for 21 short-term loans. It prohibits creditors from 22 relying on a consumer's home as the source of 23 repayment without considering whether the 24 consumer's income, debt, and employment status 4 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 would support repayment of the debt. 2 It also requires the Federal Reserve Board 3 to hold hearings periodically to keep abreast of 4 the home equity credit market targeted by HOEPA. 5 The Board held an initial set of hearings in 1997, 6 about two years after HOEPA became effective. 7 This morning, Governor Gramlich will start 8 us off with some remarks about these hearings that 9 we are now holding. 10 GOVERNOR GRAMLICH: Thank you very much, 11 Dolores. I'm happy to be here in Chicago. This 12 is, as Dolores said, the third of our four hearings 13 on this matter. 14 Let me just say a few introductory -- make 15 a few introductory comments about this whole 16 general problem. 17 The last few years have seen an enormous 18 growth in subprime mortgage lending. The rates of 19 growth in the subprime market you find usually in 20 terms of higher rates than prime mortgages. These 21 rates of growth have roughly doubled the rates of 22 growth of prime mortgage lending; and, by all 23 accounts, this has been a very socially desirable 24 movement, that credit has been extended to lots of 5 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 people who previously had been denied credit and so 2 it's been part of the process of opening up credit 3 markets to lower- and moderate-income individuals. 4 But with every good thing, there is 5 sometimes at least some potential problems that 6 come along in the wake, and one of those may be 7 predatory lending, that by all -- there are a 8 number of anecdotes of abuses taking place in 9 credit markets. There have been a number of TV 10 specials on this; and there are some suggestions of 11 problem in overall data on mortgage foreclosure 12 rates and things of that nature. 13 So this sets the stage for the issue that 14 we are dealing with today, that somehow the fed 15 would like to use its authority to encourage the 16 good growth in subprime lending, but to curb the 17 abuses, at least those abuses that we have it 18 within our power to curb, and that's our basic goal 19 here today. 20 As Dolores said, the fed does have some 21 authority in this area. We have some authority 22 under HOEPA. We have authority under the Home 23 Mortgage Disclosure Act, and we have some other 24 authority. And these hearings are fundamentally 6 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 about what we should do with our authority. We 2 hope to maintain an analytical focus here with all 3 the specific measures that come up to try to figure 4 out whether the benefits of doing something exceed 5 the cost and this sort of thing. 6 One thing that I should say at the outset 7 is that the fed can't do it all, that we do have 8 authority in this area; but if predatory lending is 9 the problem that many people allege it to be that 10 lots of other groups are going to have to step up 11 as well. 12 It turns out there are nine federal 13 regulators with authority in this area. We are at 14 the same time talking with them in Washington to 15 try to make sure that all of the federal regulatory 16 agencies are operating with a common play book. 17 Many states have regulatory authority in 18 this area. Private sector mortgage entities, such 19 as Fannie Mae, Freddie Mac who are kind of in the 20 middle between the public and private sector, they 21 can play a role; and many purely private sector 22 entities such as lending institutions can also play 23 a role by changing some of their practices. 24 This afternoon, the hearings will be 7 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 devoted to consumer education, and that is 2 certainly an important part of the mix as well 3 because if borrowers fully understood many of the 4 credit terms that we're talking about today, they 5 probably wouldn't get involved in these credit 6 problems. 7 So this is most likely a multi-faceted 8 issue that needs -- that requires a multi-faceted 9 solution. The fed does have some limited authority 10 in this area, and we're trying to see how we can 11 best use it; but this is not the only thing that 12 should happen if there is a broad approach on the 13 predatory lending issue. 14 As Dolores said, we have had earlier 15 hearings back in '97, and this is the third of the 16 hearings that we're having this year. The Treasury 17 and HUD had hearings earlier in the year. They 18 issued recently a report that had a number of 19 suggestions for us and for the Congress. And those 20 earlier hearings pretty much set the stage for what 21 we're involved with today. 22 We are trying to take up many of the 23 suggestions that have been made for our action, as 24 I said earlier, to analyze the benefits and cost, 8 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 try to figure out exactly what we should do in a 2 way that encourages subprime lending but without 3 the abuses. And we hope to keep this on a very 4 specific, very specific and analytical plane here 5 to try to guide us through this difficult issue. 6 Thank you very much. 7 MODERATOR SMITH: We'll be starting the first 8 segment of the hearing in just a minute. But I 9 wanted to mention that we do have invited panelists 10 this morning and this afternoon; but after those 11 two sets of panels have had -- have engaged in 12 dialogue with us, then we have arranged for an open 13 mic session starting some time between 2:30 and 14 3:00 this afternoon, and this will be an 15 opportunity for members of the public to sign up 16 and to offer their views in three-minute 17 presentations starting, as I said, between 2:30 and 18 3:00. 19 We will be following the order in which 20 people have registered. You can register at the 21 registration desk with Ms. Hatcher, and I would 22 urge you to do that so that we'll have some idea of 23 how the open mic session will be shaping up. 24 I would remind you that the remarks will 9 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 be limited to three minutes, but we will welcome 2 any longer written remarks that you may have for 3 us. 4 So with that, I will move into describing 5 what our rules of procedure are for this morning. 6 We will have opening remarks from each of the 7 invited panelists. They, too, are asked to confine 8 their remarks to three minutes. We have two 9 time-keepers who will be keeping track of the time 10 and will be holding up signs, I believe, to signal 11 you when the time -- well, first, when you have one 12 minute left. And the three minutes go by very 13 quickly. So when you have one minute left and when 14 your time has expired. 15 I would urge you to sort of keep an eye on 16 them even as you are looking toward us. If your 17 attention is more directed here, I will try to 18 signal you so that you will know to look and see 19 that your time is expired. 20 You will have an opportunity later to 21 engage in dialogue so this is -- you know, your 22 three minutes are not your last opportunity to be 23 offering us your views. 24 I will ask that you identify yourself for 10 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 the record. There may be questions from the 2 Federal Reserve panel, if there is a perceived need 3 for clarification, and then the general dialogue 4 will start after all of the opening statements have 5 been made. 6 So with that, we will start with Mr. Darr 7 and continue in a clockwise direction until we have 8 finished with everyone. 9 MR. DARR: Well, thank you very much, 10 Ms. Smith. My name is William Darr. I am the 11 Commissioner of the Illinois Office of Banks and 12 Real Estate, and I want to thank you for inviting 13 me here to participate in this important panel. 14 I think we're all aware of some of the 15 anecdotal incidents that Governor Gramlich referred 16 to about how predatory lenders suck the life blood 17 out of their victims; but I think it's equally 18 important that we be aware of the debilitating 19 effects that these types of loans have on the 20 community at large. 21 We know that foreclosures, particularly 22 those in the economically depressed areas, 23 frequently result in declining property values for 24 the hard-working neighbors of the victims; that 11 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 boarded up homes can become havens for gangs and 2 drugs; and that the result in the neighborhood 3 depression can discourage much needed development 4 funds from flowing into communities. 5 In Illinois, we've been attempting to walk 6 the fine line between cracking down on these 7 predators who make these loans while maintaining 8 subprime lending as a viable business line and 9 encouraging the American dream of homeownership to 10 hard-working people who might otherwise never have 11 thought such an opportunity was possible. 12 As we work to develop the administrative 13 rules designed to curb this abhorrent practice, we 14 listened to the community and heard firsthand some 15 of the stories of what this scourge might mean to 16 otherwise vibrant neighborhoods. 17 In crafting our proposed rules, we 18 attempted to meet community concerns while not 19 unduly restricting legitimate lenders from 20 marketing their products in these communities. 21 We ultimately crafted a draft set of rules 22 which attempted to limit the most egregious 23 practice of the predators which offered consumers 24 the opportunity to obtain counseling so they would 12 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 be better informed of the impact of their financial 2 decisions while stepping up our data collection and 3 enforcement efforts in order to target those who 4 would prey on the poor, the elderly and the 5 uninformed -- underinformed, I should say. 6 But the one core issue which was 7 continually the stepping off point for this debate 8 was the threshold point for defining just what we 9 would -- what we in Illinois called a high-risk 10 loan. We use HOEPA standards as defined in 11 Section 32, but we're fully aware that this 12 standard is indeed inadequate. 13 It's been estimated in Illinois that 14 Section 32 loans account for less than 1 percent of 15 all loans made. Clearly, this threshold must be 16 loosened to ensure that a wide perspective of loans 17 are covered and, as a result, scrutinized in more 18 detail. 19 We strongly urge the Federal Reserve to 20 act quickly to lower its Section 32 threshold to 21 800 basis points over Treasury Bills. We further 22 encourage the fed to better define the fee 23 calculation, to close some of the loopholes which 24 these unscrupulous lenders are using to skirt the 13 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 law. 2 But of equal importance -- and here we 3 agree completely with Governor Gramlich -- we 4 encourage the Federal Reserve to use its 5 considerable influence to press for action in 6 Washington to address this same issue. Without 7 federal action to clamp down on these predators, 8 individual states can only do so much just like the 9 Federal Reserve. 10 Unless the playing field is level to allow 11 both state and federal regulators to crack down on 12 these lenders, we're not going to get very far. We 13 all need to work together to make sure our 14 communities are not victimized and to ensure that 15 all citizens have the same access to fair and 16 reasonable credit. 17 MODERATOR SMITH: Thank you. 18 MR. BAKER: Good morning. My name is 19 Bruce Baker, and I am Senior Vice President and 20 General Counsel of the Illinois Bankers 21 Association. The IBA represents over 90 percent of 22 the banking assets in the state which has over 23 700 banks and thrifts of all sizes, and we 24 appreciate this opportunity to appear before you 14 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 today. 2 Perhaps more than anywhere else, Illinois 3 has seen a flurry of legislative proposals on 4 predatory lending this year. In the past eight 5 months, there have been two bills, two amended 6 bills, and a joint resolution introduced in the 7 state capitol; and, in the past five months, the 8 City of Chicago has been drafting an ordinance on 9 the issue. 10 The Illinois banking industry has been 11 closely involved in these efforts. We recognize 12 the large problem in our communities brought about 13 by a small number of unscrupulous mortgage brokers 14 and lenders, and we want to be part of the 15 responsible solution. 16 Yet just as the Board is holding a hearing 17 today to learn more about this issue, the banking 18 industry also has been climbing the steep learning 19 curve in the past year. 20 We have found there are three principal 21 ways that a bank holding company may become 22 involved in this problem. First, in recent years, 23 a small number of holding companies have purchased 24 subprime loan companies with high-cost loans 15 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 associated with predatory sales practices in their 2 portfolios. 3 Second, many banks, bank subsidiaries 4 purchase interest and securitizations of subprime 5 loans for CRA purposes, and some of these secured 6 ice pools include problem high-cost loans. 7 Third, some holding company subsidiaries 8 have commercial relationships with mortgage 9 originators who, in hindsight, have engaged in 10 predatory sales practices. These are all areas 11 where bank holding companies and their subsidiaries 12 should be reviewing their policies and practices in 13 order to improve their due diligence and to 14 eliminate any prospect that they are enabling or 15 encouraging predatory sales practices. 16 Beyond that, we concur with the 17 HUD/Treasury's report's recommendation that the 18 Federal Reserve should exercise its authority under 19 HOEPA and lower the Section 32 definition of 20 high-cost loans to an interest rate of 8 percent 21 over comparable Treasury yields. 22 We also support federal legislative and 23 regulatory proposals that would ensure a uniform 24 national application of these definitions and 16 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 associated prohibited practices in order to avoid a 2 patchwork of conflicting laws in 15 states and 3 potentially more cities. 4 We also urge you to consider the 5 importance of these definitional thresholds when 6 considering the list of prohibited activities for 7 high-cost loans. 8 Many legitimate prime and subprime loans 9 offer terms like balloon payments and prepayment 10 penalties. While these and other terms have been 11 exploited by unscrupulous loan originators, they 12 also are useful and desirable underwriting terms 13 that can reduce interest rates and make loan 14 payments more affordable and credit more available, 15 and they are choices made by the consumer. 16 While they may have become part of the 17 problem in the predatory lending context, if that 18 context is defined too broadly, restricting them 19 will have major repercussions throughout legitimate 20 lending markets. 21 We urge you to address these definitional 22 thresholds with caution both in terms of their 23 numbers and their underlying definitions. 24 Again, thank you for including us in this 17 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 discussion today. The Illinois banking industry 2 looks forward to working with you on this problem 3 in a sincere and constructive manner. 4 MODERATOR SMITH: Mr. Rheingold? 5 MR. RHEINGOLD: Good morning. My name is 6 Ira Rheingold. I am an attorney with the Legal 7 Assistance Foundation. I run a foreclosure 8 prevention project here in Illinois, and I counsel 9 low-income and moderate-income homeowners 10 throughout the community, and I have talked with 11 attorneys throughout the country and throughout the 12 State of Illinois about the predatory lending 13 problem. 14 I have three minutes, so I have three 15 thoughts. 16 One, the opportunity that the Federal 17 Reserve Board has today is an important 18 opportunity, and the authority that the Federal 19 Reserve Board has is a broad authority. 20 There's two parts of their authority. 21 One, it can lower the T bill threshold, and we 22 strongly urge that the T bill threshold be lowered 23 to 8 percent. 24 It also can increase what is covered in 18 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 the points and fees trigger. We think the 2 authority is there to do that. I think the 3 authority is clear that it be can done, and there 4 are items that need to be included, to simplify the 5 system, but also to make sure that definition 6 includes all the areas where there may be 7 problems. 8 For instance, per diem interest should be 9 included in that. Credit insurance should be 10 included in that. And the Federal Reserve should 11 clarify that yield spread premiums, a payment to a 12 broker, is also included in the definition of 13 points and fees. 14 Second, it has the authority in connection 15 with mortgage loans that designate unfair, 16 deceptive practices or practices designed to evade 17 HOEPA. They can also look at refinance loans, 18 which is what we're talking about today, and outlaw 19 practices associated with abusive lending. That's 20 part of your authority and it's something you can 21 do. 22 You can prohibit no document loans on 23 high-fee loans because no doc loans is a big 24 problem. Balloon payments on high-fee loans. You 19 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 can prohibit credit insurance. You can prohibit 2 mandatory arbitration. You can take a look at 3 asset-based lending on an individual basis as 4 opposed to a private practice. Those are things 5 that you have the authority to do and you should 6 use. 7 You should figure out and we can talk 8 today about prohibiting flipping and what that 9 means. And you can prohibit prepayment penalties 10 and you can prohibit the financing of fees, and I 11 think those are all things that are associated with 12 abusive practices. 13 Second, accountability. The system is 14 broken. We have a system of brokers. We have a 15 system of lenders. We have a system of path-though 16 lenders. We have a system of securitizers. And 17 when I represent people and we're in foreclosure, 18 the lender I am dealing with is the securitizer, 19 the holder of the loan. And when we go to court 20 and we say, this person has been deceived or fraud 21 has been committed, we didn't do it. The broker 22 did it. The originator did it. 23 The strength of HOEPA is it has 24 pass-through liability, and it needs to be -- the 20 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 reason why the trigger needs to be lowered and the 2 fees need to be included more is to extend 3 pass-through liability to everybody, and that 4 pass-through liability should be extended to the 5 broker, to the lender. 6 Third and quickly, objectivity. Anecdotal 7 evidence. We think there's plenty of objective 8 statistics out, but foreclosure rates have 9 skyrocketed. The NTIC study which shows subprime 10 lending matching up with foreclosures, that's 11 objective. The Woodstock study which shows that 12 lending in subprime markets are being targeted to 13 minority communities, that's objective. And the 14 Census report that showed a 365 percent increase in 15 foreclosures. 16 Finally, if it's anecdotal, it's because 17 we don't have the objective statistics. The 18 lending industry does. And with HMDA, you can 19 collect those objective statistics so we can take a 20 look more objectively as to what's going on, what 21 are the APRs, what are the fees and what are the 22 default rates on those type of loans. 23 MODERATOR SMITH: Thank you. 24 MR. DETELICH: Good morning, Governor Gramlich, 21 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 and other representatives of the Federal Reserve 2 Board. Thank you for this opportunity to speak at 3 this very important meeting today. 4 My name is Tom Detelich. I am Managing 5 Director of Branch Operations for Household Finance 6 Corporation which includes the branch operations of 7 Household Finance and Beneficial Finance. 8 Household has, for over 120 years, helped millions 9 of working Americans meet their financial needs in 10 good and in trying times. 11 Our position on predatory lending is 12 perfectly clear. Unethical lending practices of 13 any type are abhorrent to our company, to our 14 employees and, most importantly, to our customers. 15 These practices undermine the integrity of the 16 marketplace we compete in and limit our ability to 17 provide financial service needs to this country's 18 diverse consumer market. 19 That is why Household is one of the few 20 lenders to testify in support in favor of the 21 passage of the Homeownership and Equity Protection 22 Act in 1994. We worked with Congress in crafting 23 that bill in an effort to reach the appropriate 24 balance between protecting consumers from offensive 22 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 business practices and maintaining the appropriate 2 flow of credit to Americans with less than perfect 3 credit. 4 Today, we support the efforts of the 5 Federal Reserve Board to help eliminate unethical 6 lending practices; however, we question whether 7 increasing the scope of HOEPA or adding new 8 legislation or new disclosures is the right 9 answer. 10 For example, in North Carolina, this year, 11 legislation was passed that resulted in an HFC, 12 most likely other lenders as well, and restricting 13 the credit available in that state resulting in 14 fewer loans to customers who would have otherwise 15 qualified for credit. 16 Indeed, HOEPA itself may limit the number 17 of lenders willing to lend to certain credit worthy 18 segments of the market. This is not clearly the 19 original intended fact of HOEPA or the Federal 20 Reserve today I'm sure. 21 Among the many approaches to eliminating 22 predatory lending that Household does support, 23 there are three that have broad support among 24 industry and consumer groups alike. We believe 23 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 that these three approaches speak to the heart of 2 how to best eliminate unethical lending practices 3 from our industry. 4 First and foremost, enforcing existing 5 legislation and regulations. Nearly every 6 anecdotal case of predatory lending involves some 7 type of fraud or deception. Enforcing existing 8 laws that prohibit these practices will eliminate 9 many of the bad actors from our industry. 10 Second, we need to simplify and improve 11 the clarity of existing disclosures. Many examples 12 of predatory lending involve consumers who did not 13 understand the transaction they agreed to despite 14 numerous disclosures given days in advance. We 15 simply need to have better disclosures, not more 16 disclosures. 17 Third, we need to educate our consumers. 18 An informed consumer will recognize the deceptive 19 practices of predatory lenders and will make better 20 choices. 21 Household has a number of consumer 22 educational initiatives in place that we would be 23 happy to share. We are certain that the collective 24 efforts of the industry and consumer groups can 24 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 result in even better ideas. 2 We are pleased that Household is often 3 cited as the standard for high ethics and fair 4 consumer dealings by our regulators and our 5 legislators. We look forward to working with these 6 legislators and these regulators and other 7 reputable lenders in an effort to eliminate our 8 ranks of unethical and illegal practices in order 9 to protect our customers and the longevity of our 10 business. Thank you. 11 MODERATOR SMITH: Mr. Bivins? 12 MR. BIVINS: Thank you. My name is 13 Terry Bivins. I'm a mortgage broker, originating 14 conforming and non-conforming loans in Illinois, 15 Indiana and Wisconsin. 16 As a result of doing business in three 17 states, I have to comply with three different sets 18 of regulations. As in one of the hand-outs that 19 was provided before this hearing, it states, "There 20 is no ready method of measuring the amount of 21 predatory lending or how prevalent the problem it 22 represents." 23 Until you can measure this activity, you 24 cannot manage it. 25 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 In Illinois, a company is licensed, but 2 not the loan originators. In Indiana, the company 3 is licensed, but not the originators. In 4 Wisconsin, not only is the company licensed, but 5 every loan originator is licensed. 6 In Illinois, if I have an employee who I 7 fire for something I feel is unethical, there is no 8 method for the state to stop this individual from 9 moving to another company whether it be another 10 broker or going to work for a bank, going to work 11 for a finance company. He can still be in the 12 business. 13 In the state of Wisconsin, I fire an 14 individual, he is turned into the state and he 15 loses his license for a minimum of five years. 16 Until you have a method of licensing or 17 registering every loan originator in this country 18 and then being able to track the loans or the 19 initiatives from Fannie and Freddie Mae so that you 20 can follow from that foreclosure back to who has it 21 today on to who originally originated it as a 22 company as well as who the original loan officer 23 was and take action against that individual, this 24 problem will not go away and we do not know the 26 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 extent of it. Thank you very much. 2 MODERATOR SMITH: Ms. Weinberg? 3 MS. WEINBERG: Good morning. My name is 4 Michelle Weinberg. I'm a consumer protection 5 attorney in Chicago, and a substantial part of my 6 practice involves consumer credit issues including 7 predatory lending. I would like to thank you for 8 inviting me to speak today. 9 First, I would like to say that I 10 completely concur with the problems and solutions 11 presented by Elizabeth Renuard (phonetic) of the 12 National Consumer Law Center. I won't repeat them, 13 but I wanted to put that in. 14 I would like to focus on one point today, 15 and that is the exclusion of open-end credit plans 16 from coverage under HOEPA. The exclusion of 17 open-end credit plans from HOEPA coverage has 18 invited predatory lenders to structure loans to 19 meet the formal requirements of that exclusion. 20 It should be kept in mind by the Board 21 that predatory lenders are just that, they are 22 predatory. They will take advantage of any 23 loophole Congress and the Board creates for them 24 because they are motivated by the desire to make 27 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 the largest profit off of each transaction without 2 respect to the individual needs of the borrower. 3 The case of Carol Drahoble, a client of 4 mine, will illustrate that point. Ms. Drahoble 5 applied for a home improvement loan in the amount 6 of $13,000. She did not request a line of credit, 7 and she was not given any disclosures and was not 8 told that the loan was being structured as a line 9 of credit. She didn't even know this until the day 10 of the closing when he brought the loan documents 11 to her place of employment for her to sign during a 12 break. She saw at that point that it was a $75,000 13 line of credit, and she objected to it. She said, 14 I don't want this money. I have no intention of 15 ever drawing any more than the $13,000. 16 In response to her objection, the broker 17 told her that she didn't have to borrow anything 18 beyond the first 13,000 and it wouldn't cost her 19 anymore as long as she did not do so. 20 What he did not tell her and what she did 21 not see was that the broker was charging $5,900 in 22 fees for her to get this $13,000 loan that she 23 applied for; and because it was structured as an 24 open-end loan, the disclosures were not segregated, 28 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 and this broker fee was actually disclosed on the 2 back page, on Page 2 of a four-page document. 3 So she did not see that until -- she had 4 no idea she was being charged almost $6000 for this 5 loan until she received her first billing statement 6 which showed a $20,000 loan balance. 7 In making this loan, the broker and lender 8 took advantage of the loopholes. And because only 9 a creditor is liable under the Truth in Lending 10 Act, the broker was free to disregard his 11 responsibility to provide the early health 12 (phonetic) disclosures. 13 Second by structuring the loan as a 14 health, the lender can avoid making other key 15 disclosures such as finance charges and including 16 broker's fees in the APR. 17 As observed by the 7th Circuit in this 18 area in the case of Benyon versus BankOne, when an 19 activity of this kind of technical nature is 20 comprehensively regulated by the Federal Reserve 21 Board -- and no one doubts that this particular 22 agency is a repository of genuine expertise -- the 23 courts generally leave the plugging of loopholes to 24 the agency, and we are asking that this particular 29 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 loophole be plugged by the agency. 2 And, again, finally because HOEPA does not 3 cover open-end loans, the disclosures were not made 4 in this case. Thank you very much. 5 MODERATOR SMITH: Thank you. Mr. James? 6 MR. JAMES: Yes. Tom James from the Office of 7 the Illinois Attorney General. 8 As a prosecutor, my concerns are chiefly 9 in the enforcement area. Of course, as you know, 10 the only area that we're allowed to enforce under 11 TILA is with the Section 32 loan, and so I wanted 12 to address a couple of concerns. 13 In three minutes, I can hardly scratch the 14 surface, but I think there are -- first of all, we 15 need more enforcement powers at the state level. 16 Section 32 is an important facet of TILA, but 17 there's a lot of TILA that we don't get to enforce, 18 and there are a lot of abuses that -- particularly 19 the open-ended credit and other abuses that occur 20 which, if we had enforcement power under TILA, 21 would give us a lot of ability to move when other 22 agencies can't or don't have the capacity. 23 I wanted to touch on the reporting and 24 inspection. What we discovered was a lot of the 30 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 predatory lenders were very good at flying beneath 2 our radar. TILA triggers are too high. The 3 reporting and inspection with respect to things 4 like yield spread premium, prepayment penalties, 5 no doc loans, as Ira pointed out, when these things 6 -- when there's no database that we can observe 7 that attest for variances from, you know, how many 8 people are doing this, where is it occurring, how 9 often does it happen, variations from the standard 10 deviation with respect to cocktail practices would 11 give us enough -- would help us in the detection 12 process. 13 I think it's important to recognize also 14 that there's vertical integration in the 15 marketplace, and the pass-through liability is 16 absolutely critical and it needs to be expanded 17 past the HOEPA, the Section 32 loans. 18 The broker, wholesaler and securitization 19 people do work, we believe, together, and they 20 produce a single result when they engage in 21 predatory lending. 22 I think -- I'm not sure how many TILA 23 prosecutions have been brought by the federal 24 government. I would say less than a handful. I 31 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 mean, HOEPA violations. 2 So the enforcement is simply not being 3 done; and the reason for that is I think a lack of 4 inspection, a lack of reporting under HMDA, and I 5 can't imagine what else, but perhaps bureaucratic 6 trifling. 7 MODERATOR SMITH: Thank you. Mr. Varga? 8 MR. VARGA: My name is Craig Varga. I'm the 9 General Counsel of the Illinois Financial Services 10 Association. IFSA is the largest Illinois trade 11 association for what we call market-funded 12 lenders. 13 Market funded means it's private capital. 14 It's not coming -- it's not a depository 15 institution. It's not coming from the sale of CDs 16 or anything else or deposits. Money is privately 17 raised, and it makes it imperative, therefore, that 18 the loans that are made get paid back and that 19 program features on loans not be such that it 20 impairs or puts at risk the ability to get repaid. 21 So a lot of what we'll talk about here 22 today when we talk about market conditions, 23 marketing economies, competitiveness of the 24 subprime market are geared to the fact that this is 32 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 private money and the loans have to get repaid in 2 order for new loans to get made and the access to 3 credit to be provided. 4 IFSA is, as I said, market-funded 5 lenders. They make diversified loans, auto, credit 6 card as well as home equity. Most of the major 7 middle-market mortgage lenders in the country are 8 members of IFSA. It was founded in 1917, and it's 9 been the largest trade association for such 10 lenders. 11 I'm also a partner in a law firm of Varga, 12 Berger, et al. And the reason that that has some 13 importance is I spend a lot of my time defending 14 lenders in both individual cases and particularly 15 class action cases brought by plaintiffs' attorneys 16 and legal aid attorneys and so forth. And I think 17 that that has a real bearing here in understanding 18 that it's easy to put labels on things and call it 19 "predatory lender" as if the person was wearing a 20 T-shirt saying that. 21 It's not that simple. Facts are messy. 22 When you go to Court and you have to actually have 23 somebody prove something and you get to 24 cross-examine other people and assess whether those 33 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 facts are in fact what they are espoused to be, you 2 find that the process just isn't that simple. It 3 gets messy. 4 Therefore, it's a very individualized 5 thing. And the difficulty I have with the labeling 6 of predatory is that proposals that suggest that we 7 can broad brush across the board and say, this is 8 no good, this is predatory, this person is engaging 9 in such a tactic ignores the messiness of those 10 facts. 11 As far as IFSA goes, what are we for? 12 We're for an informed consumer and a competitive 13 market. We're for simplified disclosures. We're 14 for consumer education. We think that people ought 15 to get taught personal finance courses in high 16 school early, often and continuing. 17 We're also concerned about the possibility 18 of unintended consequences coming from all this. 19 The thought that simply moving the triggers and, 20 therefore, encompassing a higher percentage of 21 loans that are made today ignores the fact that 22 when we move the triggers that 1 percent that was 23 being mentioned earlier might be 1 percent but 24 simply at a higher level such that the loans below 34 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 that that we're thinking we're increasing the 2 percentage of coverage, those loans aren't being 3 made, so we're still only covering the alleged 4 1 percent, which gets me to another point, the 5 alleged 1 percent or other statistics. 6 I suspect we're going to hear a lot about 7 statistics here today. I remind everybody that 8 Mark Twain once said, "There are lies, damn lies 9 and statistics." And statistics can be a claim to 10 support any particular thing, and I urge everyone 11 to keep that in mind and urge the Board to study 12 this matter, as others have suggested as well, 13 before we make any across-the-board determinations 14 of anything. Thank you. 15 MODERATOR SMITH: Thank you. Mr. Shea? 16 MR. SHEA: Mike Shea, ACORN Housing. I would 17 like to start by acknowledging and thanking the 18 ACORN members in the audience who have taken time 19 off their busy schedules to attend. Thank you, 20 Governor Gramlich, for holding this meeting. I 21 would ask and request that in the future as you 22 hold these kinds of meetings that you at least 23 consider holding one of them in the evening or on 24 the weekend when more working people could attend. 35 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 ACORN Housing Corporation operates a 2 pre-purchase and delinquency counseling agency. 3 We've counseled approximately 150,000 people over 4 the last ten years. We recently celebrated a 5 creation of the 30,000th homeowner through our 6 program. 7 Over the last three years, we've been 8 inundated with clients who have been caught up in 9 predatory loans and are trying to get out or else 10 who are trying to refinance through cash-out 11 refinance in order to do debt consolidation or fix 12 their homes. 13 We've heard one horror story after 14 another. As a result, we've waged an aggressive 15 campaign against subprime lending. We're currently 16 in negotiations with five subprime lenders, and 17 we've proposed state legislation for five states, 18 and we're currently moving city legislation around 19 the country. 20 One thing we found is that subprime 21 lenders will do the right thing when they're asked 22 to and educated and when they're forced to. We 23 recently concluded an agreement with an AmeriQuest 24 Mortgage Corporation, which is one of the largest 36 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 subprime lenders in the country. It has three 2 parts to it. The first is a pilot program in ten 3 cities which will offer the best subprime mortgage 4 product to low-income communities. Chicago is one 5 of those communities. 6 Secondly, they have adopted best practices 7 which is, we think, one of the best in the 8 industry; and, third, they have agreed to work with 9 us to try to raise the bar for the entire 10 industry. They understand that to stay in 11 business, the abuses of predatory lending have to 12 be corrected. And we're finding that some of the 13 subprime lenders are becoming more enlightened as 14 they become educated and are willing to work with 15 us to raise the bar. 16 We're here largely because of people like 17 Lola Bosley, who lives in the Marquette Park area 18 on the south side of Chicago. She's an elderly 19 widow. She was making $350-a-month mortgage 20 payments until she was refinanced in January of '99 21 by Creative Mortgage. She has -- her income is 22 $900 a month, Social Security, fixed income. After 23 her refinance, her debt service on her loan is $700 24 per month. 37 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 We're here because of people like 2 Casey Newsome, who lives on the west side of 3 Chicago, who refinanced with Associates. Received 4 a $32,000 loan. Of this loan, $3500 were in fees 5 and closing costs, and an additional $6000 was in 6 single premium credit life insurance. Fully 7 one-third of her loan was made up of fees. Her 8 loan carried a 14.5 percent interest rate. 9 We're here because of people like 10 Lily Petty, who's also here today who lives on the 11 west side of Chicago who was forced to refinance 12 her loan. She needed cash out; and, as a result, 13 her interest rate is 14 percent which was 14 originated at the time when rates were 7 percent. 15 Her loan was packed with fees and amounted to 16 30 percent of the loan. 17 I will address the questions that you have 18 put in your materials in the discussion. Thank 19 you. 20 MODERATOR SMITH: Thank you. Mr. Brown? 21 MR. BROWN: Good morning. My name is 22 Michael Brown. I'm Chairman and CEO of 23 Sable Bancshares which is a community development 24 financial institution located on the west side of 38 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 Chicago that services the credit and development 2 needs of the citizens, in particular, in North 3 Lawndale which happens to be where a number of the 4 predatory lending abuses have occurred which have 5 led to the legislation that we're here to talk 6 about today. 7 As a digression, I would like to stop and 8 thank the Board for the invitation today, and I 9 look forward to and engaging in a complete 10 substantive discussion. 11 Because the time is short, though, I have 12 written a statement, a prepared statement. I'm 13 going to quickly embark on somewhat of a different 14 but risky path. 15 It's clear to me that the issues 16 associated with predatory lending require a 17 balanced approach in their resolve. Legislation is 18 extremely important as it relates to its ability to 19 restrict the predatory lending. There's no 20 question about it. And I do believe that hearings 21 such as this go a long way in addressing this 22 concern. 23 However, my focus today -- and, again, the 24 comments will be very quick -- will deal with a 39 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 different part of the solution. 2 It's my belief or our belief that it's 3 important that we encourage and stimulate the 4 natural forces of the business market within the 5 communities where predatory lending occurs in order 6 for us to have the kind of resolve that's 7 sustainable and long-term. I think that sort of an 8 approach matched up against focus and strong 9 legislation, in our opinion, will serve the needs 10 of the community that are hardest hit by the 11 predatory lending issue. 12 I think the first point that needs to be 13 underscored is that we need to aggressively 14 continue to improve the access to credit. We need 15 to make sure that we have a broad cross-section of 16 lenders that are willing to operate in these 17 communities. 18 Now that may sound strange from a bank 19 holding company that has, as one of its 20 subsidiaries, a community bank, a $52 million asset 21 institution. However, again, it's our belief that 22 competition is good; that through competition what 23 you ultimately do is that you attract quality 24 lenders both from the standpoint of micro lenders 40 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 -- a full complement, the large community banks, 2 credit unions, community banks, et cetera, all who 3 are doing, what? Competing for the business of the 4 customer. 5 Recent statistics indicate that those 6 markets are good markets and they exist and they're 7 vibrant. In 1998, there were 27,470 loans that 8 were made in that community or in the Chicago 9 community that were designated as subprime loans. 