Morning Session of Public Hearing on Home Equity Lending
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.)
August 16 hearing on home equity lending |
Afternoon session |
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Last update: February 14, 2002