Morning Session of Public Hearing on Home Equity Lending
Garden Conference Rooms A and B Federal Reserve Band of San Francisco 101 Market Street San Francisco, California Thursday September 7, 2000 PRESENT: EDWARD M. GRAMLICH, Member, Board of Governors, Federal Reserve System, Chairman, Committee on Consumer and Community Affairs. FOR THE DIVISION OF CONSUMER AND COMMUNITY AFFAIRS, FEDERAL RESERVE BOARD, WASHINGTON, D.C.: DOLORES S. SMITH, Director, (Moderator, Afternoon Session) GLENN E. LONEY, Deputy Director (Moderator, Morning Session) JAMES A. MICHAELS, ESQ., Managing Counsel JANE E. AHRENS, ESQ., Senior Counsel SANDRA BRAUNSTEIN, Assistant Director and Community Affairs Officer (Afternoon session) FOR THE FEDERAL RESERVE BANK OF SAN FRANCISCO: JOY HOFFMAN MOLLOY, Director, Community Affairs and Public Information Federal Reserve Bank, San Francisco 3 I N D E X Opening Remarks Glenn Loney, Moderator 5 Opening Remarks Edward M. Gramlich, Governor 7 Federal Reserve System Chairman, Committee on Consumer and Community Affairs SPEAKER: PAGE PANEL NO. 1 PEGGY L. TWOHIG Assistant Director 13 Division of Financial Practices Bureau of Consumer Protection Federal Trade Commission ELENA DELGADO President, 17 Irwin Home Equity Corporation ROBERT GNAIZDA Policy Director & General Counsel 20 The Greenlining Institute ANN CARLTON BOSE President, Estate Funding, Inc. 24 MARY LEE WIDENER Chief Executive Officer 27 Neighborhood Housing Services of America, Inc. DAVID H. SANDS Partner, Troop Steuber Pasich 30 Reddick & Tobey, LLP NORMA P. GARCIA Senior Attorney, Consumers Union 34 SANDOR E. SAMUELS Managing Director, Legal 36 General Counsel & Secretary Countrywide Home Loans, Inc. JOHN L. BLEY Director, 40 Department of Financial Institutions State of Washington DANIEL J. MULLIGAN Partner, Jenkins & Mulligan 43 MICHAEL A. RANKINS President & CEO 45 Rankins Mortgage Corporation JOHN A. COURSON President & CEO 47 Central Pacific Mortgage Company 4 PANEL DISCUSSION 50 AFTERNOON SESSION Opening Remarks Dolores S. Smith, Moderator 164 PANEL NO. 2 ALAN FISHER Executive Director 167 California Reinvestment Committee FRANCINE MCKINNEY President 170 Home Buyer Assistance Center CHESTER CARL Chairman, Board of Directors 172 National American Indian Housing Council CHRIS LAMBERTI Board of Directors 177 American Association of Retired Persons STEVEN HORNBURG Executive Director 179 Research Institute for Housing America PANEL DISCUSSION 183 PUBLIC COMMENT: TERRY MACKEN 216 STEPHEN COGSWELL 219 BARRETT R. BATES 221 GEORGE DUARTE 224 LOUIS BRUNO 227 MILTON HODGE 231 LINNIE COBB 233 HOWARD BECKERMAN 236 SHANELLE COLEMAN 240 5 P R O C E E D I N G S 9:00 a.m. MR. LONEY: If we could begin, please. First, let me introduce myself. I'm Glenn Loney, and I'm the Deputy Director of the Division of Consumer and Community Affairs at the Federal Reserve Board in Washington. I'm going to acting as the moderator for this morning's session. The San Francisco hearing is the last of four hearings that the Board is holding this summer on home-equity lending. We had very interesting and useful meetings already in Charlotte, Boston and Chicago. The invited panelists and the members of the public at those hearings offered a wide variety of views on possible ways to address predatory lending practices in the home-equity consumer market, and we expect the same here. We look forward to hearing about these issues in San Francisco today. Like our earlier hearings, we will be discussing the potential use of the Board's rule-writing authority under the Home Ownership and Equity Protection Act and also alternatives to regulations, such as consumer outreach and consumer education. Before I go too far, can everybody hear me? Can you hear me, Margaret? Good. 6 First, let me introduce the panel, the Federal Reserve Panel. From the Board, to my immediate right, is Ned Gramlich, who is a member of the Board of Governors of the Federal Reserve System, and chairman of the Board's Committee on Consumer and Community Affairs. From the Board's Division of Consumer and Community Affairs, we have Jim Michaels, Managing Counsel, and Jane Ahrens, who is Senior Counsel, who both work on Truth In Lending matters at the Board. From the Federal Reserve Bank of San Francisco, we have Joy Hoffman Molloy, who is the director of Community Affairs and Public Information. Let me just make a few introductory remarks about what we are about here. The Truth In Lending Act requires creditors to disclose the cost of credit for consumer transactions. In 1994, the Congress enacted the Home Ownership and Equity Protection Act -- or HOEPA, as it's called -- and HOEPA added special protections to Truth In Lending for consumer's who use the home as security for loans with rates or fees above a certain percentage or amount. HOEPA was a response to accounts of abusive lending practices involving unscrupulous lenders who made unaffordable home-secured loans to house-rich but cash-poor borrowers. These cases often involved elderly, sometimes 7 unsophisticated homeowners, who were targeted for loans with high rates or high closing fees and with repayment terms that were difficult or impossible for the homeowners to meet. In brief, HOEPA requires creditors to provide additional disclosures at least three days before consumers become obligated for such loans. It prohibits lenders from including certain terms in loan agreements, for example: balloon payments for short-term loans. It prohibits creditors from relying on consumer's home as the source of repayment without considering whether the consumer's income, debt and employment status would support repayment of the debt. It also requires the Board to hold hearings periodically, to keep abreast of the home-equity credit market targeted by the HOEPA. The Board held hearings in 1997, about two years after HOEPA became effective, and now it is conducting this series of hearings. Governor Gramlich will start us off with a few remarks about the purpose of these hearings. Governor Gramlich. GOVERNOR GRAMLICH: Thank you very much, Glenn. First off, we're happy to be here in San Francisco, and thank the San Francisco Fed for putting on the meeting this morning. 8 The last few years has seen an enormous growth in subprime lending. The rate of growth in subprime lending has been roughly twice that of prime mortgage lending. Subprime lending has gotten to be a significant share of overall mortgage loans; and, by and large, this is a very positive development. Indeed, the growth in subprime lending has brought credit to millions of people who have earlier been judged to be poor credit risks and would not have gotten the loan. So this has enabled millions of people to buy homes and start really going on their piece of the American dream. But with every good thing, there may be some bad that come along in their wake. One of those may be subprime lending, or predatory lending. We hear stories of abuses that have cropped up. The basic goal of the hearings, and for every agency that has any kind of authority for predatory lending, is to try to, in effect, clean up the subprime market, to make sure that the good subprime lending proceeds and the abuses are stopped. This mixed message symbolized the difficulty of this issue. That there are many practices that might be good most of the time, but end in abuse some of the time, so it's difficult simply to ban practices. I think everyone agrees that, if consumers really understood the properties of the loans, much of this problem would go away. But, first off, there's the 9 difficulty in getting information to the community; secondly, there may be competition problems, just like the market. So, as regulators, we're treading a narrow line here, but we do what we can to stop the abuses. But we don't want to stop the good part of subprime lending. The Fed has some authority in this area. As Glenn has mentioned, or might have, under HOEPA, in addition to holding these hearings, The Fed does have authority to change the scope of HOEPA a bit, and to declare certain practices fraudulent and deceptive. The basic purpose of the hearing is to try to figure out just exactly what part of this should be used. We want to make sure that anything we do has benefits that outweigh cost. One thing that I should say, and probably others will say, is that The Fed can't do it all, but there are things that they can do and we are considering them. But there a broad assault on this issue I think is necessary. We are already meeting with nine federal regulators, who have responsibility in this area. We're already meeting with them back in Washington. In most states, there are a number of state statutes that also have bearing. So we want to make sure that all of the regulators are on the same page. Purchasers of secondary mortgages can play a role by also doing due diligence on the mortgages they purchase. There are efforts at community education that 10 are underway. The afternoon part of the hearings are going to focus on those. So a broad gauge approach to the problem is presumably necessary. At the same time, the focus of this morning's hearing are clearly on what The Fed ought to be doing. So we will be structuring the efforts to bring out some of the delicate issues in that hearing. These are not the first hearings that have been held. There were an earlier round of hearings back in 1997. Treasury and HUD has had a number of hearings on predatory lending this year. This is now the fourth of the hearings, or the last of the hearings, that we are holding under HOEPA. At this point, I'm going to quit. We'll let the panelist talk about the issues. We're here mainly as listeners. But, again, I would like to thank everybody in San Francisco for having us out here and hopefully we'll have a successful meeting that develops some sensible and effective policies. Thank you. MR. LONEY: We're going to spend the morning considering ways in which the Board might use its rule-writing authority under the Truth In Lending Act and HOEPA to curb predatory lending practices and home-equity lending, while preserving access to credit for borrowers 11 with less-than-perfect credit. This afternoon, we will discuss alternatives to regulation, such as consumer outreach and education, that might help address predatory practices. At both sessions, we particularly hope to hear about studies or research on subprime or equity lending that will inform the Board in its deliberations. We're very interested in hard data that anyone has on these issues. In addition, we have set aside time to hear from members of the public. Anyone who, any of the members of the public who want to can sign up to participate in the open-mic session later this afternoon. The order of appearance at the open-mic session will be based on the list. The sign-up will also help us gauge the length of time participants may be asked to observe in expressing their views. The expectation, based on the experience at the earlier three hearings, for people who have signed up for the open-mic session can expect about three minutes. I think the sign-up is downstairs at the lobby where we came in, the west entrance. So, any of you who want to sign up for the open-mic sessions, please do so. I need to talk briefly about the rules of procedure we're going to use at the meeting today. These are the same rules of procedures that governed in our preceding three sessions in Charlotte, Boston and Chicago. 12 What we're going to do is: We're going to ask the panelists assembled here and this afternoon, the second panel, to limit their prepared remarks to about three minutes. We have a timekeeper, sitting right there in the middle. Raise your hand, please. Her name is Georgette Bhathena. She is going to give you a one-minute warning, and then a time-is-up warning. If we are going to get through this in any orderly way, it's going to be incumbent upon us all to observe the time constraints. I just want to assure the panelists that, after that, we're going to have a more open session discussing a number of issues that the Board raised in its notice of this hearing. We will -- there will be time for everybody to express their views on the various issues that the Board has expressed a particular interest in. What we're going to do is, is we're going to start with my friend and colleague, Peggy Twohig, and proceed clockwise. Each panelist will present their opening statement. Then, after all the panelists have made their opening statements, there will be a general discussion among the panelists and among us from the Federal Reserve. Although, I will say that, after making your opening statements, the Federal Reserve panelist may want to ask questions. During our first segment, following the opening 13 statements, we'll discuss possible changes to HOEPA's scope from 9:50 to 10:30. Then we will break for about ten minutes at 10:30, and reconvene for the rest of the morning session to discuss possible additional restrictions or prohibitions for specific acts or practices under HOEPA. So, without further ado, I will ask the panelists to introduce themselves, where they're from and their title, and affiliation. So, Peggy, if you will. STATEMENT OF PEGGY TWOHIG, ASSISTANT DIRECTOR DIVISION OF FINANCIAL PRACTICES, BUREAU OF CONSUMER AFFAIRS FEDERAL TRADE COMMISSION MS. TWOHIG: Good morning. My name is Peggy Twohig. I'm the Assistant Director for Financial Practices, Federal Trade Commission. I appreciate the opportunity to appear at this hearing on behalf of the Federal Trade Commission and discuss a serious problem of abusive lending practices in the subprime market. The Federal Trade Commission is looking at a number of ways to address these practiced, primarily through law enforcement and consumer education. The Commission has made halting predatory lending practices a top enforcement priority. The 14 Commission has brought action against large and small subprime lenders for various legal practices. In the interest of time, I will mention a few of these actions. Other Commission actions are discussed in the full written statement that has been submitted to the Board, and it's available both here and is available on the Commission's web site. A number of these actions have involved allegations of lenders violated the Home Ownership and Equity Protection Act, which we call HOEPA. Last year, as part of Operation Home Inequity, the Commission settled cases with seven subprime mortgage lenders for violations of HOEPA, as well as other law violations. The HOEPA violations included failure to provide required HOEPA disclosures, illegal asset-based lending, and use of prohibitive loan terms. The Commission obtained substantial remedies, including redress of over a half-million dollars. These involved a total of several loans. In the case of one lender, a ban against any future involvement in high-cost mortgage loans. More recently, the Commission settled a case of this type against a Washington State lender. That case included an additional allegation that the lender made direct payments to home improvement contractors in violation of HOEPA. That settlement required, as part of the settlement of 15 the case, more than $150,000 in consumer redress. In March, the Commission announced the settlement, along with the Department of Justice, and Department of Housing and Urban Development, with Delta Funding Corporation, a national subprime mortgage lender. The Commission alleged that Delta violated HOEPA by engaging illegal asset-based lending. Other cases involved different violations of law, including deceptive lending practices. Last month, the Commission settled a case involving deceptive advertising and marketing practices of the now-bankrupt First Trust Financial, which involved both claims of the amount of money you would save against the foundation loan. And, of course, we're still litigating our case against Capital City Mortgage Corporation. This one involved allegations that that company, and its owner, deceived consumers in just about every stage in the lending process. I see I'm already running out of time, so I'll just mention that we also have many consumer brochures that address home-equity lending that are available on our web sit. We distributed about 200,000 copies of them so far. While some of the predatory lending practices we have seen can be addressed through the current laws and 16 regulations, the Commission recommends that the Board make several regulatory changes to strengthen the protections in the high-cost market. The Commission recommends that the Board further restrict acts and practices under HOEPA and change the HOEPA triggers. We believe a very small percentage of subprime mortgage loans are currently covered by HOEPA, and the Commission has observed problem-lending practices in subprime loans where the rates and fees falls far below the current trigger. As a result, this protection offered by HOEPA will help those few borrowers unless HOEPA is expanded to cover more loans. More particularly, the Commission recommends the Board change the HOEPA triggers by both lowering the HOEPA APR trigger to 8 percent, and including lump-sum insurance premiums in the HOEPA fee trigger. The Commission also recommends that the Board address the problem of loan packing by prohibiting the financing of lump-sum, single-payment credit insurance and other products sold with HOEPA loans. The Commission believes that a prohibition of this type is necessary based on its long enforcement history in credit term packing and given the nature, complexity and highly unequal bargaining position involved in these transactions, disclosures alone would not be adequate to protect consumers. 17 In addition, the Commission recommends that the Board prohibit mandatory arbitration clauses in HOEPA loans. Mandatory arbitration agreements undermine the consumer's ability to exercise the statutory right to protection in the credit marketplace. Consumers, in this very high-cost market, particularly need those protections. The Commission's full statement include other recommendations. And, since I've run out of time, I'll stop here. Thank you for the opportunity to appear. MR. LONEY: Thank you, Peggy. I'm sure you'll get to finish some of your thoughts later. Sorry. Ms. Delgado. STATEMENT OF ELENA DELGADO PRESIDENT, IRWIN HOME EQUITY MS. DELGADO: Good morning. My name is Elena Delgado. Can you hear me? I'm the president and founder of Irwin Home Equity. I'm pleased to have the opportunity to participate in this panel. Irwin Home Equity -- otherwise known as IE --is a subsidiary of Irwin Financial Corporation, an Indiana state-chartered bank holding company. IHE originates home equity loans and line of credit which are funded by its affiliate, Irwin Union Bank and Trust Company, an Indiana 18 state-chartered, Fed member bank. IE offers its products in 28 states and is subject to regulatory oversight in all of these states. As you can see, we are subject to a fair amount of regulatory scrutiny. IE is a direct-response lender targeting credit-worthy but underserverd borrowers. Our home-equity loans are generally secured by a second mortgage on the borrower's residence. We are a debt consolidation lender and our loans enable our borrower's to pay off high-rate debt and credit-card debt. Our customers generally have A-plus or A credit and are never lower than B plus. Because our borrowers carry high-credit balances and are looking for a high LTV loan, they are precluded from obtaining credit from conventional banking sources. Therefore, our products/borrower combinations are a higher risk than most banks and we price adjust for this increased risk. We offer applicants the option of choosing to reduce their rate by the inclusion of pre-payment penalty or by the payment of discount points and fees. We feel that the ability to use these loan terms gives our borrowers the option to choose a product that best fits their needs. We are not in the foreclosure business. Since the inception of our business six years ago, we have originated over 50,000 loans and have completed the 19 foreclosure process on only 34. We do make money on our foreclosures and, in fact, our total losses due to foreclosures approximates $370,000. We are here because today a small number of our loans fall under HOEPA and we want to share our experiences on HOEPA with you. We also would like to offer some suggestions on how to make HOEPA more effective. We don't believe HOEPA is accomplishing its primary objectives. Our belief is that the disclosures required by HOEPA haven't been either particularly helpful nor well understood by the borrowers. We are not aware of any borrower changing their mind about a loan based on the information contained in these disclosures. We believe that HOEPA is having an adverse affect on the cost of doing business and has curbed access to credit to higher risk market segments because of the increased risk associated with these loans. In addition, the industry has defaulted to using HOEPA as a proxy for predatory lending. This has created a reputational risk, as well. Because of these risks, we believe that lowering the HOEPA triggers will further accelerate the flight from HOEPA loans which will further limit the availability of credit to the needier market segment. Already we've learned from our Wall Street financiers that there is waning interest on the part of investors and underwriters 20 in paper secured by HOEPA loans. This is because all of the parties involved in the transaction can't guarantee the adequacy of the process, but are forced to bear the liability. Also, we are reading news articles daily about lenders refusing to make HOEPA loans. If The Fed elects to reduce HOEPA triggers, more of our loans will fall under HOEPA. At that point, we also will need to decide whether or not it makes business sense for us to continue to make HOEPA loans. We have pulled out of North Carolina due to passage of their high-cost loan legislation. We are here to propose responsible ways to revamp HOEPA such that it can accomplish it's purpose. We look forward to your insights to our proposal and some enlightened discussions. Thank