10 That represented a 1600 percent increase in 11 subprime lending in the City of Chicago. That's 12 significant. 13 It also spawn something else that people 14 never believed would happen, and that is the 15 creation of a secondary market which created 16 liquidity which makes lending possible in 17 communities where lending or access to credit was 18 very difficult in the past. Choices are very 19 important. 20 The one last point that I would make, and 21 I know my time has expired, is that I think we need 22 to start taking a broader view of the market as 23 well, and that is, we need to look at technology 24 and encourage the integration of technology into 41 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 the subprime lending game. And what that simply 2 means is that we need to have lenders who have the 3 ability to take technology, utilize it to identify 4 lenders of choice that can service the needs of the 5 community and match those lenders up who are 6 willing against individuals who have an interest in 7 procuring credit in those particular communities 8 and doing it in an efficient and timely manner. 9 That goes back to the issue of choice. 10 That gives people the opportunity to get the best 11 rates and work with the best lender in order to 12 effect change in the community. 13 I would like to conclude by saying that, 14 indeed, there is no one solution that we can 15 advance to address this particular problem. 16 Predatory lending is insidious and it has to be 17 addressed; and today's hearing will go a long way, 18 I think, in not creating new issues, but closing 19 the loop on several issues that have been in 20 existence for a long period of time. 21 MODERATOR SMITH: Thank you. Mr. Immergluck? 22 MR. IMMERGLUCK: Thank you, Governor Gramlich, 23 members of the staff of the Board and the bank. 24 I'm Dan Immergluck. I am Senior Vice President of 42 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 the Woodstock Institute here in Chicago. 2 The Woodstock Institute has conducted 3 policy research on mortgage credit, community 4 investment for more than a quarter of a century. 5 We welcome this opportunity to talk about one of 6 the greatest threats to neighborhood stability 7 today and to community reinvestment: Predatory 8 lending. We look forward to the Board taking 9 meaningful action to improve regulation. 10 We recognize the need for lenders to offer 11 loan products to those with imperfect credit; but 12 the home equity loan market has become extremely 13 segmented by race and by age with subprime 14 specialists, many of which have exhibited abusive 15 lending practices, targeting minority neighborhoods 16 and especially minority elderly folks. 17 The home equity loan market, particularly 18 the subprime portion, suffers from extreme market 19 failure stemming from profoundly imperfect 20 information as well as large negative spill-overs 21 or, in the economics jargon, negative 22 externalities. 23 The information problem is due in part to 24 the fact that many subprime lenders are simply not 43 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 familiar with the basics of the mortgage process. 2 They suffer from fundamental and life-long 3 disadvantages in basic literacy and financial 4 experience. This is due to decades of exclusion 5 from the financial system and from our separate and 6 unequal educational system. 7 At the same time, many of these borrowers 8 are under substantial economic duress and are 9 isolated from those who might give them advice. As 10 a result, they are highly susceptible to 11 manipulation by brokers and lenders who are highly 12 compensated just for closing a simple refinance 13 loan. 14 Let me be clear. The fundamental 15 difference in financial knowledge between the 16 borrower and the lender in these transactions is so 17 great that counseling or remedial education a 18 little laudable will never overcome it. Certainly 19 end disclosures will do nothing to address this 20 problem. 21 Moreover, there's too much money to be 22 made by the broker and the lender for him to allow 23 a deal to be lost due to the actions of what will 24 always be some meagerly financed credit counseling 44 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 or education campaign. The counselor will always 2 find she's entered the pictured long after the 3 homeowner has already been sold on the loan. 4 The second source of market failure is the 5 negative public cost from skyrocketing and 6 geographically concentrated foreclosures. These 7 aren't anecdotal. We're talking about 8 5000 foreclosures started in the Chicago area by 9 subprime lenders in 1999. Not an anecdote. 10 Foreclosure is not a private event, 11 especially not in a lower- and moderate-income 12 community. It often results, as Mr. Darr said, in 13 vacant and later abandoned properties which in turn 14 leads to blight and crime. This affects property 15 values, business investment, tax base and overall 16 community health. Classic examples of negative 17 spill-overs. 18 90-day delinquency rates for C grade loans 19 according to a voluntary industry survey of 20 27 subprime lenders are 10 percent, 40 times the 21 delinquency rate of prime refinance loans and 22 5 times the rate for FHA loans. For D grade loans, 23 it's 22 percent, almost 90 times the prime rate and 24 11 times the FHA rate. 45 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 Because the public cost of foreclosures 2 are not internalized into the transaction, the 3 underegulated market results in an excessive amount 4 of high-risk lending. 5 Let me say that we do not underestimate 6 the challenge the fed faces in issuing regulations, 7 but ask the Board to leave any excuses for inaction 8 to the defenders of predatory lending. The Board 9 should get to the business of issuing meaningful 10 regulation and fulfill the mission given to it by 11 Congress. Thank you. 12 MODERATOR SMITH: Mr. Bochnowski? 13 MR. BOCHNOWSKI: Thank you, Governor Gramlich, 14 representatives of the Federal Reserve. I am 15 David Bochnowski, CEO of Peoples Bank in Munster, 16 Indiana. Our headquarters are located about 17 30 miles from here. I appreciate this opportunity 18 to testify on behalf of America's community 19 bankers. 20 In Boston, ACB member Bill Gothrup urged 21 you to greatly improve the supervision of 22 unsupervised non-bank lenders and avoid 23 stigmatizing legitimate loans in terms as 24 predatory. I want to reinforce those 46 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 recommendations and also add to ACB's support for 2 lowering the HOEPA APR trigger to 8 percent. But 3 that's not enough. Consumers need access to 4 mainstream institutions and the education and 5 counseling to help them avoid being victimized by 6 predatory lenders. 7 Here's what Peoples Bank is doing on these 8 issues: A few years ago, we tore down half the 9 city block and opened a state-of-the-art office in 10 East Chicago, Indiana, an increasingly diverse 11 community. We offer services in both English and 12 Spanish. This continues the bilingual tradition 13 for Peoples Bank in East Chicago. We long ago 14 offered English and Polish as our two languages. 15 Peoples is now discussing opening another 16 office in Gary, Indiana, a community, which like 17 Chicago, suffers from the shift to less 18 labor-intensive domestic steel industry. 19 We know it takes community banks being 20 involved in their communities to help stimulate new 21 economic activity and stabilize the mortgage 22 markets. Peoples Bank already provides 23 homeownership education. We and 12 other community 24 institutions jointly sponsor regulated 47 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 homeownership seminars even though community banks 2 are very competitive. Each of us has banded 3 together to fill a need, to help consumers 4 understand what loans are about and how to avoid 5 predatory terms. 6 Peoples Bank recently hosted an evening 7 session -- and all these sessions are in the 8 evening -- and it was conducted in both English and 9 Spanish. Over 30 people attended. 10 Community banks all over the country are 11 doing similar things; but, clearly, more needs to 12 be done. For example, effective public service 13 advertisements could help offset the aggressive 14 marketing from predatory lenders alerting consumers 15 of potential danger and urging them to seek 16 education and counsel. 17 ACB also recommends improved disclosure of 18 high-cost loans. That does not mean more 19 disclosures. More boilerplate will not help ours 20 and will also add to the burden that is already on 21 banks. 22 Once you have drafted new HOEPA 23 disclosures, ACB recommends that you field test 24 them to see what works and what doesn't in the real 48 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 world of average borrowers. 2 Let me conclude on a few points: 3 First, community banks are not part of the 4 predatory problem. They are key to the solution. 5 Second, subprime lending has helped many 6 homeowners become owners. 7 Third, expanding HOEPA coverage too much 8 and restricting certain terms could be both harmful 9 and ineffective. 10 Fourth, borrowing education and counseling 11 are essential buffers against predatory lenders. 12 Fifth, disclosure should be simplified and 13 field tested. 14 And, finally, ACB will continue to work 15 with you and other agencies and, most importantly, 16 our customers and communities to eliminate 17 predatory lending practices. Thank you. 18 MODERATOR SMITH: Mr. Butler? 19 MR. BUTLER: Thank you for inviting us to 20 participate in this discussion. I'm Bob Butler, 21 Chief Life Actuary at the Assurant Group. Joining 22 me is Alex Columbus from our Govern Affairs 23 Department. 24 I would like to throw out a few ideas for 49 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 later discussion. I will limit my comments to 2 credit life and credit disability insurance sold on 3 home equity loans. 4 First, I would like to clear up one 5 misconception. I have seen statements circulated 6 that the credit life loss ratio is 40 percent. 7 40 percent is the loss ratio of all credit life 8 insurance sold by all companies and all markets. 9 It is not the loss ratio for this book of 10 business. 11 The Assurant Group has been writing in 12 this market for, oh, maybe, three, four years, and 13 so we've been in it a relatively short period of 14 time. 15 What we have found though is the average 16 age of the insured is four to ten years older. 17 Most of our accounts write both home equity and 18 other lines of business. So isolating the 19 experience has been difficult. 20 We do have four large accounts that 21 specialize in home equity business. Those four 22 accounts have earned $46 million worth of premium. 23 The loss ratio right now is 49 percent for the 24 credit life. It's an immature loss ratio. As the 50 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 people age, the loss ratio will decline. We think 2 the underlying loss ratio on credit life for this 3 market is 60 percent and not 40 percent. Under 4 credit disability, we're running 116 percent loss 5 ratio which is something we'll have to correct. 6 We believe credit life and credit 7 disability insurance provides real value. I mean, 8 we paid out over 20 million credit life claims 9 already in this market on those four accounts. We 10 urge you not to throw out this valuable product 11 because of perceived abuses. Fix the abuses. 12 One way to do it would be to send a letter 13 to the insured post closing and give -- tell them 14 exactly what they bought, what the terms of the 15 deal were; and then, in the privacy of their home, 16 they can decide whether or not they want the 17 insurance. Our product comes with a 30-day free 18 look. If they decide they do not want the product, 19 we will give a full refund. 20 Two other things we'll throw out. One, 21 refunds. Some states allow the rule of seven-day 22 refund. What we would urge is, in those states, 23 refund on a rule of anticipation or actuarial 24 method. Rule of anticipation gives back to the 51 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 insured what we would charge for the remaining 2 coverage. So it's a fair return. 3 Another thing we'll throw out, another 4 idea is in calculating a single premium, many 5 states require you to calculate a series of monthly 6 premiums and then add them up, but you add them up 7 discounting for interest and mortality. We suggest 8 that that be done and that will give the insured 9 the time use of their money. In effect, they'll 10 have earned investment income on their purchase. 11 Thank you. 12 MODERATOR SMITH: Thank you. This first 13 segment of our discussion this morning will hold us 14 on examining possible changes to the rate and fee 15 triggers that we have mentioned. 16 Adrienne Hurt will lead this part of the 17 discussion. 18 MS. HURT: Thank you. It's clear that in spite 19 of HOEPA's protection, predatory lending persists 20 and, as some have stated, all subprime loans are 21 not predatory. However, many of the anecdotal 22 reports and the lawsuits involve subprime loans. 23 Some of these loans contain terms such as 24 balloon payments and prepayment penalties that are 52 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 restricted in the high-cost loans that are subject 2 to HOEPA. And some of these loans fall just below 3 the HOEPA triggers. 4 So one suggestion being made to further 5 deter predatory lending is to expand HOEPA's 6 coverage to extend its protections to a larger 7 class of transactions. 8 A loan is subject to HOEPA if the loan's 9 APR exceeds the rate of the Treasury securities 10 with a comparable maturity by more than 11 10 percentage points. So, for example, if a 12 consumer has a loan with a ten-year term and the 13 APR is a little above 16 percent, today, that loan 14 would be subject to HOEPA. 15 A loan is also subject to HOEPA if the 16 points and fees paid by the borrower at or before 17 closing exceeds the greater of 8 percent of the 18 loan amount or $400; and that $400 is adjusted 19 annually by the CPI. It's currently $451. 20 The Board has the authority to expand 21 HOEPA's coverage under both of these triggers. 22 HOEPA authorizes the Board to adjust the APR 23 trigger by 2 percentage points, up or down, from 24 the current threshold of 10 percentage points above 53 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 the Treasury security with a comparable maturity. 2 The points and fees test may be adjusted by 3 including more fees in the calculation. 4 We would like to hear your views on 5 expanding the triggers including the possible 6 effects of this expansion. We would like to spend 7 about 15 minutes just focusing on the APR trigger 8 and then move on to discussing the points and fees 9 trigger. 10 During this discussion, if you're aware of 11 any data that suggests how many loans are currently 12 covered by HOEPA, and if you have any estimates on 13 how many more loans might be covered if the APR 14 trigger were lowered to 8 percent, we would 15 appreciate that information. 16 We can start the discussion perhaps with 17 Mr. Darr or Mr. Rheingold based on your comments in 18 your opening statements. 19 MR. DARR: As I mentioned in my opening 20 statement, we would certainly support the lowering 21 of the APR threshold down to 8 percent. 22 As far as additional coverage, you know, 23 I'm not sure that our data is any better than 24 anybody else's, but we've heard -- and I take this 54 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 from Woodstock Institute -- the current threshold 2 only covers about less than 1 percent. I believe, 3 Dan, it was 7/10ths of 1 percent, according to your 4 numbers. We think that the coverage will increase 5 maybe up to in the neighborhood of 4 percent. 6 Any additional coverage -- and I know 7 you're restricted as to how much you can reduce the 8 threshold, but we would strongly encourage you to 9 reduce it the full 2 points to 8 percent to cover 10 the maximum. 11 MR. RHEINGOLD: If I can just add a little 12 bit. In the past few years, I have looked at 13 thousands of loans, and our agency probably 14 represents a couple hundred clients. I'd say 15 three-quarters, four-fifths of those clients have 16 HOEPA loans. I would say almost every one of those 17 HOEPA loans are the points and fees trigger. 18 I can think of maybe one or two loans -- 19 and I have seen some of the worst loans you can 20 ever imagine. They do not hit the APR trigger. 21 It's simply too high. We never -- there's I think 22 one instance in the last few years of looking at 23 thousands of loans where the APR trigger was hit. 24 Lowering it to 8 percent I think would be 55 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 capturable. Again, the point about capturing more, 2 in my mind, most important point is the 3 pass-through liability, making the market 4 accountable for each other. 5 GOVERNOR GRAMLICH: I wonder if I could ask 6 you, just on that point alone, do you have any -- 7 from these loans you have looked at -- I realize 8 you didn't count them up and all of that, but do 9 you have any off-hand notion if we went to 8 points 10 what the coverage would be under the rate 11 trigger? 12 MR. RHEINGOLD: I don't think that the increase 13 would be tremendous because we're still talking 14 about APRs that would be in excess of 14 points. 15 We see 14 points, 14 and a half APR, but they are 16 not frequent. I would say most of the APR that we 17 look at are in the 13 and 12 range. Never the 16 18 range. 19 MR. IMMERGLUCK: Governor, the source that Bill 20 referenced is in the HUD/Treasury report, and it's 21 based on -- 22 GOVERNOR GRAMLICH: Yes, we know that. 23 MR. IMMERGLUCK: But if you look at that 24 history, basically, it's 5 percent. 56 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 GOVERNOR GRAMLICH: Yes, we know those numbers 2 and -- right. Yes? 3 MR. SHEA: I would like to share some lessons 4 we've learned in our recent discussion with 5 AmeriQuest Mortgage, which is one of the largest 6 subprime lenders based in Orange County, 7 California. They did about 60,000 loans last 8 year. 9 In our discussions with them, we asked 10 them, were the APR threshold lowered like 2 points, 11 what would it do to their business? They currently 12 do not do HOEPA loans. They said it would capture 13 about 11 percent of their business. 14 In further discussions with them, they 15 have committed to work with us to try to lower the 16 APR threshold in state legislation, if that could 17 be done, to 6 and a half percent. Their view, that 18 would probably capture about 30 percent of their 19 business by lowering it to 6 and a half percent. 20 They would support this because they think 21 that this would force industry participants to 22 engage in cost-cutting. They do not think it would 23 decrease the volume of loans that they would be 24 able to make very much, but they think it would 57 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 drive out many of the bad apples in the industry 2 who make enormous profits oftentimes in this 3 industry. 4 So they would favor the cost-cutting that 5 such a lowering of the threshold would bring 6 about. 7 MR. DETELICH: If I could give a different 8 viewpoint there? 9 While lowering the APR trigger would 10 certainly increase the coverage of HOEPA, the 11 question is, will that reduce or eliminate any of 12 these unethical lending practices? And I think 13 that's questionable. 14 Some of the earlier testimony in Charlotte 15 and Boston clearly indicated that lenders 16 intentionally do not make loans in that credit 17 segment that would qualify in the HOEPA area. In 18 other words, they're not in the market. Lowering 19 the trigger would likely mean fewer lenders making 20 loans to this segment of the market. 21 I think Mr. Brown said it well: Choices, 22 good choices are what will keep the active -- will 23 keep predatory lenders away. Borrowers with few 24 choices are the prey of the predatory lenders, and 58 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 raise or lowering the trigger will mean fewer 2 choices for a good number of lenders or borrowers. 3 MR. VARGA: On that front, if I could, I would 4 like to say that this is an area where the lack of 5 the statistics and the ease of which certain 6 statistics are thrown around based on anecdotal and 7 informal review of files is really not the thing 8 that ought to be the basis for making wholesale 9 changes. 10 Now our association and market-funded 11 lenders are for enforcement of the law with respect 12 to the "bad apples"; but the concern is, as 13 Mr. Detelich said, if you reduce the triggers, you 14 may simply not be increasing the coverage from 15 whatever percent to whatever percent. You may just 16 be increasing the amount of loans that aren't going 17 to get made and the "percentage of coverage" 18 remains the same. And that's a very real concern 19 for people who are designing their programs that 20 face the risks that come with making HOEPA loans. 21 And I think that's a very real concern. 22 The other thing is, again, the fact that 23 there simply aren't statistics. Many of the people 24 who make HOEPA loans now are not people who even do 59 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 HMDA reporting. Unless they do a large volume of 2 purchase money mortgages, they're not even required 3 to HMDA report. The HMDA reporting now doesn't 4 include rate and terms and that degree of 5 specificity. 6 So I don't believe there's anybody out 7 there who has statistics on -- good, reliable 8 statistics now on HOEPA loans and what would 9 happen, even assuming market conditions stayed the 10 same and we simply dropped the triggers, on how 11 many more loans we get covered by. 12 And, again, we urge that it's not a static 13 market. If we move the triggers, it's going to 14 affect lender behavior, and that's a constant to 15 keep in mind. 16 I think the key point is if you need to 17 develop the statistics, why not develop statistics 18 and then look at this after the fact once those are 19 developed? 20 MR. BIVINS: From your hearings in 1997, it was 21 concluded it was too early to really gauge the 22 effect of HOEPA. 23 Having been in business in 1994 when HOEPA 24 came about, there was no change in the lenders that 60 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 were doing loans and willing to provide the 2 disclosures at that time. In recent years, the 3 majority of the lenders that I brokered business to 4 have, in fact, stopped doing HOEPA loans. So there 5 has been an effect there. 6 But I have never had -- I believe I have 7 had one customer not go through with the loan 8 because of the additional three-day disclosure. 9 Every borrower, including myself, who takes out a 10 loan looks to see what is the payment, can I afford 11 it, and make a decision. The disclosures have not 12 discouraged people from taking these loans out and 13 I don't think they will in the future. 14 At some point, if you push more loans into 15 being HOEPA, the lenders are going to make a 16 business decision to go back and start doing HOEPA 17 loans again and live with the consequences of the 18 disclosures, the additional documentation and 19 possibly, you know, the press that they're going to 20 receive from it. 21 MR. IMMERGLUCK: Can I make the point, if the 22 argument being made by the industry here, the 23 subprime industry, is that we're not -- we're going 24 to see fewer loans if the levels are lowered. 61 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 Why? Because we want to avoid scrutiny. 2 Well, if that's the case, then so be it. 3 We want fewer loans made. If we know that we have 4 22 percent delinquency rates in D grade paper which 5 are essentially the loans covered by HOEPA, they 6 need the scrutiny. They need more scrutiny. 7 The second point is, right now, HOEPA is 8 Swiss cheese. There are all kinds of ways to not 9 make -- to not have HOEPA loans but to make up the 10 fees in other ways, to do prepayment penalties in 11 various ways that are consistent with the law, to 12 have credit life insurance with commissions that 13 generate the revenue for the originator through the 14 commissions. 15 If we don't deal with a definition of 16 points and fees and make it universal, I don't care 17 what you do about the interest rate trigger. It 18 won't matter. People will find ways to be below 19 the trigger if you don't make that definition 20 comprehensive. 21 MR. DETELICH: I think you misunderstood the 22 point. The reason that lenders it's my 23 understanding -- Household does make HOEPA loans. 24 The reason that lenders who don't make HOEPA loans, 62 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 my understanding is, is not to avoid scrutiny. 2 It's the cost of the compliance. 3 MR. IMMERGLUCK: That's what the lender says. 4 The reality is the lender doesn't want to comply 5 with HOEPA. It's an easy response to make that 6 it's the cost of compliance, but the reality is, we 7 don't want to avoid scrutiny. 8 MR. DETELICH: What other scrutiny is there 9 today of HOEPA loans? 10 MR. IMMERGLUCK: When a lender sells a 11 security, an asset-based security and that lender 12 has to say there are 50 HOEPA loans in here, right 13 now in this climate, that security will be hard to 14 sell. 15 The stigma associated with HOEPA is 16 significant because lenders know that this is a big 17 concern. So lenders are avoiding HOEPA loans 18 because lenders don't want the scrutiny of those 19 loans. 20 MR. SHEA: Solomon Smith Barney and Merrill 21 both committed to us just last week that, in fact, 22 moving forward, they will never buy HOEPA loans. 23 MR. RHEINGOLD: I'm actually a little amused by 24 this conversation because I hear all these people 63 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 who don't make HOEPA loans, yet we see HOEPA loans 2 left and right all the time. I mean, I have a list 3 of every subprime -- 165 pops-up prime lenders, and 4 I can tell you that we had HOEPA loans identified 5 by all those people. 6 Now if what they're saying is by lowering 7 the interest rate credit won't be offered, I think 8 that's absurd. I think that the cost of credit -- 9 I have no problem -- and, again, we have to know 10 what HOEPA does. HOEPA doesn't say you can't make 11 those loans. HOEPA simply says you got to give 12 additional disclosure, and there are certain things 13 in there you can't do. And if they're saying the 14 cost of making those HOEPA loans are great, then 15 pass it on to the interest rate and make your money 16 that way. And if the interest rate -- and then let 17 the marketplace do its business. 18 So if the interest rate isn't competitive, 19 a couple years from now, people's credit get 20 better, they can refinance. If they don't want to 21 make those loans, good, don't make those loans. 22 MR. BROWN: You know, to be crystal clear, Tom, 23 I do believe -- and, clearly, my comments 24 underscore the fact that I believe that the market 64 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 should have all of its forces working which means 2 the competition has to drive this process. There's 3 no question about it. 4 But I think because of the marketplace 5 that these particular loans are being made in that 6 it's very important that we understand that we have 7 -- we have to make sure that the neck is as broad 8 as possible so that we, under the HOEPA laws, get 9 as many of those lenders involved in one simple 10 thing: Compliance through disclosure. 11 Terry, you said that disclosure didn't 12 necessarily obviate a loan being made. I think you 13 said one, but I think it's poor to understand that 14 once those loans were made that you had six days 15 wrapped around that person's loan closing which 16 allowed them to become real clear on what it is 17 that they were getting involved in; and that, 18 historically, has not been the case. So lower the 19 net. I think there's value in that. 20 MODERATOR SMITH: Mr. Baker? 21 MR. BAKER: The resounding evidence that we've 22 obtained here in Illinois is that most lenders will 23 not make loans over whatever the threshold is that 24 the defines high-cost loans in the present 65 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 environment. 2 We've had a lot of participation, the 3 benefit of input from lenders all over the country 4 and here in Illinois because of the City of Chicago 5 ordinance which has held a lot of fascination and 6 fear for people around the country because it can 7 be copied by an untold number of cities. 8 And if you look at the proposals today 9 that are floating around, starting with the North 10 Carolina legislation going through the current 11 Chicago draft ordinance and many of the proposals 12 being -- supported by many of the people in this 13 room, the devil's in the details. 14 When you look at the list of what 15 constitutes predatory lending activity, it's very 16 uncertain. It's not that lenders are looking to 17 avoid scrutiny on this question. They're looking 18 for certainty; and when you look at the proposals 19 as what constitutes predatory lending, it's going 20 -- you don't know who your judge is going to be 21 down the road and it's going to be a very 22 subjective decision. Take a look at some of the 23 words used in some of these proposals. 24 With that kind of lack of certainty, most 66 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 lenders are simply not going to make loans over the 2 threshold. And that's going to drive people in the 3 subprime market to the marginal lenders and the 4 problem is going to simply increase. 5 MR. BOCHNOWSKI: If I might interject. 6 Responding to Ira's point, community banks don't 7 make HOEPA loans. It's a fact. And the reason why 8 community banks don't make HOEPA loans -- I guess, 9 there's two parts of this. One is that we got a 10 lot of risk, and one of the risks that we have is 11 reputation risk. We have to stay in that 12 community. My company has been in business for 13 90 years. That's the primary reason I suppose why 14 we don't go through the reach. 15 But the point that is raised is the 16 enforcement authority. No matter what changes we 17 might make in the HOEPA triggers, who's going to 18 enforce the law? Who's going to go in and do what 19 happens to us? Who's going to come in, as the fed 20 does, and examine us, inspect us I guess or, as the 21 FDIC does, examines it? 22 I think a lot of issues that we're 23 discussing really goes to who is going to take the 24 hard look; and I think that would eliminate a lot 67 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 of the unscrupulous brokers that are out there that 2 are putting these deals together and collecting 3 their fees and walking away. 4 MR. RHEINGOLD: And that's again the point 5 about raising the trigger or lowering the trigger 6 as the case may be. 7 We want the market to do its due diligence 8 so that when we have those broker fees included in 9 whatever form they are and that trigger is loaded, 10 all those fees are included, when a loan comes from 11 a broker and the fees are high enough, then that 12 lender won't make the loan until it does its due 13 diligence over that. 14 When there's a no doc loan, a lender won't 15 make that loan. When that application says this 16 person has $3000 in income and their back-end ratio 17 is 38 percent, that lender looks past that 18 application and looks at their income and makes 19 sure that that's happening. What we want is the 20 market to control this stuff. 21 So by making those fees included in there 22 and by lowering the threshold, people are looking 23 over their shoulder. The market is looking over 24 its shoulder. The lender looks at the broker, the 68 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 secondary market looks at the lender so that those 2 bad behaviors that are occurring, they'll be 3 monitoring because they don't want to be liable for 4 it; and that's what's so important about increasing 5 the loans covered under HOEPA. 6 MODERATOR SMITH: Mr. Bivins, would you have 7 the last word on this segment before we move to 8 costs and fees? 9 MR. BIVINS: Mr. Rheingold made a statement 10 that he's seen hundreds, perhaps thousands of HOEPA 11 loans. I would question when they were 12 originated. Prior to October or so of 1998, most 13 lenders were in fact originating HOEPA loans. 14 Today, in this market, I see very, very few lenders 15 originating HOEPA loans today. 16 MR. JAMES: I might interject there that in 17 November 1998, the first lawsuit by law enforcement 18 agency that I'm aware of in Minnesota sued on HOEPA 19 loans and the market dried up. And we sued a month 20 later, and Massachusetts sued right in the middle. 21 MR. BIVINS: I think the market forces on Wall 22 Street have a lot more to do than -- 23 MR. JAMES: That pass-through liability had a 24 lot to do with it because the lawsuit we filed 69 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 said, in asking for the remedy, rescission from the 2 culprit and from its assigns. 3 MR. IMMERGLUCK: Let's just be clear. If 4 lenders are saying they're not going to make loans 5 under HOEPA, the reason they're not making them may 6 be due to the fact that they know that the loans 7 over the threshold are problematic, okay. That's 8 my closing comment. 9 There's somehow a notion of because of 10 compliance or because of disclosure costs or 11 something else, that's why we're not making the 12 loans. Maybe it's because those loans have 13 problems. That may be -- HOEPA may be a very good 14 signal for the loans with problems, so that may be 15 why they cut back on those loans. 16 MODERATOR SMITH: Adrienne, would you move us 17 on to the next portion? 18 MS. HURT: Sure. Oftentimes in having this 19 discussion, there's a great focus on the points and 20 fees testing. So we'll move along on that. 21 But I did have one question about the APR 22 triggers. There were a couple of the comments 23 suggesting that most HOEPA loans are covered by the 24 points and fees test and not the APR test. So I 70 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 guess the question would be -- and you can respond 2 to it in this next segment -- do you see any 3 downside to lowering the triggers for the points 4 and fees but not lowering it for the APR? 5 But moving to the points and fees test, as 6 I mentioned earlier today, a loan is covered by 7 HOEPA if the points and fees paid by the borrower 8 at or before closing exceed the greater of 9 8 percent of the loan amount or $451. And except 10 for interest, the points and fees test consists of 11 all items that are included in the APR in the 12 finance charge, including compensation that's paid 13 to brokers by the consumer at or before closing. 14 The Act specifically excludes reasonable 15 closing costs that are paid to unaffiliated third 16 parties like appraisal fees, the title insurance, 17 recording fees and the like. 18 HOEPA authorizes the Board to add such 19 other charges to the points and fees test as the 20 Board deems appropriate. Now presumably this 21 provision is limited to points and fees paid by the 22 consumer at closing. 23 The Board's Federal Register Notice 24 identified three fees that have been suggested for 71 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 inclusion in the points and fees test. Optional 2 credit life insurance premiums; and, when a loan is 3 refinanced with the same creditor, counting a 4 prepayment penalty or points related to the prior 5 loan is cost associated with the refinance loan. 6 Let's start with a discussion of credit 7 life insurance premiums and other insurance 8 products. 9 Single premium credit life has often been 10 associated with loans that are identified as 11 predatory. And someone questioned whether that 12 type of insurance has any economic benefit to 13 consumers. Some have even suggested that it be 14 prohibited, and that's an issue that we'll discuss 15 later this morning. 16 But for purposes of the coverage test, the 17 question is is there any reason why single premium 18 credit life insurance should not be included in the 19 points and fees test? 20 MR. COLUMBUS: If I could please speak to that? 21 Let me introduce myself. Alex Columbus, Compliance 22 Council with Assurant Group. We sell a lot of 23 credit insurance. 24 You run the risk if you include the 72 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 insurance in the points and fees test of the 2 unintended consequences; and what I have been 3 hearing a lot of the lenders saying is that the 4 loan will not be made. 5 I think you have to ask yourself what will 6 you be achieving by including the insurance in the 7 points and fees test? What abuse -- what alleged 8 abuse are you going to be addressing? 9 And I would submit to you that all you 10 would be doing is creating a type of loan that 11 you're going to put into a bucket that you have to 12 have added recordkeeping and added disclosures, and 13 that the insurance, alleged insurance abuse of the 14 packing, in other words, the uninformed or the 15 actual outright fraud of the sticking of the 16 insurance charge into the loan is not going to be 17 addressed because the alleged abuse as performed by 18 the broker or the lender is still going to go on 19 because they're going to go out and sell the loan, 20 and they're going to -- it's just going to be a 21 loan that you now have to keep records on. 22 If you really want to address the abusive 23 practice, the packing of the insurance, that there 24 are more effective means of doing that; and 73 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 Mr. Butler suggested one which we think is a very 2 effective and reasonable alternative and that is 3 the post-closing notice and coupling that with a 4 30-day free look. 5 If you say that on any type of loan that 6 has credit insurance on it we're going to include 7 it in the points and fees unless a 30-day free look 8 is required and post-closing notice is provided, 9 the lender is not going to pack the insurance 10 knowing that 30 days later the insurance is going 11 to be taken off because the consumer is going to be 12 told that they just finance the purchase. The 13 insurance is very costly for a lender to book the 14 insurance on a close-end loan and then take it 15 off. There's a lot of system stuff, and it's very 16 expensive to do. 17 We propose that the notice be sent to the 18 consumer at their home where they can read it at 19 their leisure away from the pressures involved in 20 the closing atmosphere; that the notice be written 21 in plain language and inform the consumer that you 22 just -- whether you knew or not, you just bought 23 insurance. You financed it. This is the rate. 24 This is the term of the insurance. This is how 74 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 much it cost. You have the right to cancel it 2 within 30 days and get 100 percent of your money 3 back. This is the number that you call to cancel 4 it. This is how you cancel it. 5 That will address the issue. That will 6 address the packing issue; and that's a more 7 reasonable way of addressing the issue than 8 including it in the points and fees which it's not 9 going to really address the issue. 10 I think in looking at the Board's 11 authority -- if I may continue, please -- you have 12 to, yes, grant it. HOEPA says that the Board can 13 include in the points and fees such items that it 14 deems appropriate, but you have to make a 15 determination based upon Congress's intent; and I 16 think that Congress's intent was clear in the way 17 it structured HOEPA and TILA, and it says that 18 TILA, the way they define the finance charge, is 19 the costs that are a condition of obtaining the 20 credit, in other words, the mandatory costs. And 21 when they enacted -- 22 MODERATOR SMITH: If we could break in. 23 MR. COLUMBUS: I think this is an important 24 point that I would like to make. I will finish 75 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 after this. It's very short. 2 When they enacted HOEPA, this was after 3 TILA, and they tied the HOEPA points and fees test 4 to the finance charge; and the finance charge in 5 TILA expressly excludes credit insurance as long as 6 it's a voluntary purchase. Okay. That's the key. 7 As long as it's a voluntary purchase. 8 And had they wanted to include the 9 insurance in HOEPA's points and fees tests, they 10 wouldn't have tied it to the finance charge. All 11 right. And I think the Board understood this when 12 they wrote Reg Z and they expressly authorized 13 truncated coverage and the sale of credit 14 insurance. 15 MODERATOR SMITH: Thank you. 16 GOVERNOR GRAMLICH: I wonder, without rehashing 17 the whole legislative history of this -- I'm just 18 trying to get at your bottom line. 19 I take it your bottom line is that if this 20 30-day free look is given with all the terms you 21 specified, then the credit life insurance becomes 22 optional, voluntary. It should not be included in 23 the points and fees triggers. But if the 30-day 24 free look is not given, then I take it you're 76 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 saying that you have no objection to having the 2 points and fees included? That you have credit 3 life included in the points and fees test? 4 MR. COLUMBUS: That would be a compromise that 5 we could live with. And I think that actually 6 HOEPA and TILA already -- we talked about 7 enforcement and passing through the enforcement; 8 and I think that HOEPA and TILA already provide a 9 lot of penalties and enforcement abilities. 10 Let's look at it. 11 GOVERNOR GRAMLICH: We know the rest of it. I 12 am just trying to get at your bottom line. 13 MR. COLUMBUS: No because if the insurance is 14 packed, then it ceases to become a voluntary 15 purchase. 16 GOVERNOR GRAMLICH: We understand. 17 MR. COLUMBUS: And it should be . . . 18 MODERATOR SMITH: Mr. Michaels? 19 MR. MICHAELS: Yes, I want to go back to what 20 you opened up with which is -- your statement was 21 that if we put credit insurance premiums in the 22 points and fees test, the loan would not be made. 23 Can you elaborate on your rationale for 24 that? 77 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 MR. COLUMBUS: I am just basing it on what I've 2 heard this morning. A lot of the lenders have said 3 that if you lower the APR that that would result in 4 unintended consequences of less loans being made. 5 Well, inclusion of the insurance in the 6 points and fees test is also -- in every case is 7 going to make the loan a HOEPA loan. So that is 8 going to have the same effect as the APR lowering 9 and so forth. I am just basing it on what the 10 lenders have said this morning. 11 MR. MICHAELS: It seems to me, though, at that 12 point there's three possible -- at least three 13 possible options which is, you don't sell the 14 insurance for that loan. You sell the insurance on 15 a basis where the premiums are not paid up front at 16 a closing that are paid monthly, then it wouldn't 17 go in the points and fees test, right? Those are 18 two options. Or it's a no loan (phonetic). 19 MR. COLUMBUS: Let me address those. It's been 20 suggested that, you know, monthly pay insurances is 21 a viable alternative. And it can be a viable 22 alternative. However, I do not think that it will 23 be one that consumers will avail themselves of 24 because of the realities of the financial situation 78 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 that most of these individuals are in. Okay? 2 You have to look at the issue from the 3 presumption that insurance is a good thing. Okay? 4 And that what we're doing is by financing the 5 insurance and selling it as a single premium 6 product is making a good thing affordable for 7 individuals who voluntarily choose to purchase it. 8 Okay? 9 And that is the thing that single premium 10 finance insurance does is that for those people 11 that voluntarily choose and make the decision that 12 they want insurance, it becomes affordable by 13 financing. On a monthly pay basis, it becomes 14 unaffordable. 15 The unfortunate reality is that this is a 16 segment of the market that is not served by the 17 traditional insurance industry, and that is because 18 these -- you know, I will generalize it -- this 19 segment of the market does not qualify for and 20 cannot afford the high-dollar insurance policies 21 that the agents seek the commissions on. And so 22 they are a hugely underinsured segment of the 23 population. 24 By financing the insurance, you make it 79 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 affordable for them. And Mr. Butler just testified 2 as to the value of the product as evidence. We're 3 running over a 100 percent loss ratio. That means 4 we're paying out on the disability product more 5 than we get in. And on the life product, we're 6 paying 50 to 60 percent loss ratio. 7 MR. MICHAELS: I guess I've not quite 8 understood why the insurance is unaffordable. The 9 consumer pays for PMI on a monthly basis, and it's 10 affordable. 11 Why is it the credit life insurance is not 12 affordable on a monthly basis? 13 MR. BUTLER: It's affordable for certain 14 people, but the single premium makes it even more 15 affordable. So there would be a segment of the 16 borrowers that will be served by the single premium 17 product. It does make it more affordable. 18 MR. BIVINS: Also, sir, credit life insurance 19 is regulated by the state. The rates for the 20 insurance are regulated by the state, and a person 21 is eligible for the insurance at age 18 or perhaps 22 as high as 65. And the rate charged for a 65-year 23 old person is the same as would be charged for a 24 20-year old person. 80 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 If you go to an age-rated policy and a 2 health-rated policy, then the break, depending on 3 the state, is somewhere between age 40 and 45. 4 Then suddenly the age-rated policy becomes much 5 more expensive than above that age than it does 6 below that age. Therefore, it's a product that can 7 be affordable to everybody. Not only do the states 8 regulate the rate that is charged, they also 9 regulate the commissions that are charged. 10 I'm sure you can make a statement that 11 over the last 20 years those rates have gone from 12 $1 to $1.20 per hundred down to 50 cents and 13 below. So the product is not nearly as expensive 14 it as used to be. People buy it. They have it. 15 They typically don't have other coverages. 16 MR. JAMES: There's a disadvantage, though, in 17 that the life of the average loan is under 7 years 18 or so. So that if you buy a single premium policy 19 for a 30-year loan and -- the history is people 20 refinance out of those loans. 21 MR. BIVINS: Mr. James, I don't believe there's 22 a credit life product that will go for 30 years. 23 The longest term is 120, perhaps, months. 24 MR. JAMES: So that's the life of the loan. 81 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 MR. BIVINS: The second mortgage loan -- the 2 net credit life only insures the payoff balance. 3 Oftentimes it is truncated so it is only in effect 4 for the first years of the loan knowing that the 5 policy is going to get paid off -- the loan is 6 going to get paid off before the insurance would 7 run out. 8 MODERATOR SMITH: Mr. Rheingold? 9 MR. RHEINGOLD: What the credit insurance does 10 is it skims equity from the house. It's taking the 11 person's equity out of their home. 12 The most telling comment that was made is 13 that every -- if credit life insurance or credit 14 disability insurance is included in points and fees 15 -- they didn't even ask about anything -- it would 16 automatically be a HOEPA loan. That means it's 17 pretty damn expensive. 18 And to amortize that over that 30 years at 19 a high interest rate is absurd, and it's a way of 20 taking people's equity out of their home, and it's 21 not -- the problem is is that they're concerned if 22 you take it out of the equity of their home, people 23 will have a choice, and it will be a consumer 24 choice because it's a separate. Here, you can buy 82 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 this. This is good for you. If you pay it, 2 great. If you don't pay it -- people have that 3 separate choice. They're not going to take it. 4 But if it's part of their house and they 5 don't realize there's any cost at this point in 6 time, then they'll do it. That's their big 7 concerns. If you separate it out, people aren't 8 going to buy it. 9 MR. BUTLER: That's why we would have the 10 post-closing notice. We would expose them to the 11 cost and to the terms of the contract and give them 12 a full refund and tell them the amount of the 13 refund. 14 MR. RHEINGOLD: I think at some point we could 15 have a discussion about disclosures and notice and 16 the lack of sophistication of homeowners that get 17 that. 18 I mean, I think it's a noble idea. I 19 think that notices, I think the disclosures serve 20 almost no purpose and are not regarded by the 21 consumer in any -- by the consumer with almost no 22 protection whatsoever. 23 MR. BUTLER: You don't think if they saw the 24 total premium that -- 83 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 MR. RHEINGOLD: I don't think they would 2 understand it. 3 MODERATOR SMITH: Mr. Varga, you will have the 4 last word before we move on. 5 MR. VARGA: Just a couple of points on the 6 credit insurance. First of all, I am an exciting 7 guy like Ira. I read these loan files all the 8 time. I'm not sure that I've ever seen a borrower 9 who is involved in any litigation or involved in 10 who has any other life insurance, so that the 11 credit life insurance product that they have is the 12 only life insurance that they have. 13 Many times what's happening is that the 14 point in time that the borrower dies, were it not 15 for the credit life insurance, the loan balance 16 that would be otherwise due that would be factored 17 into the overall family financial equation at that 18 point in time would be one that couldn't be paid 19 and, in this instance, the home would be lost. In 20 other instances, it would be that the car would be 21 lost because, at that point in time, it's a 22 critical point in time. 23 All the claims can be made that are always 24 made that the premiums are too expensive. Of 84 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 course, it's not competitively underwritten. 2 Anybody can get it at any age with any health 3 condition basically. 4 But the point is that at point in time 5 it's absolutely paramount that there be a source of 6 funds, to pay off the loan, and credit life 7 provides it; and I have never seen a borrower who 8 had any other insurance. 9 Another thing, I've never seen a credit 10 life insurance policy that didn't have a 30-day 11 free look period. 12 So with respect to if that becomes the 13 additional criteria for exclusion from the points 14 and fees test, maybe building on what we have with 15 Truth in Lending that excludes it from the finance 16 charge, I suppose that would be one thing that 17 could be added. I've never seen one without it. 18 Another thing with respect to it on the 19 single premium versus the monthly, another thing I 20 see in the real world of experiencial life and 21 patterns on how people pay and when they default is 22 that if you are charging the premium monthly, 23 people who are behind and struggling behind and the 24 lender forbearing and accepting late payments and 85 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 so forth, people are likely to enable themselves to 2 make that monthly payment, likely to cancel that 3 credit life. 4 So they might have kept it for six months, 5 then started struggling with their loan payment and 6 canceled the credit life. So they're really 7 getting less value for the credit life that they 8 paid for for six months; but then because they're 9 getting behind, cancel in the seventh or eighth 10 month. 11 Whereas, a single premium, they have it 12 throughout. If the person defaults on the loan, 13 their insurance doesn't get cancelled. 14 Here, if you paid it monthly, even if a 15 person didn't voluntarily drop it in that seventh 16 month I described, if they got behind on the loan, 17 I believe that when it's paid monthly the lender 18 would be able to -- when a borrower is in default 19 and hasn't made that monthly payment, the borrower 20 wouldn't have insurance because they hadn't made 21 that monthly payment. 22 All the lenders string along and let 23 people be in default for a couple months before 24 anything happens. That's an absolute. I see it 86 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 all the time. 2 So here you would have people who hadn't 3 made their monthly payment in the seventh or eighth 4 month who aren't going to have credit life 5 insurance. And I think that it's significantly of 6 less utility for them than paying it in the single 7 premium. 8 Now if we want to talk about the cost 9 issues and those kind of things, maybe that's a 10 whole different point; but I see credit life and -- 11 not just credit life, but credit IUI. For the 12 market segment that we're talking about here that I 13 see litigated in cases, employment is a big cause 14 of default, and I think credit IUI is a valuable 15 product in that sense, and I don't think that 16 people are going to end up getting utility out of 17 it if they pay for it monthly. 18 MODERATOR SMITH: Adrienne? 19 MS. HURT: In the short remaining time we have 20 before the break, we would like to discuss 21 expanding HOEPA's coverage by applying to a new 22 loan the points charged on the prior loan that's 23 refinanced by the same creditor. 24 When is it appropriate? I guess the 87 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 question is when is it appropriate to count fees 2 related to a prior loan, to a refinanced loan? 3 And if there are other fees you believe that should 4 be included in the points and fees test, we would 5 like to your views on that. 6 MODERATOR SMITH: Who would like to start? 7 MR. RHEINGOLD: I will be more than glad to go 8 if no one else is volunteering. 9 I just want to make one correction or at 10 least my interpretation is that in terms of fees to 11 the broker, the language of the law says it's any 12 payments made directly or indirectly to the 13 mortgage broker. It doesn't say by the consumer. 14 It just says paid directly or indirectly to the 15 broker at the time of the closing. And that, to 16 me, means that yield spread premiums should be 17 included as the law is written. But if it's not, I 18 think it's something that should absolutely be 19 included in the points and fees because it is a fee 20 that goes to the cost of the loan, and it's 21 something that -- that is one thing. 22 Second, in the definition of finance 23 charge in terms of Truth in Lending, per diem 24 interest is counted as a part of the finance 88 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 charge. 2 Yet, in the commentary under HOEPA, 3 per diem interest is excluded in the points and 4 fees trigger. I'm not sure why that is. And I 5 have seen a number of loans just below the HOEPA 6 radar screen that if you added that per diem 7 interest, it would become HOEPA loans. That's a 8 fee that will be financed over the life of the 9 loan, and we think that's something that needs to 10 be included as well. 11 I will leave the -- I will get back and 12 let somebody else talk about the finance charge of 13 the previous loan and let them deal with that, and 14 I will be glad to respond. Let somebody else have 15 the floor. 16 MS. HURT: There is also the issue of whether 17 it's still the same question about applying loans 18 on a previous loan -- I'm sorry, applying fees 19 relating to a previous loan on the new loan, 20 prepayment penalties or points. 21 Does anyone want to comment on prepayment 22 penalties or points? But the overall question, all 23 of these fees apply to the prior loan; and the 24 question is should they apply to a refinance 89 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 loan? It's a way of getting that loan. 2 MR. VARGA: I would speak to that one. I've 3 never seen -- I haven't seen all the loans, but 4 I've never seen a lender apply a prepayment penalty 5 when it's refinancing its own loan. I just don't 6 think that's happening in the marketplace. 7 Now, you know, market conditions change 8 and what wasn't being done two years ago might be 9 done now and vice versa and so forth as we go 10 forward. But I've never seen that. 11 So I think that the argument might be, 12 well, then, if lenders aren't doing it, then let's 13 codify it into law. I think it just isn't done in 14 the marketplace. 15 MS. HURT: What about points? 16 MR. VARGA: Well, I understand that what you're 17 talking about is taking the points from a prior 18 loan and adding them into the HOEPA trigger for the 19 next loan on refinance. I think that that would 20 have the effect of pushing many, many, many loans. 21 Maybe Mr. Detelich -- it looks like he 22 wants to say something. 23 I think it really skews inclusion of loans 24 that are really otherwise possibly far from being 90 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 HOEPA loans into being HOEPA loans and triggers the 2 whole set of consequences that we talked about 3 before in a changing landscape that I think in 4 today's climate and going forward is going to have 5 significantly different lender behavior than maybe 6 has been behavior lender in the past about making 7 HOEPA loans. 8 And it isn't to -- speaking to what 9 someone else said here before that lenders are 10 trying to avoid scrutiny with respect to HOEPA 11 loans. What they're trying to avoid is having 12 additional quivers in the arrow of a borrower's 13 attorney to use the fact that it's a HOEPA loan as 14 additional leverage to forestall foreclosure and do 15 a variety of other things. 16 It's problems with saleability of the loan 17 in loan portfolios. It's not to withstand 18 scrutiny. It's the additional exposure that it 19 brings in terms of leverage that ultimately affects 20 -- and this is an important thing to keep in mind 21 -- whether this loan is going to get repaid so 22 that more capital can be had to make more loans 23 going forward. 24 MR. DETELICH: If I could comment and confirm 91 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 what Mr. Varga said about -- I don't know of any 2 companies either that charge a prepayment penalty 3 to their own customer in a refinance transaction. 4 I've never seen that happen in my 24 years in the 5 business. I'm sure it happens with some lenders. 6 I've not seen it. 7 On the issue of including points on a 8 previous transaction in the points and fees test. 9 The problem with that is it creates an uneven 10 playing field. 11 The way that I treat one of my own 12 customers is going to be different in a refinance 13 transaction, different than another lender would 14 treat that customer. In other words, the other 15 lender would not be counting points in the previous 16 transaction. 17 We have an uneven playing field. There's 18 an opportunity for an unscrupulous lender to 19 actually prey on my customers offering a loan that 20 has little benefit but actually ends up being 21 slightly better than mine just because I don't have 22 the extra waiting period or whatever. 23 I think you need to keep a level playing 24 field on how I treat my customers and other lenders 92 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 treat my customers. 2 MODERATOR SMITH: Mr. Rheingold, and 3 Mr. Immergluck, and Mr. Shea, and Mr. Bochnowski. 4 MR. RHEINGOLD: Very quick. The point that 5 we're getting at is we want to prohibit flipping. 6 I think we're talking about we don't care who the 7 other lender was because brokers change lenders who 8 they make deals with. So the lender is responsible 9 for the previous loan. 10 I think it's a good idea and I think we 11 need to think how it gets tailored. We want to 12 prevent the thing that doesn't provide a benefit 13 for people. And the notion is if something has 14 happened within the past year, then you should have 15 increased scrutiny on it. And even if the points 16 and fees on that loan aren't unbelievably high, if 17 you add in the existing refinance, one, it 18 prohibits some of the equity scheming that we see 19 all the time and the kind of flipping. 20 So I think it's a good idea. I think 21 other people probably have addressed it in previous 22 hearings on how exactly it needs to be typed. What 23 we consider a flip; how frequently is it 24 occurring? 93 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 It is not an infrequent occurrence for us 2 to see a HOEPA loan that gets flipped six months 3 later to a non-HOEPA loan. So suddenly, even 4 though we think that that broker engaged in that 5 behavior, that lender engaged in that behavior, 6 when that foreclosure comes down the line, that's 7 not a HOEPA loan. We have no redress. 8 So I think if it occurs within a certain 9 period of time, I think it's a very good idea to 10 include the previous fees. 11 MR. IMMERGLUCK: Following what Ira said. 12 Brokers have a set of lenders that go from -- if 13 you just try to deal with flipping within the same 14 lender, it's completely easily circumvented. 15 They'll just go from one lender to the next lender 16 to the next lender. 17 So I would say that's -- if you only 18 constrain it to the existing lender, it's going to 19 have almost an insignificant impact. 20 The problem is you can have a loan right 21 now that has 7.9 points as defined under HOEPA, has 22 a 5 point prepayment penalty and has 10 points or 23 20 points in credit life insurance and it isn't a 24 HOEPA loan. The settlement charges on the loan 94 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 will eat up 40 percent of the equity in the home. 2 It's absurd. The law isn't working. It's totally 3 broken. 4 I just want to -- since I wasn't allowed 5 to respond about the seven or eight minutes of 6 comments by the credit life representative, 7 46 percent of credit -- in a study done by Purdue 8 at their Credit Research Center which is an 9 industry-funded research center, 46 percent of 10 credit life recipients that were sold lump sum 11 credit life said they either got credit insurance 12 and was never told that the insurance was optional 13 or they felt pressured to purchase and felt buying 14 the insurance would approve their ability to get 15 the loan. 16 This isn't voluntary. And the notion that 17 this is occasional packing is absurd. So I just 18 wanted to make sure that that was clear. 19 MODERATOR SMITH: Mr. Shea? 20 MR. SHEA: I would welcome the opportunity at 21 some time to introduce Mr. Detelich to 22 Casey Newsome of Chicago who was in fact refinanced 23 by the Associates which is a finance company 24 similar to Beneficial. 95 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 Eighteen months after the refinance, 2 Associates once again solicited Ms. Newsome for 3 another refinance to flip their own once again; 4 and, in fact, they were going to charge the prepay 5 penalty on their original loan on the new loan. 6 So it does happen. The Associates does it 7 fairly commonly. I believe we have at least two 8 cases from your company as well. 9 MR. VARGA: Excuse me. I have to say something 10 at this point. I have been in a lot of these 11 forums and consumer advocates in a lot of other 12 contexts around the country, and one of the ground 13 rules we've had in those kind of discussions, in 14 bar forums has been that we don't mention lenders' 15 names. Those lenders -- 16 MR. SHEA: You don't name names? This is 17 reality, jack. 18 MR. VARGA: Well, those lenders aren't here 19 with respect to responding to these specific 20 assertions that are reported as fact. And it's 21 great to come in with all of that and be able to 22 tout all that; but those people aren't here in a 23 way to go through that loan file and be able to 24 address that. 96 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 I don't think that in a forum such as this 2 where we're talking about, yes, there's an 3 industry, yes, there's a consumer point of view 4 that we have to sit here and tar specific lenders. 5 If you want to talk about specific 6 programs that ACORN has worked out with specific 7 people, I suppose, you know, that's one thing. But 8 when you are hurling accusations at people, I don't 9 think that we really need the names of those 10 particular companies. 11 So, you know, I suppose the rules are 12 whatever they are, but that's an industry point of 13 view on it; and I will say that in other forums 14 where we have these kinds of discussions, that's 15 one of the ground rules. 16 MODERATOR SHEA: Mr. Shea, please finish. 17 MR. SHEA: I'm done. Thank you. 18 MODERATOR SMITH: Mr. Bochnowski? 19 MR. BOCHNOWSKI: Again, community banks are not 20 actively engaged nor do we have any interest in 21 flipping loans. It's not in our best interest or 22 in our customer's best interest. 23 What I would be concerned about it is as 24 times change. And right now in our marketplace, I 97 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 know no one who charges a prepayment penalty on the 2 loan. And I must admit, at the community bank 3 level, it's really tough to get fees out of our 4 customers. 5 But as times change, we might find 6 ourselves, depending on how you write these rules, 7 in a situation where someone is going to come in 8 with a legitimate reason for refinancing their 9 loan. They may want to take more equity out 10 because their circumstances have changed. 11 In that circumstance, if we also had, 12 again, a situation where fees were being charged, 13 where prepayments were enforced or could be 14 enforced in the marketplace, we might be 15 stigmatizing a loan that would be harmful to our 16 customers and that we would want to put, in the 17 best interest of our customer, on our books because 18 they're trying to draw out additional cash or 19 whatever their specific reason might be. So I 20 would be cautious. 21 MODERATOR SMITH: Mr. Bivins? 22 MR. BIVINS: There's a question of if you 23 included the points and fees in previous loans in a 24 refinance, are you going to bring a lot of loans 98 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 into HOEPA that otherwise wouldn't? 2 In today's market with interest rates 3 rising, there are a lot of first mortgages, 4 purchase money loans that are being written with 5 adjustables. Everybody thinks the rates are going 6 to go back as low as 7 percent at some point. They 7 may be getting a loan at an interest rate that is 8 very low today that's going to graduate, increase 9 over time. 10 Their situation may change. They want to 11 refinance and take equity out of their home. The 12 market may move so that they feel it's time to move 13 from an adjustable to a fixed rate; and you could 14 be bringing in borrowers and forming loans to HOEPA 15 disclosures, and I don't believe that's your 16 intention here. 17 MODERATOR SMITH: I think we're ready for -- 18 did you have something? 19 MS. HURT: One more question. 20 MODERATOR SMITH: And then we're going to take 21 a break. 22 MR. MICHAELS: This may not come out so much in 23 the form of a question. It depends on whether you 24 can answer it. 99 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 I am going to address it to you, 2 Mr. Detelich, but it's really a question or 3 request, I guess, posed to any lenders who make 4 HOEPA loans, as a lender who says they make HOEPA 5 loans. 6 I guess the question is do you have -- 7 have you studied or do you have some idea of what 8 percentage of your loans would be covered by HOEPA 9 if, in fact, we dropped these triggers? Have you 10 studied that or are you in the process of studying 11 it? Can you help us with that type of data? 12 MR. DETELICH: We know that today it's about 13 10 percent of the loans that we make in total. We 14 think it may, depending if all of these are 15 implemented, it would probably more than double, 16 somewhere around double. 17 Now I have to qualify that. Tracking for 18 this is very difficult. We're tracking it in 19 reverse fashion, looking back at the hurdles and 20 the price of each of the loans. But it's 21 approximately 10 percent, and it could 22 approximately double. 23 MR. MICHAELS: Can you help us a little bit 24 with some of the assumptions that went into that in 100 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 terms of change in the points and fees trigger or 2 the change in the APR trigger? 3 MR. DETELICH: Primarily the APR trigger. The 4 points and fees did go to identify -- you know, 5 again looking back without the exact data and how 6 the regulation would change, it's primarily the APR 7 trigger that would push it up to somewhere around 8 19 percent. 9 MR. MICHAELS: And then the 10 percent figure 10 now, is that based on APR or mostly points and 11 fees? Do you have some idea of what percentage? 12 MR. DETELICH: By the way, that is for the 13 loans that we book here today, just looking at a 14 sample. So it's not looking at a portfolio. 15 MR. MICHAELS: But of the 10 percent, do you 16 know what part of those are based on the APR 17 trigger? 18 MR. DETELICH: Using points and the fees -- 19 using the points to calculate the APR, it's the APR 20 trigger, yes. We don't make -- I don't think we 21 make any loans today, HOEPA loans, that go through 22 the hurdle based on points. In fact, I'm certain 23 we don't. All of our HOEPA loans are APR trigger 24 loans only. Only. 101 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 MR. MICHAELS: Thank you. 2 MODERATOR SMITH: We'll be coming back to some 3 of these issues, I'm sure, after the break; but 4 we're going to take ten minutes, and we will 5 reconvene at five after the hour. 6 (Whereupon, recess taken at 7 10:51 o'clock a.m.) 8 (Whereupon, back on the record 9 at 11:09 o'clock a.m.) 10 MODERATOR SMITH: If the panelists would rejoin 11 us, we are ready to reconvene, and we're going to 12 start with a question from Ms. Williams on the 13 preceding segment. We are starting with or without 14 you. Please start. 15 MS. WILLIAMS: The question that I wanted to 16 ask is we talked a little bit this morning about 17 the various proposals at the state level as well as 18 at the city level, and could you talk a little bit 19 about how those proposals discussed the triggers as 20 well as the points and fees? 21 MR. COLUMBUS: Are you talking about the 22 post-closing notice? 23 MS. WILLIAMS: The city ordinance that was 24 talked about a little bit earlier this morning as 102 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 well as the state proposal. 2 MR. BAKER: I would like to start off with the 3 comment that most of the proposals that we have 4 seen as introduced suggest an interest rate 5 threshold of 5 percentage points over competent 6 Treasury yield and a total of 3 points in fees. 7 Clearly that would be so low as to cut off 8 a huge segment of the subprime market where lenders 9 choose simply not to make loans over that 10 threshold. In fact, that would cut into the 11 B subprime market as well as the C and D subprime 12 markets. 13 MODERATOR SMITH: Could you use the mic and see 14 if it's working. 15 MR. BAKER: Can you hear me now? 16 The current draft of the Chicago ordinance 17 is still at a 6 and a half percent interest rate 18 above competent Treasury yields and the 5 points in 19 points and fees. We've had a number of proposals 20 down in Springfield that likewise began with 3 and 21 5 threshold. 22 In terms of the definitions of predatory 23 practices when you look at those proposals, they 24 have a lot of big terms. I don't recall any of the 103 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 specific words offhand since they're not on the 2 table today, but they include things like simply 3 deceptive practices or pressurized sales or things 4 of that nature; and that's what gives cause -- 5 concern to lenders is that strictly a subjective 6 judgment could be made after the fact by somebody 7 who's not happy with a piece of paper, and that's 8 just too much of a danger for any responsible 9 lender to walk into especially a regulated lender 10 who's being judged on the safety and soundness of 11 their lending decisions. 12 There are a lot of comments to be made, 13 but those are the points I would like to make. 14 MR. IMMERGLUCK: Alicia, I would just make one 15 point, and Commissioner Darr should chime in 16 because one reason why the thresholds are so 17 important in HOEPA is Commissioner Darr and other 18 folks I think at the state level are, to some 19 degree, hamstring by them. 20 I mean, I appreciate the Commissioner's 21 efforts to try to fight the predatory lending 22 problem. There was basically a commission set up 23 by a legislator in Illinois that to some degree fed 24 into the regulations that have come out of the 104 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 Commissioner's office. And the discussion about 2 what the threshold would be was pretty much -- it 3 was a commission that was pretty much -- I think I 4 counted 24 industry representatives and 3 consumer 5 representatives at the meeting I went to with a 6 couple government people. 7 There was really an assumption that the 8 HOEPA levels were the appropriate levels. There 9 was no discussion of why was that appropriate, what 10 makes that appropriate, how much? The discussion 11 of what percentage of loans are covered never came 12 up. It was just, these were Section 32 loans, and 13 that is what we followed. Sure enough, when the 14 draft regulations came out in Commissioner Darr's 15 office, they used -- they just said Section 32 16 basically. 17 So, you know, you do have to realize that 18 state regulators and others are, to some degree -- 19 you are setting the precedent for them. 20 MR. DARR: Thank you, Dan. I wanted to bring 21 that point up before in that lively discussion we 22 had prior to the break. 23 That is definitely the case. We don't 24 feel that we have, via a rule anyway, the authority 105 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 to set rates or go in a different direction. And I 2 have a feeling the legislature would agree with us 3 on that. We feel Illinois legislates their 4 responsibility. 5 So we -- that's why we pegged our rules; 6 and, frankly, the HOEPA thresholds are the trigger 7 point for everything in our rules, whether consumer 8 counseling, the prohibition against certain 9 activities. They are the linchpin to our whole 10 rule-making efforts. 11 That's why I'm so anxious for the feds to 12 exercise their authority on this important issue. 13 MODERATOR SMITH: Mr. Bivins? 14 MR. BIVINS: If I could make a comment. I will 15 get to the city thing, but I want to address first 16 some of the consequences of HOEPA itself. 17 We've heard some comments that the 18 industry will find the loopholes that are there. 19 As HOEPA went into effect and lenders stopped doing 20 HOEPA loans and brokers were not able to charge as 21 high broker fees, the tendency in the past was to 22 make a second mortgage when in fact that would be 23 appropriate and that's what was being requested for 24 home improvement, for debt consolidation, and for 106 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 cash out. 2 As a result of HOEPA, I believe there are 3 a lot more loans that are being done as first 4 mortgage refis because the money to be made on a 5 small second mortgage just isn't there anymore. 6 Part of the compromise in the City of 7 Chicago ordinance was that loans of $16,000 and 8 under, that a broker lender could charge $800 for a 9 reasonable cost originating that loan, and that 10 $800 could be charged on a $10,000 loan or it could 11 be charged on a $8000 loan which would be the 12 equivalent of 10 points, but then it would not be 13 part of this predatory disclosure that the City had 14 brought out. 15 So that's one thing that the city in this 16 process has brought to the table that we have not 17 seen at the federal level. 18 MR. VARGA: One other thing, speaking to the 19 state efforts. Most of the companies in the 20 association I represent are not regulated, 21 supervised by OBRE. They're regulated by the 22 Department of Financial Institutions in Illinois 23 under which licensees who have the license -- 24 consumer's loan act license can make real estate 107 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 secured loans. 2 Those rules likewise pick up on the 3 Section 32 trigger, and it's not just simply 4 because, well, that was easier. The suggestion 5 perhaps made earlier here where somebody did it 6 unthinkingly or reflexibly, it was done with a lot 7 of thought, I believe; and part of the rationale 8 was that you would have an unequal, unlevel playing 9 field if you had the triggers be lowered with 10 respect to state licensed lenders supervised by DFI 11 or OBRE in comparison to federally regulated banks 12 and thrifts who would not be subject to that state 13 regulation; and there is an overlapping competition 14 for some of the customers that we're talking about, 15 and that's my idle concern. 16 Again from the standpoint of understanding 17 that market-funded lenders, to stay in business, 18 need to be able to compete as against people who 19 are competing against them and not have an unlevel 20 playing field. So that's part of the reason. 21 DFI isn't here, but I think that needs to 22 be said that I think that was the thought process. 23 MR. MICHAELS: Mr. Bivins, you said something 24 which caught my attention insofar as the preference 108 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 in terms of the lenders -- economics of the lender 2 is that they want to make the refi the first rather 3 than the second small mortgage because the consumer 4 is looking for a relatively small amount of money. 5 So the question I have is is that 6 something we should be looking at? Should we be 7 looking at HOEPA rules that encourage in some way 8 the making of that small second mortgage instead of 9 refinancing the whole first mortgage? And, if so, 10 how would the fed do that? Is that something you 11 would do through triggers? This is open for 12 anybody to comment on. 13 MR. JAMES: Well, I would say that this goes 14 right back to refinancing, how you treat those 15 points on the prior loan. 16 If you have a rule that says you got to 17 treat those points as HOEPA trigger, include them 18 in the subsequent refinance, you're going to push 19 lenders into making seconds instead of refinancing 20 the whole ball of wax again. 21 And part of what happens when you have 22 seconds is you don't -- the state laws that are in 23 place that have been formulated over the last 24 100 years to protect consumers come into play. And 109 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 they're not preempted. 2 So it would have a dual effect. It would 3 give us the power to exercise laws that were -- 4 that have been dealing with these problems over the 5 last century. And it would also make the lenders 6 -- it would be a disincentive to strip that equity 7 on the second time around. 8 MR. BAKER: It's important to keep in mind, 9 though, that the lender has a lesser interest with 10 a second mortgage as opposed to a first. The risks 11 are higher. The prospects of recovery are less, 12 and that's going to be underwritten in the cost of 13 the loan, either in points or fees or in the 14 interest. 15 You also have to remember that the amount 16 of a second mortgage is going to be much less, 17 typically a $40,000 amount or maybe $80,000 tops, 18 something like that. And there, when you are 19 looking at 5 points in fees, you're only talking 20 about $400 on a $80,000 loan. 21 So the risks of greater. The amount of 22 fees that can be charged are really de minimis in 23 the scheme of thing, and that makes the whole loan 24 a lot more problematic and a lot more risky for the 110 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 lender and probably less -- from a lender's point 2 of view, it should be less subject to these types 3 of restrictions. 4 MR. MICHAELS: How does the Federal Reserve 5 account for that in terms of -- you know, what 6 could we do in terms of our rules that would make 7 it more likely that a lender would want to take 8 that risk? Are you talking about changing the 9 regulatory scheme for the smaller loans? Is there 10 something that we could do? 11 MR. BAKER: You are asking a fairly broad and 12 important question. I don't think it's the role of 13 the fed or any governmental body to want to direct 14 the market into one loan product versus another 15 loan product. I think that should be left up to 16 the marketplace. 17 I think -- and I don't have an exact 18 answer to your question. I don't think anybody 19 does, and that's why you are holding hearings 20 today. I think when the ultimate problems are 21 distilled and isolated, they need to be addressed 22 directly. 23 Somebody mentioned this morning that 24 individual loan originators aren't licensed. No 111 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 matter what rules you make on thresholds and on 2 definitions and on dos and don'ts, there will 3 always be a market of tens of thousands of 4 individuals out there that will figure out the next 5 way to get around the corner and to continue plying 6 their trade. 7 So I think you're going to have to -- I 8 don't think there's a simple answer to your 9 question. But I would caution you to think twice 10 about trying to direct the market into one loan 11 product versus another. 12 MR. MICHAELS: I wasn't talking directing the 13 loan product. It's a question of whether or not 14 the complications of the regs or the complexities 15 of the regs would be different on the smaller loans 16 than the larger loans. 17 MR. BIVINS: My comments were based on the cost 18 of origination. The feds could address it by 19 saying loans of a certain size and under are 20 excluded from HOEPA. 21 If the threshold is -- ends up being 22 6 points in fees, then 6 points on a $10,000 loan 23 is $600, and when you put in what the lender is 24 charging, the broker is basically left with 112 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 nothing, and he's not going to originate that 2 loan. He can charge 1 or 2 points on a first 3 mortgage refinance that might be $100,000. It 4 would be for a 30-year loan instead of 5 or 10; 5 and, therefore, he will go through the process of 6 originating. 7 When I started in business in 1983, I got 8 a lot of $5,000 loans. Today, I have very few 9 lenders that will do a loan under 10. Most of them 10 are at 15 and above. 11 So when you apply all these HOEPA triggers 12 to any loan, there is a disincentive to make a 13 small loan because you cannot justify the time and 14 energy that goes into it. 15 MODERATOR SMITH: Mr. Rheingold? 16 MR. RHEINGOLD: I have two thoughts. One, I 17 would have no problem, speaking for myself, in 18 having different triggers for a small second. 19 As Tom said, there is federal reaction on 20 the first claim, not the second. Encouraging the 21 seconds, a state can regulate seconds; and having a 22 higher trigger on seconds, I would have no trouble 23 with that at all. 24 The second thing -- and I think you talked 113 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 about the marketplace -- I think one of the 2 problems that we hear about the seconds is that the 3 broker makes his money from that upfront fee, and 4 then they're gone from the transaction. 5 So I think the marketplace -- the lender 6 and the broker have got to sit down together and 7 figure out how the broker is going to make money 8 when that loan performs and that their compensation 9 works not only by that initial upfront payment by a 10 loan that's successful, a loan that doesn't come 11 into default. And I think that's the way the 12 marketplace needs to change. 