you. MR. LONEY: Thank you, Ms. Delgado. Mr. Gnaizda. STATEMENT OF ROBERT GNAIZDA POLICY DIRECTOR & GENERAL COUNSEL THE GREENLINING INSTITUTE MR. GNAIZDA: Good morning. I'm Bob Gnaizda, the general counsel for the Greenlining Institute. Before I begin my prepared remarks, I wanted to make just some introductory observations. Firstly, 21 Governor Gramlich, all of the community groups we represent want to thank you for your very special commitment for this community reinvestment. We'd also like to thank Joy Hoffman Molloy, of the Federal Reserve Bank here, for being an outstanding counselor/adviser and so helpful to community groups. There are three procedural matters I want to discuss before I go into my prepared remarks. First, the key outside player is not here and was apparently not invited; and that is: the investment houses responsible for the ten-fold increase in predatory lending over the last five years, through their $300 billion in financing. Secondly, these hearings are far too narrow. Ninety-five percent of the potential problems are excluded from the coverage of these hearings. Thirdly, the Federal Reserve is in the best position to be the leader in resolving this problem. These hearings are only a very partial and narrow solution to that leadership. And now my prepared remarks. I'd like to make brief substantive observations. The first is Wall Street. Wall Street must be brought to the table. In the last five years, they have provided financing of $300 billion in the subprime lending, which is an increasing amount for predatory lending. They have 22 failed to exercise due diligence, and they must be forced to do so. The first solution is for the Federal Reserve Chairman, Alex Greenspan, to call that to Washington, much as he called that to New York, to save the multi-million dollar hedge fund. Secondly, we must recognize that up to half of all persons securing subprime loans are actually eligible for prime loans. Fannie Mae and Freddie Mac are in a leadership position in doing that conversion. Thirdly, there is no substitute for honest competition. Predatory lending will continue unabated unless there is effective regulated, scrutinized competition that cares for the consumer. And the Federal Reserve is in the best position to make that happen. Fourthly, the Federal Reserve can begin that process by refusing to permit any mergers where there is predatory lending. That will send a message immediately. Five. The Federal Reserve can require or encourage corporate codes of responsibility, what I would call a consumer bill of rights for regulated institutions. That's the way to encourage them, by providing incentives, by giving them additional CRA credit, since there should be a moratorium on foreclosures. HUD has begun that process in LA, New York, with FHA loans. I'm now going to move to my ninth and tenth 23 points because my time is almost up. We cannot address this problem without at least looking back a few years. There must be restitution for victims. There is none in any form. Lastly, and probably the most important, leadership by the Federal Reserve. It has been absent. The Federal Reserve should be the leader for protecting the consumers while encouraging, as you have said, Governor Gramlich, competition in subprime lending. And that is why we have given, in our report card, the Federal Reserve a C minus. And, lastly on leadership, Governor Davis, governor of the seventh largest economy, has three government agencies that have responsibility in predatory lending, banking, corporations and real estate. They are totally absent, and I note they are not here. I congratulate the state of Washington for sending their key regulator. I want to just end with this because we don't have enough time. Greenlining and the former banking commissioner from California, and Fannie Mae and CRC, will be holding a press conference at 10:30 in the next room. Thank you very much. MR. LONEY: Thank you. Ms. Bose. 24 STATEMENT OF ANN CARLTON BOSE PRESIDENT, ESTATE FUNDING, INC. MS. BOSE: My name is Ann Bose, and I'm probably the only person sitting at this table that originates these types of loans we're talking about: the subprime loans. I'm a mortgage broker. I own Estate Funding. My credentials are, just so you know: I was president of the LA County Association of Mortgage Brokers. I sat on the California Association of Mortgage Brokers for more than five years. I'm currently the director of the National Association of Mortgage Brokers, since 1995, and was the treasurer of that group last year. I have been honored by my peers as Mortgage Broker of the Year in 1994 and 1991. I also was a member of the California Mortgage Bankers Board for two years. In 1981 I was a teacher. I taught high school history and government. I got a divorce. In 1983, I founded this business. I was the mother of four and eight -- not four children, a four-year old and an eight-year old. Teaching wasn't going to do anything for me. I had no alimony or child support. I found tremendous opportunity in the mortgage broker industry. Within two years, I was able to support my family they way we were living before the divorce. 25 There is no glass ceiling in this business. And it is a business of tremendous opportunity for people that come to it with a sense of integrity and want to learn it and want to work hard. I think brokers make a tremendous difference in the lives of the people with whom they interact. I think we help more people realize that deal of home ownership than any other segments of this industry. We listen to our customers' long- and short-term financial goals and construct loans that meet their specific needs. We educate them to their options. We have tremendous options. As mortgage brokers, we have a tremendous opportunity to support for 100 percent financing. We have five or six different loan options. We have subprime. We have government. We have first-time home-buyer options. We have lines of credit. How about 80 percent to a million dollars? We have no-income documentation loans, and subprime as well. Brokers help keep prices down. There are a lot of us. We're a highly competitive business. Because we keep prices down, we help keep the competition honest. Subprime is becoming almost the same level of commodity as the first-risk C business and the conventional business. Because subprime has been securitized, it is very close to becoming the same type of commodity that the conventional 26 loans are. Which means you have standardized underwriting procedures and much less opportunity to abusive practices. If prices are closed, what do we sell? We sell service, education, integrity and options. We are an efficient marketing channel for a variety of loan products for the lenders. Regarding proposed regulations, I'd like to suggest that we enforce the regulations we have on the books before we assume that the legislation that we have now is not working. I don't believe there is sufficient enforcement to make that evaluation. I think that the current HOEPA regulations have, in effect, eliminated an entire class of loans that, from my experience as a broker and originating loans, I cannot find small second trustees for subprime borrowers. I can't find lenders that want to do them due to the fact of the high cost to lenders in terms of regulation, disclosures and risk, and there is no profit to do all that. It's a narrow profit for me because I can't make enough money on $10,000 or $20,000 loans to do the loans. So we've already eliminated a class of loans. I can't find comfort in that. I think industry self-regulation is very important. The best business practice is a proposal that has been put forth by the NBA and NAMB to register all originators, not just brokers. To isolate problem 27 originators, you need to register all originators. If you charter your brokers by themselves, then the bad eggs will just go to work for banks, and they have enough bad eggs themselves. So I think industry self-regulation and more enforcement and consumer education is where we belong. Lastly, I believe, as Senator Graham said in his hearings that he is not sure what predatory lending is. I think you need to define that before you try to control it. MR. LONEY: Thank you, Ms. Bose. Sorry I mispronounced your name. I'm sure it's not the first time. I hesitate to call you Ms. Widener, but go ahead. STATEMENT OF MARY LEE WIDENER CHIEF EXECUTIVE OFFICER NEIGHBORHOOD HOUSING SERVICES OF AMERICA, INC. MS. WIDENER: My name is Mary Lee Widener, Chief Executive Officer of Neighborhood Housing Services of America. We are a special-purpose, nonprofit, secondary market for the community loans bank in the Neighborhood Network. We applaud these hearings, both for their content and the message. The Board is the preeminent point of guidance with regard to financial practices in America. So the message of these hearing is very 28 important. The Board asked for comments on a number of specific items. I'd like to submit as my response the model statutes against abusive home loans, as developed by the Community Center for Self-Help, in Durham, North Carolina. We've tried to establish whether or not these have been submitted, but I really want to be sure they are on the record, and they are all the specifics called for. With regard to the details, I support all of them. In addition, I'd like to comment on and support the report the Greenlining Institute's 10 Point Plan. I think the expansion of looking at where the investment dollars come from, in particular, to support predatory lending. It's an extremely important point. You've just got tto cut this off, and should be adopted by the Board. The other objective that I feel should be included in my primary remarks would be that there does need to be a clear and more expansive definition of "predatory lending," so that the whole industry, non-profit and for-profit, know what we're trying to avoid. And some very good work was done by the National Association of Consumer Advocates on this point. And I'd like to provide that to the Board, as well. Another objective should be to establish the legal right of non-profits to protect the hard-fought 29 gains in improving the financial condition of low-wealth borrowers. The best example are work of Habitat for Humanity and the Neighbor Works Network. When these groups pull together as volunteers and partners around the country to help families who otherwise wouldn't have opportunity to see which way runs the risk of making this a way to continue to get the kind of support that we're able to provide to low-wealth borrowers. And we should not have to include those protections in these restrictions, because so much of that work has already been done ahead of this predatory lending kind of experience. And it would be impossible to check all that work in these restrictions. So we feel encouraging the general legal right in some form, whether by regulation or by statute. And, then, finally, I think it's very important that the Board succeed in sending a solid message to the financial industry that, with regard to predatory lending, it's bad to be a part of the problem, and it's good to be a part of the solution. And I would really encourage the most stringent use of regulatory power, especially in mergers and acquisitions to send this message. With regard to concerns about subprime lending and damages in that market, I have to say that I applaud your concern there, but our -- my impression is that -- 30 MR. LONEY: Your time is up, but finish your thought. MS. WIDENER: My impression is, to a large degree, people who need subprime lending, to the point that it is unclear whether or not it is moving over into predatory, probably need to stay out of the game. And there needs to be a great deal more pressure on the non-profit sector, the for-profit sector, local government sector, and the conventional market to try and regulate borrowing. MR. LONEY: Thank you. Mr. Sands. STATEMENT OF DAVID H. SANDS, ESQ., PARTNER TROOP STEUBER PASICH REDDICK & TOBEY, LLP MR. SANDS: Thank you, Mr. Loney. My name is David Sands, and I'm a partner in the law firm of Troop Steuber Pasich Reddick & Tobey. My practice principally involves representation of lenders, servicers and the investment community, like companies of some who are here. And they're big organizations, clients in corporate matters. I'm honored to be invited to speak here and to share my perspective through my practice over the years. I hope I can contribute a little bit to the Board's deliberative process on these very important issues. 31 I want to open my remarks by noting that, much of what I read in the other hearings and transcripts of those hearings, and I read in the press, it clearly troubles me. Because, as Governor Gramlich said, we really need to base our decisions in the process on what the facts are and what the studies show. Clearly, the anecdotal evidence shows -- and I'm sure the studies show -- there are many situations where unscrupulous brokers and lenders have taken advantage of borrowers, and misrepresented them, mislead borrowers. This predatory lending activity, and I would say the predatory lending and not subprime lending, is clearly deplorable. And, on the other hand, subprime lending has been extremely beneficial. Nobody can argue -- I don't think anybody is arguing that. As Governor Gramlich correctly pointed out that subprime lending has greatly increased the flow of credit into communities that have been typically underserved or not served. In many cases, may be served by payday-advance companies. That's probably the last place they want to go to for a loan. So, hopefully, if you think about all these discussions and, again, as Governor Gramlich has pointed out, I hope we always keep in mind the fact that, whatever we talk about, whatever we do, we try to keep in mind that we want to keep more credit available, for the lowest 32 cost, for as many people as possible. Turning to specific issues to be discussed today, which are principally three: Whether the Board should consider lowering the triggers; whether to change the various elements points, indeed to test; and whether it should prohibit certain practices. I think we have to ask ourselves, before we think about the isolated issues, has HOEPA had the effect of reducing predatory lending practices? Based on anecdotal evidence and discussions, I don't know, but it sure seems to be that these have, perhaps, increased. I'm not sure why, in the last six years, HOEPA has had the effect that is hoped, that people hoped it has, and why changing a law that may not prohibit the practice people are concerned about is the right thing to do. One thing I did want to talk about, at least in my practice, is not so anecdotal, but at least based on actual practice, we have been involved in abusive lending cases. Those are cases really that we are suing brokers and lenders for violations of contracts, for violations of law, because they were engaged in abusive lending practices, making loans that my clients didn't realize they were buying. As a result of them buying the funding, once they did their diligence -- which, in hindsight, may they should have done earlier -- but once they've done 33 their diligence, they turned around and took the loans back to the lenders or brokers and often made restitution to the borrowers. Meaning: There are effective enforcement mechanisms out there. Things are happening. There are three points I'd like to make for the Board to think about, which I think everybody agrees upon what we need to do, at least at a minimum, for the time being. And, again, this is based on what I've been involved with. Education -- MR. LONEY: Your time is up. If you can finish that thought -- MR. SANDS: This will be quick. No. 1 is education and counseling. An educated consumers typically is a consumer we don't see a problem with. Secondly is simpler notices. I'm not going to go into that. It's been talked about a lot at this hearing. And, three, is enforcement. I'm very happy to hear that the Federal Trade Commission has been active in enforcement. There are a lot of laws on the books right now, including Fair Lending Laws, elder abuse statutues in California, which will go very far to prohibit the practice people are concerned with. I hope we can keep these issues in mind as talk today. MR. LONEY: Thank you. Ms. Garcia. 34 STATEMENT OF NORMA P. GARCIA, SENIOR ATTORNEY CONSUMERS UNION MS. GARCIA: Good morning. I'm Norma Garcia, Senior Attorney, with Consumers Union's West Coast Regional Office in San Francisco. Consumers Union, as you know, is a non-profit publisher of Consumer Reports Magazine, incorporated in the state of New York in 1936. Thank you very much for this opportunity to be here with you this morning. I appreciate the fact that the Board of Governors has called this hearing and has gathered all of these interesting individuals at the same table to discuss these very important issues. In the interest of time, I want to second the comments offered by Ms. Twohig, by Mr. Gnaizda, and Ms. Widener, and offer a few of my own observations. I heard a comment made earlier that one of the things we want to do to preserve subprime lending because it has provided a valuable service to the public by increasing the number of people who have been able to buy homes with subprime loans. I want to narrow the focus here a little bit, because my understanding of this problem -- and we have studied this extensively -- is that the issue is not about purchase money mortgages. The issue and area of abuse comes more in the 35 home-equity-based mortgage lending. So, to the extent that the subprime lending industry has assisted more people to become home owners, I applaud the industry for that. But to the extent that the industry has been involved in abusive lending that has undermined the home ownership dream for many homeowners, on that note, I want to say that there is a lot of work to be done. I want to emphasize that if self-regulation were effective, we wouldn't be here today. There wouldn't have been the multitude of hearings that has happened in the last three years on this issue. If self-regulation were working, we wouldn't have increasing numbers of stories of homeowners who have lost their home, and all of their American dreams, to fraudulent and abusive lending practices. I think consumer education is a necessary component to attacking the problem; but, yet, cannot be looked at alone as a solution, or as an alternative to more enforcement and better regulation. We need to be very careful about this. I don't think it's the answer. It doesn't stand alone as a solution, just like self-regulation doesn't stand alone as a solution. Very briefly, I want to say that Consumers Union supports the notion of adjusting the HOEPA trigger, to lower the trigger to extend HOEPA's protections to a 36 broader class of transaction and borrowers. We also think that the points and fees triggers should be adjusted so that more fees are added to the calculation, particularly credit insurance, prepayment penalties and points when the same creditor finances a loan. We have given further comment in our written testimony about the other points you've asked us to address, so I will pass the mic on now. Thank you very much. We look to forward to the discussions with you. MR. LONEY: Thank you, Ms. Garcia. Mr. Samuels. STATEMENT OF SANDOR E. SAMUELS MANAGING DIRECTOR, LEGAL; GENERAL COUNSEL & SECRETARY COUNTRYWIDE HOME LOANS, INC. MR. SAMUELS: Thank you. My name is Sandy Samuels. I'm the general counsel for Countrywide Home Loans. I would like to begin my remarks by looking at what I believe to be the root causes of predatory lending: Lack of choice, lack of knowledge, and lack of enforcement. The past year has seen a dramatic increase in the amount of attention focused on predatory lending practices, not unlike 1994, when Congress enacted the Home 37 Ownership and Equity Protection Act in responce to similar press articles on abusive lending in Atlanta and Boston. For that matter, it's not unlike 1968 when Congress enacted the Truth In Lending Act to safequard the consumer in connection with the utilization of credit by requiring full disclosure of the terms and conditions of credit. Interestingly, the problem seems to be the same every time: Bad actors engaging in deceptive, if not fraudulent, behavior that exploits the consumer's lack of knowledge and lack of choice. The fact that we are meeting on this topic 32 years after enactment of TILA only serves to highlight that it's something outside of the federal box. Disclosures, in and of themselves, are meaningful tools for many consumers. But disclosures do not stop bad actors from preying on consumers on consumers who either don't understand the information conveyed, or who never received disclosure in the first place. These bad actors engage in a variety of fraudulent practices. Examples of fraud upon consumers have been documented in the various articles and hearings this past year. From home contractors, who have lied to consumers, to lenders who have affirmatively used Truth In Lending Act disclosure terms to mislead consumers about the true terms of their loan. Yet every state the union has statutes 38 that address fraud. Most, if not all, have statutes that address unfair and deceptive practices that fall short of common law fraud. What seems readily apparent is that there are many fraudulent acts being committed that are already clearly illegal under existing state and federal law -- usually TILA and its HOEPA provisions. In other words, no new law or modification to existing law is needed to address what is already illegal. When a neighborhood reports an increased number of burglaries, the first response is not simply to pass tougher burglary laws. The response is to increase the police patrolling the beat. And we believe that that must be the fist step taken now. Congress and the states must increase financial support of the agencies charged with enforcing these laws so that lenders, brokers and contractors that engage in this sort of activity will know that there is real risk of detection