13 So that upfront fee isn't the only 14 compensation the broker gets, but that the broker 15 gets compensated when a loan is successful, and 16 that ends the disincentive to make all these loans 17 that are failing because there is no incentive for 18 the broker to make -- they don't care because 19 there's no check in the system. So if that loan 20 fails, we got our money, I'm gone and nobody knows 21 that the broker made that loan. Nobody tracks it. 22 If there's a system in place where the 23 broker gets compensated over time because a loan 24 performs, then I think that's something the market 114 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 can do. Now whether or not the Federal Reserve has 2 anything to do with that is another story, but that 3 would be one of my responses. 4 MR. BAKER: If I could say, I don't think the 5 banking industry would disagree with what Ira just 6 said; but then the devil's in the details. If 7 you're going to compensate that broker through the 8 overhead which is going to be factored into the 9 interest rate, and then you add that indirect 10 compensation back into your calculation for the 11 HOEPA triggers, you're going to end up turning that 12 loan into a HOEPA loan anyway and then the lenders 13 are going to say, we don't want to make HOEPA loans 14 for many of them. So, again, the devil's in the 15 details. 16 I think the banking industry would concur 17 with Ira's suggestion, but then don't include that 18 indirect compensation in the calculation in the 19 definition in determining whether it's a HOEPA loan 20 or not. 21 MR. VARGA: I guess that also gets us into and 22 maybe complicates the Federal Reserve Board's task 23 in the difficulty in reconciling with RESPA and HUD 24 and the booming efforts that we're trying to get at 115 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 defining broker compensation that have been and 2 proved to be very difficult. 3 So when you have sort of a compensation of 4 the broker based on performance of the loan over a 5 period of time, that's not the way things are being 6 done now, and it just adds another complicating 7 wrinkle to what has already proved to be a pretty 8 intractable difficulty in dealing with RESPA broker 9 compensation issues. It's not a reason not to do 10 it, but it's just throwing another log on the 11 fire. 12 MS. WILLIAMS: I would like to ask one more 13 question. Dan, you said earlier, and I believe, 14 Mr. Darr, you agreed that the state was pretty much 15 hamstrung because of what the fed has or has not 16 done. 17 So if you could kind of give me a sense of 18 what you're suggesting from your view point the 19 feds should do in order to facilitate what the 20 state is trying to do with their proposal. 21 MR. IMMERGLUCK: I should clarify, we certainly 22 would like the state to, you know, use a threshold 23 that's substantially below the current HOEPA 24 threshold, and we think that the state does have 116 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 the power to do that. 2 My comment was it is harder for the state 3 to take that position if the fed has not. They 4 expect leadership from the federal level and they 5 can look to the federal level on that leadership. 6 Certainly the last part of your question 7 is I think what the rest of the morning is for. We 8 have -- you know, we've written formal comments on 9 all the things that happened; but the main thing is 10 to expand the definition of points and fees so it 11 really reflects, not from the industry perspective, 12 the borrower's perspective of what the cost -- what 13 the settlement costs of the loan are excluding 14 escrows, excluding PMI, but everything else should 15 really be included in the charges definition. 16 Otherwise, there's always going to be opportunities 17 for other profit centers to pick up the slack and 18 to strip equity. 19 MR. VARGA: I have one comment, clarification 20 on something I said about half an hour ago. It 21 might have sounded like there's one thing we can 22 throw into the points and fees that nobody has any 23 difficulty with because they don't do it which is 24 the lender refinancing its own loan and charging a 117 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 prepayment penalty which was suggested nobody ever 2 does. 3 I was informed during the break that there 4 are some very legitimate loan programs where a 5 person is given a choice of having a prepayment 6 penalty, even if they refinance with the same 7 lender, in exchange for a lower rate; and, 8 therefore, people who know they're going to stay in 9 their home are willing to take a prepayment penalty 10 even if they refinance with the same lender in 11 exchange for a lower rate. So there's nothing 12 abusive about that, per se, at all. 13 But apparently those programs exist so 14 that the thought that, you know, we can throw that 15 one in the points and fees because nobody does it 16 and nobody cares and it won't impact anything, 17 that's really not correct. 18 MR. RHEINGOLD: If I could just respond. I 19 think there's a mythology that we talk about when 20 we talk about consumer choice. 21 I mean, in the subprime market, there is 22 no consumer choice. Or maybe in some perfect 23 world, there is consumer choice and competition. 24 The competition that we see on a daily 118 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 basis is between the lender and the broker. The 2 lender is trying to tell the broker, bring us those 3 loans. We'll pay you compensation, and we'll do 4 good by you. 5 That consumer at home doesn't have a 6 panoply of choices. You can have this interest 7 rate, and you can have this interest rate or you 8 can have a lower interest rate if you get a 9 prepayment penalty. 10 That doesn't happen in the communities 11 that are being devastated by these type of loans. 12 It just doesn't happen. I have yet to meet a 13 client -- and I know it's anecdotal -- who 14 understand they had a prepayment plan. Never. And 15 never did anyone say to them, oh, by the way, you 16 can accept this prepayment penalty and then we'll 17 lower your interest rate. Never happens. 18 I will also add just as a point, I have 19 never, ever -- and I doubt this conversation ever 20 occurs in the marketplaces that we're talking about 21 -- about yield spread premiums. Oh, by the way, 22 the broker says to the homeowner, see this fee 23 here? Here's your choice. You can pay me this fee 24 and it can get financed. Or you know what? If 119 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 you can't pay that fee, that's too much of a fee, 2 we'll have the lender pay us and increase your 3 interest rate. 4 It doesn't happen. And that's a myth that 5 keeps going on here. There is not consumer choice 6 in the communities that we're talking about. And 7 there is no competition for that market. There 8 isn't. The competition is to see how much money 9 brokers can collect and how much money the lender 10 is going to make; and that consumer in those 11 communities are not offered an array or a panoply 12 of choices so that they can have good credit. 13 MR. VARGA: Well, if I can respond to that. 14 Ira, again, we both look at these loan files and I 15 see -- in Illinois, it's a required statement under 16 OBRE regs that require the borrower information 17 document and the broker disclosure agreement. 18 Any of those documents have in them -- and 19 it's been suggested by some of the people as part 20 of this HUD and broker compensation effort and 21 discussion and battle of wills who had premiums for 22 years -- a very specific thing that says, I'm a 23 broker, I'm going to get paid in connection with 24 getting a loan for you. You can either pay me up 120 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 front, and you might get a lower rate, or you can 2 pay me built into the rate, and it's going to 3 affect the rate that you are getting. 4 I have seen those in files signed by 5 people. I mean, you can say, Ira, that disclosure 6 doesn't mean anything, and I suppose we can just 7 scuttle Truth in Lending and RESPA and everything 8 else that goes with it or we can say that people 9 shouldn't be given loans and shouldn't be given 10 access to credit and we can all make that decision 11 for them, if that's what you want to do. 12 But the disclosure is there. I actually 13 believe one of the clearer disclosures is on a 14 single piece of paper, and it says, I'm going to 15 get paid because I am helping you with this and it 16 can be one way or it can be the other. Some 17 experts have put those together and suggested you 18 do it as an either/or thing, and I see those in 19 files. 20 So I don't see how you can say that it 21 isn't clear to people how the broker is going to 22 get paid one way or another. It's there. If they 23 don't read it, there is an element of personal 24 responsibility involved here. 121 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 The other thing you said, this isn't a 2 competitive marketplace. I want to mention one 3 study here. Other people have talked about 4 statistics; and with apologies to Mr. Twain here 5 that I mentioned earlier, here's one from the 6 Office of Thrift Supervision in their empirical 7 study they did on the mortgage lending industry 8 including the subprime. Maybe you've read it. It 9 was released on several months ago, and it's from 10 the Research and Analysis Staff of the Office of 11 Thrift Supervision. 12 They looked at, with respect to subprime 13 mortgages, over 1.8 million subprime mortgages, and 14 they conclude that anecdotes support both 15 contentions as to horror studies, excessive 16 profits, excessive losses claimed by lenders. They 17 say, however, the empirical data we found suggests 18 that the subprime market overall is a well 19 functioning competitive market. So apparently 20 somebody thinks there's some competition. 21 Now these are only federal authorities. 22 They have only looked at apparently whatever data 23 is reported. I know they're not the Woodstock 24 Institute. There are not various other people 122 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 involved here, but apparently somebody has looked 2 at it and determined that it's a competitive 3 marketplace. 4 MODERATOR SMITH: Ms. Weinberg? 5 MS. WEINBERG: Well, I just wanted to echo what 6 Ira was saying. I'm seeing -- personally, I'm 7 seeing more and more prepayment penalties. I think 8 the last six loans I've looked at, they all had 9 prepayment penalties, and not one of these 10 potential clients knew that it was there. 11 MR. JAMES: I would like to comment on the 12 prepayment penalties. 13 Until about two years ago, the general 14 wisdom was that prepayment penalties were illegal 15 in Illinois. And even if you saw one, no one would 16 think of enforcing them because we would have 17 prosecuted them. 18 And out of the hat came the Mortgage 19 Parity Act of 1982, an act that's been around for 20 something like a generation that has just newly 21 been interpreted by lenders to preempt the Illinois 22 prohibition against prepayment penalty. 23 MR. VARGA: It wasn't just interpreted by 24 lenders by that. It's been long interpreted by the 123 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 OTS as enabling prepayment penalties to be charged 2 on Parity Act loans. I mean, the law has been what 3 it is, and the OTS has long said that. 4 MR. BAKER: In fact, there's a 7th Circuit case 5 that says as much. You should be aware of that. 6 MR. VARGA: The fact that the suggestion that 7 somebody is taking some unfair advantage of 8 something, the law is what the law is and has long 9 been, and the OTS has long agreed. 10 Maybe those who are bringing these cases 11 -- and I have defended some of these cases -- 12 ought to have looked at the law a little more 13 before they brought the cases. 14 MODERATOR SMITH: Mr. Immergluck? 15 MR. IMMERGLUCK: Couple points. One is I think 16 the OTS is reconsidering their opinion on that 17 through an advanced notice of proposed rule-making; 18 and, secondly, on the study that Mr. Varga just -- 19 it's actually the same data source that I cited in 20 my opening remarks. 21 With all due respect to Governor Gramlich, 22 economists tend to have certain viewpoints due to 23 their training, corresponding with economists who 24 offered that study. The study is highly flawed. 124 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 And the same study has data that says the 90-day 2 delinquency rates for C grade loans, which 3 compromise almost 20 percent of the sample of the 4 loans looked at in that study, have delinquency -- 5 are 10 percent, 40 times the delinquency rate of 6 prime refinance loans and 5 times the rate of FHA 7 loans. For D grade loans, the rate is 22 percent, 8 90 times the prime rate. 9 The foreclosure rate for all subprime 10 loans, including the 55 percent of the subprime 11 loans in this study that are A minus loans, so are 12 not high risk, very high risk loans, are more than 13 four times the FHA foreclosure rate. And FHA is a 14 program that NTIC and other folks have demonstrated 15 has devastated urban neighborhoods. These are 16 loans with foreclosure rates four times as high. 17 So given that 20 percent of the subprime 18 loans that are C and D are driving this, their 19 foreclosure rates are clearly on the order of 5 or 20 10 percent. 21 What does that mean? In urban 22 neighborhoods based on the FHA data, that means 23 foreclosure rates of 20 percent. What does a 24 foreclosure rate of 20 percent in a low-mod 125 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 community mean? Abandonment of 20 percent. 2 It's one thing to have foreclosures in a 3 middle and upper income community. We don't see 4 them. Why? Because someone buys the house. When 5 we have them in low-mod communities, they get 6 abandoned. They get blighted. Blights the 7 neighborhood and it draws crime. 8 MR. DETELICH: If I could just comment because 9 when I hear numbers like that, 20 percent, that's 10 -- I'm not sure how you got from where you were 11 from 5 percent to 20 percent, but I can only 12 speak -- 13 MR. IMMERGLUCK: Which 20 percent? 14 MR. DETELICH: I can only speak to our -- 15 MR. IMMERGLUCK: 20 percent of the loans in the 16 study were C and D loans. 17 MR. DETELICH: Okay. Any what was the 18 foreclosure rate? 19 MR. IMMERGLUCK: The foreclosure rate of all 20 subprime loans was about 3 percent, four times the 21 FHA foreclosure rate. But that's for all subprime 22 loans. 23 Delinquency rate for the C loans was 24 10 percent which is 40 times the delinquency rate 126 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 for prime loans. For the D loans, it was 2 22 percent. Prime loans have a delinquency rate of 3 a quarter point. 4 MR. DETELICH: I can say this: While I don't 5 have hard or exact statistics, I can tell you that 6 every one of those categories you just cited, they 7 sound off the wall in terms of how high -- 8 MR. IMMERGLUCK: This is an industry survey. 9 MR. DETELICH: It sounded like you said that 10 the survey itself was suspect though. 11 MR. IMMERGLUCK: It's suspect because I think 12 it's voluntary. 13 MR. DETELICH: And I would agree with you. 14 MR. IMMERGLUCK: The bias is in the other 15 direction from what you are suggesting. This is a 16 voluntary survey of 27 out of 200 some prime 17 lenders who volunteer their data to this private 18 company. 19 MR. DETELICH: I'm questioning technique. 20 MR. IMMERGLUCK: If you're a bad lender, 21 they're less likely to volunteer the data than if 22 they are a good lender. 23 MR. VARGA: My only point is with the 24 admonition of statistics -- 127 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 MR. SHEA: In July -- excuse me. It's my 2 turn. In July, the ACORN Housing Corporation loan 3 counseling operation did a survey of 1500 of our 4 clients who are currently in our counseling program 5 who have subprime loans with prepaid penalties. 6 Of those 1500, we found 12 who understood 7 fully the nature of the prepaid penalty. 12 out of 8 1500. Of those 1500, 1200 would swear on a stack 9 of bibles that they were told that they could 10 refinance their loan and move to a better loan 11 whenever they were ready, whenever they had 12 repaired their credit and bettered their lot in 13 live. 1200 felt that they could refinance. 14 It's only when many of them went to 15 actually try to refinance that they understood and 16 was hit with this prepaid penalty. 17 Ira made another point I would like to 18 respond to and that is that there is no competition 19 for these loans in the neighborhoods where ACORN 20 is. This is the failure of the mainstream lenders; 21 and the fact that there are no mainstream lenders 22 on this panel and that they have not responded and 23 participated in the HUD hearing speaks volumes in 24 our mind. They are not participating in the feds 128 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 process speaks volumes in our minds. 2 You know, ACORN, NTIC, Woodstock, we've 3 all done very good jobs bringing mainstream first 4 mortgage credit into underserved communities. We 5 have not been as successful getting mainstream 6 banks to step forward to provide cash-out refis, 7 small home loans, equity loans. They have them 8 available on the books, but they do not market 9 aggressively in our communities. Yet if mainstream 10 lenders would step up and do their role, we would 11 not have nearly the problem with predatory loans 12 that we currently have. 13 MR. VARGA: I guess the suggestion there is is 14 that non-banks are not mainstream lenders. There 15 are many non-bank "mainstream lenders" who are the 16 market-funded lenders who are providing the loans 17 that increase the access to credit; and these are 18 the people who their reward for that is the abuse 19 heaped on them in these kinds of comments that we 20 hear today that equates, apparently now, every 21 non-bank subprime lender with being a predatory 22 lender. 23 MR. SHEA: Are you going to stop him from 24 talking out of turn or should we just all butt in? 129 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 MS. HURT: Actually I'll butt in. 2 MR. SHEA: Okay, great. 3 MR. VARGA: I didn't realize -- I heard people 4 throughout the day just simply make comments and 5 have dialogue. 6 MS. HURT: I know. That's absolutely fine. We 7 wanted to -- 8 MODERATOR SMITH: The problem is that some -- 9 some panelists do sort of ask and are recognized -- 10 or not recognized immediately and, you know, we do 11 need to have kind of a mix. It's not essential 12 that everyone wait for recognition before entering 13 into the discussion, but we do need to have some 14 mix of the two types. Adrienne? 15 MS. HURT: Moving along to examining possible 16 additional restrictions or prohibition for specific 17 acts or practices. Under HOEPA, the Board is 18 authorized to prohibit acts and practices. 19 And just briefly as background: In 20 connection with mortgage loans generally, the Board 21 can declare a practice unfair or deceptive if it 22 finds the practice to be unfair, deceptive or 23 designed to evade HOEPA; and, in connection with 24 refinancing of mortgage loans, if the Board finds 130 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 the practice is associated with abusive lending or 2 otherwise not in the interest of the borrower. 3 The Board's notice raised several topics 4 for discussion. Because we have limited time 5 today, we're going to focus on four. Loan 6 flipping, unaffordable lending, regulating credit 7 insurance and approving disclosure. 8 Beginning with loan flipping, it is 9 clearly a practice that is associated with 10 predatory lending, and it is a problem. Flipping, 11 as we're going to discuss it, refers to the 12 frequent refinancing of home-secured loans where 13 the consumer derives little economic benefit and 14 the lender receives significant income through 15 fees. The fees are typically added to the loan 16 amount and thus reducing the homeowner's equity in 17 the home. 18 Suggestions for addressing loan flipping 19 have been made including restricting the amount of 20 fees that may be imposed on a refinance loan and 21 limiting the number of refinancings within a 22 specific period of time unless a net tangible 23 benefit is provided to the borrower. 24 The question is within the regulatory 131 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 context, what approach, what regulatory approach 2 would effectively curb refinancings that don't 3 benefit borrowers that result in equity stripping 4 and loan flipping without impairing transactions 5 that help borrowers and without imposing price 6 controls? 7 And I will just add a couple of other 8 questions. For example, if there were a rule that 9 limited the number of refinancings on a loan, what 10 would be the basis for deciding whether that period 11 of time should be 12 months, 24 months, 36 months, 12 18 months? And how would one measure whether a 13 loan provides a tangible net benefit to a 14 borrower? 15 MR. BAKER: If I may? I think, first of all, 16 you need to be careful in looking at the phrase net 17 tangible benefit or tangible net benefit. 18 What is a net benefit? Is it a loan -- a 19 second loan refinancing that places you under 20 greater debt obligation? Is that not a net benefit 21 if the proceeds of that loan are used for 22 legitimate a purpose for financing college 23 education or something like that? 24 I think you're going to have a hard time 132 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 defining what a net benefit is. And these are the 2 kinds of uncertainties in the list of "predatory 3 activities" that are going to keep lenders under 4 the threshold at all times because they're never 5 going to know when they're going to be 6 second-guessed as to whether the purpose of the 7 loan produced a net tangible benefit. 8 You are going to have to be very careful 9 about that. 10 MODERATOR SMITH: Mr. Bochnowski, and then 11 Mr. Bivins. 12 MR. BOCHNOWSKI: I would agree. Again, in the 13 context of flipping which community banks are not 14 involved in, our problem as banks, with all due 15 respect to the regulators who are here, these are 16 always issues that are hindsight. They're never a 17 problem at the time; and how would we define a net 18 benefit to the borrower? 19 We're in the business of underwriting a 20 loan. Either we can underwrite it or we can't, and 21 either it fits our underwriting criteria or it 22 doesn't. 23 To have to get -- to go behind the 24 transaction and ask a checking list or a pecking 133 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 order of questions as to what the benefit is and 2 then to put ourselves in the position of time alone 3 is made to make that decision to the borrower? I 4 think we're going far beyond what historically has 5 been housing finance in this country. 6 MR. BIVINS: To address just loan flipping and 7 earlier comments about prepayment penalties, I can 8 tell you that prepayment penalties strongly 9 discourage people from refinancing, just due to the 10 fact that their payoff balance is substantially 11 higher because of this prepayment. 12 And sometimes it's impossible to refinance 13 in today's market because there is not enough 14 equity to include that extra payoff balance. 15 So even though the Parity Act may be used 16 in Illinois that it wasn't originally intended to 17 be, it is having net effect, and it does have an 18 effect on price. 19 I get rate sheets every day from numerous 20 lenders, and there will be different interest rates 21 based on the type of loan that is being offered; 22 and if a lender is able to use the Parity Act, that 23 interest rate -- and therefore include a prepayment 24 penalty, that interest rate will be much lower to 134 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 the consumer. 2 Is it the broker that's just trying to 3 make money? My experience and also being active 4 in the State Association Mortgage Brokers here in 5 Illinois, if a broker is charging a fee and that's 6 his compensation, then he is going to try and get 7 the loan from the lender at the lowest interest 8 rate possible. It's going to be the most benefit 9 to the consumer. 10 MODERATOR SMITH: Mr. Columbus and Mr. Varga. 11 MR. COLUMBUS: In terms of how insurance is 12 treated in determining whether a net tangible 13 benefit is provided, I think you have to be careful 14 because if a person has life insurance, let's say, 15 from the age of 40 through 70 and they didn't, 16 thankfully, have to use it, does that mean that 17 they were provided no net tangible benefit? 18 I would argue that that's not the case. 19 And so how you determine whether the insurance 20 provides a net tangible benefit is very important. 21 MODERATOR SMITH: Mr. Varga. 22 MR. VARGA: I think the terminology of net 23 tangible benefit, as Bruce said, you know, it's 24 like beauty is in the eye of beholder or 135 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 obscenities, we know it when we see it. It's 2 inherently an after-the-fact determination, and you 3 are suggesting people to an incredible litigation 4 risk similar to the inclusion in every complaint 5 that we see in every case of an unfair and 6 deceptive practice under a state deceptive trade 7 practices law. 8 It's going to be the same thing here with 9 absolutely no certainty, and I think it's, I 10 believe, the thing that would be the biggest cause 11 of lenders staying away from HOEPA loans. 12 So the more you drop the trigger, if 13 you're going to have this as one of the substantive 14 loan prohibition features to a HOEPA loan, I would 15 think this would have great lender impact and skew 16 what might have been lender effect in the past on 17 the advent of HOEPA. 18 I think the determination of what's a 19 benefit, it's difficult. I mean, just one 20 operational question is a person could go from a 21 fixed payment, fixed rate loan to a variable rate 22 closed-end loan and some of these determinations 23 have said, the monthly payment has to drop. Well, 24 the monthly payment might go up based on it being a 136 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 variable rate loan, and you can't have the lender 2 bet against itself on the interest rate. 3 So there's an awful lot of devil in the 4 detail in this one, and I think it simply drags 5 down the merits of inclusion of this as a loan 6 feature prohibition. 7 MODERATOR SMITH: Mr. Immergluck? 8 MR. IMMERGLUCK: Thank you. I agree. Let's 9 reduce the uncertainty. Let's get specific. I 10 think there's a couple things the Board could do 11 that I'm sure folks want to be disspecific, have 12 all kinds of problems with folks on the industry 13 side. 14 One is that as the HUD Treasury Task Force 15 report recommends that refinancings made within 16 18 months of a previous loan, the Board should only 17 allow points and fees to be charged on the increase 18 of the advance. You know, why should we be 19 charging fees on the same amount that we're 20 flipping over and over? 21 If you take a loan for 50 to $70,000, 22 charge it on the $20,000. Don't charge it on the 23 $70,000. 24 On the other hand, if you're really 137 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 benefitting the borrower because you're lowering 2 the interest rate, you're bringing some real 3 benefit, then you can charge on that $50,000. So 4 say that if you lower the -- if the APR on the new 5 loan is, as kind of implied in the HUD report, 6 150 basis points below the existing -- the interest 7 rate on the existing loan, then you can charge 8 points on that part of the loan. 9 It's a fairly straightforward concept. 10 It's not perfect. There's never going to be 11 anything that's perfect. But I agree, let's define 12 that benefit. Let's have some threshold. At least 13 put it out there as kind of a safe harbor, and if 14 the lender wants to argue that something else is a 15 benefit, the burden is on them. 16 MODERATOR SMITH: Governor Gramlich. 17 GOVERNOR GRAMLICH: Just on that point. So you 18 would -- you wouldn't have a full net benefits 19 test, but you would have -- you would have an APR 20 threshold or something? 21 MR. IMMERGLUCK: Yes. Obviously an ideal kind 22 of net present value test would be ideal. If that 23 could be done, that would be fine. This thing -- 24 GOVERNOR GRAMLICH: That may be 138 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 administratively costly. So you have try to figure 2 it out. 3 MR. IMMERGLUCK: Again, it says, if you meet 4 this, there's no more uncertainty. You've met the 5 net benefits. If not, you haven't met it; then, 6 yes, you have to worry about whether you are 7 bringing a benefit to us both. 8 MR. DETELICH: Let me first comment on two 9 issues. The first is the prepayment issue. There 10 is indeed a clear result from charging prepayment 11 penalties in our portfolio and the impact on the 12 reduction of the liquidation refinancing. It's 13 currently at all-time lows. 14 We are in a relatively high straight 15 environment partially due to that, but this has 16 great benefit to lenders, that we generally match 17 our funding to terms of loans. And it's very 18 helpful to have certain expectations about the life 19 of loans. 20 I don't want to oversimplify the issues 21 that securitizers had over the last three or four 22 years, but a good deal of that had to do with their 23 inability to correctly forecast how long loans 24 would be on the books. So that's my first point. 139 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 Second point, I actually agree with most 2 of what you described there except to the extent 3 that your suggestion is you can charge points on 4 what we'll call the new money. You can charge 5 point on new and old money if you had this tangible 6 benefit is what I heard you say. I think that 7 still introduces this dicey concept of tangible net 8 benefit. 9 Instead I think a better idea is to select 10 some term. We practice today at Household 11 12 months. If a refinance occurs in the first 12 12 months, we do not charge points on the old 13 money. New money only. 14 I think that's more simple. You don't 15 have the net tangible benefit issue to deal with; 16 and I think it's something that most lenders can 17 live with. 18 GOVERNOR GRAMLICH: But both of you are saying 19 in your different way not to have the tangible net 20 benefit full test, but just have some simple 21 concept that would be an approximate, rough 22 guesstimate. 23 MR. DETELICH: It would be administered without 24 a great deal of litigation. 140 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 MODERATOR SMITH: We'll go to Mr. Bivins and 2 then Mr. James. 3 MR. BIVINS: I understand having a test for 4 those people that the consumer groups feel need 5 protection. I'm concerned that the test would not 6 take into account those who don't need the 7 protection. 8 For example, my earlier comment. Someone 9 who because of their financial situation purchased 10 a property and took out an adjustable rate mortgage 11 because they wanted to minimize their payments; 12 and, within 12 months, within 2 years, they have 13 changed their financial situation. They can afford 14 a higher payment and choose to make a higher 15 payment because they want a fixed rate, fixed term 16 loan. 17 There is no tangible benefit, but there is 18 certainly a substantial benefit to them as far as 19 their peace of mind of knowing what their payments 20 are going to be 15 years from now as compared to 2 21 years from now. How do you measure that? These 22 aren't quantifiable things. 23 MODERATOR SMITH: Mr. James? 24 MR. JAMES: Just from a law enforcement 141 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 standpoint and in terms of the use of our 2 resources, we can only address maybe 2 or 3 percent 3 of the abuses we see. There's not a week that goes 4 by when we -- when I don't see a loan that had no 5 benefit to the consumer who was induced to 6 consummate the loan. And certainly with respect to 7 our ability to prosecute and the standards that we 8 apply to analyzing a problem loan, we're going to 9 bring lawsuits where essentially there has been 10 very little benefit to consumers overall. 11 I don't really -- it doesn't trouble me, a 12 no net benefit standard. It seems to me that 13 that's something that will be worked out in the 14 courts, and I don't think you can qualify or 15 quantify the kinds of terrible situations that seem 16 to crop up repeatedly. 17 MR. RHEINGOLD: Just to go back to the original 18 point a little bit. 19 The practice that we're trying to prohibit 20 is the repeated flipping of loans where people get 21 three and four loans over the course of three years 22 which wind up skimming their equity. A no net 23 benefit test that Dan talks about is certainly a 24 good idea or at least sort of a concrete way of 142 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 measuring it, and I think I agree with that. 2 I think the point we made earlier today is 3 another way of dealing with it, is adding the fees 4 that were charged in the first one to calculate 5 adding it into the second loan. In other words, as 6 that flip goes along and it's made within a certain 7 time frame, then the fees that were charged in 8 there will go toward whether or not the HOEPA 9 trigger meets. 10 And the reason why I think that's 11 important, again, the point I keep bringing up, is 12 the pass-through liability. What we have -- and 13 this is not an uncommon occurrence -- you will have 14 a HOEPA loan flip into a non-HOEPA loan. That 15 second loan is not particularly good. The equity 16 gets stripped, but that second lender or that 17 second securitizer is going to say, how did we know 18 that happened? How do we know the broker just 19 took $10,000 out that of person's home, 5,000 bucks 20 5,000 times -- $5,000 a second time? And there's 21 no liability there. 22 So, again, it's making the marketplace 23 respond. The market -- that lender who was buying 24 that loan from the broker, that securitizer who is 143 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 buying that loan from the lender will take a closer 2 look at that loan that's been made to that person 3 for the second time or the third time in 18 months 4 and say, okay, there's some suspicious indicia 5 here. We better take a look at it and do some due 6 diligence and see if, in fact, that homeowner has 7 benefited from the loan. 8 So I think that's an important point and 9 we addressed it earlier. 10 GOVERNOR GRAMLICH: Let me ask a clarifying 11 question about that. So does that mean this -- 12 Adrienne asked the question earlier about whether 13 the fees from the prior loan ought to be added to 14 the next loan. And so are you suggesting that, 15 yes, though, with the time limit on, you know, one 16 and a half years, two years something like that? 17 MR. RHEINGOLD: Yes. That's what I am saying. 18 MS. HURT: I think we're ready now to move to 19 the next subject which is unaffordable lending. 20 MR. MICHAELS: Under HOEPA, creditors are not 21 permitted to engage in a pattern of practice of 22 extending credit that is based on the collateral if 23 the consumer's current and expected income and 24 current obligations and employment status, after 144 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 being considered it was clear the consumer will be 2 unable to make the scheduled loan payments. 3 This raises a number of issues, some of 4 which probably we can't deal with here, one of 5 which is the merits of that prohibition requiring 6 that there be a pattern of practice of such 7 activity. That is the requirement in the statute, 8 and that's probably the question we could debate 9 but one Congress would have to deal with. So we're 10 going to put that one aside not for purposes of our 11 discussion this morning. 12 The other question is how do you know when 13 you have a pattern of practice? What constitutes 14 one? That is also a legal question that we could 15 debate in length. 16 What we would like to do though is focus 17 on the current prohibition and whether or not the 18 Board could revise the HOEPA rules to establish 19 requirements regarding the creditors' need to 20 document or verify the incoming expenses in 21 determining whether or not the loan is one that 22 could be repaid according to the terms. 23 What we have in HOEPA now is a yardstick 24 for that sort of rule, and that's because HOEPA has 145 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 a rule now that prohibits the use of prepayment 2 penalties under certain circumstances; and one of 3 those circumstances is where, after verifying the 4 consumer's income and expenses, the debt to equity 5 ratio -- the debt to income ratio of the consumer 6 would be in excess of 50 percent. 7 So that's one of the things we've looked 8 at is whether or not we ought to take those kinds 9 of verification requirements that are in the 10 prepayment penalty rule and use them for purposes 11 of the asset-based lending rule. 12 I would like to start the discussion on 13 that, and I will have some more specific 14 questions. 15 MODERATOR SMITH: Mr. Rheingold. 16 MR. RHEINGOLD: I am trying to be polite. 17 First, I mean, I think in terms of 18 regulations, I think one of the areas of the 19 greatest abuse -- I mean, I think, to me, a clear 20 signal that something is wrong in a loan is if it's 21 a no doc loan. If it's a HOEPA loan and it's a 22 no doc loan, that screams a problem. 23 If it's a HOEPA loan, documentation about 24 income and assets need to be included; and, again, 146 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 that goes to liability and lender's due diligence. 2 The broker does all that stuff. And I've seen -- 3 some of the greatest work of fiction I have ever 4 read are loan applications produced by loan 5 brokers. And when we wind up in court, the lender 6 says, the loan application says they can afford the 7 loan. Client signed it. Signed about 80 other 8 documents, but they signed it. 9 A lender who's making a loan that fits 10 under these triggers should be obligated to go pass 11 a loan obligation but also do its own due diligence 12 by examining the person's actual income and 13 assets. 14 I think that's one crucial thing that the 15 Federal Reserve should require. 16 MR. MICHAELS: Let me then follow that up 17 because something you said touched on a question I 18 was going to ask anyway. 19 You used the phrase, if they're making a 20 loan covered under these triggers. The current 21 rule says that lenders shall not make -- engage in 22 a pattern of practice of making loans covered by 23 HOEPA without regard to consideration of the 24 income. 147 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 The question is would it make sense for us 2 to expand that rule so that as a pattern of 3 practice issue you wouldn't engage in that type of 4 lending even for loans that fall underneath the 5 HOEPA triggers? 6 MR. VARGA: I think there are many legitimate 7 no doc loans and, in fact, I think -- I'm not an 8 expert on this, maybe other people are, but I think 9 many of them are high-end borrowers who have no doc 10 loans, for one reason or another. They're 11 entrepreneurs who own their own business or who at 12 in some midpoint with respect to their tax filings 13 or there are sometimes personal potential divorce 14 situations, and all these kinds of things that tend 15 to focus on high-end borrowers utilize no doc 16 loans. 17 I think that expanding this outside the 18 HOEPA context would really wreak havoc in that area 19 where I don't think anybody here is thinking those 20 are the borrowers we're needing to protect. 21 MR. MICHAELS: But doesn't that note really -- 22 what is the verification process going to be 23 followed for those loans? In other words, there's 24 some process a lender goes through to decide 148 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 whether or not they want to make that loan, whether 2 it's going to be repaid, some source of assets or 3 income. Is it really just about determining the 4 right mix of what the document or verification 5 requirements are rather than saying what the rules 6 don't imply? 7 MODERATOR SMITH: I am going to call on 8 Mr. Immergluck and then Mr. Rheingold and then 9 Mr. Bochnowski. 10 MR. IMMERGLUCK: There's kind of two things 11 going on. One is verification, and the other is 12 whether Mr. Michaels' 50 percent debt to income 13 ratio kicks in. You don't have to necessarily tie 14 those together. You could certainly say, 15 verification should always be done. Certainly it 16 seems appropriate. I understand there's some 17 no doc programs. 18 One way -- if there's concern about 19 high-end lenders, the City of Chicago's proposed 20 ordinance basically has an exclusion for high-end 21 income lenders. Oftentimes some people are, you 22 know, income-poor, wealth-rich, then, again, you 23 could carve out certain exclusions for those 24 people. But, generally, for low-, moderate- and 149 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 middle-income people, debt to income ratios over 2 50 percent are very unwise. 3 Secondly, you know, just to add on to what 4 Ira said, you know, the fraudulent activity, if we 5 call it that, of falsifying incomes will never be 6 caught. Fraud is just too easy to get away with. 7 We can have all the litigation in the world. We 8 basically can't enforce some general unfair UDAP 9 statutes, broad statutes. 10 We need on this particular case, since 11 this is the one driving foreclosure, perhaps the 12 worst, we need specific language on what is 13 appropriate as documentation and verification. 14 MODERATOR SMITH: Mr. Rheingold? 15 MR. RHEINGOLD: I want to get back to your 16 pattern of practice point. I think that -- to try 17 to avoid a larger discussion, I think pattern of 18 practice is impossible to prove, particularly in 19 individual cases. We only do individual cases and 20 we do people who are in foreclosure. So I think 21 pattern of practice is an extremely difficult 22 standard for us to show. 23 I think that if you want to look at 24 pattern of practice, you might want to say, if 150 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 you're making HOEPA loans with no doc loans, that's 2 a prima facie case, that you are engaging in a 3 pattern of practice of bad lending. And I think 4 that's the way you can deal with it. 5 But I think it's a really difficult 6 standard. I think, how do we individualize that 7 thing? Like Dan said, taking a look at the debt to 8 income ratio is crucial. 9 I mean, I think the thing that I find so 10 amazing is here are the people who are at the 11 greatest risk and yet we're willing to go to ratios 12 far beyond what we give the people who are 13 bankrupt. It's crazy. 14 MODERATOR SMITH: Mr. Bochnowski, and then 15 Mr. Detelich, Mr. Bivins, and Mr. Shea. 16 MR. BOCHNOWSKI: Just addressing the comments 17 for loans to fall below the HOEPA triggers. On the 18 banking side, you know, when we underwrite a loan, 19 we're required to demonstrate that there is an 20 ability to repay. So I think that it would be 21 redundant if we were to engage in that. 22 I would also be concerned that the 23 suitability question, if that's where this is 24 going, is a loan suitable to a particular borrower 151 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 at the time, that again becomes a hindsight 2 question on the banking side, and it's beyond where 3 banking has traditionally been. 4 I just would add my support to Ira's 5 comment that maybe there is a prima facie case that 6 can be made for some of these loans. 7 MODERATOR SMITH: Mr. Detelich? 8 MR. DETELICH: I think I would agree as well. 9 I don't know that anyone would make HOEPA loans 10 without documentation. If they are, they're soon 11 to be out of business. You just can't make that 12 kind of loan and stay in business long. That's my 13 first point. 14 I just like to introduce just some 15 difficulties though in giving guidance. Ira, I 16 think you would agree that those where there's no 17 ability to pay, the uninformed loans, they just 18 jump out at you. You can tell what they look 19 like. I have seen some of these. 20 That's not what we're really talking 21 about. We're talking about when we get to the 22 margins, you know, the person that you described 23 early, Mr. Shea, who has $900 income and $600 loan 24 payment. I think that's pretty clear what's going 152 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 on there, unless there's some effects. 2 The problem is, though, when you start to 3 give guidance about what is the right DIR, what 4 should it be, 50, 55, 45 or what, it can get very 5 dicey because you have -- you got a two-income 6 family in New York City and you got a grocery store 7 owner in Lincoln, Nebraska, what is the standard we 8 are going to have at the federal level to give 9 guidance on what is affordable and what's not? 10 One of those parties is not going to get a loan. 11 I'm sorry. 12 MODERATOR SMITH: Mr. Bivins? 13 MR. BIVINS: Talking about the hard money 14 lending. In 17 years of doing business in 15 Illinois, I have never had a lender who would make 16 a loan to an individual based on the equity of the 17 property owner. They have always expected and 18 demanded documentation that that individual would 19 have the ability to repay; and that's partially due 20 to the foreclosure laws in the State of Illinois 21 which are very cumbersome and very lengthy before 22 that lender would ever have access to that 23 property. 24 On the opposite side of that, 20 years ago 153 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 in the State of Arizona, a lender could basically 2 foreclose and have title within about 60 days. And 3 there were in fact who would have no concern about 4 the borrower's ability to repay. They were only 5 concerned about what's the value of the property 6 and how much is owed on it and how much do you want 7 to borrow. So I've never seen any lender in 8 Illinois not expecting the ability to repay. 9 The no doc program has come about because 10 of technology. FICO scores which is now the 11 ability to determine somebody's expectation that 12 they're going to be able to repay, FICO scores 13 would have to be very high in order for a lender to 14 then offer up a no doc program. And I agree that 15 I've never seen a no doc program for somebody who 16 was going to get a HOEPA loan. 17 That will do for now. 18 MODERATOR SMITH: Mr. Shea? 19 MR. SHEA: Well, clearly, the example I gave 20 earlier was in fact a no doc loan, $700 as a 21 monthly debt service on $900 income which was fixed 22 Social Security. No hope for that going up in the 23 future. The lady was 68 years old. That was a 24 no doc loan. I looked at the file. There was 154 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 nothing in there that tried to verify the income. 2 It had been doctored. The broker had in fact put 3 something else as their income on there. 4 In terms of expanding outside the HOEPA 5 definition to the other loans, we would be willing 6 to go with 55 percent debt to income ratio. In our 7 experience, at least with the folks we work with, 8 there is significant income that is very, very 9 difficult to document. You can do it with letters 10 of baby-sitters, et cetera, et cetera, which in 11 fact make up a significant part of many of the 12 families we work with, make a significant part of 13 their income. So we're willing to allow that to 14 expand up a little bit to maybe 55 percent. 15 MODERATOR SMITH: Mr. Rheingold? 16 MR. RHEINGOLD: I would respectfully disagree, 17 and I think that's a real danger to go up that 18 high. 19 I think there are underwriting guidelines 20 that can be followed. FHA and VA make high-risk 21 loans, and they have underwriting guidelines that 22 are pretty clear. They calculate. They look at 23 the lower income people that we are talking about. 24 They look at residual income and to see what other 155 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 debt they have to pay. 2 I think that if lenders follow FHA 3 guidelines, there would be guidelines when they 4 make these types of loans, and I think they're 5 safe. Safe. That would be a way for them to do it 6 in a safe way. Those are the guidelines they 7 should follow. 8 MS. HURT: Maybe I'm hearing what I want to 9 hear, but it sounds like verification requirements 10 for HOEPA loans seems to be a no-brainer for 11 creditors and consumer advocates? Is that what 12 we're hearing? 13 MR. VARGA: I think we're saying that no one 14 has seen or rarely seen a HOEPA loan that's a 15 no doc loan. I don't know how you can stay in the 16 business. 17 MS. HURT: So a verification requirement should 18 not be problematic? Is that also what I'm 19 hearing? 20 MR. BIVINS: I don't think it's problematic; 21 but in addressing some of this fraud and who's 22 doing it, there's a task force here in Chicago made 23 up of the FBI and HUD that's put on seminars 24 regularly for our industry. 156 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 At the most recent seminar that they did, 2 they stated that, to their disbelief, 50 percent of 3 the fraud that they were investigating is now being 4 originated by the borrowers without assistance from 5 any other outside party, be it a mortgage broker or 6 realtor or anyone else. 7 I have in the last two weeks had an 8 application come in and the borrower had gotten a 9 verification of employment with documentation that 10 totally misstated their income after it was 11 verified by the broker directly with the employer. 12 We are seeing, for $32, I can go buy 13 TurboTax and put it on the computer and stop by an 14 office supply store and pick up some blank checks 15 and create tax returns, W-2s, and check stubs and 16 present that to the broker, the lender, and there's 17 documentation, and everybody think it's 18 legitimate. 19 We are now seeing self-employed lenders 20 who are now requiring that they won't even accept a 21 tax return from a borrower. It might even be 22 signed by the CPA. They are often requiring that 23 we actually get copies directly from the IRS. 24 There are market forces in play here that are 157 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 addressing some of these issues. 2 So HOEPA loans, verifications, as I say, 3 we're always getting documentation to that effect 4 on any HOEPA loan. I'm not aware of any other 5 activity. 6 MODERATOR SMITH: Mr. Brown? 7 MR. BROWN: One quick suggestion. In this 8 particular instance, I'm suggesting that the 9 federal government follow the state. It appears -- 10 and, Mr. Darr, you can correct me if I'm wrong-- 11 the state has done a pretty good job on rules they 12 recently promulgated with regard to the new 13 predatory lending statute that this state has 14 recently enacted in laying out with specificity 15 what it takes to verify the ability to repay a loan 16 in a HOEPA environment. It's very -- to me, it's 17 very clear. And, again, I would direct you to go 18 there. 19 MR. DARR: If you are asking me to verify that 20 we did a good job, I will verify it. You may get 21 some differences of opinion from the other people 22 on the panel. 23 MR. MICHAELS: Well, I'm not going to quote 24 Mark Twain. I'm going to quote a well-known 158 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 economist: When it comes to unaffordable loans, it 2 seems that foreclosure is the hammer. 3 I noticed in reading the state's 4 regulatory proposal that one of the ways they deal 5 with this is to try to assist the law enforcement 6 agencies by creating data on where the foreclosures 7 are. 8 So the question is would that work at the 9 federal level? Would that make sense to create 10 some sort of data bank on -- at least for HOEPA 11 lenders or HOEPA loans on where the foreclosures 12 are and -- we'll leave it go at that. Does that 13 make sense? 14 MODERATOR SMITH: Mr. Immergluck? 15 MR. IMMERGLUCK: It would be great. Right now, 16 the kind of foreclosure data that we have is 17 private data that's collected from partially 18 accurate court records that has very limited 19 information and also only has the current 20 mortgagee. 21 So we cannot trace that loan back, as 22 Mr. Bivins talked about. We really need to be able 23 to trace the chain of title of the loan; and if we 24 can't do that, it's not going to be of a lot of 159 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 use. That's a real key component. 2 One of the things that we hope that 3 Fannie Mae and Freddie Mac will bring to this 4 business -- and we basically pushed HUD to require 5 it -- is that they will be able to establish that 6 chain for at least the loans that they purchase. 7 MODERATOR SMITH: Mr. Rheingold? 8 MR. RHEINGOLD: I pass it over to Tom. 9 MR. JAMES: I know there's been discussion at 10 the state level of appending the original note, a 11 HOEPA note to the foreclosure papers so that we 12 could trace it. And I think it's essential that we 13 begin to develop a system that's going to tell us 14 who's originating the foreclosures. 15 MR. MICHAELS: Does the Illinois rule have some 16 sort of device like that? 17 MR. JAMES: No. 18 MR. DARR: No. Our rule was really for our own 19 benefit, not for the law enforcement, although 20 obviously if it has some benefit to law 21 enforcement, I am happy to provide that. 22 But our goal in collecting the data was so 23 that we could see where there were deviations from 24 norms in foreclosures so that we could pinpoint 160 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 who, as has been called, the bad actors in the 2 business were and then zero in on them through our 3 own internal enforcement capabilities. 4 Personally I think that's the single most 5 important piece of the rules that we put out for 6 review. And, I might add, they're still out for 7 review. They have not been submitted for approval 8 yet. 9 MR. MICHAELS: The public comment period ends 10 when? 11 MR. DARR: We haven't submitted rules, period. 12 So there's no deadline on this at this point. 13 MODERATOR SMITH: Mr. Bochnowski, and 14 Mr. Varga. 15 MR. BOCHNOWSKI: Just a question, Jim. The 16 purpose of this is for enforcement, law enforcement 17 on that side. Would this be just for HOEPA loans 18 or would this be for all loans? 19 You know where I am going on this. Don't 20 give us anymore bureaucratic red tape that goes 21 somewhere and we don't know what happens to it. 22 MR. MICHAELS: That's the way I phrased it. 23 MR. DARR: If I just might add, in the rules 24 that you reference, the HOEPA thresholds were the 161 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 trigger point for that. Well, the data collection 2 was for those high-risk loans. 3 MODERATOR SMITH: Mr. Varga? 4 MR. VARGA: I just want to say the Department 5 of Financial Institutions' rules, which is who my 6 members are subject to, are slightly different than 7 the OBRE ones, but they provide a mechanism as well 8 to report foreclosures. 9 But you have to be -- you have to be very 10 precise about terminology here. You know, what's a 11 foreclosure? If you're using it as, let's say, 12 something indicative of who's a bad actor, just 13 because somebody files a foreclosure doesn't make 14 them a bad actor, and there can be legitimate 15 reasons for deviations from the norm of a 16 significant number of foreclosures. There could be 17 a plant closing or a layoff in a particular area 18 that sends foreclosures through the roof. There's 19 nothing non-legitimate about that. 20 But I think we said that you need precise 21 terminology so that you're comparing apples to 22 apples from one lender to another. You need to 23 look at not just the initiation of the foreclosure, 24 but does that mean in case that goes to judgment or 162 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 how about one that gets worked out some way in 2 between? You can't broad-brush treat them. 3 Those are the kind of comments that we 4 have made to the DFI in connection with the 5 proposal. But I don't think anyone is objecting to 6 reporting of data because when you get the 7 terminology down right, then maybe it gives us a 8 basis of making decisions about some of the other 9 things that are being talked about here and figures 10 that are thrown around. 11 MODERATOR SMITH: Mr. Bivins, and then back to 12 you. 13 MR. BIVINS: On my earlier comments about 14 registration, lenders make credit decisions based 15 on the repositories of the credit bureau services 16 that exist in this country. 17 Technology is bringing us to the point 18 that it should not be burdensome to create a 19 registration of loans and track all of the 20 information that you're talking about. 21 The 1003 Fannie Mae application is used 22 today, not only the borrower and their information, 23 but also who the broker is, who the loan officer 24 is; and, obviously, once the loan gets made, all 163 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 the documentation is there and the transfer of 2 that. 3 Once again, I agree. This has to be 4 documented, tracked, and then you can identify 5 where the problems are. 6 MR. MICHAELS: We already talked a good deal 7 this morning about credit insurance and 8 particularly the question of whether the premium 9 should go into the points and fees trigger. 10 I wanted to bring it up again for a few 11 minutes anyway under this segment of the program in 12 terms of specific practices that can be regulated, 13 and the reason is because it seems to us that more 14 might be able to be done in the area of 15 disclosure. And we talked about post disclosure 16 notice, but I want to talk for a little while 17 anyway about the current disclosure scheme and 18 whether improvements could be made to that. 19 Currently, under HOEPA, if it's a loan 20 that exceeds the HOEPA triggers, the consumer is 21 going to get a disclosure three days before the 22 loan closing, and that disclosure is going to have 23 a monthly payment or periodic payment amount in the 24 disclosure and the consumer knows what they'll be 164 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 paying on this loan. 2 If at that time the consumer has not 3 requested or purchased credit insurance, then any 4 part of the monthly payment that's going to be paid 5 through the credit insurance, for the financing of 6 the credit insurance is not going to be in that 7 disclosure. Then they get the closing; and then if 8 they're purchasing credit insurance at that time, 9 their monthly payment is going to change. 10 It seems to us that what that means is 11 that the HOEPA disclosure that was given three days 12 before the closing is now not accurate in terms of 13 what the monthly payment is. There's going to have 14 to be a new HOEPA disclosure and three more days 15 we'll have to go by before closing. So that's one 16 scenario where the insurance is sold at closing. 17 If, on the other hand, the insurance is 18 sold prior to closing, then there is time to put 19 the monthly payment amount for the insurance in the 20 HOEPA disclosure. And the total monthly payment 21 should certainly reflect the amounts paid for the 22 insurance. 23 So then the question becomes, should the 24 HOEPA disclosure given before closing break down 165 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 the monthly payment based on what the payment would 2 be without the insurance and then what the 3 additional increment is, this added because of 4 either the insurance or some other product that's 5 sold -- we've been told that other products are 6 sold, auto club and things that don't have anything 7 to do with home loans -- but whether or not the 8 pre-closing disclosure could be itemized in a way 9 so the consumer can see what it adds to the total 10 cost of their loan? 11 MR. BUTLER: I don't know what the sequence of 12 events the lender makes as far as these loans go. 13 I mean, do you have the information at the time 14 that you're going to be selling credit life 15 insurance so that these disclosures can be made? 16 Because we routinely do it. We disclose what the 17 additional payment is for the insurance. I mean, 18 we would have no problem with that. 19 I think you should -- we should disclose 20 the amount, and we issue a certificate that shows 21 the amount, and I have no problem disclosing what 22 the additional -- the addition to the monthly loan 23 payment is for insurance. 24 But what I don't know, and that's what the 166 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 lenders are going to have to answer, is how does 2 that impede the sale of the product? 3 MR. COLUMBUS: Are you talking about only 4 making the disclosures in case where the insurance 5 is required or a voluntary situation? 6 MR. MICHAELS: No. It would be voluntary. 7 GOVERNOR GRAMLICH: It was a little somewhat 8 complicated question, but I think in the end Jim is 9 asking about itemization, and it really is an issue 10 that goes beyond the insurance. I mean, that would 11 be one of the things itemized, but all things could 12 be itemized. 13 I mean, I guess one question that occurs 14 to me is if the total amount is there, surely there 15 can't be much cost in itemization, right? I mean, 16 you know how it adds up and so you just print that 17 out. Is that a big problem? 18 MR. BUTLER: Not when the insurance is sold, 19 no. We know all the factors. 20 MR. BIVINS: Credit life, accident and health 21 insurance on the small second mortgage, there are 22 so many variables as to what product would be sold, 23 what product the consumer would want to purchase 24 that if you just did it in a documentation and go 167 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 down the checklist there could be 20 options. 2 Although brokers rarely sell it, I'm 3 familiar with it, and it's a matter of is this net 4 credit life insurance? Is it for 3 years? Is it 5 for 5 years? Is it for 15 years? Is it just for 6 the primary borrower? Is it for both? Is it 7 credit life and disability? Is it disability 8 only? It's something that literally gets 9 discussed and worked out with the borrower. 10 MR. MICHAELS: But is the answer on the 11 disclosure, it's just what they purchased? I mean, 12 those are all the options and things they could 13 purchase; but for purposes of disclosure, you are 14 just going to put down what they actually did 15 purchase. 16 MR. BIVINS: In the pre-disclosure, that 17 wouldn't be an issue. 18 MR. MICHAELS: I was going to ask Mr. Detelich 19 this: In terms of selling credit insurance in 20 connection with HOEPA loans, how they handle them, 21 do they wait the extra three days after closing? 22 MR. DETELICH: First of all, we re-disclose. 23 So if we sell insurance -- let's go to your first 24 scenario. You've already disclosed. Now you sold 168 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 insurance, we would disclose. 2 MR. MICHAELS: And wait three days before 3 closing? 4 MR. DETELICH: And wait another three days. 5 And if the customer changes their mind and now 6 wants a different kind of insurance, we re-disclose 7 and wait another three days. We re-disclose until 8 we get it right. That's number one. 9 Now as far as adding and itemization of 10 the premium to the pre-disclosures. I think the 11 issue there is really a broader issue, and that is, 12 what was the original purpose of HOEPA? 13 Having worked with Congress in 1994, our 14 understanding was to give the consumer a brief, 15 simple statement that describes the cost of the 16 loan. Not another TILA statement. Not another HUD 17 one. A full loan closure. 18 So the direction we're going is towards 19 another full disclosure of all the facts of the 20 loan that are going to occur at the time the loan 21 is signed prior to another three-day waiting 22 period. I'm not sure that's our objective here. 23 MR. RHEINGOLD: Two thoughts. One, is it a bad 24 idea? No, it's a good idea. Do I think if the 169 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 disclosure said this is the cost of your loan if 2 you bought credit insurance, this is the cost of 3 your loan if you didn't buy credit insurance or 4 something to that effect, fine, great. 5 Disclosures don't work. I mean, we can 6 talk all we want about disclosures. Disclosures 7 don't work. And the three days before the closing 8 -- I mean, I see -- do you know how many 9 disclosures I see in every loan file I see? A 10 signed document by the person on the date of 11 closing saying, I got this disclosure three days 12 before closing. That's what we see. Whether or 13 not they got it or not, they got a document that 14 says they got it three days before closing. Nobody 15 knows. 16 I mean, I wish that we lived in a world of 17 the informed consumer who, three days before the 18 loan, they got this document, they understood that 19 in fact they were getting a high-fee cost loan and 20 this was going to jeopardize them. 21 I guess -- I mean, I don't think what I'm 22 saying here is novel. I think most would agree 23 with me. You know, fine. Take it with the 24 disclosures, but that's not going to happen at 170 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 all. 2 MODERATOR SMITH: Mr. Shea, and then 3 Mr. Columbus. 4 MR. SHEA: When we met last month with 5 Mr. Gramlich in Washington, some other federal 6 officials, Mr. Gramlich asked us, of all the 7 various issues with subprime lending, predatory 8 lending, which are the most important and where do 9 you see the greatest abuses? 10 And I must say that one of the two areas 11 that we see the greatest abuses is in the sale of 12 single premium credit insurance. People are 13 routinely told that they have to take this 14 insurance if they want the loan. 15 ACORN Housing Corporation's national 16 president, George Butz, got into some problems with 17 medical bills, went to Beneficial, refinanced his 18 house with Beneficial. His loan officer was told 19 that his chances for getting that loan were greatly 20 increased if he took the single premium credit 21 life. It cost him 3800 bucks. It got added onto 22 the loan. This is what the abuse -- this is what 23 happens all the time. 24 Disclosures, yeah, they're great. We 171 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 negotiated some additional disclosures through 2 AmeriQuest and some other lenders we're working 3 with. I showed them to our loan counselors who are 4 on the cutting edge of the field working with 5 folks. They laughed at them. They said, look, 6 this is nice stuff, but this doesn't work. 7 We see folks that come in all the time on 8 prepaid penalties that have signed various forms 9 that says they understand it, but they don't 10 understand it. So on this issue, you have to get 11 rid of it. 12 MODERATOR SMITH: Mr. Columbus? 13 MR. COLUMBUS: Our position is we're in favor 14 of disclosures. We don't want to sell the product 15 to anyone that doesn't want to buy it. And if the 16 issue is whether or not the purchase is truly a 17 voluntary one, whether the consumer is misled or 18 not, then I think that Draconian measure of 19 prohibiting the practice is unnecessary and can be 20 more effectively and reasonably -- the same 21 solution can be brought about by the post-closing 22 notice. 23 And in the situation where the consumer is 24 misled or lied to, the purchase no longer is a 172 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 voluntary one and so must be disclosed under TILA 2 and HOEPA because it becomes part of the finance 3 charge, and so the disclosures had to have been 4 made which presumably were not made because there 5 was a misleading that was going on, and then you 6 can avail yourself of the TILA, the three-year 7 right to rescission and recoup all the interest and 8 the fees paid and the penalties which include 9 another recoupment of the interest and the fees 10 paid, not to mention common law action for fraud. 11 So there are plenty of remedies for those 12 kind of situations. But I think the real answer is 13 the post-closing notice, coupled with the 30-day 14 rule. 15 MODERATOR SMITH: Mr. Bochnowski? 16 MR. BOCHNOWSKI: In my written submission 17 today, we talked about field testing some of these 18 ideas. 19 I admitted to some of the panelists here 20 of being a lawyer, although I tell my friends that 21 I make an honest living now as a banker, but when I 22 first started practicing law 25 years ago, when I 23 had my very first closing, I decided I was going to 24 let me client know what those documents were all 173 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 about. And they went from there all the way around 2 to the end of that table, and it probably was 3 26 linear feet. 4 Disclosures don't work because of what we 5 say. There's got to be a new way to do this. And 6 I think particularly when you've got vulnerable 7 populations who are the ones who are getting this 8 disclosure who don't necessarily react well perhaps 9 -- and I don't mean to be judgmental here -- but 10 maybe they don't react too well to mail in the 11 first place, some of these disclosures are 12 mystifying. We need to de-mystify this process. 13 So whatever you come up with, I encourage 14 you to try it on folks first and maybe make it a 15 little bit better. 16 MODERATOR SMITH: Mr. Detelich? 17 MR. DETELICH: I just want to say I couldn't 18 agree more with you on that statement. If any of 19 you sat through a mortgage loan closing in the last 20 12 months, I can understand how a customer would 21 walk out and say, I didn't know I had a prepayment 22 penalty, because it was indeed one of 15, 20, 30, 23 you name it, number of things they agreed to in 24 that transaction. It's very difficult. 174 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 Sitting in just a non -- a prime loan 2 mortgage closing is no better. They're all the 3 same. 4 These disclosures need to be improved for 5 all of us. Not just HOEPA loans. All loans need 6 to be simplified so that the customer can walk out 7 so that disclosure will work. Here is what my loan 8 costs and I can easily understand it. It's on one 9 sheet of paper. 10 MODERATOR SMITH: I just want to make one 11 observation before recognizing Mr. Shea, and that 12 is that we did several years ago look at this 13 question of all the various types of disclosures 14 because we were -- our Consumer Advisory Council 15 looked at the issue, and there was something like, 16 I don't know, 50 something different disclosures or 17 documents that people were receiving. 18 The council in its review did note that 19 there were only five or six that were required 20 under federal law, whether it was Truth in Lending 21 or some other disclosures; and that all of the 22 others were in place either because of state law or 23 because the lender needed to build up its own level 24 of comfort with a particular transaction and was 175 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 asking for signed documentation that its own 2 lawyers perhaps were encouraging, but that was not 3 something that was required under federal law. 4 So I want to make sure that we have some 5 understanding of the fact that all these 6 disclosures, the 26 linear feet, are not federal 7 law. Thank you. End of speech. 8 MR. SHEA: I just wanted to make one point that 9 the abuses we are seeing with single premium 10 insurance are not confined to the subprime world; 11 that most of the large financial institutions, 12 Wells-Fargo, West Mortgage, Bank America, BankOne, 13 most of those companies in fact try to paddle and 14 push single premium credit life routinely. And we 15 see several abuses where brokers who are peddling 16 those products oftentimes tell their clients that 17 in fact you have to get this insurance to get the 18 loan. This is not confined to subprime. 19 MODERATOR SMITH: Mr. Brown? 20 MR. BROWN: I want to go back to the point with 21 regard to disclosures. And, Ms. Smith, 22 notwithstanding your great disclaimer, I think we 23 are really focusing on the wrong end of that whole 24 question. I don't believe it has to do with the 176 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 disclosures because, actually, you are right. 2 We're putting the key in the hand of the fox going 3 to the chicken coop to agitate the chickens on why 4 they should comply, and that just doesn't work. 5 I think what we have to do is to go back 6 to a more fundamental point which is to educate the 7 consumer on exactly what it is that they're getting 8 involved in. 9 And, you know, like David said, you have 10 to field test some of this. And my comment, I 11 truly believe that education is the way. The only 12 footnote that I would provide is that it's a 13 question of what is the actual cost that you would 14 have to incur in order to bring the educational 15 level up as it relates to this -- to a transaction, 16 so that once they are exposed to the transaction 17 and all the elements of it, they're in a position 18 to develop the understanding and close the 19 transaction and live with it and everybody be 20 comfortable with it. 21 It's very important, though, that the 22 Federal Reserve, the state and the City of Chicago, 23 et cetera, do spend some time on figuring out how 24 maybe funds can be made available to assist in that 177 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 educational effort because I believe, without it, 2 we will spend countless time talking about 3 disclosures and their effectiveness or 4 ineffectiveness. 5 MODERATOR SMITH: We will be talking about 6 consumer education and consumer outreach this 7 afternoon. So we'll address some of these issues. 8 Mr. Baker and then Mr. Butler. 9 MR. BAKER: One excellent suggestion I've heard 10 Mr. James make in other forums is that the amount 11 financed box in the Truth in Lending disclosures 12 does not genuinely reflect the amount financed. 13 And if you were to change that rule, which 14 is certainly within your power to do, that would go 15 a long way towards removing one of the tools that 16 unscrupulous loan originators use to obfuscate what 17 they're building in, what they're packing in. 18 MR. MICHAELS: I will take that one step 19 further. That change can be made on the Truth in 20 Lending form if they can get a loan closing. 21 One of the questions we raised in 22 Charlotte and in Boston was whether or not when the 23 consumer gets disclosure under HOEPA three days 24 before closing whether it's sufficient to have the 178 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 monthly payment amount without knowing how that 2 relates to the total loan amount. So they know how 3 much it is they're borrowing for that payment, and 4 that would show them how much more than the amount 5 they requested they're paying for fees that they're 6 financing. Does that make some sense? 7 MR. JAMES: I would say that's critical. We've 8 uncovered types of fraud where the present 9 disclosure -- well, first of all, the amount of the 10 loan never shows up on the Truth in Lending form. 11 So there's great difficulty there. 12 If the consumer is relying on that form 13 for all the material elements of the transaction 14 and the loan amount is not staring them in the 15 face, there's a real potential that they'll be 16 misinformed to believe that the amount financed is 17 the amount of the loan. And, in fact, we've seen 18 that manipulation very effectively used to create 19 hundreds of billions of dollars in bad loans. 20 Hundreds of millions. 21 MODERATOR SMITH: Mr. Butler? 22 MR. BUTLER: Yeah, I want to challenge the fact 23 that credit insurance is a poor buy. I mean, it 24 provides valuable coverage. We all agree it should 179 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 be voluntary and it should not be forced on the 2 client. 3 And Dan Immergluck mentioned that 4 46 percent of the people felt that they were 5 coerced into buying the insurance. And the Purdue 6 study included a high percentage of people who 7 voluntarily chose not to buy the insurance. And 8 the conclusion of the author was that only 9 3 to 4 percent felt pressure to buy the insurance. 10 So I think the facts are being tainted. 11 They're not true. Two, we think the post-closing 12 letter will ensure that's the case. And it's 13 valuable. It's really a valuable product. Ask the 14 people who were paid benefits and families who were 15 protected. 16 MODERATOR SMITH: Mr. Rheingold? 17 MR. RHEINGOLD: My card fell down. One last 18 shot. If it's a valuable product, then sell it as 19 part of the separate transaction. It doesn't need 20 to be part of the loan. It hides -- it hides the 21 cost from the people. And if it's so good, then 22 sell it separately. 23 MR. VARGA: And how are they going to pay for 24 it? The reason it's not sold separately is 180 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 because it's financed. You're not going to sell it 2 separately and then take out a second separate 3 non-real estate loan from the mortgage lender. 4 That's not the way it's done. 5 MR. RHEINGOLD: Pay it like PMI. If they don't 6 pay it, they lose it. I would much rather them 7 decide they're having trouble with that loan, and 8 the part of the problem that they're having is they 9 can't make that monthly insurance payment, then the 10 hell with the monthly insurance payment. At least 11 they can save their home. And then they don't lose 12 their home if they don't make their insurance 13 payment. They lose their credit insurance. Fine. 14 As opposed to a system where it's imposed upon them 15 and makes the loan unaffordable and they lose their 16 home. This way they have the option. If they 17 don't want to pay it. Good-bye. You don't have it 18 anymore. They make a conscious choice. 19 MR. COLUMBUS: Thank you. Requiring the 20 insurance purchase and financing transaction to be 21 separate from the mortgage transaction is an 22 unacceptable proposition because of the reality of 23 the transaction itself. 24 If you're going to have a separate loan 181 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 for the insurance collateralized by the home, then 2 you're going to have to redo all the loan 3 documents. You are going to have to recalculate 4 the amount financed, the monthly payment, 5 everything like that, and no lender is going to do 6 that. And no borrower wants to sit through a 7 second closing. That's not what they want to 8 either. 9 If they are truly purchasing it in 10 voluntary fashion, they want to do it all at the 11 same time. And so in terms of cancelling the 12 product, the certificate says that you can cancel 13 the product any time and get a complete, you know, 14 refund of the unearned premium; and if the consumer 15 chooses to do so midway through the insurance 16 coverage there, they can do so. 17 MODERATOR SMITH: Why does it have to be 18 collateralized? 19 MR. COLUMBUS: Because they're a subprime 20 borrower. They may not qualify for extension of 21 credit that is not collateralized. 22 MODERATOR SMITH: It's insurance. 23 MR. COLUMBUS: Well, if they -- 24 MR. BUTLER: It's a question of affordability. 182 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 I have no problem having it sold on a monthly 2 basis. We just want the single premium option 3 available because it makes it affordable. It 4 spreads out the payment over a longer period but 5 makes the debt to income ratio lower and allows the 6 product to be sold and afforded. 7 MODERATOR SMITH: Mr. Immergluck? 8 MR. IMMERGLUCK: We're again talking about a 9 highly vulnerable population who is now being told 10 you can have access to insurance which nobody else 11 has to put their home up for. It's as if I'm 12 putting my home up for my life insurance, car 13 insurance or for anything else. 14 We're targeting a population that is 15 disproportionately minority, disproportionately 16 elderly, a disproportionately low-educated 17 segment. If you want insurance, if you want 18 affordable insurance, we know there's lots of 19 evidence of price discrimination based on race in 20 the insurance industry, but if you want affordable 21 insurance, we want your home. That's what is being 22 forced to borrowers. 23 MR. BUTLER: I would disagree with that. We're 24 selling the product to all income levels. We're 183 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 not picking out any one segment of the population 2 and focusing our sales on it. This product is 3 available to anybody. It's voluntary. 4 MR. IMMERGLUCK: I think the other gentleman 5 just said that a subprime market is the market that 6 needs to have a collateralized insurance. The 7 subprime market, as we have shown, is heavily 8 minority, heavily -- 9 MR. DETELICH: As a lender, I can tell you that 10 we don't take any comfort in having that portion of 11 the loan collateralized, collateralized simply 12 because it's part of the loan because it makes it 13 the most affordable way for the borrower to obtain 14 single premium insurance. 15 The other options suggest to make it 16 separate. I can assure you those consumers who 17 want credit insurance will be left with financing 18 it at a high interest rate, credit card rates. I 19 could see a cash advance on a credit card as a 20 means of funding single premium insurance. I don't 21 think that's a good idea, a separate unsecured loan 22 which is going to have a high interest rate. In 23 the subprime market, as you know, unsecured loans 24 have interest rates in the 20s and 30s. 184 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 Another option is I will just do without 2 insurance because I can't afford it. I don't 3 qualify for one. I don't think that's a good 4 option. That customer doesn't have other access to 5 other insurance products. We're not 6 collateralizing it because now we're going to 7 foreclose on the customer who doesn't make their 8 insurance payments. That's ludicrous. It 9 incorporates into the loan so that it gives the 10 customer the lowest monthly payments. It's as 11 simple as that. 12 MR. MICHAELS: Thank you. I would like to 13 leave the subject of credit insurance because we 14 had a lot of time to talk about it this morning. 15 There's one thing we didn't get a chance 16 to talk about in terms of the Board's authority to 17 declare certain practices unfair and deceptive and 18 prohibit them. That's the question of whether or 19 not it would do any good for the Board to have a 20 rule that would declare unfair and deceptive 21 practices which are already unfair and deceptive 22 under state laws. We clearly have the authority to 23 do that. 24 I have heard different arguments as to why 185 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 that wouldn't be an additional benefit in terms of 2 enforcing the law. It would be very difficult to 3 try to define in rules every conceivable practice 4 that might be deceptive or unfair. 5 As I understand, some state laws don't 6 make that effort. Some state laws are just 7 general. In other states, there's a laundry list, 8 I suppose, of specific facts and practices with the 9 ability to then go case by case and find other 10 practices. 11 So that option is one I think we're going 12 to examine since we have an unfair deceptive 13 rule-making whether we should try to define 14 specific acts of practices or create a general 15 standard that would rely on state law. 16 MR. BAKER: We would disagree -- it accounts in 17 virtually every contested foreclosure. Again, if 18 we go back to the matter that it's after the fact, 19 second-guessing of what occurred. 20 We can certainly understand a laundry list 21 that may not be all inclusive. You may have to add 22 to it as your experiences tell you; but what we're 23 looking for are bright line standards that we can 24 operate under. 186 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 MR. MICHAELS: I guess my question is to the 2 extent that we're piggy-backing on state law, to 3 the extent there is such a standard under state 4 law -- 5 MR. BAKER: Our understanding in Illinois is 6 simply unfair and deceptive practices. 