and punishment. Funding must also be increased to agencies, such as legal aid services and counseling organization, to give those most often preyed upon accessible resources to call upon before one of these tragedies occurs. The Board has asked us to address whether there are regulatory and/or statutory changes to HOEPA that would more effectively curb predatory lending. Let me make clear that we do not believe lowering the HOEPA APR 39 trigger is an effective way to enforce the law. We believe that enforcing the HOEPA provisions, and other applicable law -- I'm sorry. We believe that enforcing existing HOEPA provisions, and other applicable law, is an effective way to stop predatory lending. Most of the recent testimony has reported striking increase in the amount of subprime lending in recent years. One of the most important and positive developments in subprime lending has been the emerging of some of the largest national lendings in this market, lenders in this market. This has clearly increased the availability of credit to many Americans and has, in turn, lowered the cost of subprime credit because of increased competition. I've got much more to say, and I see my time is up. Let me just say that we believe that increased competition is the key. We think that the lowering of the HOEPA triggers will have the opposite effect. It will reduce competition, it will reduce choice, and I'll have more to say during the discussion. MR. LONEY: Thank you. Mr. Bley. // // // // 40 STATEMENT OF JOHN BLEY, DIRECTOR DEPARTMENT OF FINANCIAL INSTITUTIONS STATE OF WASHINGTON MR. BLEY: My name is John Bley. I'm the director of the Department of Financial Institutions in the state of Washington. We think the way to effectively address predatory lending is, first, simplify disclosure, establish prohibitive practices, and enforce the two. I want you to think about Ms. Bose's comments. Among other things, she said that she sells trust. In our view, based upon our years of experience in regulating mortgage lending for a non-bank, predatory lending is the use of deceptive or fraudulent sales practices in the origination of the loan secured by real estate. The federal disclosures are too complex for many borrowers and borrowers turn to loan officers to explain the terms of their loan. Thus, predatory lending is an abuse of misplaced trust. Predatory lending becomes possible when a borrower trusts the loan officer to explain the terms of the loan and the loan officer commits deception by abusing this trust. The deception may include hiding the high fees or points; variable rate loan instead of a fixed-rate loan; unneeded insurance, or 41 prepayment penalty, and may take the form of selling a consumer a subprime mortgage loan when they could qualify for a lower-cost loan. I have attached as Exhibit A of my comments a memorandum authored by the Department's chief mortgage investigator, Chuck Cross, which describes the deceptive practices we have observed in the state of Washington. Mr. Cross has spent the last five years on the front lines fighting predatory lending practices. We believe that his memorandum provides a comprehensive discussion of the practices that are causing the problem. I know you have asked us to address a series of questions regarding the Federal Reserve System's authority to make certain amendments to the regulations enforcing HOEPA, enforcing the Home Ownership and Equity Protection Act amendments to the Truth In Lending Act. I am afraid that our experience in Washington is that the HOEPA amendments have had very little impact on predatory practices in mortgage lending, and that any amendments the Board of Governors might make to those regulations are also unlikely to have a significant impact on the problem. Over the last three years, the Department has brought, among the hundred other administrative action, administrative cases against Nationscapital Mortgage Corporation and First Alliance Mortgage Company. In both 42 of those cases, many consumers told us that they received high-rate, high-fee, variable-interest rate loans when they thought they were getting fixed-rate loans and did not know about the high fees. In most if not all of these cases, it appears that consumers "received" their Truth In Lending Act disclosures to no substantive effect. Our view in Washington is that the problem of predatory lending should be dealt with surgically, I see my time is up. I'll -- we recommend simplification of the disclosure. Attached as Exbibit B is an example of how we think TILA should be simplified. We think that prohibited practices should be established. And, in terms of enforcement, this Department encourages harsh penalties for acts of predatory lending. Such penalties should include should include restitution, monetary fines, permanent injunctions from lending, and criminal convictions for individuals. In cases egregious enough to convince a prosecutor to accept them, violators should be constitutionally deprived of their personal liberty. Thank you. MR. LONEY: Thank you. Mr. Mulligan. // // 43 STATEMENT OF DANIEL J. MULLIGAN, ESQ., PARTNER JENKINS & MULLIGAN MR. MULLIGAN: Thank you. Can you hear me? Since we've been given a limited time, I'd like to first endorse two of the statements, written statements, made to the Board. The first was by the American Association of Retired Persons. The second, that presented by the National Association of Consumer Advocates. We, as litigators, support both of those comments and the statutes. I'd like to state that my experience here and my comments are based on what Mr. Sands called "anecdotal evidence," that is ten years, or more, of experience litigating against lenders, foreclosure companies on both an individual and class basis. I've also had the opportunity to lecture and meet with litigators around the country and gathering more anecdotal evidence. I'm going to have a comment on what would in another arena, the medical arena, be called, I guess, clinical evidence, and there's a tendency to ignore these. Because we know that there were cases, but we really end up representing those patients that have died in the hands of these lenders. So we have some method by comparing around the country, now at least, to see what is going on, 44 on a general basis. Given that, I'd like to focus on four areas that we see. I'd like to first agree with Mr. Samuels -- this may be a first for me and Countrywide. But I would like to say that disclosures, all of these disclosures, at least by themselves, are completely ineffective in our experience. It's constantly amazing to us that we can have two people running for the presidency and campaigning primarily on education reform. And, yet, when you go into object or litigate or any of these issues, everyone ignores the fact that a good percentage of the people simply can't read a simple form, let alone complex forms, that are given. I have some examples, but, since I don't have much time here, I'll go on. Secondly, as far as the point is concerned of what we would like to see, among other things, is the correction of data. We really don't know what is going on in the marketplace. For example: We do not know what the differential is, really, in a foreclosure between subprime and prime lending. We have no idea on a nationwide basis. The result of this is: We cannot even know, the Board cannot know, if, in fact, these increased rates and cost charges to the so-called subprime group has any economic justification. The default rates are not higher. If the default rates are not higher, why are the costs higher? 45 Third, I've been urged to say this. I'm not directly banning anything. But I have to say, from our experience, we'd love to see you place an absolute ban on repayment penalties, which are the curse of God among the elderly and the minorities that we see. There is no economic justification for it. Lastly, I'd like to endorse the FTC's comments, that the biggest single impetus to enforcement is arbitration agreements. We also ask not to observe the ban. Thank you. MR. LONEY: Mr. Rankins. STATEMENT OF MICHAEL A. RANKINS PRESIDENT AND CEO, RANKINS MORTGAGE CORPORATION MR. RANKINS: First of all, I would like to say that it's a privilege and an honor to be here before you, Governor Gramlich. The Federal Reserve is to be commended for its national efforts to ultimately enhance all consumers. Additionally, I'd like to thank Jane Ahrens, who is requested all this data from our office. Lastly, I would like to thank Rod Howard, of the Mortgage Bankers Association -- he's doing a great job -- which includes all mortgage bankers like -- I don't think I can go 46 through them in three minutes. MR. LONEY: That'll be nice. MR. RANKINS: Secondly, I'd like to endorse Ms. Delgado, for all her experiences. We've experienced the same thing. Rankins Mortgage is located in Oklahoma City. We're four-years old, the only African-American prime mortgage banker/lender in the state of Oklahoma. A lot of brokers are minority, African-American brokers, but we're the only pure lender. We're located in Oklahoma City, Tulsa, Fort Sill, Lawton. All these offices, all three, are located in the heart of the African-American community. Rankins Mortgage customer base is 90 percent African-American. For four years, we have loaned and brokered over $18 million to individuals in these communities. Seven out of ten of our clients have been turned down by national or state banks, or federal and state chartered credit unions prior to coming to us. The other three, out of ten, are just intimidated by banks and credit unions. In other words, these people feel their credit is so poor, so derogatory, that they will not go into the banks. Rankins Mortgage is a high-cost mortgage lender. We are high cost. We are high cost. Rankins Mortgage would encourage the Board to approach the new regulations very carefully. Lowering the 47 trigger and/or new regulations could result in less participants in the subprime market. Last year, when Bank of America bought a bank who had been one of our original investors, they changed the rules and decided they didn't want to be what they call a high-cost investing arm. That investor had very, very good rates. Seventy percent of those customers that we were brokering, or in the case of corresponding loans, we lost that investor. We don't use that investor anymore. I think, if the Board does consider new regulations and lowers the trigger, it's going to result in -- we dominate in our market right now; but we will become a monopoly. We don't think that's in the best interest of the citizens of Oklahoma, or any other citizens. We don't want to be a monopoly. We want to be a good competitive mortgage banker. But it will dominate the market and brokers will get out of the business, investors will get out of the business. MR. LONEY: Thank you, Mr. Rankins. Mr. Courson. STATEMENT OF JOHN A. COURSON PRESIDENT AND CHIEF EXECUTIVE OFFICER CENTRAL PACIFIC MORTGAGE COMPANY MR. COURSON: Good morning. My name is John 48 Courson, and I am the president and chief executive officer of Central Pacific Mortgage Company. We are a mortgage company that has 93 retail originating branches in 24 states. I also serve as the vice president elect of the Mortgage Bankers Association. What was advertised as a one-year job has turned into a three-year career of chairing their mortgage reform task force. I must say that I certainly applaud the hearing we're having today, and, in particular, working with the Federal Reserve, as we did with the Department of Housing and Urban Development in the effort of comprehensive mortgage reform that we dealt with as part of the mortgage reform working group over the last two years. Obviously, it's been said before, and I would echo the thought that HOEPA, as it exists today, begs the issue that, if it's effective, why are we here today? And it has not been effective. It is not the tool that clearly has solved the practices that we're here to discuss, the predatory lending, in the different venues throughout the country. As we all know, there are many legislative proposals, both federal and state, that have been actively pursued, both currently on the federal level and in state legislatures throughout the year; and, in addition, regulatory efforts, now even at the city level, being 49 pursued to combat the predatory lending. However, in all these efforts, the same approach is to tinker, if you will, with the terms and conditions of HOEPA loans. And I would submit to you that tinkering will not solve the practice. Predators will be predators. If, in fact, we tinker with terms and conditions that are already confusing to consumers, if in fact we continue to have unintended consequences by having the tinkering, what we're going to find is that all we've really done is make the process much more confusing for consumers today who, albeit, do not understand the process. I would submit to you that the answer lies not just nibbling around the edges of one piece of the predatory piece, but it lies in comprehensively looking at the entire mortgage loan process. How can you combat predatory lending by legislating or regulating terms and conditions without, in fact, looking at reforming the entire process, the disclosures that they get. An opportunity for consumers to shop for the right mortgage. Being told in simple terms, albeit, the annual percentage rate is one of the great mysteries of life for consumers. One of the great mysteries of life for lenders. Let's make it simple. MBA has put forth a comprehensive reform plan that we're working on diligently now. It has seven points 50 -- and I'm sure we'll have the opportunity to discuss it later -- to look at the entire picture as opposed to just one piece of a much larger problem. Thank you. MR. LONEY: Thank you, Mr. Courson. There were a number of issues that the Board specifically asked for the participants to address. One of those had to do with the issue of changing the HOEPA trigger. Jane Ahrens will lead the discussion on examining possible changes to these triggers. Jane. MS. AHRENS: HOEPA has two independent triggers. One is based on the annual percentage rate, and the other is based on cost paid by the consumers. Let's discuss the rate trigger first. A loan is covered by HOEPA if the APR is paid by more than 10 percentage points, the rate for Treasury securities, with the comparable maturity. And HOEPA authorizes the Board to adjust that 10 percentage point differential up to 2 percentage points. Do any of you have any data on the number of loans that are covered now by HOEPA and would be covered, for example, if the Board lowered the trigger to 8 percent? When asked this question at other hearings, one large creditor said that its portfolio is about 10 percent 51 HOEPA covered now, and would go to 20 percent if we lowered the rate to 8 percent. And we've also heard that, really, the rate trigger changes is kind of much ado about nothing because the points, the fees that capture loans under HOEPA, not the rates. So moving from 10 to 8 wouldn't make much difference. Do any of you have any -- have you done any analyses? Ms. Delgado, had your company? MS. DELGADO: Well, we do have analysis. I am just somewhat concerned because the issues are sensitive, in particular because we pay our financing to Wall Street. MR. LONEY: Would you get near a mic? MS. DELGADO: The issue is very sensitive one. We do know what percentage of our loans fall under HOEPA right now. It's a small number. That number would increase significantly if the triggers were lowered. I'm just reluctant to disclose information publicly. I would make it available confidentially. MS. AHRENS: Anybody else? MR. GNAIZDA: Two observations: One, the National Committee, the Investment Coalition, has estimated that, by lowering your trigger, you would cover change from one percent, with a subprime loan to five. And they base that on the Treasury-HUD Report. My 52 question is this: Why has the Federal Reserve failed to gather that information? There's no way for community groups to gather that information. Every mortgage broker contends it's confidential. The Federal Reserve should gather it confidentially for each company, but not confidential overall. Then we could understand the scope of the problem. On it's face, it sounds like a good idea, to lower the trigger. I'm not sure that is is, and I'm not sure that, if we do that, it will make that much difference. Greenlining would tend to side with the regulators in Washington in terms of their suggestions about how to address the problem. It may be, by focusing on this trigger, the narrowness of that, that we are losing sight of the larger problem. MS. TWOHIG: Let me a disclaimer out of the way before we proceed here. The statement that was submitted to the Board by the Commission is the Commission's statement. And the remarks I gave earlier where a summary of that statement. Anything I say in response to questions are my own views and do not necessarily reflect the views of the Commission, or any individual Commissioner. With that said -- MR. LONEY: That's okay, Peggy. We like your 53 views. MS. TWOHIG: I can't tell you that in our enforcement experience, we don't believe that there that many loans that are covered by HOEPA now. It's a very small percentage. We don't have specific data. We have limited resources, and, so, we do what we can do in the enforcement area. But based on what we have seen to date, it's a very limited percentage. I will say that, because of the other reasons I've mentiond, we do think that the APR trigger should be lowered as much as the Federal Reserve has reported to do, combining with that more substantive prohibitions. It's also the case, though, that most of the times we do HOEPA loans, it is because of the trigger. So that is a very important part of the task. We also, as I said in my comments, think that more fees should be included in that trigger, particularly if there is a lump-sum credit insurance premium. MR. SAMUELS: I agree with Mr. Gnaizda and Mr. Bley, in that lowering the triggers we believe will not have any benefit. But, in addition, we also believe that it will have a significant detriment. Because one of the things, as I said, that we are looking to is the increased competition. And we have very specific examples of banks who are worried about two things: reputational risk and 54 compliance risk. And because of the severe penalties, even an inadvertent HOEPA violation. There are a number of companies who are just saying: I'm not going to do it. We're going to get out of the business. And we heard from Mr. Rankins about that, and that is not just anecdotal. That's documented all across the country. So, what we're trying to do is, we want to increase competition, we want to increase choices for the consumers. This is not the way to do it. MR. MICHAELS: Can I follow up with a question? Because you've heard from a number of companies, let me put this directly to you. In terms of Countrywide's own experience, do you make HOEPA loans? MR. SAMUELS: Yes. MR. MICHAELS: So what percentage of your funding is HOEPA covered? MR. SAMUELS: It's small, very small. MR. MICHAELS: What percentage would it be? MR. SAMUELS: We are actually looking at that issue. It's hard to come up those, those numbers, for a lot of reasons. No. 1, it is not clear, you know. A lot depends on what happens with these, whether they're going to covered by the fee issue. I would agree with you that the fee issue is probably more important than the rate issue. But both of them are important, again, in terms of 55 covering the loans under HOEPA. However it's extended, what you're going to find is that different lenders are going to make different decisions. Some are going to say: Okay, we have the systems. We have the technology, and we have the willingness to bear this risk. It may be that after we have some experience in their bearing this risk, we may decide it's not worth it and we're going to get out. We don't know at this point. So far, you know, we've had little problem with HOEPA. We're concerned that, as it expands, we could have significantly more problems with HOEPA. But, more importantly, we're concerned that there are other institutions who are just going to say that, expanding HOEPA, we're going to get out of that business as well. MR. MICHAELS: Let me follow up with two questions. One, without trying to pin you down to precise figures, which I understand your reluctance to do, but orders of magnitude, were you talking double digits, single digits? MR. SAMUELS: I would hate to give you that. It's not huge because that's just not our business. But, obviously, we are mostly a prime lender. We do have a subprime unit that we deal with both in our retail and wholesale division. But HOEPA is not a large part of 56 that. Certainly, depending on how low it goes, then one of the issues that we also have in terms of these we will get to. If you open the door for it, we are concerned about our having to include affiliate fees. When we have an appraisal company, a credit reporting company, and title company, we have to include those fees. So our triggers are a lot lower than, say, another company who uses third-party fees even though, when we combine those fees, we can give a better deal to the customer, both in terms of cost and in terms of efficiency. But it operates to our detriment. GOVERNOR GRAMLICH: I wonder if I could jump in on this? The numbers that we have seen, as were mentioned by the Federal Trade Commission, indicate that HOEPA loans are actually a pretty small share of subprime loans, whether single or double digits, whatever. And if you just look at the kinds of disclosures and prohibitions, and so forth, under HOEPA, they don't seem all that onerous. And, so, one wonders what is the problem? Is the problem really in the stigma of HOEPA? I mean, is that why everybody is shying away from the trigger? What is the problem with HOEPA? MR. RANKINS: Governor Gramlich, let me try to expand and respond to some questions, several of the questions that Ms. Ahrens asked. 57 Ninety percent of the loans that we make are under HOEPA. We act merely as a broker in our community. And it's based upon who we broker, the investor that we sell the loans to. For the most part, to try to respond to that question, we are overly disclose to the client. The client, why am I signing all these papers? Well, it's because of the documentation, disclosures, the points, the fees. We overly, overly, overly disclose. GOVERNOR GRAMLICH: You don't think the points and fees, things like that, should be disclosed? MR. RANKINS: Yes. We overly disclose. That's not an issue with us. Our issue is if the trigger is lowered, we're going to have investors that are -- right now, we have good, competitive rates. Those investors are probably going to get out of the business and subprime lenders -- GOVERNOR GRAMLICH: That's what I'm asking: Why? If all that is going on is that they can't give the balloon payments for the first five years, and reverse amortization mortgages, and they have to disclose the points and fees, what is the problem? MR. RANKINS: The stigma of high cost. GOVERNOR GRAMLICH: So it is the stigma? MR. RANKINS: It is the stigma. MS. AHRENS: Ms. Bose, then Mr. Bley. 58 MS. BOSE: As an originator, we have done three loans in the last two years. And the reason that we don't do them is that (a) the lender discourages us from doing it. They don't like the regulatory burden and they don't like the risk. It has nothing to do with the fact that it's a high-cost loan. It's simple for us, but for them it's not possible. We can't make enough money to cover our costs. And I know profits are a word you don't hear. But I need to pay my mortgage, too. So if I can't make a profitable loan, and the investor has to spend so much time and effort with disclosures and the regulatory burden, and the potential that they may rescind this thing in three years because they made a ten dollar mistake, they're not going to do the loans, period. So it's not just one thing. The point is that what you are doing is eliminating the whole class of loans for credit-challenged people who need them. And we can't do it for a variety of reasons. But the point is we'll be eliminating a source of financing for people in an area that can't go anywhere else. MR. BLEY: We asked this question several times, and I think we made an interesting observation. First of all, when the test is created, it has to be applied to all refinancing and second-mortgage transactions to determine the section has been triggered. We don't think that 59 lowering the trigger point, it does not create a greater cost. And making the test on the margin, you already have tests. You have to test each of the loans. The calculation is the same with the changed variable. There is another interesting observation that our field examiners have made, which is that many subprime lenders appear to automatically make HOEPA disclosures -- just talking about the disclosure now -- on all of their loans. They do see that it is cheaper and safer, and we're talking about regulatory risk, that to make the disclosure rather than taking the time to check and risking the possibility of having erred on the test. Giving that it is cheaper to comply on all loans, rather than test all loans, lowering the trigger should have no greater cost or less availability. MR. COURSON: I'd like to respond to Governor Gramlich's question. We're talking about a small slice of the market. And I don't think there's any data that really determines at what rate level abusive and predatory lending practices take place. There seems to be this assumption that predatory lending is somehow ties to HOEPA loans. I would submit to you that moving the rate trigger, if you will, or any of the terms or conditions in HOEPA, is not going to. If it's that small a piece of the market, the predators out there, the abusive practices, 60 are much more widespread than just that slice of the loan. And the issue there, therefore, as the gentleman from Washington said, is to really look at prohibitive practices and try to zero in on those, as opposed to terms and conditions. GOVERNOR GRAMLICH: But that is essentially a part of the point. Because there are some practices that are prohibitive by HOEPA, and not prohibited for non-HOEPA. So, if you change the trigger, then some practices become prohibited. I mean, that's exactly the point of all of this. MR. COURSON: I understand that, but the prohibition, I mean, those are prohibited today. Yet we still have -- we're here talking about predatory lending practices, and those have been prohibited since HOEPA has been around, and it hasn't solved the problem. So I don't think it's a prohibition. GOVERNOR GRAMLICH: That's actually what we're asking. Within the HOEPA sector, I mean, everybody is worried about the changing of the trigger because more loans will come under it. What we're trying to figure out is that, within the HOEPA segment where some things are prohibited, are those prohibitions effective? MS. TWOHIG: I would just encourage the Board to be very careful about overreacting to the notion that, 61 well, we can't lower the trigger because that means more people would leave the market. I think that there are practices -- our enforcement experience shows that there are practices going on out there that are very troubling. We have found HOEPA violations. In our law enforcement actions, we have found lenders that had loan provisions that had increased, an illegal increase, after default and clear asset-based lending, had short-term balloons and direct payments to home contractors. We have seen just a about everyone of those conditions violated, but it's a very small slice of the market. We believe that more coverage of HOEPA is appropriate to get at a few more loans. We don't think that increased coverage, so that those very important protections and prohibitions that really are just inappropriate for this segment of the market, with these variable consumers, are or would -- we think it would do much more benefit than harm. And I'll just stop there. MR. SAMUELS: I'm glad reasonable minds can differ on this issue because there are a couple of things. As a national lender, we have to look at, we have been looking at, federal, state and even local attempts to regulate this area. One of the things that we have seen when we take a look at the triggers is, okay, we see the triggers, what's the impact of that? And I'll give you a 62 couple of examples. And I do need to disagree with my colleague regarding repayment penalties, because that's a big issue for us. We think it's a very, very good thing to give the consumer a choice because it allows us to think that they are going to stay in the house for five years. They get a fair rate and we think that's a very good thing. Now, are there abuses with prepayment penalties? Of course. I'm not going to say that there aren't. But we have, in our experience, a lot of people who are very happy with prepayment penalty because they get a lower rate, and that's what we are about. We are about lowering costs and giving consumers choices. If the consumer thinks he's only going to be in the house for three years, we don't them to take a prepayment penalty for five years because, then, they are going to have to pay it. But it gives the borrower a lower rate, and it also gives the investor some degree of certainty that that loan is going to be around. So, if you're going to talk about lowering triggers, the lowering of triggers, in and of itself, we have to look at them to see what comes along with it. If you're going to prevent us from being able to offer prepayment penalties and we're not --- we are very careful. We want the industry to be very careful about 63 providing a choice along the lines of Fannie Mae come out with last April. We think that that's a good thing, not a bad thing. We think that that's fine. We are not in favor of asset-based lending. We are not in favor of the predatory practices that has somebody pay $500 a month for their mortgages, and have them have a monthly paycheck come in for $500. That is a predatory practices and those people should be strung up by their thumbs. We have no issue with that. What we are trying to prevent is we do see legitimate choices for consumers and keeping the good guys in the business to be able to make these kinds of loans available. GOVERNOR GRAMLICH: Could I just -- so, I think you're saying that you don't have any problem with the current prohibitions under HOEPA. But you don't want us to expand those. MR. SAMUELS: Frankly, we prefer not to have some of those prohibitions, again, on prepayment penalty. Many of the prohibitions we have no issue with at all, absolutely. But extending them, again, the reputational risk -- and it's there, because we've heard it -- and also the compliance risks, it's there. We are concerned about increasing costs that result from a lot of these compliance concerns. Resulting from inadvertent violations of HOEPA. 64 MS. AHRENS: Let's have -- MR. MULLIGAN: Two quick points. One as to competition. It seems to us that the largest generator of HOEPA in the last four years, First Alliance, who is now in bankruptcy, absolutely no problem in getting funding out of Wall Street for its loans, for years, until the moment they filed. Lehman Brothers was buying their stuff day in and day out. Second point is, in fact -- on the triggers now -- if, in fact, lenders are willing, as everyone seems to be, fees up front, discounts for interest rates, and that prepayment penalty is the cost of that loan. There's no way around it. Even if you could justify the prepayment loans, on some economic grounds, you have to include it in the cost of the loan. MS. AHRENS: Prepayment penalties. Just let me say that we can go back to it. MS. DELGADO: Can I make a point about the triggers? Part of the problem that we see is that, again, in the disclosures. We don't believe the disclosures are well understood by our borrowers. We don't seem to pass the connection. That's one thing. Lowering the triggers is only going to subject more borrowers to a lower threshold. We're just lowering the threshold. I wanted to speak to the compliance issue, 65 because it can't be taken lightly. Some of us, the financial institutions that rely on secondary markets for financing, the secondary markets don't want to assume the pass-through liability because they have no way of controlling whether those disclosures are sent out on time; and, yet, they bear the full liability. So it's really difficult for us to go out there and obtain financing from these sources if they're just reluctant to proceed with us. MR. GNAIZDA: Could I just add something on the trigger? I don't think we're dealing with the real world. The attorney general in California submitted to the California Public Utilities Commission, in the case we're involved in, the following statements. Twenty to twenty-five percent of all Californians are functionally illiterate. Now, if that's even close to the case, that means, for predatory lending, you're talking about 50 percent or more. That's why we have to go back to what John Bley has talked about, which is effective, powerful enforcement. That's why we also commend Dan Mulligan and his law firm for what they're doing with Lehman. Lehman Brothers, they shouldn't have to do it. It should have been done by the regulators, including the SEC. MS. AHRENS: Turning now to the point of fee 66 triggers. A loan is covered by HOEPA if the point of fees paid by the consumer exceed the greater of 8 percent of the loan and the dollar figure, which is adjusted annually at $451. For this purpose, points and fees include all items that are included in the finance charge, all compensation paid to mortgage brokers, and it specifically excludes reasonable closing costs paid to unaffiliated third parties. HOEPA also authorizes the Board to add such other charges that we may deem appropriate. The Board's notice of this hearing talks about a couple of fees: prepayment penalties paid on loans refinanced by the same creditor, and single premium credit insurance for couples. Let's start with prepayment penalties on loans refinanced by the same creditor and affiliates. We've heard, in prior hearings, that some people never impose prepayment penalties. Yet, we hear from consumer advocates that it happens all the time. Would someone like to address the effectiveness if the Board proposed keeping the financing by the same creditor affiliate so that -- is it a common occurrence or does HOEPA's restrictions really make it a minimal -- MR. MULLIGAN: My experience is twofold: One is the state law is now becoming ineffective, and any lenders are hiding behind that. We have commented to the OTS about that. California has the experience. For example, 67 Texas moved in prepayment penalties. There's an open question as to whether or not those have all been preempted by the OTS regulations. Second point is: Many lenders do waive, in fact, prepayment penalties on their own loans. I know that Household, Beneficial, Associates often does, not always. I've never seen Countrywide. So that doesn't occur. Where it occurs is in the attempt to refinance out of loans for people, and there is something that they really didn't remember, didn't know about in the first instance. And interesting practices come up. We understand the term in the industry called "biking." That is biking, where a lender does not even send out demand statements on loans in the refinancing because they know that the old lender will come in and offer a better deal and want a new loan, and, surprisingly, they'll close. All of this time they thought they were paying off taxes, credit cards and suddenly they can't be covered because they forgot to add in the prepayment penalties. That's becoming more common, as well. MS. AHRENS: David. MR. SANDS: On prepayment penalties, and we're really talking about the prepayment penalties for loans by the same lender. It would include prepayment penalties in 68 that situation and the points and fees. I guess what I don't quite understand this, because we're talking about situations where, as Mr. Mulligan said, where there's biking. Where a new lender comes in and basically refinances the borrower out with the penalty you're suggesting, which includes the prepayment penalties, points and fees in that situation. The new lender, the existing lender, comes in, as Mr. Mulligan said, and wants to make a better deal, but knowing they can't, because they have to put the prepayment penalties in there, but the new lender doesn't. So the borrower gets these two statements, one says that the new lender, you're going to charge me X, and the old lender is charging me X plus Y because old lender has to include the prepayment penalties. So the borrower says: I don't really understand these disclosures, but one looks a heck of a lot more expensive than the other. I didn't realize that one gets to include the prepayment penalties and one doesn't. So I'm going to take the new lender's loan, even though it's vague and more expensive. So, I don't know why including the prepayment penalty, which creates an uneven playing field and unequal disclosures would make a lot of sense on the surface. MS. AHRENS: We're running out of time for this portion, but I do want to touch on premium credit 69 insurance and similar products. Why should these fees be added to the point fees? Anyone have any comment on that? MR. RANKINS: I just want to make one point on penalties. For Rankins Mortgage, that's a dichotomy. We want the benefit of this, as Mr. Samuels said; but, on the other hand, we bring our borrowers to our credit. They have to live with the 12 percent interest rate. Then, in two years, we bring them back to 9 percent. That's the dichotomy. We experience -- we don't know. We're right in the middle. On credit insurance, we would say that that should probably be added into the fees. We don't sell it. We think it's a terrible product. We think it's a disservice to our consumers. MR. BLEY: If I can make a comment? First of all, I think you know our theme is that predatory lending occurs when as a result of the manner in which loans are originated, that there's a breach of trust, and that the consumers don't understand the disclosures because they're too willing, too complex, and they turn to the loan officer and say: What does this mean? In that context, I think we need to make an observation about what we hear in consumer complaints. We hear about prepayment penalties. Far and away the 70 greatest consumer complaint we hear about prepayment penalties is that they were unknown. Not that they exist, but that they were unknown and there was no opportunity to include that in the consumer's decision. So the bargaining part goes away, along with the prepayment penalties. So the key here I think is clear disclosure of the prepayment penalties but in a simple one-page disclosure which, again, we have attached to our comments. I hope you get a chance to read Mr. Cross' memo. I can't emphasize that enough. Again, it has significantly influenced me on this issue and has really turned my mind around, not focusing on terms, which I think are inherently neutral if they are understood, but to the manner in which these loans are made. MS. AHRENS: Dan, and then Norma. MR. MULLIGAN: Prepayment penalties and credit insurance is probably the worst products that was ever involved, at least in the way it is sold. And rather than including them in the trigger, we would recommend that it simply not be allowed to be sold at the time the loan is originated. I know the Board, or anyone else, says we can't sell credit insurance. But if you make the lender come back after the fact, and in that way let the borrower exactly see what they're buying or paying for, some of it 71 is unbelievably bad. At least that throws it all in the pot at the same time and hiding those costs. MS. WIDENER: I would absolutely agree that it should not be allowed. I think there should be some special effort to clarify between private mortgage insurance and credit insurance. Because I think some consumers are being confused about that. We really want to say credit life insurance, and all those credit products, absolutely should not be allowed. I'm aware of -- sorry, we don't have studies -- totally aware of borrowers being forced to take the credit product as part of doing the loan. It's just ripping off their equity. I'd like to also say that, in general, on all of these issues, I did not say it in the testimony, as represented in the model statute, I think the trigger should be lowered, the prepayment should not be allowed. All of these types of things, anything you can do to communicate the message that this behavior has to stop. It needs to happen, it just needs to happen. If the Board is going to err, it should err on the side of protecting this very vulnerable client group that's really suffering from predatory lending. People who absolutely can't read, don't understand what's going on. I have to agree that the disclosures have very 72 little effect, even though you have to have them. What we have to is get at solving the problem of low-wealth borrowers having their equity totally gone. MS. GARCIA: Two quick comment, if I may, very quickly. One of the things I want to highlight here is that the assumption is that, in good loan, prepayment penalties will lower the cost of borrowers by giving them better interest rate and lower fees. But what we're seeing with high-cost loans is that the borrowers aren't getting lower interest rates and they're certainly not getting lower fees. In fact, the prepayment penalty is one of several things in a package that makes a loan extremely unfavorable for the borrower. So I first want to get to that initial assumption. The second is that one of the reasons why Consumers Union believes that prepayment penalties should be included in the cost factor is because there is a cost associated with that restriction on the loan. There's a cost to the borrower and it's, and it has to be in the cost factor because all of the prime lenders will allow the borrower to buy down or trade out of the prepayment penalties by paying a higher fee, paying higher interest rates. And the point is to discourage lenders from loading up unfavorable terms onto borrowers in order to 73 create an impossible situation for the borrower, which will cause the borrower to refinance; and, therefore, get deeper into their equity to pay another set of fees. And, perhaps, even a higher interest rate to refinance the loan. With respect to credit insurance, Consumers Union believes that it is a total rip off for consumers. We issued a report in 1999 that chronicles our findings where we believe the consumers group were ripped off to the rate of $2 billion a year for credit insurance. I support the comments of my other colleagues who said that credit insurance had no place in the lending role, particularly at the point of sale of the loan. MS. AHRENS: Thank you. MS. DELGADO: As long as we are on prepayment penalties remains alive, I want to talk a little bit about it and take a little different position, because prepayment penalties do have a practical application for the consumer. It will cost the consumer anywhere from 3 to 4 thousand dollars to originate a loan. No one seems to talk about that very much. And the prepayment penalty is a way to buy down that loan. Because just to -- for a lender, to make money on a loan, or recoup his acquisition costs, is going to take from 3 to 4 years on average. So the prepayment penalty is a way to ask the borrower were 74 they planning to keep the loan on their books for 3 years, or so, and actually buy down rates significantly by one percentage point a year, or more than that. Actually, it's a really good feature. It seems that we should be focusing on bad practices. Features, by themselves, are good things. They're very, very good negotiating tools for both the borrower and the lender. MR. LONEY: Okay, Jim. MR. MICHAELS: Just before we close, I want to make sure that we gave everybody the same opportunity here. Mr. Rankins is the other lender on the panel. I didn't get ask the question and I want to make sure you have an opportunity. If you can give us, if you have some idea of what percentage of your loans are not just subprime, but also covered by HOEPA and how that would change if the triggers are lowered by 2 point? MR. RANKINS: Many percentage of ours are HOEPA loans. We strictly are all subprime, no prime lending. Our position is unique because we're the only African-American mortgage banker. The consumer comes in and, as a consequence, we do home-equity loans that have been turned down. MR. MICHAELS: They're all HOEPA, virtually? 