7 MR. MICHAELS: So if a federal rule piggy-backs 8 on that, it wouldn't make any additional practices 9 unlawful. It would just say, if you violate state 10 law, then you have violated HOEPA as well. What 11 that does it brings the remedies of HOEPA and 12 brings -- 13 MR. BAKER: And that's exactly my point. It 14 just creates more uncertainty in the very important 15 area of HOEPA and the remedies of HOEPA and the 16 prohibitions of Section 32 or whatever may come 17 from that. 18 With that lack of clarity and the hammer 19 at the other end, there's going to be an incredible 20 chilling effect on any enrollments made over the 21 trigger points. 22 MODERATOR SMITH: Mr. Varga and Mr. James. 23 MR. VARGA: The other thing it would do would 24 essentially give a federal private right of action 187 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 for what is now a state law UDAP deceptive trade 2 practices claim. And from a litigator's 3 standpoint, what that would do would turn every one 4 of these claimed unfair practices into a suit in 5 federal court on a nationwide class action. 6 Because what it does is put the plaintiff's counsel 7 in federal court on an alleged nationwide class 8 action. 9 Right now, if you bring in that kind of 10 claim -- it's difficult now to deal with lenders, 11 and I think it would truly drive lenders out of 12 HOEPA because of the litigation costs of that. 13 Right now, at least if you bring a claim 14 under a state law deceptive trade practices claim, 15 there's a pretty good argument as a lender because 16 of the variations in state law on deceptive trade 17 practices, it's difficult to have a nationwide 18 class of a generalized deceptive practice. 19 This would, by essentially giving federal 20 sanctions to this, both move it into federal court 21 and lenders would be flooded with nationwide class 22 actions on these garden-variety claimed unfair and 23 deceptive practices. 24 That's a thing that under the authority of 188 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 the FEC Act there is no private right of action for 2 plaintiffs' attorneys to bring unfair claims under 3 Section 5 of the FTC Act. It's reserved for the 4 government. Here you would be significantly 5 expanding it. You would be significantly driving 6 up the litigation costs, and I think it's 7 significantly going to push people completely out 8 of HOEPA. 9 MS. HURT: Can I just ask you, do you think 10 that with regard to UDAP problems you'd have a 11 class action? 12 MR. VARGA: Well, from a lender standpoint, we 13 would say, clearly, these are individualized 14 situations. As many people have said here, they're 15 after-the-fact determinations of whether something, 16 you know, was unfair or not. That's not the way 17 the lawsuits are going to be brought, and they will 18 be brought, and they'll be brought in federal court 19 as alleged nationwide claims. 20 MR. MICHAELS: Have class actions been 21 successful on UDAP claims generally? Because the 22 fact is different in every case. 23 MR. VARGA: I would like to have you as my 24 judge. 189 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 There are many cases that are brought and 2 they go to judgment or they go to significant class 3 settlements. The core of the claim is the state's 4 unfair and deceptive trade practices claim. 5 But here you would be federalizing it and 6 having it be uniform across the land, and every one 7 of the things that we've been taking issue with 8 here or in, for instance, the Chicago ordinance 9 that says after the fact this was an unfair 10 deceptive practice, that would be claim on a 11 class-wide basis on a nationwide basis, and you 12 would have facilitated that by essentially giving a 13 private right of action for it where there isn't 14 one now. 15 MS. HURT: Could I just narrow the question? 16 Would there be any benefit to legal aid attorneys 17 or would there be any problem from the creditors if 18 the Board used its unfair and deceptive authority 19 to declare specific acts like blank, it's unfair 20 deceptive to falsify information on an application 21 or to have a consumer sign blank documents, 22 something that's clearly unfair and deceptive? 23 MR. RHEINGOLD: As the legal aid attorney here, 24 I guess I should answer. 190 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 I think the thing that drives us -- and, 2 again, we can't drive -- we don't do class action 3 lawsuits. We can't. We don't. So I know nothing 4 about that. I won't respond to the class action 5 driven, but I will agree that the Consumer Fraud 6 Act doesn't seem to be a place to do that. 7 Nonetheless, what HOEPA gives us and what 8 it needs to give us is the right of rescission. 9 That's the ball game for us, is we can say, hey, 10 you screwed these people. They can rescind the 11 loan. And if you identify classes of behavior, 12 that if they're violated, we can go to the lender 13 and say, we're rescinding. That's what's important 14 to us. 15 And so, you know, as far as I'm concerned, 16 if you are making UDAP violations so that there's a 17 UDAP violation, we don't have to go to state court, 18 we just say, under federal law we can rescind that 19 loan, I think that's a good thing. 20 I think if we want to narrow it down and 21 list certain behaviors that are deceptive 22 practices, I think that would be enormous help as 23 long as that rescission right runs with it. 24 We talked about some things earlier. I 191 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 would throw out another notion on a HOEPA loan. I 2 think that a balloon payment on a HOEPA loan should 3 be an unfair practice. We think it's a signal. I 4 have seen it time and again, and it's a signal for 5 refinancing. And it's a way to get people 6 flipped. People don't know that they have balloon 7 payments. 8 I have heard the arguments a million times 9 that there's a legitimate marketplace in the prime 10 lending market. I am not going to argue with 11 that. That's one thing for them. 12 MR. JAMES: From the law enforcement 13 standpoint, that would be manna from heaven. 14 There's a real need to make our enforcement power 15 in this area parallel under HOEPA and under our 16 uniform deceptive trade practices. 17 I think the federal rules with respect to 18 class actions accommodate or prevent the abuse that 19 I hear talked about with respect to bringing -- 20 trying to broaden a class into a country-wide 21 application a state UDAP law. I don't think the 22 courts are going to go for it, and I think there's 23 plenty of protection in the courts against that. 24 There's currently a case pending downstate on this 192 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 issue, and I think it ought to be resolved as a 2 matter of state law. So I think it's a tremendous 3 idea. 4 MR. BAKER: This discussion, once again, 5 underscores the critical nature of the analysis of 6 the trigger points because if, like Ira suggested, 7 we were to ban balloon payments from high-cost 8 loans, we would be eliminating the revolving home 9 equity market for that sector of people who are 10 only eligible for high-cost loans. Do we want to 11 do that? 12 I mean, that's -- if you set a low trigger 13 rate, you're going to be carving out the revolving 14 home equity market in this nation from a 15 significant element of the population. 16 So, again, these components are all 17 interrelated. Balloon payments aren't bad, 18 per se. I would submit they shouldn't be 19 considered bad for high-cost borrowers. Maybe 20 they're a warning signal and should receive 21 stricter scrutiny; but we have to be very careful 22 about throwing these provisions around in the 23 context that are critical. 24 MODERATOR SMITH: Mr. Bochnowski? 193 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 MR. BOCHNOWSKI: Your suggestion is helpful for 2 states like Indiana where we don't have it. The 3 legislature is just working on it. 4 I think that, you know, to have hard, fast 5 and bright lines may become problematic. Perhaps 6 presumptions is better than strictly outlawing it. 7 Again -- and I would echo the comments 8 that were made by Bruce -- that these activities, 9 these terms in and of themselves are not 10 necessarily predatory. The context in which they 11 are used defined in the context makes the 12 difference as far as all of our understanding. 13 MR. RHEINGOLD: Just a quick response. I'm 14 kind of confused because I hear a mixed message 15 here. I hear, one, we can't have broad language 16 because then we won't know what to do. But we 17 can't have bright line rules because we're going to 18 throw some stuff out if we have bright line rules. 19 I think if we want -- we've offered both. 20 Net tangible benefit is a concept that I think is a 21 good concept in taking a look at flipping. Balloon 22 payments, how bright -- or if you want to go the 23 bright line rule, no balloon payments, no mandatory 24 arbitration clauses, no prepayment penalties. Then 194 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 the rules of the game are clear; and if that's what 2 the lending market wants, then the ground rules are 3 clear as opposed to sort of these nebulous 4 concepts. 5 MR. BAKER: If I could just jump in, I do think 6 there is a middle road to take between left field 7 and right field, between banning balloon payments 8 and not providing any bright lines. There are 9 other options that ought to be considered. 10 For example, the industry standard for 11 balloon payments is seven years. If you see 12 anything less than seven years -- maybe five, you 13 know, for some lenders, but certainly nothing under 14 five -- that's going to be a flashpoint for you. 15 We could have -- I just throw it out for 16 purposes of discussion, I'm not advocating it -- 17 but a seven-year floor for balloon payments on 18 high-cost loans would not carve that option out of 19 the specific market, but it is a bright line. 20 There is something other than total banishment of 21 prepayment penalties or balloon payments or other 22 things like that. 23 MR. JAMES: I'll just add one other thing which 24 is always a concern as I represent a state, and 195 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 that is that whatever is done in the rule-making 2 process, be sure not to preempt our present 3 authority because we need everything we have and 4 our arsenal is very thin. 5 MODERATOR SMITH: Okay. I think that with that 6 we will bring to conclusion this morning's 7 session. 8 I thank you very much for sharing your 9 views with us and making the contributions that you 10 did this morning. I encourage you to submit 11 written statements that may elaborate on some of 12 your views. 13 With that, again, thank you very much. 14 And we will reconvene at 1:30 in this room for the 15 afternoon session. 16 (Whereupon, recess taken at 17 1 o'clock p.m.) 18 (Whereupon, the Afternoon 19 Session is bound under separate 20 cover.) 1 FEDERAL RESERVE BOARD 2 PUBLIC HEARING 3 ON HOME-EQUITY LENDING 4 August 16, 2000 5 AFTERNOON SESSION 6 7 STENOGRAPHIC REPORT OF PROCEEDINGS had in 8 the above-entitled matter held at the Federal 9 Reserve Bank of Chicago, 230 South LaSalle Street, 10 Chicago, Illinois, MS. DOLORES S. SMITH, Moderator. 11 12 PANELISTS: 13 MS. GALE CINCOTTA, National Training 14 Information Center 15 MS. LINDA CRANE, John Marshall Law School 16 MS. BETH LLEWELLYN, Partnership for 17 Homeownership, a Foundation of the 18 Illinois Association of Realtors 19 MR. JACK MARKOWSKI, City of Chicago, 20 Department of Housing 21 MS. ROCHELLE NAWROCKI, Neighborhood 22 Housing Services 23 MR. DAVID VOSS, First Bank of the Americas 24 197 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 (Whereupon, the following 2 proceedings commenced at 3 1:45 o'clock p.m.) 4 MODERATOR SMITH: I believe we're ready to 5 start. I will start by welcoming you to the 6 session; and for those of you who were not here 7 this morning, I will just go through some 8 information. 9 My name is Dolores Smith. I'm the 10 Division Director for Consumer and Community 11 Affairs at the Federal Reserve Board. I will be 12 the moderator for this session. 13 We had a very interesting morning. I know 14 we will have an interesting afternoon, and so I 15 will start by introducing our panel. I might 16 mention for those of you who were not here this 17 morning that we did have with us Ned Gramlich, who 18 is a member of the Board of Governors and who is 19 the Chairman of Oversight Committee on Consumer and 20 Community Affairs. He was not able to stay for the 21 afternoon, but he will be receiving a report and 22 then also will, I'm sure, be looking at the summary 23 of the afternoon's presentations. 24 We have, starting with my left, 198 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 Adrienne Hurt, who is Assistant Director, and 2 Jim Michaels who is Managing Counsel. Adrienne and 3 Jim are the two who are primarily responsible for 4 managing Truth in Lending matters of the Board. 5 To my right, I have Sandy Braunstein, who 6 is Assistant Director for Community Affairs and our 7 Community Affairs Officer for the Board. And then 8 next to her, Alicia Williams, Vice President from 9 the Federal Reserve Bank of Chicago. 10 The rules of procedure that we'll be 11 following this afternoon: The invited panelists 12 will have three minutes for introductory remarks. 13 We have time keepers who will be letting them know 14 when they have one minute to go and when their time 15 has expired. 16 The opening remarks is really just the 17 beginning session, section here. We will have an 18 opportunity for dialogue, so it's not the last 19 opportunity for people to make their contributions 20 to our discussion here this afternoon. 21 We will at the conclusion -- after we have 22 the opening statements, then we will start our 23 panel discussion. We will continue -- we will come 24 to a break some time in about an hour, I'd say, and 199 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 then after the break we will go to the open mic 2 session. So those of you in the audience who have 3 an interest in presenting an oral statement, please 4 sign up if you have not already done so. You do 5 this at the registration desk out in the lobby area 6 here. 7 So with that -- I might say that this 8 morning we focused on some of the more technical 9 questions about how might the Board use its 10 rule-making authority to address concerns about 11 predatory lending practices. 12 There was discussion this morning of the 13 fact that -- well, at least some people suggested 14 that disclosures which is what our regulations 15 primarily provide are not and cannot be the entire 16 answer to preventing vulnerable consumers from 17 getting into a situation where they are subjected 18 to predatory lending practices. 19 And so this afternoon, we will be talking 20 about ways in which consumer education and consumer 21 outreach might help along with whatever disclosures 22 and other -- and substantive protections might be 23 put in place. 24 So with that, I will ask Ms. Cincotta to 200 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 start us off, and we will be going in a clockwise 2 direction. 3 MS. CINCOTTA: Thank you very much. Glad you 4 are holding these hearings. 5 For those of you not familiar with NTIC 6 and NPA, National People's Action is a national 7 network of neighborhood groups across the country; 8 and the National Training Information center is the 9 group that works with getting information, getting 10 research, training staff and being involved in all 11 these kinds of meetings, bringing in data, 12 et cetera. 13 We fought for FHA reforms and we've been 14 dealing with the amount of foreclosures year by 15 year. We have just won again some reforms. And so 16 far we have got 56 of the mortgage bankers that 17 were doing these foreclosures cut off, you know, 18 one by one by one. So it's up to 58. 19 We won CRA nationally. And in just 20 Chicago alone with four banks that we've been 21 working with for 15 years, we got out a billion 22 dollars. What I'm trying to say by that is we're 23 dealing with all the different portions of funding, 24 et cetera, what's happening in the market. 201 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 What we've been hit with so hard is the 2 number of foreclosures which have tripled in the 3 Chicago area in the last five years. Subprime 4 lenders caused the explosion. Their share of 5 foreclosures went from 3 percent in 1993 to 6 38 percent in 1999. 7 So what we're trying to say is we're 8 trying to deal with the banking, the red lining, 9 any of that, FHA foreclosures. We have this thing 10 now that is hit. Lenders who would never lend 11 money in the area before, now that they found a way 12 to come up with horrendous interest rates, points 13 and fees, are like in droves. The amount of, as I 14 said, companies that are coming into Chicago or 15 into the state are unbelievable. So where you had 16 a couple companies locally, they're all coming in. 17 Couple things we think the feds could do 18 is modernize HMDA so that we can prove loans are 19 predatory. Disclose points and fees, interest 20 rates, credit score. Prevent financial 21 institutions from getting CRA credit for subprime 22 loans. 23 43 percent of Bank America's loans in 24 Chicago in 1998 were subprime. Most of the 202 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 subprime in minority neighborhoods. 2 And the changes in HOEPA that we see are 3 need to stop predatory lending: No credit 4 insurance premiums included in the loan. No 5 prepayment penalties. No flipping. No balloon 6 loans. Make whoever owns the loan responsible for 7 it. And lower the APR trigger to 5 percent. 8 And, finally, one caution. While we're 9 meeting here and while this is going on and we 10 debate with the industry and the Chicago city 11 ordinance, the state legislature, et cetera, the 12 industry has a bill in Washington called the Ney 13 bill, N-e-y, that if they get it through, it will 14 prohibit any city or state from doing anything. 15 So while they -- some of the industry 16 might come here and talk friendly, they're pushing 17 an industry bill that would stop us from doing 18 things. 19 MODERATOR SMITH: What does that mean? What 20 does it stand for? 21 MS. CINCOTTA: That's the name of the person 22 sponsoring it, N-e-y, the Congress person. 23 MODERATOR SMITH: Thank you. Mr. Voss? 24 MR. VOSS: Thank you. I appreciate being 203 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 invited here this afternoon and being asked to 2 comment on the latest threat to our community, 3 predatory lending. 4 First Bank has been operating for almost 5 three years, and we have refinanced many predatory 6 loans made by unscrupulous mortgage brokers and 7 lenders. Moreover, while home equity lending has 8 received the most recognition, I'm here to tell you 9 that predatory lending goes well beyond mortgages 10 and it includes consumer loans and life line 11 financial services. 12 At First Bank, we're reminded every day 13 that the practices of predatory lenders places a 14 tremendous burden on decent and hard-working 15 people. 16 First Bank was formed in the fall of 1997 17 and began operations in one office approximately 18 ten minutes southwest of the Chicago central 19 business district. We served the predominantly 20 Mexican/American Chicago communities of Pilsen, 21 Back-of-the-Yards and Little Village. 22 We are an FDIC-insured, for-profit bank. 23 We are also one of the four depository community 24 development financial institutions or CDFIs 204 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 designated by the U.S. Treasury in the Chicago 2 area. In fact, the U.S. Treasury is one of our 3 shareholders. 4 As a CDFI, First Bank's mission is to 5 provide financial services and to make loans and 6 investments to the underserved families and 7 businesses in our community. We have obviously 8 faced substantial obstacles in achieving our 9 mission. The Hispanics are distressed or, in many 10 cases, they're are unfamiliar with banks. 11 In a study done by the Metropolitan 12 Chicago Information Center, MCIC, 25 percent of the 13 Hispanics felt that their banking needs were not 14 being met at all or not too well. This compares 15 with 16 percent for African/Americans and 7 percent 16 for whites. 17 In addition, approximately two-thirds of 18 Hispanics compared to 40 percent of whites used 19 currency exchanges and check-cashing centers, in 20 effect, making them their financial institution. 21 Life line transactions are check cashing, 22 money orders, bill payment and money transfer. We 23 found that there were some companies in our 24 community that were charging outrageously high 205 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 prices for these services. By charging fair and 2 reasonable prices, we were able to establish 3 ourselves in the community and gain the trust of 4 potential customers. That is how we introduced 5 them to mainstream banking. 6 From September 1999 to now, we have 7 refinanced over 150 mortgages, home equity loans 8 and consumer loans. Some of these mortgages had 9 interest rates as high as 12 percent when market 10 rates were 8 percent. The borrowers are decent, 11 hard-working people, but they do not understand 12 personal finance. 13 I have got a couple of examples here, but 14 I know I am going to run out of time, so I will 15 just move along. If you want to talk about the 16 examples of some of the loans that we've 17 refinanced, I will be happy to do so. 18 While predatory practices around mortgage 19 and home equity loans have received major focus in 20 the past few months, I'm here today to tell you 21 that a significant problem also exists in consumer 22 loans. Shall I stop? My time up? 23 MODERATOR SMITH: We'll get -- we'll come 24 around to you again, and then you can continue. 206 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 Ms. Nawrocki. 2 MS. NAWROCKI: Thank you for the opportunity to 3 speak today on an issue that is dismantling years 4 of positive reinvestment. 5 I represent Neighborhood Housing Services 6 of Chicago. We are a non-profit, community-based 7 lender and certified community development and 8 financial institution. We were formed in 1975. 9 NHS brings about community reinvestment through a 10 partnership of residents, business and government. 11 Last year, NHS originated 15 million and 12 leveraged an additional 19 million in home 13 improvement and home mortgage loans. We also 14 provide hands-on homeownership counseling and 15 training through our Neighbor Works Homeonwership 16 Center, and we provide a comprehensive mortgage 17 delinquency program to help families remain in 18 their homes in times of financial difficulty. 19 NHS has becoming increasingly aware of 20 predatory lending and its negative effects on 21 families and neighborhoods over the last year as we 22 begin to see a dramatic increase in the number of 23 clients seeking assistance through our Foreclosure 24 Intervention Program. Through this program, we 207 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 offer mortgage delinquency counseling and 2 intervention and, in some cases, NHS is able to 3 provide small, low interest loans to help customers 4 become current. 5 Approximately 50 percent of all client 6 intakes are due to predatory lending. This year, 7 NHS will receive over 1200 requests for foreclosure 8 intervention services. The need for such services 9 is increasing at an alarming rate, and we are 10 struggling to keep families in their homes and 11 prevent others from obtaining financing from 12 predatory lenders. 13 Today, clients seeking assistance from the 14 NHS's Foreclosure Intervention Program are 15 radically different from clients of several years 16 ago. Today, the majority of clients have obtained 17 home refinance or home equity loans from subprime 18 lenders with excessive interest rates and fees. 19 Upon further examination of loan documents 20 by NHS staff, predatory lending practices such as 21 charging excessive yield spread premiums, balloon 22 payments, flipping and packing of unnecessary 23 credit insurance have been identified. The 24 widespread use of these practices has become so 208 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 apparent that NHS staff now regularly requests to 2 examine all mortgage documents of potential 3 customers even if they are interested in obtaining 4 a home improvement loan with NHS. 5 Today, NHS staff is spending approximately 6 a quarter of their time providing assistance to 7 clients who have fallen behind on their mortgage 8 due to predatory lending. 9 Predatory lending has and will continue to 10 dismantle 25 years of positive reinvestment by the 11 community, banks and government if it continues 12 unchecked and unregulated. 13 To put this into perspective, in the 14 Back-of-the-Yards neighborhood where we have one 15 office, just in the last year, there were 16 102 foreclosure cases initiated in an area that 17 measures 12 by 17 blocks. At least, 75 percent of 18 the foreclosures were direct results of financing 19 by predatory lenders. Most likely the majority of 20 these homes will end up vacant and further erode 21 the positive investment that has occurred to date. 22 Industry efforts to push mandatory 23 counseling, consumer education and increased 24 disclosures as a solution to predatory lending are 209 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 simply too little, too late and, frankly, are 2 unfair to the consumer. While counseling and 3 education can be very important tools to prevent 4 borrowers from obtaining predatory loans, NHS of 5 Chicago believes that counseling is only part of 6 the solution. 7 NHS's long history of working in 8 underserved neighborhoods convinces us that until 9 predatory lending practices are made illegal and 10 exorbitant fees and profits are restricted, lenders 11 will continue to engage in abusive lending 12 practices with or without mandatory counseling at 13 the expense of the homeowners and the neighborhoods 14 in which they reside. Thanks. 15 MODERATOR SMITH: Thank you. Mr. Markowski? 16 MR. MARKOWSKI: Thank you. I am 17 Jack Markowski. I'm the Commissioner of the City 18 of Chicago, Department of Housing; and along with 19 the people that you've heard already testify here, 20 we're concerned very much about the effect of 21 predatory lending on Chicago neighborhoods. 22 We're interested in this issue not only as 23 a consumer issue but for the impact it's having in 24 our neighborhoods, as Rochelle said, to reverse the 210 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 25 years of progress that good lending and good 2 community development has made in our 3 neighborhoods. 4 We're interested in this because of the 5 vacant buildings that are the remnants of predatory 6 lending that destroy the good work in the community 7 and destroy the value of the properties of the 8 folks who don't even have the predatory loans but 9 just live next door and pay their mortgages on the 10 properties, and they see buildings throughout their 11 neighborhood becoming vacated and properties 12 destroyed being sites for crime as a result of 13 predatory lending. 14 In spring of this year, the Mayor 15 announced a threefold initiative to combat 16 predatory lending. We call it our Foreclosure 17 Prevention and Community Stabilization Initiative. 18 The first part of this is to prevent abuse 19 by mortgage brokers and lenders. That was what -- 20 the panels before me talked about this and you said 21 that was your topic this morning. This is about 22 regulations and legislation to regulate the 23 practices surrounding this abusive lending 24 activities. 211 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 We are strongly in favor of those 2 initiatives, however, at the Federal Reserve Bank, 3 at the State of Illinois and with the federal 4 government. We are not ourselves in a position as 5 a city to regulate financial practices. We are in 6 a position to be able to state who we will and 7 won't do business with. And we've been developing 8 a series of criteria to state what we think abusive 9 lending practices are that says who the city won't 10 do business with. 11 But even if we -- when we get that passed, 12 most of the bad lenders are not doing business with 13 the city anyway. So we really need this strong 14 regulation and legislation at the state and federal 15 level. 16 The other two parts of our program are 17 assisting homeowners at risk of foreclosure and 18 expediting the acquisition and rehab of vacant 19 buildings. As I said, vacant buildings are what's 20 left behind, the ultimate result of the predatory 21 lending. 22 We've announced get-tough policies on 23 vacant building owners to make it less attractive 24 to own a vacant building in the city. Owners now 212 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 have to register their building with the building 2 department; purchase liability insurance for damage 3 the building may cause to other properties; and 4 they need to board it up in accordance with 5 standards promulgated by the building 6 commissioner. 7 We also are setting in place with 8 community organizations programs to obtain those 9 vacant buildings through forfeiture from the 10 parties that end up with them and expedite the 11 rehab of those so we can have a fast-track rehab. 12 Finally, we want to assist the consumers 13 with consumer education. We both are going to 14 intervene, and I will talk more later with regard 15 to Department of Consumer Services about class 16 action lawsuits that she will initiate; and we're 17 also with -- a number of lenders, brokers, 18 community organizations, religious institutions, 19 government officials throughout the city are 20 developing an aggressive public education campaign 21 to inform consumers about their credit options and 22 about the dangers of predatory lending and to 23 educate them on their consumer decisions. And I 24 would like to talk more about that later. 213 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 MODERATOR SMITH: Ms. Llewellyn? 2 MS. LLEWELLYN: I'm a little nervous. I hope I 3 can speak up here. 4 We're evidently a little bit different. 5 We are a non-for-profit foundation. We write 6 mortgage programs and then go out and get them 7 funded. We provide homeowner counseling. We 8 pre-screen the applicants ahead of time. When they 9 come to the class, they're given a certificate. 10 The money, according to what they're qualified for, 11 is removed theoretically from that dollar amount so 12 that they have a large period of time to shop, to 13 buy wisely. They're not encouraged to go in a fast 14 pace because the money is going to sit there for 15 the duration until that program ends. That's 16 usually five to six months although we have had 17 them as long as a year. 18 I told my board of directors yesterday 19 that evidently we are subprime lenders and that we 20 deal with very, very low-income people who have 21 either no credit history or who have had credit 22 problems in the past. 23 We look at two years of acceptable credit, 24 three years after a discharge of a bankruptcy. We 214 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 use no FICO scoring in our credit reports at all. 2 We have 18 counseling centers across the 3 state. Everyone uses the same material. Credit is 4 reviewed the same way. Local lenders are 5 participating in these programs -- and I am glad to 6 see some people here who have helped my 7 participants in a big way. 8 We have, according to what they reported 9 yesterday, a .14 percent default rate. It's pretty 10 darn good I guess. Excuse me. I will get control 11 here a little bit. We just are finishing about 12 50 million that we have done in the last year and a 13 half. It's a 5 percent interest rate with a 14 thousand and one percent down payment, whichever 15 was higher. 16 Now I will say something that we're really 17 firm on -- and I have to argue this every time we 18 go to get funding from either the mortgage 19 insurance companies or from another entity. We 20 keep our debt ratios at 36 percent. Flat out. 21 36 percent. In five years, we've made two 22 exceptions to that rule. That took a conference 23 call between the mortgage insurer, the funder as 24 well as myself and the lender who was originating 215 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 that loan. We've only done that twice. 2 1 percent. We have found that a down 3 payment is not indicative of default. We try to 4 make sure that there is 5 percent more residual 5 income left at the end of each month that will take 6 care of necessary expenses and emergencies. 7 We also find that the majority of these 8 people -- Mary Backus is 73 years of age. She made 9 $11,000 a year. We find that they have no medical 10 insurance; and, if they have any at all, they're 11 paying it monthly. Most of the collections I see 12 are medical collections. We look at how long it 13 took them to repay that. Any collection has to be 14 repaid, but we kind of wink at medical so to 15 speak. 16 I am a little bit alarmed at things I am 17 starting to see on credit reports. A lot of them 18 are very, very high cellular phone bills, and it's 19 coming from our younger people. And I will talk 20 maybe later a little calmer. 21 MODERATOR SMITH: Ms. Crane? 22 MS. CRANE: Thank you very much. I have been 23 working since at least 1996 on the MCAP Chicago 24 steering committee which stands for Mortgage Credit 216 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 Access Partnership, one of six such programs put 2 together by various regional Federal Reserve 3 Banks. 4 I am a law professor at the John Marshall 5 Law School here in Chicago where I teach property 6 law and commercial law. And I think I was invited 7 to join MCAP after someone at the fed saw me 8 purchase their program where I was talking about 9 some research I'm doing and had been doing, looking 10 into the history of mortgage lending generally as a 11 way of trying to get a handle on why it's so 12 impervious to -- at least discrimination in the 13 mortgage lending practice is so impervious to 14 attempts to ameliorate it. 15 I found that actually the history of 16 mortgage lending is one of exclusion right down to 17 the letter, and not one of inclusion; and, 18 therefore, it's perfectly consistent for it to 19 continue to be one of exclusion in the present 20 day. 21 When we started the MCAP and we picked the 22 four task forces, subjects to the task forces that 23 we're going to paying attention to in Chicago, one 24 of them was Professional and Consumer Education. I 217 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 raised objections to its inclusion because I 2 thought that it seemed to ignore the problem of the 3 role of racism and other motives that remains 4 unaddressed to some extent while we focus such 5 scarcely available energy on educating the public, 6 once again, producing another brochure. 7 It also seems to suggest that the public 8 was being harmed because it was uninformed, 9 slightly stupid. It was just too much like 10 blending the victim for my taste, and I objected. 11 It was included, and it was probably a good thing 12 that it was. But I would like to lend my voice and 13 say things that other people aren't saying. That's 14 what continuing to be a law professor allows you to 15 do. 16 When those original task forces completed 17 their work, the steering committee created a fifth 18 task force, Credit Scoring and, beginning in 19 December of '98, a sixth, Predatory Lending. 20 Credit scoring is still a huge problem and 21 clearly contributes to the development and 22 continuation of predatory lending practices. I'd 23 love to see some additional work done in that 24 area. 218 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 Because I am satisfied with the focus on 2 developing new regulatory restrictions during this 3 morning's program, I am willing to engage in 4 discussion about consumer education. And, in fact, 5 upon reflection, I find myself in favor of devoting 6 a lot more attention to the matter of consumer 7 education in this context of predatory lending than 8 I was in the context of mortgage lending 9 discrimination generally. 10 Why? I think I'll have to wait until 11 discussion if you guys actually go in to that; but, 12 without overstating the point, I am a little 13 uncomfortable with some of the hint of internalism 14 because some of it means to attacking predatory 15 lending head-on. Consequently, education has 16 greater substantial value and appeal to me in this 17 context to the extent that a more well-informed 18 consumer can potentially make better choices from 19 among a larger, not smaller, pool of borrowing 20 options. 21 MODERATOR SMITH: Thank you very much. I will 22 ask Sandy to start our dialogue on this session. 23 MS. BRAUNSTEIN: Okay. I heard a lot of 24 interesting things in people's opening statements 219 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 today, and it's good to have -- we got a mix of 2 folks on the panel, some of whom deal with the 3 consumer education, some of whom also deal with new 4 products for the subprime market or to serve 5 customers that are currently being served by 6 subprime markets. 7 But I thought I would start out and I 8 would like to discuss some -- all of that; start 9 out with some questions about the consumer 10 education piece of it. And, in particular, for 11 those of you that are doing consumer education and 12 counseling, I would like to hear some thoughts on 13 what techniques have been particularly useful in 14 outreaching the appropriate targeted populations 15 that the predators target. You know, are there 16 certain kinds of materials, media? What has been 17 most effective? What do you find has worked? Or 18 if you find something definitely hasn't worked, I 19 would like to hear about that, too. 20 MR. MARKOWSKI: I think the first thing to 21 realize is we're at the front end of this, so that 22 when we're talking about outreach campaigns, I 23 don't think there's across the country -- and maybe 24 Boston is perhaps the furthest ahead in terms of 220 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 having a well-established campaign in their Don't 2 Borrow Trouble; but across the rest of the country, 3 most of us came into this last year or so as 4 recognizing a problem and then beginning to deal 5 with it. 6 At the city, at least, we have a wide 7 ranging group of maybe up to 50 people from all 8 these various sectors that are coming together to 9 develop a comprehensive public education campaign; 10 and we're going over these same questions that you 11 are talking about: What is the best way to -- 12 who's reaching these people now from the predatory 13 side, from the abusive side, and how do you 14 counteract on the other side? 15 There's people like NHS and like Bank of 16 the Americas, David Voss, in the streets on a 17 day-to-day basis are reaching out to their 18 customers in the neighborhoods. 19 And what I think is that there has to be 20 embodied in a campaign -- we're developing an 21 overall campaign, but we're going to have large 22 scale media advertising, but it has to be 23 complemented by local messages and local messages 24 involving local approaches, local delivery vehicles 221 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 of the message whether it's in utility bills, 2 whether it's through their churches and religious 3 institutions, whether it's through centers for the 4 Department on Aging for senior citizens. There has 5 to be many, many different ways in the community to 6 reach people. 7 But also, I think, it's the kind of thing 8 it seems to me that not only you have to reach once 9 and many times with the message, you have to make 10 it so that it's something that they think about 11 when they're approached by the predatory lender 12 that they know, oh, this is the time I'm supposed 13 to call so and so. This is the time I am supposed 14 -- this is what they were warning me about. 15 Somehow that has to click and then they have to 16 have an alternative place to go for advice. 17 And we think as part of the overall 18 outreach campaign, one of the things we're going to 19 have with it, too, is an 800 number that we think 20 has to be manned and end up serving as a central 21 reference point to give people alternative advice. 22 MR. VOSS: That's a great idea. Financial 911. 23 MR. MARKOWSKI: Right. Maybe that's the 24 message. 222 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 MS. BRAUNSTEIN: Are you -- as a follow-up 2 question, are you participating with the 3 Freddie Mac expansion of Don't Borrow Trouble? 4 MR. MARKOWSKI: Freddie Mac is working with us 5 as is Fannie Mae, both supporting this, and we're 6 now approaching other institutions to participate 7 in the campaign. 8 We think that Don't Borrow Trouble -- 9 we're not convinced that that is the message for 10 Chicago. We think it's a very good message, and I 11 have been very impressed with the materials I have 12 seen from Boston; but I think our opinion right now 13 is we want to be a little more explicit about what 14 the problems are. 15 I think, in my own opinion, it's a 16 sophisticated message and it might be too 17 sophisticated; and I think we want to be a little 18 more explicit about what the problem is and what 19 you have to watch out for and then what the 20 alternatives are. 21 But, yes, we're working closely with them 22 and we're basing it on that experience. 23 MS. NAWROCKI: I would like to add to what Jack 24 said. Certainly, we are at the front end of the 223 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 public awareness and the consumer education 2 campaign. 3 NHS, we have taken a lead in trying to get 4 the word out to consumers in our neighborhoods. We 5 participate in community meetings. We're going to 6 be providing information to NHS loan customers 7 telling them what to watch out for. And we have 8 also incorporated a predatory lending module within 9 our home buyer education courses. 