75 MR. RANKINS: They're all HOEPA, with lots of disclosure. MR. LONEY: And we're glad to hear that. We will take a ten-minute break, please, and, by my clock, be back at 10 minutes to 11:00. Off the record. [Recess.] MR. LONEY: Can we get started? Well, I guess we can proceed, and the other panelists can trickle back in as they will. The next session of this morning's meeting, we're going to examine possible additional restrictions or prohibitions for specific acts and practices. Under HOEPA, the Board is authorized to prohibit acts and practices in a couple of ways: In connection with mortgage loans, if the Board finds the practice to be unfair, deceptive or designed to evade HOEPA; and in connection with refinancing of mortgage loans, if the Board finds that the practice is associated with abusive lending practices or otherwise not in the interest of the borrower. The Board's notice announcing these meetings raises several topics for discussion, and, because we have limited time, I'd like to focus on four of those topics: Loan flipping, unaffordable lending, regulating credit 76 insurance, and improving disclosures. We'll start out by talking a little bit about flipping and getting the panelist views on some of the issues related to that. Flipping is the, in common parlance, the first of the frequent refinancing of home-secured loans, particularly where the customer derives little or not economic benefit from the refinancing, and where the lender receives significant income through fees. These fees are typically added to the loan amount, thus reducing the homeowner's equity in the property. What we'd like to talk about, in a couple of respects, is what regulatory approach the panelists believe would effectively curb these kinds of refinancing that do not benefit borrowers without impairing transactions that do help borrowers. And, so, it's important that we kind of make that distinction. In recent reports submitted to Congress by the Department of Department of Housing and Urban Development and the Treasury Department, it was suggested the Board should prohibit refinancing within a specified time period, unless there is a tangible net benefit. What would give the Board, in particular, a basis for deciding what a particular time period should be? Should it be 12 months, 18 months, 36 months? What number should we do, could we use? And how would we 77 measure the notion of "benefit" to the consumer? For example: Would lowering the payment amount and extending the number of payments actually work out to be a benefit to the consumer? So, to start this discussion off, I would be interested in knowing any responses you have to the general question of what regulatory approach would effectively curb these refinancings that do not benefit borrowers without impairing transactions that help them. And, then, if you could address the question of how would we come up with the time period, if that seems like an appropriate approach, and how to measure the benefits to the consumer in any flipping. So, if anybody has any thoughts on this, I'd certainly like to hear it. Yes, Ms. Bose. MS. BOSE: I don't think it should be the frequency of refinances that should be regulated by the Federal Reserve. The idea of flipping is most lenders now put into their broker contracts that, if we refinance the loan within 12 months, we give them back our profit. And because this is very detrimental to the industry as a whole, I believe the industry has taken very strong steps to discourage loan flipping throughout the industry, and it varies on how the penalty works. But basically, if the 78 borrower refinances within a year, and they don't go back to that same lender, the lender penalizes the originator. And I think the industry takes that very seriously. I hate to see the Federal Reserve start to regulate how frequently someone can refinance their house, or when it would make sense, or when it wouldn't make sense. I think that's just not the purview of government. MR. LONEY: Anybody over here? MR. BLEY: I guess I'll get in my comments in my prepared remarks, as you predicted. I guess we think the greatest value of regulation isn't in micro management terms, as you might guess with my previous comments. But I think the greatest value in regulation is its deterrent effect. So how do you deter a predatory lending? One observation is that we, at DFI, remain perplexed at the existence of federal criminal penalties for any consumer who defrauding a lending institution, while the penalties against lenders for defrauding consumers are, for the most part, administrative and financial in nature. A general worst-case scenario for a lender receiving a consumer, or deceiving a consumer, is disgorging the profits associated with the violation, and an admonishment not to do it again. We know that some lenders see no downside to the undertaking of mortgage 79 fraud. At worst, the penalty is to stop enriching themselves. So, we believe that the best approach to this is to deter predatory lending by establishing certain prohibited acts. I won't go through those. There's about 8 or 9. I'll just point out that they're attached as Exhibit C to our comments -- by the way, we're making more copies of this -- on page 7, and it lists what's in the state of Washington's Mortgage Broker Practices Act, and lists out what the prohibitive practices to be in the law and enforced. Again, it focuses on manner, not on prohibitive terms. MR. LONEY: Go ahead. MR. SAMUELS: Again, I have to applaud Mr. Bley. He's the kind of regulator we like. Because, because it really is a manner as opposed to a practice issue here. And I absolutely agree with Ms. Bose. As a lender, we hate brokers coming back to us and refinancing loans. Because, then, we don't -- we've paid a premium for these loans, and we're going to lose that premium. I have to say, in my own case, I guess it was in '93 or '94, I believe I refinanced my loan with Countrywide twice because I didn't hit the bottom of the interest rate cycle. And, what we really don't want to do is inhibit people from benefiting themselves when there is 80 a down-interest-rate market. Now, when we talk about benefit to the borrower, I mean, I hope -- and I talk to my people about this all the time -- that every loan we make is a benefit to the borrower. Because that's what we're in the business to do. So that, when we talk about a loan that only puts fees in the pocket of the lender, that's a predatory act unless you see that there is something that is beneficial to the borrowers. So I'm not sure that time frames are relevant here. Because, as I said, I think that what we need to look at is to make sure that what is happening is the borrower is given choices to achieve the borrower's economic objectives. Whether it's taking cash out, or medical, educational, home-improvement needs, or taking advantage of a down-interest-rate cycle, or whatever, the benefit that they see to themselves, we want, we don't want to put stumbling blocks in the way to be able to accomplish that refinance. One of the things I've seen that troubles me greatly is a proposal that another lender can refinance your loan, but you can't refinance it within a certain period of time. "A Miracle on 34th Street" was a great movie, but, you know, the Macy's, Gimbels' thing doesn't work in this situation. We want to be able to refinance 81 our borrowers, and we think we could do it in a way that is more beneficial to the borrower because we can do it in a more efficient and less costly manner than some of our competitors. We certainly would not want to be faced with a law or regulation that prohibits us from doing that. MR. LONEY: Mr. Courson. MR. COURSON: We, as part of the process of the mortgage reform group over a two-year period, debated this topic extensively, both time periods, net benefit, measuring benefit. That group included not only lenders but service providers and consumer groups, and frankly found ourselves in a quagmire. It was a circular argument that could never identify all the unintended consequences when you get into trying to identify the specific acts by either regulation or legislation that would, in fact, prevent flipping, and it totally broke down. And, therefore, I think, when you try to get into that, you really find yourself never ever able to capture those precise elements that will stop the flipping. And I think the answer is, as the other panelists have said, you have to really look, therefore, at the predatory practices themselves. MR. LONEY: Did you -- MR. MULLIGAN: Yes. We've also seen a lot of flipping, and even though our associates are not here 82 today. But we have tried and tried as well to come up with something that could be regulated in that area and none of it makes any sense in terms of the ability of the individual consumer to determine. So we also don't urge any prohibition on that, or any attempt to regulate, but rather to increase the enforcement. Perhaps he single largest issue from our point of view is to eliminate the pattern and practice requirement for abusive practices under the code. It becomes a monster to litigate. In fact, it becomes almost impossible to either bring a class-wide claim or your own. If that could be removed, then, the ability to go after the lender for predatory conduct would be increased enormously on an individual basis. MS. WIDENER: I think what the Board -- oh. MR. LONEY: Go ahead. MS. WIDENER: I don't have, I can't offer any specifics with regard to how one might regulate what the problem is and prevent it specifically. But I think, in general, the Board has the power of its CRA examination authority to discourage the feeding of those who do the flipping. And that is that I believe the CRA credit is given for the purpose of purchase of subprime loans. And to the extent that is true -- and I don't know how that exactly works. I just keep hearing that they are given 83 credit. To the extent that's true, I would encourage the Board to withdraw from giving credit for the purchase of subprime loans in the CRA process until there can be a clearer definition with regard to what is predatory versus what is subprime. And right now, I think that we're treading too lightly on the issue of subprime in an effort to not close down a flow of credit to a certain client group. But I think, in that process, we're allowing a lot of low-wealth borrowers to get ripped off. So, again, I'm suggesting that the situation has gotten to the point, and I don't have the ability to do a study, but I know through what we're looking at in the NeighborWorks Network. I know what I'm hearing through Habitat for Humanity, folks that I work closely with, that too many people who have been helped are simply having their equity ripped off. It's become an issue of the Congressional Black Caucus, it's so big, that low-wealth borrowers are increasingly unable to pass on wealth to family members, to future generations. And it's getting to a point that we just need to say, Halt!, and let's see what we can do to just back off the whole situation of subprime to the extent it cannot be clarified as not predatory. MR. RANKINS: May I make a comment? 84 MR. LONEY: Sure. MR. RANKINS: With respect to some of the issues that Ms. Widener addressed, these borrowers are not as unsophisticated as some people would contribute they are. I'd say 30 percent of the homes that we refinance, these homes are paid for. These people come in for various reasons: weddings, buy campers. A great deal of them are seniors who want to buy a RV. They want to put a grandchild through college. That's what they do with this equity, and that's what they want 20, 30 years, respectively, in order to do that. So, we don't want the Board to be placed in the position to try to impede some of that, called economic growth for us. And some of these people, who are on fixed incomes or retirement, I agree with Ms. Twohig, there should not be asset-based lending; but there should be, in many respects these people should be given an opportunity, if they qualify and there is an ability to repay, they should have that opportunity to utilize that asset, their homes. MR. LONEY: Yes. MR. SANDS: Just a couple of points on prohibited practices, generally, and flipping, specifically. First of all, it's obivous that time frames 85 really are a problem because it really doesn't address the emergency. You will find a lot of borrowers, who are credit-impaired, may have emergencies that come up, medical emergencies. They are suddenly impaired from the financing and taking money out of their equity to pay for medical emergencies, and they're left with no choice, or maybe a worse choice. Secondly, I think as John Courson pointed out, coming up with these safe-harbor minimum standards is probably impossible. In coming up with a amorphous standards means you're going to end up with as many different standards as are judicial districts. And I'm not quite sure why that benefits anybody but me, as an attorney. So I'm not quite sure how that benefits anybody else, though. Just a couple of points on safe harbors as poor excuses for prohibitive practices. First of all, I'd like to suggest, and people think about, whether if the borrower obtains truly independent counseling as part of any prohibitive practice or term, or whatever it is that the Board considers safe harbor for truly independent counseling -- I'm sure what that means, necessarily, in each case. I do have a client that sells credit life insurance and requires the borrower to go to legal aid 86 organization in Los Angeles and get independently counseled before they place insurance. But they don't have a safe harbor for that. I really think they should in that circumstance. Secondly, they consider -- and that was part of the HUD, I can't remember which report, but have a part up for credited Investors. One thing which certainly makes me, which I find most foreign in my practice, is wealthy borrowers who -- and the SEC has, for example, one standard of what a credit means for very wealthy borrowers who have their loan negotiated by an attorney, and they come back and say: Well, you know what? You missed something. We don't like the loan. We want to do something. And there will be, in fact, credit investors, even falling under HOEPA, who may be going through a divorce, have their credit ruined, and are going through difficult times. And, in fact, get a Section 32 loan, and then try to take advantage of the fact that they were sophisticated: they had been represented by counsel. It's a very small group, but it's a troublesome group. I'm not quite sure that the laws would benefit that group. I'd like to consider whether that makes sense. MR. LONEY: Governor Gramlich, you wanted to ask about enforcement. GOVERNOR GRAMLICH: We'll do that last. 87 MR. LONEY: Last? GOVERNOR GRAMLICH: After we do the next portion. MR. LONEY: Okay. One of the things that has come up in the context of this is the issue of balloon payments. And we understand that, to avoid HOEPA's restrictions on balloon payments, some lenders may include payable-on-demand clauses in HOEPA loans. Is this, in your experience, prevalent where flipping occurs, this notion of payable on demand? And should the Board consider restricting payable-on-demand clauses? Does anybody have any thoughts on that? MR. MULLIGAN: We don't really see it as a problem. The use of balloon payments is very limited. It does have its pockets, but it's very small, small segment of the market. And payable on demand is really sort of a term, which, to me, doesn't make much sense, because you're paying off, you're flipping anyway. It really calls into question the disclosure element behind the problem. There's nothing wrong with balloon payment if you know it's there. If you don't, it's a real killer. MR. LONEY: Anybody else want to say anything on payable-on-demand loans or flipping, generally, before we move on? (No response.) 88 If not -- MS. WIDENER: Could I comment on flipping generally? I think, again, I want to emphasize that it's really important to define the term in a way that everybody is meaning it the same way. The work done by Consumer Advocates, for example, on the definition of flipping, gave the example that was in the Wall Street Journal on April 23, 1997, where there had been a number of loans in a four-year period representing in the fees, in the flipping process, being $29,000 for a $26,000 loan. So I think that, you know, we've just got to get to defining what we're talking about here in graphic ways that everybody can understand what we're trying to stop, and not inadvertently feed this activity without knowing it. MR. LONEY: Thank you. Any other thoughts on this before we move on to the next item? (No response.) We're going to change the focus now to talk about ways to address unaffordable lending. Jim Michaels, here, will lead this discussion. MR. MICHAELS: Thank you. Under HOEPA currently, creditors may not engage in a pattern or practice of extending credit that's based on the collateral loan so that, given the consumer's 89 current and expected income, current obligations and employment status, a consumer will not be able to make the scheduled loan payments. For purposes of this hearing, there are a couple of questions we're not sure that we would be able to cover or do justice to, and the first is the question of whether there ought to be a pattern or practice requirement that is the clear requirement of the current statute. It's one that dealing with that issue is one that's more appropriate for the Congress. It's not something the Board could deal with by regulation, and so it's something we have to live under now. And there is a second issue of how do you know when you have a pattern or practice? It's a difficult issue. It rises under a number of different statutes, including HOEPA. It's one that the courts have struggled with, but it is primary a legal question. We can certainly debate it at length here, but we're not quite sure. We don't know if that would be useful. So, assuming we do have this law that is not wonderful, but to engage in a pattern or practice of lending where the consumer cannot make the scheduled -- I'm sorry -- where the creditor has not considered whether or not the consumer can make the scheduled repayments. We want to move to some very specific issues. And that simply is how do you deal with this prohibition in terms 90 of enforcing it. Currently, and there is a requirement in our, in HOEPA, that, if there is a prepayment penalty, it's allowable, and there are several conditions of HOEPA from where you might allow a prepayment penalty. But there is a yardstick for verifying that consumers have some repayment ability, an additional 50 percent debt-to-income ratio test. There is a documentation requirement that they have the ability to make the payments on the loan before you impose a repayment penalty. So what we are considering is whether or not it would make some sense to have some additional yardsticks in HOEPA regulations for when a lender has failed to consider the consumer's ability to repay. There's a couple of ways we can do this. But the one that comes to our minds is simply having a verification or documentation requirement to show that lenders did, in fact, consider the consumer's ability to repay by looking at credit reports, by looking -- by verifying employment income, by looking at current obligations. So the first question I want to ask is whether it makes sense to have some sort of verification or documentation requirements in connection with this prohibition under HOEPA? When we proposed HOEPA initially, we had a lot of comments from industry 91 suggesting that we not do that, so the current rule is to, in fact, not do that. The question now is whether the Board should reconsider that and impose such documentation and verification requirements. Let me open the discussion on that. So, Peggy, first. MS. TWOHIG: Part of the Commission's statemenet addresses this issue. And the Commission believes that documentation requirements would be extremely helpful. We've seen very poor documentation by lenders. At the same time, it doesn't appear that they're adequately considering income. It's extremely hard, as an enforcement matter, to sometimes figure that out, and then we face the possible defense that, oh, we considered it; we just didn't write it down. What we have seen in our cases so far, even where there was very poor documentation, for instance, where there was no income recorded at all. Income was clearly not verified or was pretty clearly suspicious. We've seen instances where no credit report was pulled. Sometimes the credit report was pulled and the debt-to-income ratio that was calculated ignored clear obligations in the credit report. So we've seen all manner of problems in terms of lenders not really considering ability to pay fully. 