10 But I just want to be clear that there's 11 no way that an organization like NHS can compete 12 with the marketing efforts that are ongoing by 13 predatory lenders. People are being inundated by 14 mailings, phone calls, and I'm a little bit wary of 15 even what a public awareness campaign can do when 16 the predators are out there day in and day out just 17 inundating people with materials. 18 MS. LLEWELLYN: I would like to add that 19 there's a trust issue here, too, that when you are 20 doing counseling and you have spent a good deal of 21 time with them even before on the phone talking 22 credit, working out particular issues with them and 23 then following them all the way through to the 24 closing of that transaction, they do tend to trust 224 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 you more, but there has to be a voice at the other 2 end of this phone. 3 You know, when you call up a number and 4 you're told to push 1 if you want this and 2 if you 5 want this, it's pretty frustrating for these 6 people. 7 It's a difficult thing for people to 8 discuss credit. Credit is still a very private 9 issue with people. It can be caused because of a 10 divorce. It can be caused because of a 11 relationship with a boyfriend or girlfriend. It 12 could have been absolute stupidity. It could have 13 been an error. 14 But for them to come forth and actually 15 sit down and talk one on one with a strange person 16 that they've never seen before on credit issues and 17 things that happen to them in the past -- and 18 they're all related to emotional things -- it's 19 pretty difficult for them. 20 Now you're talking about solicitation by 21 mail, solicitation by door. That's difficult. And 22 those guys have to be pretty darn good to build 23 that level of trust when they knock on that door 24 and convince these people that they need to turn 225 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 over their life savings which is generally the 2 equity in the home. 3 MR. VOSS: Trust is extremely important, and 4 one of the things that has to be done, at least in 5 the communities that we serve, Pilsen, Little 6 Village and Back-of-the-Yards, is to develop a 7 trusting relationship. 8 That takes time. You have to work one on 9 one with the people and you have to bring the 10 people into your bank or into your business, 11 whatever that is, for some reason. Maybe it has 12 nothing to do with banking. To pay a utility bill, 13 to get their blood pressure checked, to buy their 14 rapid transit tokens, whatever it takes so that you 15 can get them accustomed to walking into your 16 business so you have an opportunity to talk to 17 them, so that over a period of time you can gain 18 their trust. 19 It's a very difficult issue. Traditional 20 marketing methods don't work in our community. 21 We've tried radio, TV, door stuffers and every kind 22 of thing you can think of. Mailers, contests. 23 People get their information in our community by 24 word of mouth. 226 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 So you got to get to the people and you 2 got to get them to trust you, and you got to give 3 them a comfort level in integrity in dealing with 4 them so they will come back to you and talk to 5 you. 6 Because the information in our 7 neighborhood spreads by word of mouth that that's 8 where the predators are really getting ahold of 9 these people. You can look down some streets in 10 our neighborhoods and see where the predators have 11 been because there will be a whole string of loans 12 that were done on a predatory basis because they 13 talked to somebody who said, I think you should 14 call my friend, my relative or whoever it is who 15 took care of me, and they do. And they're very 16 unsuspecting, very trusting, and they end up 17 getting ripped off. 18 So you got to do -- you got to turn the 19 predators into prey; and the only way we've been 20 able to do that, and we've done it successfully, is 21 to go one on one with the people by whatever means 22 it takes to gain their trust. 23 MS. BRAUNSTEIN: Do you actually, David, do 24 people from your bank actually go door to door in 227 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 the neighborhoods? 2 MR. VOSS: Absolutely. Not door to door in the 3 neighborhoods, but I'll tell you what we do, to 4 give you an example. 5 In the month of June and July, we opened 6 60 ETA accounts which are electronic transfer 7 accounts; and I understand from some of my spys 8 here at the feds that that's about 10 percent of 9 the total that were opened nationwide. 10 But we didn't open those accounts by 11 putting a sign in the lobby or taking out a 12 newspaper ad or going on the radio. We took actual 13 staff people and put them in our neighborhood 14 Social Security offices certain days of the weeks 15 to talk to the Social Security recipients -- 16 remember, those are the people who are coming in 17 with the problem -- and converting them to ETAs. 18 So you got to do that. You got to go to 19 the people, in many cases -- not door to door -- 20 but you got to go to Oxione (phonetic) Chicago, the 21 De Sosa security offices, to the churches, where 22 you can get before people. 23 And the second thing you have to do is get 24 them to come in your door to do some kind of 228 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 business with you. It may have nothing to do with 2 financial services. It may simply be to pick up 3 their light bulbs when they pay their utility bill 4 or to have their blood pressure checked or to talk 5 to a health care practitioner about wellness. 6 All of that stuff works. Ultimately, the 7 predator becomes the prey. 8 MS. BRAUNSTEIN: One of the things that's been 9 suggested to us sometimes when we talk about 10 amending HOEPA is that maybe everybody who gets a 11 HOEPA loan should be required to see a housing 12 counselor so many days before closing. I would 13 like to get some reaction from that. Do you think 14 would that work? Would that -- you know, what do 15 you think of that idea? 16 MS. CINCOTTA: I think counseling is a mixed 17 bag. I think there is good counseling, there's bad 18 counseling, in between; and there are people who go 19 through it who believe it or don't believe it or 20 get it but it doesn't translate when something 21 happens in their life. 22 And using an example of our group in 23 Cincinnati who did hands-on counseling with the 24 people to get them ready to buy homes, built the 229 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 homes, got them in there. They went through all 2 this for a good length of time, but if they didn't 3 have to sign off before those new homeowners took 4 another loan or did anything, they were prey to 5 predatory lenders. 6 It just was incredible where they have 7 gone through all this, but it took having that 8 where I can't get a bad loan from him without 9 signing -- him signing off on it. They got the 10 counseling. They know, but the allure or the sales 11 pitch on it is beyond that. 12 MR. MARKOWSKI: I think along those lines, I 13 think counseling is good, but if those of us have 14 ever been in any kind of consumer education program 15 or classes or anything we've learned, it's totally 16 different when you're actually in the midst of a 17 transaction. 18 I mean, whatever you know theoretically, 19 it's a different situation when you're being given 20 a pile of papers and being told to put your 21 signature in 15 different places in a loan closing, 22 and there absolutely has to be trust in that 23 scenario. 24 I mean, it's impossible, if anybody would 230 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 think that they would sit down and actually read -- 2 it's not expected in a loan closing that you're 3 going to sit down and read through all those papers 4 and understand everything that's there. That's 5 totally not expected and it can't be done in the 6 normal course of business. So, instead, there has 7 to be a trust that what's in there makes sense. 8 Now I myself, I don't need counseling, but 9 I would never go to -- I have enough counseling to 10 know that I would never sign a transaction like 11 that if I didn't have legal representation. So I 12 have my legal representation in the room with me if 13 I was going to enter into that transaction. 14 So if we're not going to provide that for 15 every person -- we could provide that for every 16 person so they have -- you need representation or 17 counseling right then in that instance. That's one 18 alternative. Or you have a framework where that's 19 not necessary because they have been protected by 20 the regulations. 21 MS. NAWROCKI: First of all, I don't believe 22 that counseling alone is going to stop any 23 predatory lending. I think that you got to couple 24 counseling with real prohibitions against abusive 231 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 lending practices such as flipping, improvident 2 lending. 3 Second, the volume of subprime lending 4 that's occurring, I don't know how counseling is 5 going to help all those people. Today I think I 6 know of four counseling organizations within the 7 City of Chicago where one of them was completely 8 under water. 9 There's not enough funding for counseling 10 organizations. Who's going to pay for the 11 counseling? Is the cost going to be borne by the 12 consumer? Is it right that this burden should be 13 placed on the consumer without placing any 14 responsibility on the lenders or the brokers? 15 And, thirdly, when is that counseling 16 going to occur? If it's going to occur after a 17 person has already been sold a loan or told that 18 this loan will definitely be in their best 19 interest, how good will the counseling -- how much 20 good will the counseling do? And who is going to 21 perform the counseling? 22 We've seen proposals put forth where the 23 lender or the broker could provide the counseling. 24 A VOICE: That's a good conflict of interest. 232 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 MS. NAWROCKI: Definitely. 2 MR. VOSS: You got to get to the people before 3 applying for the loan. I mean that's when the 4 counseling has got -- and the help and the trust 5 has to develop. It's too late once they've applied 6 for the loan because they probably got somebody 7 they know that got them the deal. You can trust 8 them, right, because that's my first cousin. 9 MS. LLEWELLYN: And if they think that someone 10 says to them, well, the loan is approved, but you 11 have to go to this class and have counseling prior 12 to coming, and they know that this is it, you get 13 down there to the end and they say, you either take 14 the counseling or you don't get the loan, and they 15 want the loan. That's all they know is that they 16 want the loan. So they'll go ahead and it's 17 already after the deal is approved. So you have 18 already put the carrot out there. 19 MS. BRAUNSTEIN: I should clarify that what I 20 was thinking of was counseling that would include 21 having somebody, a third party, go through the deal 22 with them. 23 MS. LLEWELLYN: In a right of rescission? 24 MS. BRAUNSTEIN: They haven't signed yet. 233 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 MS. LLEWELLYN: They paid an application fee. 2 MS. BRAUNSTEIN: Probably. 3 MS. LLEWELLYN: Probably. 4 MS. CRANE: What I wanted to try to add is that 5 I certainly do see the sort of problems associated 6 with giving counseling of certain sorts after a 7 certain point and the transaction has already past; 8 but, at the same time, I mean, if we're about the 9 business of sort of deconstructing this, figuring 10 out exactly when it's too late, then we should also 11 be able to figure out when it's not too late and -- 12 or if we're able to say who won't be able to get 13 through to the consumer, we should also be able to 14 figure out who could get through to the consumer 15 and when they might be able to be successful at 16 it. I don't have an answer to those questions. 17 MS. BRAUNSTEIN: That was going to be my next 18 question. 19 MS. CRANE: But I do think that given the level 20 of expertise and the understanding of these issues 21 that is present here including -- and I probably 22 could come up given time -- that these are not 23 insoluble problems if we treat them the same way we 24 treat other problems that they are successors to. 234 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 When we look at the unlawful 2 discrimination against persons in this very same 3 context using other means, we have, you know, DOJ 4 settlement agreements coming from left and right. 5 We have imaginative applications of existing law as 6 well as private initiatives to try to address them, 7 and I think that we could do the same thing here. 8 Now as far as it goes -- one of the things 9 I had prepared to say, been prepared to say was 10 that I think we should have mandatory education for 11 consumers for certain categories of loans; and 12 perhaps we even impose the duty to make those 13 disclosures on the lenders themselves, not 14 necessarily on the handful of consumer education 15 agencies that are outgunned who are trying to do it 16 now. And that even if it may be that, 17 logistically, the point in which this information 18 is shared might not be ideal, that doesn't in my 19 mind mean that we don't add that to the list of 20 things that are used as attempts to address the 21 problem. And there are some people, maybe not all, 22 maybe not half, but a bunch of people might, having 23 this information shared with them, even at late 24 stages of a transaction, may decide, whoa, you 235 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 know, I didn't know that. 2 Also, I think with respect to the content 3 of education, in my experience here, the content of 4 the disclosures being referred to primarily as 5 information about credit worthiness, readiness and 6 financial understanding, you know, issues, things 7 like that, so that they're more savvy borrowers 8 about the economics of the transactions and so 9 forth or a preparedness for going into certain 10 types of transactions. 11 Why can't the content of the education 12 also be about HOEPA and Truth in Lending? Why 13 can't we tell people, look, there are laws that are 14 -- regulations that are in existence that you may 15 not know about, your lawyer may not know about, and 16 that are serious; and if your transaction looks 17 like this, then those laws apply. 18 So that even though we sort of separated 19 out this discussion from the morning discussion 20 where there was more focus on regulation changes to 21 law this morning, I think that there could still be 22 -- you know, there's no need to totally divorce 23 this discussion from that idea as well, and I am 24 thinking we want to get tough because they are 236 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 tough issues. 2 MS. WILLIAMS: If I could ask a question about 3 counseling because sometimes you often hear there's 4 a question about the quality of that counseling 5 that people will receive. 6 And so along those lines, should there be 7 like minimum guidelines or standards that are set 8 so that when you are counseling an individual, you 9 know exactly what it is you are getting into? So 10 some reaction to that. 11 MS. NAWROCKI: Well, I think if we're going to 12 talk about counseling, we should put forward 13 regulation on high-cost loans; and that one way of 14 ensuring the quality of the counseling that 15 somebody receives is that you would -- a counselor 16 would go through the loan and, according to HOEPA, 17 according to hopefully new regulations against 18 high-cost loans, they would determine whether or 19 not somebody is getting a loan that they cannot 20 afford to repay. 21 So what are the guidelines for improvident 22 lending, looking at what a debt to income ratio 23 ought to be and using guidelines such as that. 24 Look to see if they have been a victim of loan 237 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 flipping as determined, and using those sort of 2 guidelines to mandate the standard of education 3 that somebody would receive. 4 Otherwise I don't know without -- you 5 know, without any sort of prohibitions against 6 those practices, how will you determine what 7 counseling they'll receive? 8 MS. BRAUNSTEIN: Gale? 9 MS. CINCOTTA: We don't just counsel people who 10 drive cars. We have rules, regulations, stop 11 lights, stop signs, jail terms, et cetera. And I 12 think we've taken homeownership which is so 13 important, such a big debt, and just say, 14 counseling. 15 Counseling is a mixed bag. Some is very 16 good. Some isn't. And other people, even if it's 17 good, they'll listen to it. 18 So I think there has to be -- like when we 19 talk about rules to stop predatory lending, no 20 credit insurance premiums included in the loan, I 21 don't have to look for it. They're breaking the 22 law if they do it. No prepayment penalties. No 23 flipping. No balloon loans. Make whoever owns the 24 loan responsible for it. You know, lower the APR 238 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 figure to 8 percent. 2 When you set rules, rather than we tell 3 everybody here, now you could get screwed over, so 4 maybe you go to a counselor, who has to hurry out 5 for a date, to help you with this most -- maybe one 6 of the most important decisions you make 7 financially in buying a home. 8 I think you have to build, I mean, these 9 kinds of rules to protect the people. Because, as 10 I said, we have it on stop signs. We have it on 11 all kinds of other places, but somehow here we're 12 going to go to these magical counselors. 13 MS. LLEWELLYN: Let's put the burden on us. 14 I would like to say that in doing 15 counseling, I do -- we do primarily pre-purchase 16 counseling -- the APR is the easiest thing to 17 explain. 18 When I sat here this morning listening to 19 what we would do with TILA, what we would do with 20 everything else, I thought what in the world -- how 21 would I explain this? What would I do? 22 Well, the APR is the easiest thing to 23 explain to a consumer. They can understand that. 24 They can compare that, and they understand that. 239 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 For us who do counseling -- here I am 2 taking sort of the easy shot out, but that is 3 true. But in doing the research for this and 4 reading the documents that you two put out in the 5 letter to us, I noticed that there's a high 6 percentage of these people who are in the predatory 7 issue that are elderly and minority. 8 Well, now how do you get to those 9 people? You get to those people through their 10 churches, and the only way you can get invited into 11 their house is through television because almost 12 everybody has a television. 13 So you would have to have some sort of way 14 of communicating to them an exact replica almost of 15 somebody coming to your door, beware, this is what 16 would happen to you. Many of our elderly, it's 17 difficult for them to read, but they can hear and 18 they watch television, and often that's the only 19 company that they have. I think that might be a 20 good avenue for you guys to look at. 21 MS. BRAUNSTEIN: One of the things -- I wanted 22 to change tracks a little bit to some of the 23 alternative products that I heard mention here 24 today. 240 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 Because one of the things, just to kind of 2 close out this counseling or piece of it, is that 3 we heard from some housing counselors who are in 4 the business is that when a borrower, consumer 5 comes in, even if they come in before they have 6 entered into what would be termed a predatory deal, 7 and if the counselor sits down and goes through the 8 paperwork with them and explains this is really not 9 a good deal, it's not in your best interest, that 10 oftentimes the counselor gets frustrated because 11 the consumer will go ahead the next day and sign 12 the deal anyway because they need that $600 or 13 whatever it is to pay a medical bill and there's no 14 alternative. At least, they feel at that point 15 there's no alternative and this is the only way 16 they're going to get that money. 17 So I was just wondering. I have heard 18 today -- and we've heard this expressed in some 19 other cities and the lack of alternatives, and I 20 hear today that it sounds like there are some 21 alternative kinds of products and programs around 22 the table, and I would be interested in hearing a 23 little bit more about that, especially David. And 24 I know, Beth, you mentioned you are doing loans 241 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 and, Rochelle, and you are actually refinancing 2 some of these deals. 3 MR. VOSS: Well, as an alternative product, I 4 think you got to find ways to bring people to you 5 or go up to them one on one such as we do with the 6 Social Security office on ETAs. 7 But let me give an idea that you might 8 want to think about. I think the ultimate solution 9 is to create more community bank offices in these 10 communities. I mean, I have not -- I don't know 11 any community bank that started in our neighborhood 12 except for us. Yet there are more currency 13 exchanges, more car title loan places, more Payday 14 Loan places opening every week, and they're the 15 financial institution of our community. 16 If the Federal Reserve Bank could create 17 some kind of an incentive because it cost a lot -- 18 we did this. We opened a 1200 square foot branch 19 in no man's land; and the idea would be that it 20 wasn't -- would not be intimidating and yet it 21 would give the mainstream banking services; but it 22 takes years of doing life line banking services to 23 people to get them to come to be bank customers. 24 You are losing money over this period of time and 242 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 we're for-profit banks. Shareholders don't like 2 that. 3 But if the Federal Reserve could guarantee 4 perhaps with a letter of credit a large deposit, 5 say, $3 million because the insurance of the 6 accounts will only go up to 100,000, if you would 7 give some kind of letter of credit so that a 8 community bank would establish itself in these 9 communities and automatically have this large 10 deposit that would be fully insured because of the 11 backing of the Federal Reserve System or a letter 12 of credit at a below market rate, that would cover 13 these four or five years it takes you to bring this 14 branch to the main line of banking as a profitable 15 operation. 16 That would encourage other banks and 17 financial institutions to open up offices in these 18 communities as rapidly as the Payday Loan Stores 19 and title loan companies and the currency exchanges 20 that are expanding today and provide an alternative 21 for people to go to. 22 I also think that the Federal Reserve Bank 23 could be kind of a conduit in putting together 24 large deposits that would be put into these branch 243 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 locations or perhaps even from CDFIs, working with 2 other community development financial institutions 3 to make this happen, and there may be other ways. 4 But I think that's a way that you can 5 develop some products and things and get banks and 6 savings and loans and other credit unions to open 7 up offices in these communities where they're not 8 doing it today. 9 MODERATOR SMITH: Gale? 10 MS. CINCOTTA: I think it's going in the -- it 11 should in that direction, more like S & Ls on every 12 corner; but what's happening, ATMs, people are 13 encouraged not to even go in the banks that exist, 14 to go outside and use the machine. People are 15 being charged five bucks if they walk in the door 16 to see a live person and talk to them. 17 So everything we're saying to get the 18 hands on so people have a relationship, everything 19 is moving to you don't -- what they're saying, you 20 don't have a lot of money. We don't want to bother 21 with you. Work the machine outside or pay five 22 bucks or don't come in at all. 23 It's the opposite of what you really need 24 for people to have access, you know, to credit and 244 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 not get into this trouble which is -- it's almost 2 hostile to the people. 3 So that when they see an ad or a predatory 4 lender knocks on their door, hi, I like you. Gee, 5 you look like you need a break. There's comes -- a 6 personal touch comes out, even though they're going 7 to scam them. They at least have that beginning of 8 we like you, we're going to help you that they 9 don't get from a regular bank who won't hurt them, 10 just won't do business with them. 11 MS. CRANE: That's where we see, at least, in 12 my view, where predatory lending really has 13 originated. 14 In at least, you know, my own maybe 15 somewhat cynical way of looking at things, we've 16 made it too tough for the lenders to refuse to do 17 business with certain communities. You know, the 18 heat was on. You could not just discriminate 19 openly as you had in the past and just refuse to do 20 business with someone because they were black or 21 because they were Latino or because they were 22 elderly. They couldn't do it. 23 And so that I think that what has 24 happened, the evolution of the predatory lending is 245 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 the result of new ways to continue to oppress 2 certain groups; and this is, I think, signified in 3 large part as well by the banks who have moved away 4 from providing personal service and so forth. 5 MS. LLEWELLYN: I think predatory lending 6 starts further back. I think you got to step 7 another step back. Some people heard me speak on 8 this before. 9 This credit scoring is just nuts. I just 10 pulled up an article. I think I sent it to you 11 guys from the U.S. Public Interest Research Group 12 in March of '98 that said nearly 30 percent of all 13 credit reports have serious errors that could cause 14 unfair denial of a car loan, a mortgage or even a 15 job and often go undetected. 16 That's pretty good because before you pass 17 the Fair Credit Reporting Act, it was 48 percent or 18 44 percent, as I remember. 19 But if 30 percent -- now if one out of 20 three of you have an error on your credit report -- 21 how many of you look at your credit report every 22 year? Once every year at the same time every 23 year? How many of you look at your credit report? 24 Well, you should. It's like 246 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 housekeeping. It's good business. You should. 2 Usually about March after all the new credit cards 3 are taken out for the Christmas holidays, you get 4 10 percent off of everything you buy. And you 5 should do that. 6 Of 35 people -- seriously -- of 35 people 7 in each class, I will have only one that has ever 8 seen her credit report or his credit report and 9 they didn't understand how to read it. So that's a 10 moot point. 11 We do pull their credit reports, put them 12 in a sealed envelope, give it to them at the 13 beginning of the class when they come in and the 14 lenders are there to talk to them about their 15 credit. I have already talked to them or some of 16 the others have on the phone before they even get 17 there. 18 I can't believe that we're using credit 19 scoring or any other kind of FICO, any kind of 20 scoring to determine whether somebody has a 21 willingness or an ability to repay because it 22 doesn't really -- 23 MS. BRAUNSTEIN: You said you don't use FICO 24 screening? 247 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 MS. LLEWELLYN: We do not. Absolutely do not. 2 MS. BRAUNSTEIN: And you have 36 percent debt 3 ratio. Is that front or back? 4 MS. LLEWELLYN: That's back. When we're 5 running their debts before they even -- when 6 they're filling out their application, if they got 7 more than 20 percent commercial debt, 20 percent 8 monthly commercial debt, then we sit down. We 9 don't deny them into the program, but we sit down 10 and talk to them about how to dump some of this 11 debt. 12 With 5 percent interest rate, we've never 13 done more than 6 and a quarter percent interest 14 rate, but the last -- we did about 50 million at 15 5 percent interest rate. For every 25 bucks a 16 month they dropped off their debt a month, they 17 jumped five grand on the purchase price of a home. 18 For every 50 dollars they dumped off that 19 commercial debt, they jumped $10,000 in the price 20 of a home. 21 So we spent a lot of time working with 22 them on debt reduction. And that's why we have to 23 take the money out at the beginning and hold it for 24 them because it takes a little while to do it. 248 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 These are people who sell boats. They 2 sell motorcycles. They sell stereo equipment, 3 anything they could come up with to come up with a 4 thousand dollars or 1 percent to put down on this 5 house. They have to have some sort of down 6 payment. 7 Now I'd give them the house with no money 8 down. I really would. I have a lot of confidence 9 in these people. But the other people who 10 participated with us in this program are adamant 11 that there has to be some cash in there. But 12 sometimes it takes them quite a bit. These are 13 people who consider this not just a house, but this 14 is a refuge. This is their home. 15 I brought with me -- we just had a survey 16 out to our buyers. And Sandy Tipes. She works at 17 Hardy's. She has four kids. And we asked her how 18 has owning your new home changed your life? She 19 was in Section 8, living in government housing. 20 How would you describe the difference? 21 The kids are the same but, otherwise, 22 everything has changed. I feel like a new person 23 again. Before, people looked down on us because we 24 were poor and in subsidized housing. We're still 249 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 in the same school district. We're within town 2 limits so that we can walk to the store if the car 3 breaks down. We are off Public Aid. I learned how 4 to budget and take care of ourselves. It gives me 5 a reason to go to work. Before, the more money I 6 made, the more my rent would be. There was no 7 incentive because we could never get ahead. 8 I plan on staying in this house forever. 9 It's our home. The kids always wanted to have a 10 family dinner together. We finally have a place 11 for a dining room table -- they ate in shifts 12 before -- where we can say grace and be thankful 13 for our new home. 14 I want to be helpful to others in the 15 program to answer some of the questions they may 16 have and be a support for others. 17 Well, one of the things she liked about 18 our program was that there was somebody there on 19 the end of the phone and that somebody would give 20 her a call within ten minutes. 21 And she did have some difficulties. That 22 one was a little bit tough, but we were really 23 proud of that. She got a really nice home, and 24 she's got great kids. 250 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 So I think you have to look at the credit 2 issue when you make your determination as to 3 whether you're going to move them into a A minus, a 4 B, a B minus, a C, whatever you are going to move 5 them into, and then you jack the interest rate. 6 I don't think that is -- I don't think 7 that that shows definitely their intent or their 8 willingness to repay. It could be medical issues. 9 It could have been a divorce. 10 We need to have a class on the proper way 11 to get a divorce. These kids come out of a divorce 12 and they assume that the divorce decree is law and 13 that when the divorce decree says he or she was 14 responsible for this and she was responsible for 15 that that he's going to pay that bill, she's going 16 to pay that bill; and often they have left where 17 they were living and gone back home where support 18 was. They have no idea that these creditors who 19 can't find them are filing collections against them 20 until we run a credit report. 21 The other one is young people who come to 22 class and have never discussed their financial 23 history before with each other; and, all of a 24 sudden, they're going to buy a house and a credit 251 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 report is run and she didn't know what it shows on 2 that credit report. He didn't know. They never 3 discussed it. 4 So education has to start a lot earlier 5 than where we are in the marketplace, but also 6 credit scoring. 7 MR. MARKOWSKI: On that credit scoring problem, 8 I acknowledge what Beth is saying about the credit 9 scoring as an issue. 10 But I also want to say that whatever 11 method you use to score, to rate your borrower with 12 respect to credit, there has to be an underlying 13 principle, too, that a borrower is entitled to the 14 best credit. They will get the best credit for 15 which they're entitled. 16 That is not an accepted principle in the 17 industry, and I think the Federal Reserve bank can 18 join with others and push that as a principle. To 19 anybody that hears that, it's outrageous to think 20 that responsible lenders would steer somebody 21 toward a lesser credit or, alternatively, if they 22 come to a subprime lender and they really qualify 23 for a better loan, in terms that they don't push 24 them upstream. 252 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 So I think that the Federal Reserve Bank 2 could help us in establishing that as a principle, 3 that you get the best credit for which you 4 qualify. You're entitled to that. That's a 5 borrower's -- one of their rights. 6 The other thing I would say is that -- and 7 I don't know if Rochelle wants to talk a little bit 8 about this -- with NHS, the Department of Housing 9 in the city, we do have an alternative financing 10 pool. It's not at the front end, although NHS has 11 a number of products at the front end for people to 12 rehab their homes. But we have one at the back end 13 for people that are in danger of foreclosure due to 14 predatory loans that they have gotten themselves 15 into. 16 This is a loan pool that NHS has developed 17 with the series -- with a number of banks in the 18 area that are investors, and the City of Chicago is 19 providing money both for NHS administration of the 20 program and for something of a loan insurance 21 funds. We have 6 percent loan insurance fund, that 22 that's basically what's inducing the banks. The 23 banks bear 94 percent of the risk, but that has 24 been enough to get them in the program, and we have 253 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 this pool that we're calling the normal loan pool 2 to refinance people out of predatory loans. 3 I don't know, Rochelle, if you want to say 4 anything anymore. 5 MS. NAWROCKI: I would just like to add, 6 there's 15 participating institutions in the loan 7 fund. It's a $2 million loan fund. It's a pilot 8 program, and we hope to do 20 to 25 loans this 9 year. So it is very small. 10 But, basically, the idea is -- or the 11 concept behind it was that we needed a way to 12 refinance people that had been victims of predatory 13 lending. Through our work with the Legal 14 Assistance Foundation, we were getting settlements 15 for people who had been victims of predatory 16 lending, and we needed to refinance them and we 17 didn't want to refinance them with that same lender 18 that had ripped them off previously. 19 This normal program is a result of that 20 need. We closed on one loan to a woman, 78-year 21 old woman who paid nearly $10,000 in fees to get a 22 70,000 finance loan. 23 We have a loan committee meeting tomorrow, 24 and we have eight loans to be presented. I just 254 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 spoke with one of our neighborhood directors this 2 week and, in a week, she has six new clients for 3 this program. So I'm sure that we're going to be 4 able to use up the money. 5 I guess I should say, that is, if we're 6 able to negotiate a settlement with the predatory 7 lenders because that is one of the key components 8 of the program is that we have to get a settlement 9 from the lenders so that we're not using the 10 investments in this fund to pay off the bad 11 lender. So that is one thing. 12 Another product that we have -- 13 MS. BRAUNSTEIN: I'm sorry. When you say 14 settlement, you mean they agreed to take a lesser 15 amount? 16 MS. NAWROCKI: Exactly. 17 And another product that we have is with 18 Freddie Mac and Harris. We call it our refi/rehab 19 product. It's a slightly alternative refinance 20 product where we'll be able to refinance people, 21 allow them to do a small amount of rehab, if they 22 need that. And we have more flexible underwriting 23 guidelines as far as credit history. 24 And then we also have a home improvement 255 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 product as well although I will say, due to the 2 overmarketing of predatory lenders, we are finding 3 it difficult to get to people on our own home 4 improvement loan product. 5 MS. BRAUNSTEIN: I know we're running out of 6 time, and I want to ask a question for us at the 7 fed. 8 We would like to know, aside from the 9 regulatory fixes which were discussed this morning 10 in great detail and were mentioned also this 11 afternoon, in the consumer education community 12 outreach field, what is it -- what role would you 13 see that the fed could play that could help what 14 you are already doing or what others are doing? 15 Is it developing materials? Is it 16 marketing? Is it either delivery systems? What 17 is it that the fed could do to be helpful in 18 that? 19 MS. CRANE: I think that one area -- again, 20 going back to the credit scoring. I'm not sure if 21 the fed has any kind of authority in this regard, 22 but I assume it can say whatever it wants to, at 23 the very least, and that is with going back to the 24 ground work that was laid for predatory lending to 256 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 be able to be so successful when we have people -- 2 everyone wants a home. There is -- it's part of 3 the human condition to want a home. The leverage 4 that it provides you and all those other kinds of 5 things. 6 And, yet, there's a scarcity of land, as 7 we know. And there are lots of incentives to 8 discriminate against people who are able to be 9 preyed upon with the goal in mind to prevent them 10 from achieving that homeownership. 11 With credit scores, not only is there not 12 a fundamental kind of a philosophy to give people 13 the best scores that they might be entitled to 14 under -- after the score is calculated, but we know 15 from the work that we tried to do in credit scoring 16 that there are lots of factors that go in to the 17 score that bear no resemblance whatsoever to 18 anything relevant to credit worthiness or credit 19 readiness. Absolutely nothing. 20 In fact, there are many things that can go 21 in to scores that are in fact proxies for rates in 22 the class and lots of other kinds of things which 23 then result in a lower score that are proprietary 24 so that we can find out what they were, but then 257 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 lead to borrower to being unable to qualify for 2 conventional loans; and then, of course, they 3 continue, because they do want a home like 4 everybody else, to look for money and they end up 5 in the hands of predators. 6 So that, again, as I said in my opening 7 statement, I think credit scoring has laid a big 8 part of the foundation for predatory lending, at 9 least in the mortgage area. God knows, it's not 10 only in the mortgage area where it's a big 11 problem. 12 But to the extent that the fed could in 13 fact do something to unbundle this credit scoring 14 mystery, the immunity that the credit scorers and 15 the institutions when they put together their 16 factors that go in to how they calculate their 17 credit scores, that would be very helpful. It 18 would be a start because you run into a wall -- and 19 I've been a part of the group here at the fed and 20 elsewhere of people who are really serious about 21 trying to unbundle this, and we ran into a wall. 22 Then we found ourselves, lo' and behold, 23 focusing on predatory lending which, again, was by 24 no means a coincidence considering the fact that 258 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 nothing had been done about credit scoring which 2 historically has never even been used in the 3 mortgage lending context; and why is it being used 4 in a mortgage lending context as soon as we make 5 greater strides toward eliminating discrimination 6 and mortgage lending and conventional loans I think 7 is because it's so useful for continuing and it's, 8 again, for some reason, apparently immune to that. 9 So to the extent that the fed could in 10 fact look in a comprehensive way at what is 11 involved with how institutions that do listen to 12 the fed calculate their credit scores and 13 scrutinize them and give them some guidance and 14 some demands on how they should not be used in 15 improper ways, I think that is one thing that could 16 be gone over. 17 MS. LLEWELLYN: I agree with her. And also, 18 again, as I said, I deal mostly in rural 19 communities which Illinois primarily is rural. 20 I would like to point out that in my small 21 rural towns -- and this comes up in 90 percent of 22 the cases -- many of the rural businesses in small 23 towns don't report to a credit bureau. 24 So these people who come up with, it shows 259 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 no credit history at all. You sit down with them 2 and you say, well, have you ever had any account 3 any place else? Well, I got an account at the gas 4 station down here. It's not a Shell. It's not an 5 Amoco. It's just a gas station. And he goes in 6 and pays it off every month. He's got an account, 7 over a couple years, different times at a local 8 furniture store, and it doesn't show up on a credit 9 report. 