92 We think it would be extremely helpful, both from an enforcement perspective, and also making sure the lenders, who do need to comply with the HOEPA asset-based lending provision, are forced to specify what they are considering. We think it would have a deterrent effect in that regard. MR. SAMUELS: We talk about this issue, I think, at some length in our written comments. But let me just say, very briefly, that we think this is a very dangerous area to get into. Because the reality is that, in many communities, including the many minority communities and immigrant communities, sometimes it's difficult to document income. And there are a lot of jobs that carries with it the difficulty of documenting income. Again, what we're trying to do is to walk that very fine line between making sure that people who can -- who apply for loans, can pay it back. Not just out of the equity in their homes, but out of their sources of income. And the issue of not restricting people who are involved in trades or occupations where they're in cash businesses, where income documentation is difficult, we don't want to restrict those people from qualifying for home loans. GOVERNOR GRAMLICH: The obvious question is: If you can't document the income, how do you know the income, and how do you know they can pay the loan back? 93 MR. SAMUELS: Right. And I would say that there are certain reality checks, let's just say. And I'll take, you know, sort of a waiter in a restaurant. If a waiter in a restaurant puts down that he or she is making $300,000 a year, we're going to ask what kind of a restaurant they're working at, and, you know, whether that's real. There are some ranges that we have to, you know, consider. We have stated income loans. We have, you know, other kinds of loan products where people -- and I'll say doctors and lawyers are probably at the top of the list of people who want to qualify for these loans. They don't want to show us all of their verification for the income that they may have. And, so, there are programs where we do check that they can repay the loans under certain guidelines, but there are -- it is difficult to have the same kind of verification that you would if some -- if the entire nation worked on a W-2 system, where you'd have to do is, you know, call the payroll department of a company and say how much is a person making. So it is a more difficult -- it's a more difficult task. It's a difficult underwriting challenge, but it's one that we don't want to have to worry about meeting every time we have a difficult borrower to verify their income. We don't want to be faced afterwards with a 94 challenge that, oh, you didn't take into account the fact that I couldn't pay this loan. GOVERNOR GRAMLICH: Are there are a lot of high-income doctors and lawyers who presumably may be playing some games with the IRS, or somebody in he HOEPA segment? MR. SAMUELS: I don't want to impugn a segment of our borrowing base. I'm not going to suggest that. Let's just say that some don't want to be as forthcoming as others. MR. MICHAELS: Let me just clear some of your assumptions. First of all, if we're talking about documenting income and current debt, and we're talking about only HOEPA loans, and we're talking about making sure that the rule -- making sure that it's documented as a pattern and practice, as opposed to going to individual cases. Is that still prone to saying, as a pattern and practice, you must generally document income and expenses for HOEPA loans? Doesn't that give you enough flexibility that you need for individual cases? MR. SAMUELS: Well, I'm not sure where we would end up. If you're going to impose, for example, a certain percentage on the lending industry, which we very much would not want to see happen, and you say: Well, in an individual case, you might exceed the 50 or 55 percent; 95 but, as a pattern and practice, you're not. I'm nervous about that. Because, again, I can't necessarily get to a 50 percent -- I can't, with any certainty, say that person falls within a 50 percent, you know, ratio, where I can't necessarily verify that this is what this person is making. Now, what I may have to do is, I may have to go down 45 percent, you see? Because, if I can't verify it and I have to worry -- and, by the way, we're very much opposed to what Mr. Mulligan suggested before, and this eliminating the pattern and practice requirement -- as you can imagine. Because, you know, we don't -- you know, people do make mistakes, sometimes, and there are anomalous results sometimes, that don't make you a bad actor, you know? It makes you -- you need to rectify that situation; but it doesn't mean that you violated the law. I mean, to the extent that you are on a -- that you are engaging in a practice of making loans to people who can't afford to pay them back, yes; that's a violation. What I'm saying is: There are industry standard guidelines that legitimate lenders utilize in trying to make as many loans as we can. That's what we're in the business of doing; and that's a very good thing, we think. What we don't want to do is to impose restrictions on us to eliminate a class of people whose income is difficult 96 to develop. MR. MICHAELS: Well, let's suppose, let's suppose we were not talking debt-to-income rations, per se. That the only requirements we're talking about is just the lenders who, as a pattern and practice, document that they consider any common expenses, without having any specific ratio that was required to be met. And did that as it applied HOEPA loans. MR. SAMUELS: That's called underwriting. MR. MICHAELS: Right. That's why I'm having a hard time saying -- MR. SAMUELS: No, no. We have no problem with underwriting. But, again, I have to say that my CEO, Angelo Mazzolla, who some of you may know, often talks about the days when he sat across the table from, you know, borrowers and, you know, these people were saying to him, you know, "I want this home. I will work two jobs in order to get this, you know, this home." And he would make that loan everyday of the week. MR. MICHAELS: But is that really relevant? As a pattern and practice, you don't make a high-cost HOEPA loan that way without at least documenting these things. MR. SAMUELS: Is that -- I'm not sure. MR. MICHAELS: In other words, as a pattern and practice, you don't make high-cost loans covered under 97 HOEPA, isn't that right? MR. SAMUELS: As a practice, we do not make any loans where the individual, you know, where we can't have some degree of certainty that the person is going to repay the loan. I mean, that's, as I said, that's called underwriting, and that's what we do. We don't just say: Let's take a look at that appraisal, okay? Is there enough money in that, in the value on that house, for us to make loan? No. I mean, we don't do that. And the lending industry does not do that. MR. BLEY: Predatory lenders may, and I think the context of this unaffordable loan discussion needs to be in the context where there's high equity in the home, and that the loan may be for something -- and I'll just pick an arbitrary number -- 40 percent of the loan to value, or 60 percent of the loan, where there is equity after foreclosure. And the issue is: Will that loan ever be foreclosed on because the consumer can't afford the loan. I think the biggest concern here, and one thing that we've identified, is that most of the loans that we would consider coming from predatory lenders, are variable rate loans. So the cost of the loan is going to accelerate through the terms of the loan, especially in a rising interest rate environment, which we've been in. Now, it's our understanding that Section 32 98 requires the consideration of the consumer's current and expected income, but only the current obligations. So that's best-case scenario from the point of view of the lender. That's what needs to be considered. We would suggest that, really, what public policy should require is the opposite of that. That the borrower's income should be fixed at the point of origination because there is much less a guarantee that a borrower will retain employment or receive raises than to guarantee that the rate will increase, and use the worst-case payment stream calculated at the maximum the creditor could move the rate. If that is determined to be unaffordable, then you run a real danger that that lender is going to -- will make that loan. A predatory lender will make that loan knowing that, knowing that the loan will, or a high probability that the loan will go in default, but that there's high equity and they can make money off it. MR. LONEY: Anybody else? MS. DELGADO: I actually -- I have a question for Mr. Bley. Mr. Bley, how do you implement that? How do you enforce it? And let me give you an example, since we are in the business. Let's say that we underwrite a loan at 2 percent above prime, 11.5 percent. How would you do the 99 debt-to-service ratio calculation? I mean, assuming -- would you assume that prime rises 10 points? I mean, that could actually disqualify the borrower from obtaining financing. I don't know how you would implement that proposal such that the borrower is still eligible for the loan. Am I misinterpreting what you said? MR. BLEY: I -- MS. DELGADO: It's not a bad idea. It's just that -- MR. MULLIGAN: Let me ask it this way. Let me rephrase the question to you. How do underwrite that loan now? MS. DELGADO: You underwrite the loan based on the current prime. MR. MULLIGAN: And given that the interest rates are going up or down, and, in fact, I haven't seen anybody without a 4 on their notes in recent years, so they actually go up and don't go down, what is your assumption for the future? MS. DELGADO: Well, I mean, at what point do you assume payment shock occurs and the borrower can't make the payment? MR. MULLIGAN: Exactly. So you're underwriting is really loan to value, isn't it? MS. DELGADO: Our underwriting is not loan to 100 value. MR. MULLIGAN: I understand. I mean, not your company; but, in reality -- MS. DELGADO: We're a lender. MR. MULLIGAN: Yes. But in reality, what's you're looking at in these types of loans, especially with no-doc or income-stated loans, is, with all due respect, is just loan to value. That's all your looking at. If you've got a borrower sitting in the inner-city, or wherever, that is qualified under these standards, and you're taking an income-stated or no-doc loan, that's about all you're looking at is the equity. That's all you've got. And I'll tell you what you get in terms of the package -- and I've seen a lot of them -- handwritten statements saying, gee, I run a babysitting service, I make -- I've seen $5,000 dollars a month by a woman who is fully employed, they had the W-2s. Or, gee, doesn't your son live here? He could probably pay rent of X. Or, you know, golly, you can probably rent that part of your house out for this. Write that down for us, and that goes in the loan package, and there is no verification. So, if you're looking at verifying, be careful of what you're looking at. Because, the moment you turn around and turn on the lender and say: I want some relief 101 from this borrower. The counterclaim is that you defrauded us in the loan application. Look! It's in your own writing, right here. And to finally answer your question, Mr. Bley, I don't know how you would actually consider the variable rate. I don't know how you do it now, and I don't know how you would do it if you were doing it now. I agree with it, but I don't know how to do it. MR. BLEY: I think I'll give a lawyerly answer. I think it depends on the facts and circumstances. [Laughter.] But I think, but I think, I think it states the point, that there's a tendency in these areas to find absolute objective criteria. And that, in my opinion, is not the real world. My constant theme this morning has been prohibiting acts or practices and enforcement. Inherent in that there's lot of discovery, a lot of interviewing, a lot of, in some cases, a lot of confrontational, adversarial type deposition processes. And I think part of the burden of the state in this area is that maybe this is the prima facie elements of a case. But, then, I think the state would have to prove some sort of -- in deference to Dan -- pattern or practice, maybe in an individual case, but some form of intent that really at the base of this transaction it wasn't to make a loan at 102 all. It was to steal the equity. So, to answer your question, there is no silver bullet. It's based on facts and circumstances, and probably it's the state's, it's got to be the state's responsibility to prove that. MS. DELGADO: And, so, maybe the way to regulate this type of activity, making unaffordable loans, is to force lenders to submit, to disclose foreclosure and repossession activity. And that can very easily be done. MR. BLEY: That's a good regulatory technique to determine whether that pattern or practice may be made. MS. TWOHIG: On the documentation point, I just want to state that I don't think we're asking for a whole lot. As has been pointed out, HOEPA does require that current, that income and expected income and employment, and at least current obligations be considered. And all we're asking for is that the lender be required to record what that is so we can then evaluate it and do our job. And, right now, it's not a requirement. So we have seen it. Mr. Samuels said that they do some kind of verification. That's fine. Just note what it was. Because we have seen many instances where that's just not noted, and they'll come back and say: Oh, we did this, we did that. But it's very hard to know, for sure, really 103 what was done, and to investigate whether that really was done, when it's not even noted. MR. GNAIZDA: If I might ask a question regarding foreclosures. I'd like to ask it of you, Mr. Michaels. Does the Federal Reserve, or anyone else, have that data by state, and then by companies? Wouldn't that -- and then my second question would be: If you don't have it, wouldn't that be highly useful, given what we've heard today? I'm not sure what you've heard in Chicago, in Boston or North Carolina. MR. MICHAELS: I'm not sure anybody came here today to hear my opinions. MR. GNAIZDA: I'm very curious. MR. MICHAELS: It's my understanding that we do not have any data. But I think it would be helpful. MR. GNAIZDA: Could I ask how helpful? Because I'd like to make a recommendation, if you think it's highly helpful, that we get it. And I would think that among the various regulators, nine of them who are working with you -- including yourself, you had nine major regulators -- you should be able, with your jurisdiction, to be able to get a good cross-section, particularly, if you call upon the leadership, such as the state of Washington and a few other major states. So I'd like to make a request that that, the 104 effort, be made within the next 30 days to gather the information, and, hopefully, we can have a report within six months. MR. MICHAELS: I will tell you the issue came up in some of the other hearings, as well. It's obviously something we're going to consider. MS. WIDENER: Could I comment? I just want to go on record supporting Peggy's comments about documentation. That is about the minimum that we can require with regard to a practice. I mean, the minimum. There has to be evidence that the lender made a judgment that the person could pay back the loan. If they did not make a judgement that the person could pay back the loan, they have violated the law, and I think that should be clear. MR. MICHAELS: Let me, let me take this discussion one different step; and that is: HOEPA now currently says that it's a violation to engage in pattern and practice in asset-based lending, but that applies only for HOEPA loans. What if that prohibition were extended to non-HOEPA loans? I want to consider that question separate from the question we were discussing about what you do in terms of adding documentation and verification practices. Assuming, for a second, that we're not talking about additional verification and documentation 105 requirements, what if we just extended the prohibition on asset-based lending to non-HOEPA loans, as well? The idea is that it's probably no better a practice to engage in that type of activity at interest rates just below the HOEPA trigger on loans that are at the HOEPA triggers, or above the HOEPA triggers. MS. TWOHIG: Would you define what you mean before I answer it? MR. MICHAELS: Yeah. I'm now using that as shorthand for the whole -- the HOEPA prohibition says you don't engage in some pattern or practice in making the loans where you don't consider the consumer's ability to meet the scheduled payments. MR. RANKINS: Since we admittedly admit that we do many 8 percent HOEPA loans, we do use the stated-income program. That's a good product that we've used over the last four years. There are an array of contrators, beauticians, different people will are self-employed that stated-income program mostly applies to. We have never made a loan that we haven't used bank statements or tax returns. Okay? The tax returns -- I think beauticians are the ones. That's a cash cow business. They'll maintain, well, I make $30,000, with respect to the revenue. But then they'll bring me a bank statement with $100,000, because there's some savings account. 106 So we have ways of being able to protect the investment, and that's not looked upon as an asset-based loan. I think that has been the documentation that I've used. To date, I've never used the program, when I had a program implemented, where it was just we wrote a statement. It was some verification of some kind. MR. MICHAELS: I guess -- I take it, then, that the current prohibition doesn't affect your 98 percent. Expanding it isn't going to be a problem for you, either. MR. GNAIZDA: I'd like to make a comment along that line. MR. MICHAELS: Go ahead. MR. GNAIZDA: As you know, we have an underground economy in the Unites States. No one knows the extent of of it. It's estimated to be at least 155 percent. In many minority communities, it's 25 percent. I've been told that, in California, like Calexico, on the border, it's 50 percent. We can't deny people opportunities to get credit because they're participating in the underground economy. And what I think would be interesting is using Mr. Rankins as an example. Because I have a feeling you're doing very good work. You have to get back to what John Bley has talked about, the whole trust relationship. And one of the things I would look at is: What's the percentage of foreclosures? 107 I'm not asking you to give that. MR. RANKINS: I will. MR. GNAIZDA: Okay. MR. RANKINS: I came here to disclose. MR. GNAIZDA: Right. [Laughter.] MR. RANKINS: I most definitely am doing disclosing. MR. GNAIZDA: Okay. MR. RANKINS: From my recollection on the stated loans, and that's what we call them in the industry, the stated loans, to date, the ones that we've made, I can't recall a default. MR. GNAIZDA: Congratulations. MR. RANKINS: I can't recall one default. But I was just telling Dan, a minute ago, why would an investor make a loan that has the inability to repay? We're not in the real estate business. And trust me, whenever even the broker or the correspondent makes a loan and it goes into foreclosure, it all comes back to him. It becomes an issue, all the issues associated with making this loan. You're looked upon making laws, bad laws. It's a domino process. So, we want to be very, very careful of what type of loans we make. MR. SAMUELS: If I can address the foreclosure 108 issue, for a minute, because I think that it's very important. Again, I think that we do not, we shouldn't fall into the trap of saying foreclose equals a predatory loan. In fact, we looked at this. We've looked at this in some parts of the country, in particular, because we were concerned about, you know, some statistics that we saw. And we analyzed every single one of the foreclosures that we did in a particular Zip Code. It was interesting that I think one of the 26 that we looked at was a subprime loan. The others were I think FHA or conventional. But what we saw in each case was a tragedy of some sort: a divorce, a death, a medical, a serious medical problem. Every case was one of those. Our big problem in connection with foreclosures was the fact that the borrower would not call us, or return our calls, or answer the door when we sent people to, you know, to the door. We have a, we have a SWAT Team, a loss mitigation SWAT Team, that we send into areas because we don't want to foreclose on people. That is a bad thing. We lose money, the investor loses money. I see all the lenders, sitting around the table, nodding their heads. And that is the fact. And, so, when we sit and hear: Oh, you are making -- you know, directed at us -- the industry is 109 making predatory loans so that they can foreclose. We're saying: What are they talking about? Because it is a lose-lose situation for all of us. And I will tell you that it's difficult sometimes for us to get people to call us when they are in dire straits. Embarrassment, hoping it'll go away if they don't deal with it. I mean, there are a lot of reasons why people don't address these issues. We have an excellent track record when we are able to sit down with the borrower, who is in default, and work something out with them so that they don't lose their homes. I mean, we have some tremendous statistics in that regard. But I think it's very important that, when we talk about bald foreclosure statistics, we don't say: Ah, there's a lot of foreclosures here. It must mean there's predatory lending. I'm not saying that it doesn't go on. But I have to say that, in our experience, and I would venture to say in the experience of everyone who is sitting at this table, that a foreclosure is a bad thing not just for the borrower, but also for the lender. MR. GNAIZDA: I want to make a comment. I don't think that's the case with many of the lenders. I want to get into the circumstances. I know it is for you, but I want to ask a question that I think is very relevant. You gave me a statistic, basically, only 15 percent of those 110 that were involved in the foreclosure respond to you. And I'd like -- it gets back to Mr. Bley's point about trust and understanding. Mr. Rankins, when you have a problem, what percent of the people you make loans to respond? MR. RANKINS: With respect to foreclosure? MR. GNAIZDA: Not even foreclosure. Just generally problems. Do you find that -- MR. RANKINS: The payments, things of that nature? MR. GNAIZDA: Yeah. MR. RANKINS: I would say that we get a pretty good -- I would have to say, you know, I would probably have to get with one of my branch managers who handles the delinquencies. But delinquencies that we experience is probably that we get a pretty good response. We call and we even go to the home, as Mr. Samuels said. But in our community, we