10 And I was thinking about this when you 11 sent out the information to us. If credit is a 12 determining factor in moving a consumer from a 13 prime loan to a subloan, then a copy of that credit 14 report and scoring should be given to that 15 applicant for review prior to processing a loan, 16 before it gets anywhere, at the very onset. 17 If that is what you are basing your 18 decision on moving them into a subprime product, 19 then they should be aware that that's the cause. 20 They should have time to review that. Often they 21 got to go home and talk to their wife, their 22 mother, their father, somebody, to figure out how 23 to read the thing. 24 There should be some sort of an 260 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 instruction and also a sheet in there that tells 2 them these are the avenues to correct. Something 3 that gives them some information. 4 These people are sometimes just caught 5 totally unaware. Totally unaware. 6 MR. VOSS: Since we're on credit reports, why 7 don't you make a regulation that says that lenders 8 have to report good credit payments? Because I 9 think there's a tendency to report those that don't 10 pay. But, oftentimes, there's little effort to 11 report -- 12 MS. LLEWELLYN: Or there's gaps. They look and 13 they report it every three months or every four or 14 every five. 15 MR. MARKOWSKI: I agree with that. So you're 16 going to have -- you talked this morning about 17 regulations. Now we're talking about stuff beyond 18 regulations. 19 I would say beyond the regulations, 20 wherever you end up going here, best practices and 21 standards is I think one of the roles for the fed 22 to play; that those things, whether it's about 23 credit reporting, whether it's about credit 24 scoring, whether it's about, what I said earlier, 261 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 about consumer being entitled to the best loan for 2 which they qualify, those are the kinds of best 3 standards and principles that the fed could help 4 promulgate for member institutions. 5 And with respect to consumer education, I 6 mean I think consumer education, this is such a big 7 task to go on so many different levels; and, on one 8 hand, when I think about consumer education 9 campaigns, I know we have some friends from 10 Fannie Mae here, but I think of the Fannie Mae 11 commercials that I see, the public interest 12 commercials at the Super Bowl that you see from 13 Fannie Mae about the family owning their home. 14 There needs to be that equivalent, I mean, of this 15 issue at a national level. 16 Now that's not going to come from the City 17 of Chicago or from local banks here, but there 18 needs to be a campaign that ends up being 19 underwritten at both -- and carried out. 20 And it's got to be coordinated in a sense, 21 too. The other thing I think about a PR campaign, 22 I mean, we need assistance and support for our 23 local campaign here. But I think we also need 24 coordination with everybody, whether it's the 262 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 Fannie, Freddie or the fed or local banks or big 2 banks, that I think we all have to work together to 3 be part of -- develop themes that hold everybody 4 together on so that you can carry it out with your 5 name on it, but it's still part of an overall 6 effort for this consumer education and, as I said, 7 so the fed can be involved in that national kind of 8 advertising. It can be local support. It can be 9 -- but we're going to have to have the 10 responsibility primarily through us or maybe 11 through your member institutions of carrying the 12 message locally and door to door in the 13 neighborhoods. 14 MS. WILLIAMS: If I can go back and ask Beth a 15 question. You talked about education and it should 16 start a lot earlier. How early were you thinking? 17 MS. LLEWELLYN: Thank you for that segue. I 18 got cards out there, stack of cards out there. 19 We have gotten funding that was funded by 20 Freddie Mac. We did a web site called 21 www.Credit-Power. A friend of ours at Microsoft 22 out in Redmond, Washington, gave us the name of a 23 company called Management Group that developed 24 this, and they hired a man named Bill Nye, The 263 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 Science Guy, who helped write the script for this. 2 It's for junior and high school. The site 3 itself is done. It's a very large site. It's very 4 interactive. It's a game. It's an E-Mail out to 5 the future for 15 years. There's a little envelope 6 up here flying. You can click on it. It goes out 7 15 years and tells you all the stupid things you 8 did and allows you to go back and make better 9 choices. 10 And at the end of that, there's a multiple 11 choice question and answer, and seniors can enter 12 into a thousand dollar cash scholarship. We give a 13 thousand dollars to a high school senior on the 14 first workday of every month. And those E-mails 15 are then dumped to my site to my office and a name 16 is drawn. 17 So it's easy to get funding for that. 18 Dog-gone-it. I wish it was easier to get funding 19 for counseling. It's easy to get funding for 20 scholarships. 21 But it's part of a program that's being 22 converted to Spanish right now. We'll have that 23 done in eight weeks. It's part of the program that 24 will be introduced into the school systems, we 264 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 hope, and also in other states as well. It will be 2 classroom material on credit responsibility and bad 3 choices you make and how it affects what you do in 4 your future. And it's pretty serious, but it's got 5 a good tone to it. 6 My mother was aghast. I had to 7 demonstrate this at the Freddie Mac both last fall, 8 and my mother was with me, and she was going 9 through it. I was practicing. I was just as 10 nervous then as I am now. And, at one point, she 11 was just aghast. She said, oh, my gosh, she was 12 living with this young man and he ran off with her 13 car. I said, I know, Mom, but it works out okay. 14 Watch this. 15 It's a good -- it's a good piece of work. 16 I'm really proud of it. I think that people that 17 worked on it did a marvelous job. I think it's 18 going to get better. When we are done with this 19 one, we're going to do a fair housing one. 20 You know, you look back on your life and 21 you say, what did you do that really made a 22 difference? I think this thing is great. I think 23 it's great. 24 So pick up a card out there. Give it to a 265 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 high school senior. Tell him to dial in and learn 2 something. 3 MR. VOSS: Great idea. I'll just take it back 4 one, even to a lower -- we've opened up banks in 5 grade schools and in high schools here in Chicago. 6 And these are just not banks that are run by us. 7 They're run by the kids. They elect their own 8 board of directors, their own president. They hire 9 their own tellers. The only thing we do is train 10 and mentor and audit. 11 That's one way that you can get the kids 12 -- I mean, the one grade school we're in, their 13 board of directors voted to open it up all the way 14 down to the third grade this year. So you're 15 getting kids whose parents probably have never been 16 in a bank or wouldn't use a bank. At least they're 17 going home and talking about it. 18 Let me give you an example. I had a 19 16-year old girl come in the other day and wanted 20 to know if I would lend her $1600. She works at 21 our high school bank. And I said, I don't think 22 so. You have to get somebody to cosign for you. 23 And I said, what do you want the money for? She 24 said, well, my dad has been studying to be an 266 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 electrician for two years or whatever, and he has 2 to get his license, and to join the union, it's 3 $600. I said, why don't you go get your dad and 4 bring him back over here? 5 We were able to give him -- the dad was 6 going to go to one of these Payday Loan Stores to 7 get the $600; but because she worked in our school 8 bank here in Chicago, she said, gee, dad, why don't 9 you go talk to this guy in the bank, and even 10 though he had never been in a bank, I'm sure, he 11 did; and instead of paying, I don't know, 12 200 percent for the loan, he paid 12 percent for 13 the loan. 14 So those kinds of things really work when 15 you get out there and get in there, even at the 16 grade school levels, certainly at the high school 17 level. 18 MS. BRAUNSTEIN: Gale? 19 MS. CINCOTTA: I think of getting information 20 out, warnings, people who need to get paid and 21 don't want anybody to go into foreclosure. 22 Ameritech, People's Gas, Bell Telephone, all these 23 places that send you bills, real estate, county 24 assessor, any of those places that depend on you 267 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 owning your home and being solvent, you get 2 mailings all the time. Mailings from banks, 3 whatever. Credit companies. There are envelopes. 4 All you need is maybe another piece of paper. 5 Eventually, you know, if you get enough of 6 those, you might start to warn them. Some of the 7 papers that you get from there have hardly anything 8 on them. You can turn them over and put the 9 warning on them. 10 But I think there's constant things that 11 touch people that you forget you can stick another 12 piece of paper in it and get it. Eventually it 13 gets to folks. 14 MODERATOR SMITH: Is there anything else you 15 would like to add before we -- 16 MR. KAYAM: Let me just jump in real quick. 17 My name is Jason Kayam. I'm with the TIC here with 18 Gale. 19 David, in his -- and I'm going to put you 20 on the spot here, Dave -- in his testimony offered 21 some profiles of people that they have been able to 22 refinance. And I, for one, would be kind of 23 interested. I don't know if we have time in this 24 forum to hear that because it's surprising that 268 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 there aren't more banks stepping up to the plate 2 and beyond the NHS pool; but here, I think there 3 are sorts of profiles or stories of folks. Do you 4 have time for that? 5 MR. VOSS: Well, we had a customer who is now 6 our mortgage customer who had come in and paid 7 12 percent for a mortgage in our neighborhood. His 8 credit score was north of 700 which is very good. 9 He paid 3 points to close and $2000 in 10 miscellaneous processing fees. 11 We refinanced that loan for 8 percent, 12 charged $200 for processing and no points, and 13 we're saving that family $300 a month in their 14 payments. That $300 a month is getting spent back 15 in our community and recycled many times creating 16 community wealth. 17 We've got a whole -- many more instances 18 of that. Jack knows some of these because he came 19 out to our bank and took a look at some of the 20 files one day. 21 Especially in the consumer loan area where 22 these people are paying just on consumer debt for 23 furniture or for appliances 48, 50 percent. We've 24 been able to refinance at bank rates for 12 to 269 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 15 percent. These are people with good credit 2 rating, and we can show you these files. 3 That money, again, is saving them maybe 4 $300 a year on a small $2000 consumer loan, maybe 5 900 or a thousand dollars over three years. That 6 money stays in the community. It gets spent in the 7 community, and it gets recycled. That's what 8 creates household wealth. That's what creates 9 community wealth. 10 That's something -- the key to that is to 11 get to the people before the predators get to them 12 because you can't get the points back. 13 And the other thing -- and that's through 14 education and all of the things that we talked so 15 much about here today. But the people that we've 16 been able to do that for are also telling the 17 people down the street and across the street and 18 their other friends and relatives. That's how 19 we're starting to build our business is by word of 20 mouth because we were able to help some people save 21 money every month. It's just as simple as that. 22 How much more money do they have every month to 23 spend or save or do whatever they want with. And 24 they tell their friends and they tell their 270 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 neighbors and they tell their relatives and they 2 come in. 3 MS. WILLIAMS: I have just one more question. 4 We were asking a little bit about things that we, 5 the fed, could do in relation to education. And I 6 heard a little bit about the credit scoring and 7 some of the best practices. But is there anything 8 that you can offer up that we can do in a very 9 short-term to make some real impact in regards to 10 education? 11 MR. VOSS: I think you could do an awful lot 12 because you have the resources to take on the very 13 sophisticated marketing techniques and repetition 14 of the predatory type organizations. 15 But, more than that, I think you could 16 start getting into, for instance, sponsoring some 17 of these school banks that are being set up or by 18 creating some incentives for other financial 19 institutions to start opening branches or community 20 banks in these neighborhoods. 21 They will do this because you could make 22 money in these communities charging fair rates, if 23 you can get the people to come in and use your 24 organization that they traditionally don't use. 271 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 So there's a lot that I think the fed can 2 do. But especially I would start with 3 co-sponsoring some of these school banks and 4 developing some programs to incent community banks 5 to either start up or to open offices in these 6 communities where there are no banks other than 7 currency exchanges and Payday Loan Stores. 8 And, certainly, if you can with your 9 resources do media advertising that's as 10 sophisticated and as repetitious as what the 11 predatory organizations do, that will help. 12 I think Jack's idea of having some kind of 13 a financial 911 or Gale's idea of a warning, you 14 know, enough times so people will -- you know, it's 15 like if you feel faint when you are walking down 16 the street. Maybe some time you will think if you 17 see it often enough times on the TV that you can go 18 to the doctor, somebody to talk to and get that 19 treated, you will. If that's what it takes. 20 That's where I think the fed can have a 21 good role and positive impact not only for our 22 communities but for the citizens that live there 23 and for the Federal Reserve System which is totally 24 misunderstood by the people of our community. They 272 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 don't have a clue what the Federal Reserve System 2 does. 3 MODERATOR SMITH: One of the things that I 4 would like for you to maybe think about is I think 5 that there are a lot of -- people look at the fed 6 and they think a lot of resources; but, in the end, 7 I wonder the extent to which you might be able to 8 achieve some of the same benefits by reaching out 9 to your colleagues in the banking industry. 10 There seems to be considerable interest on 11 the part of major financial institutions in doing 12 something to counteract predatory lending abuses 13 without regulation. So it seems that the time 14 might be quite right for making suggestions to what 15 the industry can do in supporting some of these 16 efforts. 17 MR. VOSS: The major institutions would be 18 happy to put 2 or 3 or $4 million into the branch 19 of a community-based bank that would like to serve 20 and open in these communities. 21 The Federal Reserve -- but they won't do 22 it because they have this $100,000 insurance of 23 accounts limitation and they are obviously, 24 regulatory wise and from a pure business 273 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 standpoint, concerned about going over it. 2 So if there would be some way to get a 3 letter of credit, it wouldn't cost the fed a dime, 4 or some kind of other guaranty that would ensure 5 those deposits. That would be one way without 6 spending a lot of resources you could get other 7 banks to make deposits and make it possible for 8 branches to be open in those communities. It 9 wouldn't cost you. 10 Or you could also be an consolidator 11 putting together a hundred thousand dollar amount 12 from major different organizations so that one 13 could be opened in these communities, and it would 14 have that four- or five-year period to develop its 15 own book of business as it's providing these life 16 line banking services to the community. 17 We've got an office. We've set up a model 18 office to do that. I could tell you exactly what 19 it costs us to run it every year. We've been at it 20 two years. 21 MODERATOR SMITH: It may be that we can -- that 22 you can help in setting this up as one of the best 23 practices that a bank could undertake, and we can 24 go on from there. 274 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 Well, I want to thank you very much for 2 being here this afternoon and sharing your views, 3 and we will take what you have said and take it 4 where we can from here. But we really thank you. 5 Now we were scheduled to take a break and 6 then go into the open mic session. What we would 7 like to do is go directly to the open mic session 8 if people don't mind. I understand we need a 9 separate mic. We can start with one of the mics 10 until we get the separate mic. 11 So we will move along. Thank you very 12 much. By all means, if you have written statements 13 now or if you can give us written statements in the 14 very near term, we would very much like to receive 15 them. 16 The order which people signed up, 17 Mark Lavery -- and forgive me if I am 18 mispronouncing your names, but you will be able to 19 say them correctly when you introduce yourselves. 20 Samuel Penczyk. Mark Reynolds. 21 Daisy Thompson. Onetta Cole. Eddie Clark. Laura 22 Stevenson. Lawrence Luther. Dan Edelman. And 23 John Lukehart. So we'll start with Mr. Lavery. 24 And here we have our mic. 275 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 We are going to ask the time keeper to 2 move over here so that you will be able to see when 3 you have one minute remaining, when your time is 4 expired. 5 MR. LAVERY: Good afternoon, ladies and 6 gentlemen. My name is Mark Lavery. I'm a lawyer. 7 I represent consumers, and I have come here today 8 to ask members of the Federal Reserve Board when 9 they sit down and make the rules that will be a 10 very important way to protect consumers in America, 11 that you remember that the rules are being made for 12 the borrowers, for their protection. 13 HOEPA was not passed as a way for the 14 credit industry to continue to avoid regulation. 15 They were given a very generous grant of 16 deregulation in 1980 when basically the usury laws 17 in this nation were destroyed. 18 So HOEPA is what we have today to protect 19 them. And it's a modest means of protection. 20 However, one way you can put some real 21 force into the law is by banning and prohibiting 22 deceptive and unfair practices. That's the rule 23 that you can make, just like it is here in Illinois 24 under the Consumer Fraud Act, that if a lender 276 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 commits an unfair, deceptive practice, and they are 2 found liable for that, the remedies of HOEPA would 3 apply. 4 And what that does in the strongest and 5 most real way is it gives people who are honest 6 victims of crime in the context of the home repair 7 fraud phenomenon which is taking over the country 8 in many areas a way to protect themselves in 9 foreclosure court. 10 We represent clients who are often victims 11 of home repair fraud; and the secondary lenders who 12 buy the paper are basically the market makers of 13 this destructive force. 14 You're going to hear later from 15 Eddie Clark and some members of his family. He was 16 solicited by a loan originator whose family member 17 was the home repair fraud artist. And it's not too 18 unlikely. They work hand in hand. And what they 19 do is they promise you services that they're never 20 going to deliver on. They get a loan secured by 21 your home. They really never often give you any 22 kind of real services. And then they sell the 23 loan. You can't pay it because it's too high to 24 begin with and you didn't get the services, and 277 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 they take your house. 2 You got another client, Mary Clifton, who 3 couldn't make it today, and she's also threatened 4 to lose her house right now. 5 If you give us the plaintiff's attorney -- 6 who aren't the enemy here. Don't let the defense 7 industry tell you that we're the enemy here, that 8 we're just out there to make a profit. We're just 9 there to help our clients try to save their homes 10 and let them live. 11 So please consider that when you make 12 these rules. Thank you very much. 13 MODERATOR SMITH: Thank you. Samuel Penczyk? 14 Mark Reynolds? 15 MR. REYNOLDS: Good evening. I am 16 Mark Reynolds with Chicago Loan Shark Task Force 17 and the Illinois Coalition. I got involved in the 18 predatory loans because there were neighbors coming 19 to my location with predatory loans, one of which 20 is now in foreclosure. 21 The Chicago Loan Task Force and the 22 Illinois Coalition, we came to the point that we 23 wanted to bring attention to these kind of things 24 across the state. Not only across the state, but 278 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 across the nation. We were working with Chicago, 2 the ordinance of -- the Chicago ordinance 3 predatory. We were also working with legislation, 4 state legislation. And may I say we've worked with 5 state regulations which some of us felt that they 6 were weak. 7 We want to stop these predatory loans 8 because they're deteriorating our community. These 9 kinds of loans are certainly increasing 10 foreclosures around this nation. They started out 11 with a certain small amount of foreclosures. Now 12 they're up in the thousands, and all of these homes 13 are closed down. 14 We want HOEPA to stop prepayment 15 penalties. You were asking about what can be 16 done? These banks that are going on, doing these 17 loans, a letter could be submitted to these banks 18 asking them to make recommendations to stop these 19 kind of practices even though the regulation has 20 not been earmarked. 21 You can write letters to the community: 22 Stop prepayment penalties, stop flipping. Stop 23 these balloon notes. Stop giving loans where 24 people cannot pay because sometimes -- thank you. 279 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 The time has expired, but we want you to know -- 2 MODERATOR SMITH: You have one minute. 3 MR. REYNOLDS: One minute. Thank you. 4 We want HOEPA to understand that you must 5 pass strong regulations, strong guidelines and set 6 enforcement so that the people who are not 7 following these guidelines are placed in some kind 8 of penalties. 9 Because here's what's going to happen: If 10 we set forth some weak guidelines, we are only 11 licensing predatory lending to be a legal 12 practice. 13 So I'm going to ask you to take the 14 leadership, not only for this state, but for the 15 nation so that the nation will adhere to what 16 you've done. Thank you kindly. 17 MODERATOR SMITH: Thank you very much. 18 Ms. Thompson? 19 MS. THOMPSON: My name is Daisy Thompson, and 20 I'm a member of the Chicago Loan Shark Task Force, 21 and I'm here to represent the homeowners of 22 Chicago. 23 I went to refresh my mortgage for $15,000 24 to improve my home. A friend told me about 280 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 Unlimited Financial Services. Unlimited Financial 2 Services was supposed to make me a loan -- a 3 mortgage of $44,000. Instead, the mortgage was for 4 $55,000. The fees was -- they give me fees on my 5 loan for 6000 -- over $6000. 6 I signed the papers, and when -- after I 7 signed the papers, I was told to go out and sit in 8 the lounge. And while I was sitting out there, the 9 loan officer came out and told me the bank had -- 10 the mortgage company had phoned and said I wouldn't 11 get that much money. Instead, I received $2,300. 12 They sold my mortgage to Aim Capital. I'm 13 fighting to stay out of foreclosure. 14 I ask that you stop the practice that 15 forces homeowners out of their home. Make 16 regulations now that stop the practice. Make loans 17 that people can afford. Make lenders responsible 18 for their loans. And also make payments that will 19 only take up half of their monthly payments that 20 they receive of their monthly -- like me, which I 21 only get $488 a month with a payment of 600 some 22 dollars for Aim Capital. Thank you. 23 MODERATOR SMITH: Thank you very much. 24 Onetta Cole? 281 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 MS. COLE: Good afternoon. My name is 2 Onetta Cole, and I'm a relative of Eddie Clark. 3 And basically what I want to say is just quick and 4 to the point. 5 Eddie's situation was that he had received 6 a solicitation by phone. We can help you with home 7 improvement. Nothing wrong. Okay. Fine. We'll 8 redo the porch. Redoing the porch, $3000. Loan 9 balance on the home, 60,000. Mortgage was 10 refinanced for 89. He got 3 in hand, 3 for the 11 porch; and, again, the construction worker was a 12 relative of the mortgage person. So the porch 13 never was done. Began, but not finished. 14 At the time, didn't know, but the mortgage 15 note had a three-tier prepayment penalty in it for 16 the first ten years of the loan with a 15-year 17 balloon payment of 89,000 plus. 18 So we do need assistance. It's just 19 curious to me that with the HMDA recording 20 practices that we do have in place, why isn't it 21 being looked at to see why are the developers or 22 why are these people just centralizing on these 23 type of people who are elderly, retired in certain 24 areas? Because once the homes are foreclosed upon, 282 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 who ends up owning the property? And then what 2 happens when those properties are foreclosed on? 3 The property is put into a certain condition that 4 is unliveable, torn down. The lots are then 5 there. Developers are on the lots. 6 You see what I'm saying? It could be 7 looked at as a conspiracy type of situation or just 8 totally desolation of the neighborhood. So we do 9 some need regulation on that. 10 And then absolutely I am looking at the 11 credit scoring. I personally work in the banking 12 industry, and there is a very big mystery with 13 credit scoring. That needs to be regulated across 14 the board just so the consumer has basic knowledge 15 of where they stand when they do try to get a 16 loan. Thank you. 17 MODERATOR SMITH: Thank you very much. 18 Eddie Clark? 19 MR. CLARK: Good evening, ma'am. I come by my 20 own. They charged me $7,000. Tore my porch down. 21 Left it like it was for two months. We didn't have 22 no porch to get out in the front. We had to go out 23 the back way. 24 So we called them. She said, nothing to 283 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 do about it. You have to wait until your time 2 come. 3 So they came and harass my wife, harass my 4 wife. She got sick. She called Onetta, told 5 Onetta, I'm tired of people harassing me. I said, 6 can you do something about this? She said, wait a 7 minute. She said, I will do something about it. 8 So she comes out there, and they called 9 the same night and harassed. Onetta said, who are 10 you? She said, never mind who I am. I said, I am 11 tired you harassing people because they owe. My 12 wife got sick behind there. She had to go to the 13 hospital, and she had a slight heart attack. And 14 that was it. Thank you. 15 MODERATOR SMITH: Thank you, Mr. Clark. 16 Laura Stevenson? 17 MS. STEVENSON: Good afternoon, everybody. My 18 name is Laura Stevenson. I live at 5819 South 19 Fairfield. We had a pretty little home. And not 20 only they appraise the loan, the lady that sell us 21 the house, get the loan for us, we bought the house 22 from, they don't want to fix the house. 23 My ceiling is coming in. The foundation 24 is falling in, in the basement, and they said 284 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 they're not going to fix my house. 2 I just move in there in November the 19th, 3 and we had a lot of problems. We had squirrels 4 come in the house. I have a five-year old child. 5 She can't sleep in her bed. Water come on her. 6 We need your help. And it's a good credit 7 loan from EquiCredit. I talked to EquiCredit. 8 They said, nothing they can do. We talked to the 9 lady lawyer. He said, that's the way we get the 10 house and that's the way we take it. 11 I just give some pictures -- I mean, some 12 tapes to the young man up there and the document. 13 The house is a $60,000 house. The house don't even 14 worth $25,000. I had CWSC come in and they see the 15 house. They said it don't worth it. We had 16 contractor come in there and see the house. They 17 said, it going to cost $85,000 to fix the house. 18 The house have to tore all the way down. 19 We got a violation already from the city. 20 They're supposed to come out next month again. 21 They said, if they come out, they're going to tore 22 the house down. If they tore the house down, we 23 still got to pay the loan. 24 So we need your help. Thank you. 285 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 MODERATOR SMITH: Thank you. 2 Lawrence Luther? 3 MR. LUTHER: My name is Lawrence Luther. I do 4 electrical contracting in log homes. 5 I got some pictures and some verifications 6 on things that took place that I would like to show 7 you. 8 This is pictures on advertising. I had a 9 log home that was -- it was to be supposedly 10 financed by MidCity Mortgage out of Green Bay; and, 11 when they came out, I was -- it was a second that 12 went for resale for -- for a home, and it was a log 13 home. It's an old-time log home out of Tennessee, 14 Nashville, and they're a HUD-rated log home. 15 What happened is that I started out in 16 February of doing it as a spec and had contractors 17 that worked with me without charging nothing until 18 it sells. But when I got so far along, Adam that 19 worked at MidCity Mortgage, he worked at TitleTone 20 in Green Bay, when he switched me, he said, hey, we 21 got some loans that you can work with that's no doc 22 because I couldn't show a profit in my electrical 23 contracting business because of union targeting. 24 So I says, okay. When I come along, he 286 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 said, you need about 85 percent done, according to 2 what his boss said. And his boss's name was B. J., 3 and she was a lady. 4 Well, when I got about 80 percent done, 5 she comes along and she comes out to the site, and 6 she says, for us to require you to have -- for me 7 to move in, that the septic system is in and the 8 well is working, and by May 19th I would have 9 financing. 10 Well, I get it done, get it all there. 11 And I took out an extra $5,000 on my insurance 12 policy because the cash value was worth that much 13 to be it because that was $65,000 coming in. I 14 walk in there. Where is Adam? No Adam is in 15 there. Well, he's out there. They get him on the 16 phone. How come you're not here? He says, well, I 17 hate to tell you this, but the loan fell through. 18 How come? Because it's a log home. 19 And here it was nothing else but -- they 20 put all the advertising that they're going to 21 finance it. And then I had an open house two weeks 22 later on Memorial Day, and I had another guy put in 23 an application in for it. We had 15 people on that 24 open house I did. They collected. 287 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 And you said about putting out phone 2 numbers like for lenders and that, that's what they 3 do. They have it out there that they're lending, 4 but where is the fair market for log homes on the 5 lending part? Is there any -- why is there 6 restrictions on log homes? This company was a 7 HUD-approved home, why did they deny the loan? 8 And also, here, I will give you that 9 picture -- and here is the Midwest City Mortgage. 10 It gives you the size of the home, everything 11 that's involved in it. And also I will give you a 12 little helpful information why I cannot make a 13 profit in the housing market. Here I will show you 14 the housing stats in the Green Bay/Brown County 15 area. It's a big drop. 16 I will read to you what's -- this is what 17 the union activity is doing out in the Green Bay 18 area and the Appleton area. They take 2 percent 19 off the guy's wages and private independent 20 contractors. I was offered a contract in 1994, and 21 I rejected it because it took 2 percent off the 22 guy's wages to put out independent contractors. 23 It reads, and this is how they do it. It 24 says, when a project is selected for the target 288 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 program, an estimate will be made of the number of 2 hours of electrical work to be performed on the 3 job. 4 Based on this estimate, calculation will 5 be made of a total amount of money which will be 6 designated by the target program. For the 7 particular project, the union will then make an 8 announcement that with respect to this project it 9 will make cash payment from the target program's 10 fund in the amount calculated to any contractor who 11 is awarded the work for the project and who has 12 either signed a contract with the union. 13 The cash payment will be made on the 14 perspective of whether they are party to a contract 15 with Local 577 at the same time they submit their 16 agreement with Local 577 or payments, the 17 determination to which projects are going to be 18 included in the target program; and the amount of 19 money to be granted for specific projects will be 20 surely developed by the employee. 21 You can read that over yourself. 22 MODERATOR SMITH: Thank you very much. 23 MR. LUTHER: The thing is what I'm saying about 24 this 2 percent is that it's in the residential 289 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 contracting area. Here it is. 10 percent 2 difference. 3 Instead of targeting an independent 4 contractor, we can put it towards housing. In 5 Green Bay, they got the packet referendum. They're 6 voting on 2 percent of $295 million. That's 7 $5 million to put out contractors. Why couldn't 8 they put it into low cost housing? Take a look at 9 that. 10 MODERATOR SMITH: Thank you very much. 11 Mr. Edelman? 12 MR. EDELMAN: Good afternoon. My name is 13 Dan Edelman. I am an attorney. I bring a lot of 14 Truth in Lending and related lawsuits on behalf of 15 borrowers. 16 I would like to bring to your attention a 17 number of technical issues which are necessary, I 18 think, to accomplish some of the reforms you want 19 to accomplish. I wasn't planning on speaking, but 20 some of the discussion -- I made some notes while 21 people were discussing various points. 22 First, credit insurance. Under current 23 law, there is no requirement that the creditor 24 forbear while a claim is made under a credit 290 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 disability or life policy. 2 I have seen multiple instances in which 3 the creditor will immediately declare a default, 4 accelerate the loan knowing full well that the 5 borrower is dead or disabled and probably has a 6 legitimate insurance claim, cancel the credit 7 insurance, because they have a security interest in 8 it, apply the premiums to the loan balance, the net 9 effect of which the credit insurance is utterly 10 worthless. 11 There is no requirement under current law 12 that the credit insurance actually protect the 13 borrower against anything. 14 I've taken this issue to the state 15 Appellate Court. They refused to imply such a 16 duty. I think the Federal Reserve Board ought to 17 at least as a condition of excluding the credit 18 insurance premiums from the finance charge. 19 Credit insurance industry suggested it 20 might be a good idea to send a letter out 21 describing the coverage and give you 30 days to 22 cancel. Does that do you any good? Only if the 23 check upon cancellation has to go to the borrower. 24 Most loan documents are written so that it goes to 291 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 the creditor and is applied to the loan balance. 2 In effect, they got the money one way or the 3 other. 4 The duty of the broker to give -- the duty 5 is to give the best terms for which somebody 6 qualifies. Current compensation systems for loan 7 brokers tend to do the exact opposite. If the 8 broker can be compensated, can receive additional 9 compensation in the nature of a yield spread 10 premium directly tied to an increase in interest 11 rate, the incentive is to get the highest rate that 12 the borrower can be sold upon, not the lowest 13 rate. 14 Something needs to be done to change that 15 compensation scheme even if you want a no-point 16 loan and the broker's compensation is funded out of 17 the payments. It should not be tied directly to 18 increased interest rates. 19 Loan advertising. A certain very large 20 subprime lender advertises on a web site that it 21 will not -- the law requires us to get income 22 information from you, but we won't verify it. I 23 don't know what legitimate purpose is served by 24 this. It appears to be an invitation to submit 292 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 inflated and bogus applications so you can get a 2 loan. 3 Home improvement. Let me just finish the 4 one thought. Home improvement financing. 5 Section 32 loans require either the borrower's 6 signature on a check or a completion certificate. 7 That requirement, at a minimum, should be extended 8 to any loan known to be used for home improvement 9 purposes. 10 In addition, it is all too easy to get a 11 borrower's signature on a completion certificate or 12 a check when in fact the work is not completed. I 13 had a case where somebody put a second story on. 14 The structural members were half the size required 15 by code. Nobody paid any attention to this until 16 the poor woman tried to sell the property and, of 17 course, it wasn't salable. 18 In home improvement financing, there 19 should be some requirement of certification of 20 compliance with local building requirements, any 21 required inspections by local authorities; and if 22 it's a significantly sized transaction, independent 23 inspection before the lender can disburse the 24 funds. I thank you for your time. 293 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 MODERATOR SMITH: Thank you very much. I 2 understand that Mr. Lukehart is not here. Is there 3 anyone else -- oh, you are here. No? Yes? 4 But if there's anyone else that would like 5 to make a presentation -- are you -- 6 MR. CULVER: Yes. 7 MODERATOR SMITH: Please. 8 MR. CULVER: Good afternoon. Something today 9 occurred -- 10 MODERATOR SMITH: Would you state your name? 11 MR. CULVER: I'm sorry. Todd Culver, for the 12 record. 13 County Mortgage, in which they pretty much 14 did a refinancing of my Godparent's house. Now one 15 question that I came up with is if they are on a 16 fixed income, the debt to ratio shouldn't be too 17 high to even qualify for this loan. And if you are 18 on a fixed income getting $500 a month, how is it 19 possible that you can afford a thousand dollar 20 mortgage? And I think there should be some 21 regulations on that. 22 And, second of all, you prey on 23 illiteracy, there should be some regulations on 24 that. I'm not saying you could determine whether 294 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 or not an individual can actually read or write or 2 understand; but you are looking at a person that -- 3 I'm not discriminating -- are ages 65 and 70, they 4 don't know the legal terminology. 5 Me, I'm in the collection field. I'm a 6 collection manager. So the FDCPA regulates us. We 7 got to abide by the rules. So I think they should 8 have to do the same. No way you can afford a 9 mortgage at $500 a month when what you are getting 10 in and your outtake is over $1500. It's not 11 possible. And, again, I don't even know how the 12 loan officer can even approve a loan in that 13 standard. Yet it's still being done, and these 14 poor innocent people are losing their homes. Thank 15 you. 16 MODERATOR SMITH: Thank you. Is there anyone 17 else who would like to have a turn at the mic 18 whether or not you have signed up since you have 19 not signed up? 20 If not, then I thank everyone who 21 participated. I also thank those of you in the 22 audience who have come to this because of your 23 interest. And so I thank you again, and we will 24 just take it from here. 295 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 Our next hearing, as I mentioned, is in 2 San Francisco and then I'll close by encouraging 3 you, if you have comments that you would like to 4 submit for the record, if you would get them to us 5 by -- what date did we way say? -- by September the 6 1st. And you can get -- the address is in the 7 notice that was published. It also can be made 8 available at the registration desk if you would 9 like to have it. So with that, we are adjourned, 10 and I thank you again. 11 (Whereupon, the Public Hearing 12 of the Federal Reserve Board 13 adjourned at 3:41 o'clock p.m.) 14 15 16 17 18 19 20 21 22 23 24 296 McCORKLE COURT REPORTERS, INC. CHICAGO, ILLINOIS - (312) 263-0052 1 STATE OF ILLINOIS ) 2 ) SS: 3 COUNTY OF C O O K ) 4 5 ANNA M. MORALES, being first duly sworn, 6 on oath says that she is a court reporter doing 7 business in the City of Chicago; and that she 8 reported in shorthand the proceedings of said 9 public hearing, and that the foregoing is a true 10 and correct transcript of her shorthand notes so 11 taken as aforesaid, and contains the proceedings 12 given at said public hearing. 13 14 ______________________________ 15 Certified Shorthand Reporter 16 17 SUBSCRIBED AND SWORN TO 18 before me this______day 19 of________________2000. 20 21 22 _______________________ 23 Notary Public 24
August 16 hearing on home equity lending
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