personalize a lot of that. So we get a pretty good response. I would say 90 percent. Very few -- and, if we don't get a response, there is a problem, a death, they're out of town, or something like that. MR. GNAIZDA: I wasn't intending to say anything to be critical because you told me that you're trying to improve your ability to communicate. But what it does indicate is that there is a fundamental problem that we 111 can't get around unless we directly address it, and that is the relationship of the lender to the borrower. Now some lenders take advantage of that, as Dan Mulligan discussed regarding First Alliance, and their predatory practices. But you have Countrywide, which is taking advantage of it in a positive way. MR. MICHAELS: We have several people who still want to -- we want to try and wrap this part of the discussion up in a couple of minutes. So I'm going to call on everybody, with the understanding that we're going to try to keep it short. So, you first, Mr. Courson second. Was there somebody else? MS. GARCIA: Very briefly, I want to say that foreclosure information is very, very helpful and useful for us to see if there is a trend there. Foreclosures don't always equate to predatory lending. But a high percentage of foreclsoures might be some sort of indicia that there is a problem there. I think you heard the gentleman at the end of the table, Mr. Rankins, say that he lets to HOEPA borrowers. HOEPA borrowers don't necessarily equate with poor borrowers. They're performing borrowers. So it is possible to make HOEPA loans and have performing borrowers and do this successfully. It is very interesting that such a large portion 112 of your business is HOEPA, but you have a very low rate of foreclosure. I think that's fascinating. I mean, I think that's something that the industry should study and find out what is it that Mr. Rankins does that other people aren't doing? How can he make HOEPA borrowers successful borrowers? MR. COURSON: I want to quickly address the point. You asked the question about extending the asset-based restrictions, stated-income restrictions, to non-HOEPA loans. And I don't want to, I don't want to let the moment pass saying that I think that is fraught with problems in terms, again, going back to the same type of discussion we had on flipping, of capturing all of the elements that might, in fact, make that a very legitimate, bona fide loan. So, I have to tell you, I was laughing with Sandy coming in today. You are now looking at one of those, as of yesterday. I just bought a condominium, and just bought the company from City Group. And I was told that, well, now, since you're a sole proprietor, we can't trust your income going forward, so you are now a stated income. So, I are one. [Laughter.] I think there are circumstances and it just goes to point out that, when you drop that back into the total 113 population of mortgage loans, there are going to be undetermined circumstances that we really need to be involved in and aware of. MR. SAMUELS: I gave him my card, though. I won't give him disclosure. [Laughter.] MR. COURSON: So did Mr. Rankins. MR. RANKINS: I are too. I have a mortgage, too. It's stated. MR. MICHAELS: Was there one more. MR. SANDS: Yes. Just one other thing. I think it's really critical and just want to reiterate the point that Sandy made, and some other people made. It is critical that underwriting standards be kept flexible. You know, every client I know that I have does some sort of income verification review. Can the person repay that loan? But the loan is based on character, collateral and credit. And, so, it's disingenuous for anybody to say that don't look at collateral. They absolutely look at collateral. And, you know, I don't want anybody to think that's not the case, but just make sure it's kept as flexible as possible. Secondly, the big problem, and we are on the other side of some cases, as is -- the same side as Mr. Mulligan on some cases involving a company he mentioned. 114 These are sales tax issues. Every single one was a sales tax problem. They were misleading, fraudulent sales taxes. So I'm not quite sure, by anything we discussed today, that, unfortunately, would address that. Thirdly, I do want to reiterate this point: I really hope the Board puts, in some way, that allows a creditor to correct Section 32 problems. MS. WIDENER: I'll be very brief. On the point of the cash economy, let me just suggest that, as a direction, we work very hard to push borrowers to document their income. That the value of forcing them to do that so that they create the type records, that they need to be solid borrowers in the future, is very, very important. Not only in terms of fairness to the country and them paying their taxes, but in fairness to themselves and getting brought under the Social Security System, for their own future. So I just think that everything that we can do to push people in the right direction to have a sounder society is what we should do. MR. MICHAELS: Thank you. We have two or three topics we still want to cover, and we have about an hour left. So, with that understanding, we can cover them in 20, 30 minutes, we'll try. The next issue we're going to bring up may engender a much longer debate, so that's why I'm telling you. 115 It's the issue of credit insurance. We touched on it a little earlier in the limited context of whether or not the premiums for credit insurance should be put into the HOEPA points and fees trigger. I'd like to broaden the discussion as to talk about credit insurance. We have heard a number of recommendations during both in the HUD-Treasury Report and the hearings we've held. The clearest of these has been the suggestion that we just, that HOEPA just ban or forgive the sale of credit insurance in connection with HOEPA loans. The other suggestion is that we prohibit the sale of credit insurance at that time and allow the sale to be delayed to post closing. MR. SAMUELS: Can I ask are you just talking about single premium? MR. MICHAELS: Single premium. MR. SAMUELS: Single premium, right. MR. MICHAELS: Single-premium credit life for those who are -- it's the practice of a selling credit insurance policy with a premium for the entire term of the policy, which is due and payable at that time of purchase; but, then, the entire cost is put into the loan amount and financed. So the consumer is, in fact, paying the credit insurance every month as part of their loan payment. The alternative to that is to have a policy where you pay the 116 premium monthly for as long as the insurance lasts. The practical difference is, if it's a -- let's say it's a 15- or a 20-year loan, the credit insurance policy may only last 5 years. So it's a difference about whether you pay the premiums divided up over 5 years, as you pay monthly; or whether you pay it up front and finance it and pay a little bit over the entire life of the loan, which is 15 or 20 years, which reduces the amount of the monthly payment for the credit insurance, but then you do also have to pay the interest on the amount you borrowed up front. So it's a complex issue. We've heard these suggestions. What we're looking for is whether there are other suggestions that might also work. One of the things that had occurred to us is that, under HOEPA, you get a disclosure three days before loan closing. That disclosure has in it the amount of your monthly payments. If you have not purchased credit insurance at that time, that monthly payment should only be the amount of the loan, the amount that repays the loan principal and interest. If you go to closing, and then you purchase credit insurance, and you finance it with this lump-sum premium, your monthly payment is going to up and there should be, at that point, a redisclosure under HOEPA of what the new monthly payment is going to be, and an additional 3-day waiting period before closing. 117 That's the way we believe our current rules work. The question is whether or not there needs to be a better disclosure at closing in situations where the insurance may be part of the transaction prior to closing, or whether there needs to be better disclosures at closing, or whether there needs to be better disclosures after closing. After closing, the issue is, and I use the phrase, "packing," where the loans automatically include insurance. The consumer is told very little, if anything, at the closing. Is given a stack of documents where insurance is clearly in there, but the consumer never has a chance to focus on it. And, then, the question would be: What additional disclosure, after the closing, might help the consumer focus on that insurance purchase, and whether or not the consumer might have some right at that time to cancel the insurance and get a rebate of the premium? That's a lot. I know I've rambled on a bit. Those are some of the things we've talked about at our other hearings, so I want to open it up for discussion as to what we should do under HOEPA about credit insurance. MR. SANDS: I can't say I know a heck of a lot about credit insurance, but I do have a couple of points to offer. 118 You know, obviously, the one issue is disclosure. I think everybody at this table, and probably everybody in the room, is aware that adding a disclosure is always of questionable substantive value to anybody. I mean, it would be nice to have a disclosure which says: Here's your loan, with credit insurance; here's your loan without it. Here's the differences. Please review and initial it. If you really want it, that's fine. And, in a perfect world, that'd be great. I'm not sure if that's, if that really is going to work. I guess what I mean, what one of my clients actually suggested, and I might have mentioned earlier, and I think it is a good idea, is to simply say: If you want to offer single-premium insurance, you have to get counseling. You have to have somebody else, go outside, get somebody else to look at it, and get somebody else to sign off on it; and, then, come back, away from the lender, away from any affiliates of the lender, and, if you still want it, you can have it at that point. MR. MICHAELS: Peggy. MS. TWOHIG: At the risk of being slightly repetitive, as I said in my opening remarks, the Commission's position on this is clear. The Commission believes that, given the abuses it's seen in the sale of credit insurance packing, there should be a prohibition on 119 the financing of single-premium credit insurance. And, by the way, it's not just credit insurance. There is also insurance that's sold with the loans that's not related to credit at all. It's just extra insurance. We've seen auto club memberships. We've seen other membership type things sold. We've seen auto club memberships sold to people who don't even have cars. There's all kinds of extra products that are sold with the loan. So I just want to make sure that that's understood. But even with that ban, the Commission's statement also says that, for any sale of credit insurance that's on a monthly basis, we think that there should be a further requirement that the Board should require that each billing statement disclose the cost of the monthly credit insurance, and that the insurance is optional and can be canceled at any time. If a prohibition is not mandated, of the type that I've just talked about, then, as a second alternative, Plan B, the Commission suggests that the transaction should be -- the credit insurance sale should be separated or unpacked as much as possible from the sale of the credit. I believe that consumers are vulnerable to the packing of credit insurance, and other extras, at any time before the loan is closed, and even before they get the money, because they just are too susceptible to 120 thinking that they have to buy it, to go through with it. It's a highly unequal bargaining position. It's very complex. There's high pressure. We've seen either -- and with little opportunity to read a huge stack of documents, and it's very -- it's so rife with overreaching that we think that very strong remedies are warranted. MR. MICHAELS: Do you address -- could you address the issue of pressure and sales tactics by sending the consumer a separate letter after the closing saying: By the way, you've purchased credit insurance. This is how much you purchased, this is how much you pay for it every month as a result. And, if you want to cancel it, here's you call. This is how much we're going to have to pay you back. MS. TWOHIG: My own view is that that is way too little, too late. There really needs to be stronger remedies that address the problem up front. MS. WIDENER: I'd like to say that, until you get stronger remedies, do the letter and making it crystal clear what they can get back and how. MS. GARCIA: I agree with Ms. Twohig that providing the consumer disclosure after the fact is of little value to the consumer. In fact, what we need to do is to prevent the abuses on the front end, because many consumers don't even realize they've been taken advantage 121 of. So they may have legitimate claims, or legitimate reasons to get out of that credit insurance; but you're asking them to proactively respond to an abuse in the first place. And that's not fair to the consumer. MR. MICHAELS: If the Board is not going to consider banning, I would agree with Mr. Sands and Mr. Bley and join them together. The only way to stop the practice and avoid the sales pressure tactics is take the profit out of it. So if there aren't any better penalties than you have to refund the premium, there's no reason to do it. MR. RANKINS: I used to sell credit life insurance; but, for the past four years, I have not sold the product. We don't sell it, and you don't want to sell it after the loan has closed. We advise the client that this is not a good product, this is not in their best interest, and that's what we do. That's a dichotomy because I've lost 2 or 3 loans from clients who wanted credit life insurance because their daddy had credit life, their grandfathrer had credit life. So that's the thing that I have to combat. I also, with my colleagues, they may not charge the points to be charged, and they may use the credit-life portion of the business as a means of income. So, I support my colleagues that can sell the product. I don't 122 sell it because I don't think it's a good product. I think that, in my opinion, there should be -- that is one thing I will say, that I think the Board should put in the fees: It should be disclosed within the fees. That's a corporate decision we made. We don't sell it and probably never will. MR. BLEY: Jim, I think this gets to the issue of improving disclosures. So, in my comments, that's one of the topics. But, in my comments, I said that we need to simplify disclosures. Referring to my prepared remarks, Exhibit B, we take a stab at rewriting Truth In Lending, and try to make a one-page disclosure out of it. If you notice that it gets rid of the concept of APR. Also, I'll refer you to the cover of that, which suggests that the 20-minute video be created, possibly using a sports star to help educate consumers on what an equity transaction is, which would become part of the disclosure early on in the transaction. It would be a bulky thing with the video in there, so it would be difficult for somebody to just throw it away as junk mail. But within that, on one of the -- there's two alternatives. We couldn't agree in the Department, so we put both of them in there. But, in one of the alternatives, there is a small paragraph in here that says who gets the money, break it down where the money goes. I 123 guess it might remind you of the movie that was out a year ago, or so: Show me the money, but who gets the money. And that may be a simple way at least to show that a certain amount -- especially when that single premium is financed, a certain chunk of that loan is going to go for credit life purposes or disability, whatever. MR. MICHAELS: Well, one of the ideas we talked in our other hearings was that, no matter when the insurance is sold, you're going to have to have a disclosure under HOEPA that's three days before closing. If it's a lump-sum premium that's been financed, your monthly payment is going to show, including not just the required amount to repay the loan and the interest, but any amounts for, whether it's auto club, or credit insurance, or any other products or services that were added in. So what we talked about is: Should the HOEPA disclosure be broken down into the monthly payment to pay this loan, and the portion of the monthly payment -- they could list anything that's optional, and the consumer knows right there that, maybe they don't want to pay that portion of the monthly payment. Maybe that's the part that there not interested in. Would that help? You know, you can do that without complicating the whole the insurance thing. 124 MR. BLEY: Well, we're suggesting that you try to get it down to one disclosure. I'm not so sure, on the margin, the value of that. I understand that reasonable minds may differ. MR. SAMUELS: I'm going to be speaking theoretically, because don't offer it either. But there are a lot of issues involved with the single premium. When the loan is canceled, how much money gets refunded? Do they use actuarial methods? You know, things like that, those are big issues. I know I'm talking to a lot of my colleagues, who are representing consumer groups, that those are very big issues. We all know about the packing and not disclosing that the loan amount does have that hanging in there. That's a despicable practice. I think we come back down to the issue of whether this is a product that is neutral on its face, but horrible in its implementation. Or is it a horrible product, you know, and should be banned from the face of the earth? I had a discussion with a fellow who is working in our subprime group, and, in a prior life, a company that he worked for, he told me exactly the same story that Mr. Rankins mentioned, but it wasn't two or three. It was a vast majority of people who he dealt with who said: I want single-premium credit life insurance. And he would 125 try to talk them out of it, and they would say: No, this is what I want, because I can't get any other insurance, for whatever reason. And this is an easy way for them to get it. So, I would say, done properly, I guess there are situations in which it is a benefit to the consumer. Perhaps there's so many incidents of abuse that, you know, maybe we do want to throw the baby out with the bath water in this kind of a situation. But it's not, I think, as cut and dry. There are people who feel that that this is a benefit to them. But, again, you know, we, like Mr. Rankins' company, made the decision of not to offer it. MS. TWOHIG: I just want to make sure there's no misunderstanding. We are not talking about prohibiting the product. We're talking about prohibiting the financing of single-premium insurance. MR. MICHAELS: Right. MS. TWOHIG: So, in the instance you're talking about, yes, definitely; that consumer could be sold the insurance on a monthly basis, with full disclosure every month of how much is for credit insurance; if optional, can be canceled. That would be no problem. MR. SAMUELS: But they might want to finance it, and they might want to finance. And I would say that I can envision a situation where, if they canceled the loan, 126 they get, you know, the appropriate amount of money back, and that, you know -- so that they made a decision, an informed decision. Okay? MS. TWOHIG: My response to that would be: fine. If they say, I don't want to pay so much every month. I really want to pay for it all at once, and I want to pay interest on it, and I want you to charge me points on that. That's fine. They can do that as long as it is well after the closing of the loan, perhaps after the three-day decision period, where they actually have their funds in hand. For those who don't want it, and who are subject to coercision, then you can, if that's really what consumers want. MR. MICHAELS: It seems that we've already sort of sequed into the disclosure issue, so I'm going to take us there intentionally. We've asked for comment in our published notice on the number of disclosures issues, including credit insurance. Also asked about official disclosures, the nature of referrals of consumers to counseling for HOEPA loans, who discloses balloon payments, improving the HOEPA disclosures themselves that are given three days before the loan closing, improved disclosures dealing with foreclosure situations. Let me start this out, because we opened up -- 127 in the opening statements, I think Mr. Bley and Mr. Courson, both, raised this issue of simplifying disclosures. And this issue keeps coming up. I was part of the team of folks who were involved in the Mortgage Reform Process that went on for several years, and the Board -- there is obviously a lengthy report on where our view are on reforming Truth In Lending disclosures generally. The thing about HOEPA is that the HOEPA disclosures themselves come three days before closing. In my view, they're relatively simple disclosures. The complexity comes from the disclosures at closure. The question is, that I would ask first of all: What can we do -- we have to report on things we can do to simplify the lending disclosures at closing -- what can we do to improve disclosures for HOEPA borrowers, particularly to HOEPA disclosures? The idea behind those disclosures is you get them at a time when you're not in the closing table, you're not in a pressured environment, you still have some time to think about, for the next three days before closing at least, if not more, and during the rescission period, about whether this is the transaction that makes sense for you. What can we do to make that HOEPA disclosure more effective? And is it really too complex now? 128 So I just want to open up with that. MR. COURSON: Since my name was mentioned, I'll respond. I think that the issue with the disclosure is that it's not early enough. The whole -- I'm going to go outside of HOEPA, because HOEPA is a piece of this -- but the entire disclosure scheme is fair today. Good-faith estimates, Truth In Lending, APR, and so on, is not, is not consumer friendly. So, even though you may have another opportunity on a HOEPA loan, three days before funding, to take another look, I'm going to suggest to you that much earlier in the process we need to streamline these disclosures down to a one-page, and tell the consumer what they want to know in simple terms so they can have the opportunity to shop. You can't shop APR. You may think you can, but I'm going to guarantee you that no consumer -- if somebody came into our office as a consumer and said, What's your APR?, we would think they're either an auditor, a regulator, but they aren't a consumer. And, people, that's not the comparison. It's what's my loan amount? How much cash do I have to bring to closing? What's my interest rate and what's my payment? So I think it's starts much earlier to give someone the opportunity to shop. Then, when you come down 129 to the HOEPA, the simplification, if they've got that very simple, one-page disclosure, looking at the transaction, again, it really becomes much more relevant. Because they're lost in the morass. They're already there. They're already with the predator, and they are in their clutches, and they're not going to -- that disclosure and the question of how many people see that and truly say, oh, I better go call another lender, has to be a very small number of those loans. So I think you've got to capture the disclosure much earlier in the process, at the time of the initial contact. MR. MICHAELS: Anyone else? (No response.) Let's talk about -- we did talk about the credit insurance. Before we leave the HOEPA disclosures, one of the other things we talked about is what the consumer gets on a HOEPA disclosure, which is APR and a monthly payment, and some general friendly advice about you could lose your home if you don't repay this loan. But in terms of specifics, one of the things they don't know from that disclosure is how they're going to be borrowing. There's a monthly payment there, but they don't know what the loan amount is that leads to that monthly payment. My understanding is that, given the amount of fees that might 130 be financed, they may be surprised to learn how they got to that montly payment. If they knew part of that might be optional because it includes credit insurance, they might be surprised to learn they could lower their monthly payment. Just the loan amount itself might give people pause as to whether this was a transaction they really wanted to enter into. Would that additional information help consumers before closing? MR. BLEY: I think, Jim, I think that's very consistent with what our staff has found. We have two problems with HOEPA disclosure. I kind of have to chuckle with this. It's content and timing. What else is left? [Laughter.] We've identified five terms, five key terms the borrower's decisions are based on: Loan amount, loan type, note rate, all costs, and actual payment of them. But nowhere does the regulation require these variables to be disclosed. In terms of timing, the problems we've had in the examination side is that the following terms are nowhere to be found: make, provide, deliver, place, furnish, application and consummation. And, do, we're constantly embattled about the interpretation of those provisions. And I think, in some cases, we've been 131 forced to provide some more clarification on that state law. We cite one single sentence in 226.19 (a)(1) with the following undefined terms are used: make, consummation, deliver, place and application. So, to the extent that it's deemed the disclosures should be made, I think you may want to look at clarifying, adding some of the key variables that borrowers want to know, and not just wrapped up into an APR. Also the terms I talked about in terms of timing, when is something actually delivered. Is it dropped in the mail? Is that delivered? Or is it actually received? Constant debates about that. GOVERNOR GRAMLICH: We think that the HOEPA disclosure needs to be concise, but complete; simple and thought provoking. We looked at the draft that you have suggested and came up with an idea that actually combines some of our own ideas, and came up with a proposal for HOEPA disclosures. It's on page 11 of my testimony. What we're saying to the consumer here is they're getting an important notice about fees and interest rates. "You are receiving this special notice because the fees or interest rate this lender wants to charge you are much higher than normal. They are so high that they greatly increase the risk 132 that you will end up losing your home. You could lose your home if you take this loan and can't afford the payment. You are borrowing X-number of dollars. Your loan requires you to pay X-amount of dollars per month. Your incomes is X-number of dollars per month. Before you sign this contract, you should look for a cheaper source of credit. There may be other creditors that offer other choices. You have the right not to go through with this loan, even though you signed a loan application or received this notice. Call this toll-free number: 1-800- etc. Housing counselors can help for free." We think it's concise, complete, to the point, and simple. We offer that for your consideration. MR. MICHAELS: You raised a point there that I raised earlier, which is: Do consumers need to have, particularly HOEPA borrowers, better information about the availability of counseling and where it is available? The issues of how to make counseling available, those are topics we can talk about this afternoon, because that's what we scheduled the time for. But in terms of would it be effective to include counseling as part of the disclosure? 133 GOVERNOR GRAMLICH: In out experiences with consumers, who have reported cases of predatory lending, overwhelmingly they have said: If we had known that this is what we were getting into, we would have looked elsewhere. In our consumer education campaign that we had here in the Bay Area, the five Bay Area counties, one of the things we did was we told consumers about alternatives for borrowing. For example: If someone was interested in borrowing money because they needed to make their home wheelchair accessible, we let them know about programs available in their city or county that provided low-cost funds in the form of a loan, or in some cases grants, in order to make those improvements. This very same person could have gone to a lender to try and get money for this purpose when, in fact, they may have qualified for lower-coast credit through one of these alternatives. This is the kind of information that an objective, qualified counselor can provide to a consumer before the fact. And this is information that's extremely valuable. In addition, if a consumer decides that they want to go through with the loan that is expensive, they still have that option, but at least you know you have an informed borrower. And in my discussions with lenders, they always say that informed borrowers are better 134 borrowers. MR. RANKINS: I think that we have to be very careful. The client that walks in my office, the typical client, for instance, this 3-day rescission, the average client wants to know why he can't get his money right then. Then, we proceed to explain that, under HOEPA federal regulations, they can't. It's for their own protection. Well, a lot of them leave the office mad. I think if we look at the possibility of trying to put additional counseling and say you have to go in and receive counseling prior to closing, we're going to have some problems with some of those clients. Yes, I think that some of that is good. But I am responding now to what the clients say to us. The rescission, I'll tell you, that's a nightmare to the clients. They want their money right then. But I do agree that I think the rescission period is good. Because we've had some at midnight that decided they didn't want to do that. I think we need to be very careful about that. MR. MICHAELS: I was trying to be careful that, too, I just thing that mandatory counseling -- I mean, manadatory notice, that counseling services exist and here's how you find one, and here's what they might be able to do for you, but it's up to you. You know, either 135 way are approaches we've heard discussed. MR. RANKINS: Who is going to pay for this? [Laughter.] MR. SAMUELS: I'm glad you raised that. Because we are -- I second Mr. Rankins' comments. And I want to talk about two things: (1) is we very much favor good disclosures, making available notices and just making accessible counseling, legal services. You know, those kinds of services to people are very, very important. On a mandatory basis, we've had exactly the same experience that Mr. Rankins has talked about. I'm going to take that one step further and talk about this three days. You have to furnish to the consumer these disclosures three days before the closing. And if something changes, even at the request of the consumer, you have to say: No, I'm sorry. We can't close on that day. It's going to take another three days. I'm too much of a gentleman to repeat some of the things that have been said to us, or to our branch people, to give a response to that; but I think that, again, seeing a lot of the lenders around the table nodding their heads yes, it's a real problem. It's a real problem because people need the money right now, for various purposes. And having to say to them we have to extend this period for three days, and 136 we don't have any choice. Because, again, the zero tolerance for making a mistake, and making a misstatement. And we would even be liable if we can't prove that we didn't, that we didn't furnish it three days ahead of time. Even if the disclosure was absolutely accurate, we're still liable, see. And, again, this is part of the regulatory burden that we've been talking about in connection with HOEPA. So that's another issue that is -- it's good to talk about theoretically from a regulatory standpoint; it's far different when you have to sit across the table from a borrower who is expecting certain things and you can't meet those expectations because of regulatory burdens. MS. BOSE: In the few HOEPA loans I've done, my experience has been that they want their money right now. That's the nature of the beast, and that disclosure is a problem. We had to do that twice on one of three that I did. It was very tough. What I want to talk about, very briefly, was the importance of consumer education. I think we all agree that it's important, but -- one of the things that I do with my customers, because I'm a broker and there's so many option, is I spend quite a bit of time educating them as to their options. And I do it because it empowers them to make a decision, and it also enables them to see if I'm 137 giving them a good deal or not. So that's what I do. I'm not saying other people do it, but I know that I do a good job. I want them to understand I do a good job. I want them to come back. I work strictly on referral. But it seems to me that consumer education would go a long way to empowering these people to protect themselves. And it seems like the consumer organizations sitting at this table would be the ones to provide that counseling to people, if they wanted it, at an affordable rate. But I just think, of the three things that I said at the very beginning, which was increased enforcement, industry self-regulation, and consumer education, it's a very, very important part of consumers protecting themselves, and empowering them to feel they're in control of the transactions. MR. MULLIGAN: Basically, just to give you our experience with counseling, along with Consumers Union and VOSP, we worked for about five years on programs, especially for seniors and minorities in San Francisco, even to the point of providing some seed funds to set up 800 numbers. You could call in and get a lawyer for free to review their loan documents, Saturdays, at various senior centers, Norma, and so on, all free. And the response rates averaged less than two calls a month. It 138 just was not something that was effective. I'm not really found of mandatory counseling. I don't think that works very well, either. I don't have a real solution to that problem because that's there with the voluntary program that we set up, or help set up, rather. It was fully funded, but was totaly ineffective. MR. MICHAELS: Why was that? MR. MULLIGAN: People would not call in. They would not -- MR. MICHAELS: Because it wasn't well known? Because it was -- MR. MULLIGAN: I'll tell you. They advertised it in Norma's group, VOSP. They went out to the churches, they went to the senior centers. They went to the neighborhoods, they went to the brokers. Put out flyers. And short of doing TV ads, which gets a little expensive, and we did radio ads. I don't know how you could have advertised it any better. And it was, as I said, totally free under the Bar Associations program. I guess what we come back to is Ms. Bose said today: The only way to really handle the really nasty players to to increase the enforcement. We do this day in and day out, receive letters every day at the door. I've never seen state funding. I've never seen Rankins. I haven't seen Countrywide in five years. But you do see 139 the same players over and over. As Mr. Bley said, if the result of an action, whether it's by the FTC or private action, is: Gee, you have to pay back fifty cents on every dollar that you stole, and that's the result, you'd be have to be pretty stupid not to go into that business. MR. COURSON: Two points: We see borrowers coming into our offices, consumers, and there are certain loan programs that we participate in that do require counseling. And when told that, for that particular, to be eligible for that particular loan product, which they want, that they have to have the counseling. They really resent it. I don't have the time. I don't want it. I don't need it, and I trust you. You can tell me everything you want. Now that's the sheep and lion in some cases, also. But I think it's a recognition from the consumers that the reality that they don't necessarily perceive that they need that, that they're looking at the lender. We have -- part of our comprehensive reform effort that we're working on and we've had discussions, both with The Fed and with HUD, we believe that there needs to be a very, plain-English, simple mortgage information book that is given to every consumer at the first contact with any settlement service provider, any settlement service provider. It can be written in simple 140 language. It can clearly have information in there characterizing flipping, characterizing packing, talking about voluntary counseling, and so on, that's very plain English, that's give to that consumer right up front. Now, granted -- back to the example -- if they choose to utilize it, at least they have it. Now they're getting it in bits and pieces. It's only as good as the settlement service provider they're talking to, but at least they won't have one, well-thought-out, cooperative effort coming from the regulators that they have, that gives them the information. MS. WIDENER: I'd like to support that final, that comment, to put together something that everyone gets. It's, again, reinforcing the issue of definition and educating people as broadly as you can in every settlement situation, every single one. With regard to counseling, I don't know how you make it mandatory and have it mean what you want it to mean. But I feel the value of it is very clear. Counseling is valuable. And in the NeighborWorks Network, we require it. The consumers don't always want it, but it makes them better borrowers if they are made to understand what it means to own and care for a home and the type expenditures beyond the loan and repair and maintenance of the home, that they will have to be prepared to meet. 141 Good counseling includes budget counseling, so they are forced to look at their own income and expenses. Sometimes, they like to bury their heads in the sand, as well, and just let me get this loan and somehow I'll make it work. Well, if you can't make it work on paper, it's very hard to make it work otherwise. So I think counseling has a real value. I would encourage that you encourage it. Through incentives, encourage lenders to use it. I don't know how you regulate it. I don't know how you make it law. MS. DELGADO: I'm in favor of counseling, and I'm also in favor of writing simple disclosures that get to the point and that are better written in English. But I actually have another question, and I don't know exactly where to stick it in. And that has to do with at what point do we, or should we -- we think we should -- be treating second mortgages and junior liens differently than we do for a senior. We don't know why HOEPA doesn't have different triggers for a junior lien loan and senor lien loan. They carry with them very, very different risks. The cost of underwriting are relatively the same, but the loans carry with them a very, very different risk, and they're priced very differently than market rates. So by comparing, by treating all high-cost loans as subprime is just not 142 accurate, and you're lumping in second mortgages in there. We think that there should be different disclosure requirements, different triggers, that actually explain the differences between the products and the lien positions. MS. TWOHIG: On the HOEPA disclosure, generally, and also where counseling gets into that, I'd guess I'd just like to make a few points. One, I think it's important to keep the disclosure as simple as possible. Going back to something you asked awhile ago, though, Jim, I think it would be worthwhile to add a requirement that it be disclosed how much the borrower is borrowing. Because, often, that is confusing and the borrower just simply doesn't know. That's particularly true with the huge points and fees that are added in some of these loans. I think the Commission's statement also recommends that the Board consider something if prepayment penalties are allowed, that there be a disclosure about prepayment penalties. Because, also, that could be a surprise because they are allowable in HOEPA loans under certain conditions. In terms of counseling, I think, I guess, I have my doubts about whether a disclosure that counseling is encouraged would do much good. But I think it might do 143 some good in some instances; and, so, I think it might be worth adding that sentence. You know, in addition to you could lose your home, we encourage you to seek counseling. I think if the consumer does find counseling, then another issue is whether there is such counselors are available out there. But I think it might help capture the front end, which is extremely important to catch some of the deceptive practices we see going on out there. Things where they're being sold alone, that's adjustable rate, and comparing it to a current fixed rate. Things like where they're being compared, a non-escrow loan to an escrow loan monthly payment. Things where they're being told that they will save money when, in fact, they might lower their monthly payments; but, over the long term, they are not saving money. So it could be that the answer would spot those sort of misrepresentations, or misunderstandings they might have at the front end. That's why I think it would be helpful. I do think it's an important part of the solution to these problems. MR. MICHAELS: I wanted to cover, quickly, one more disclosure, then I want to talk about enforcement a little bit. That has come up several times. One of the other areas where we question whether there could be additional, better disclosures is the area 144 of foreclosure. Where consumers have HOEPA loans and there are actually HOEPA violations, consumers need to know that they're being foreclosed on and that they may have a defense. We understand that state law and local practices generally govern foreclosure process procedures that are followed. Most states require actual notive to the consumer before initiating a foreclosure. We also understand that there are some cases in some states where the consumer does not get actual notice that a foreclosure is being initiated. It's done by publication. And even when consumers do get notice, they may not get the right information in that foreclosure notice about what their legal options are at that point. So we've asked for comment on whether or not the Board should consider adopting some sort of minimum federal standards for actual notice to consumers before foreclosure in HOEPA cases, so that consumers, who have been treated unfairly or are subject to predatory practices, do have the opportunity to raise any defenses they have on seeking advice of counsel. And I'll open that discussion now. Do we have any comments? MR. SANDS: I'm just sort of confused about the notice. Because, in most states, I mean it's probably 145 governed by every state, the HOEPA foreclosure process, and even the substance of the notice. So how is it that you promulgate by regulation? I mean, you're looking to preempt state law. I'm not even sure how you could do that. MR. MICHAELS: Well, we can do that. No, the question is -- we're aware that -- [Laughter.] MR. SANDS: No, but on the other side, you have to figure how does it work with the state notice, and what is conflicting with the state notice. How does it work with the timing? I mean -- MR. MICHAELS: Those are all key issues. I think we started out with the question of whether or not it makes sense -- most states do have a foreclosure process where there is notice to the consumer. It just seems that in those few states where the consumer is not getting actual notice that there should be some basic level of minimum standards where we'd say: Look! These are HOEPA loans. You have to at least give the consumer, you know, at least attempt to notice them that you are actually foreclosing on them. If the state has a process that works and it's in place, that's fine. The next question would be whether or not, even in states that already have that process of 146 actually notice. whether or not there's some minimum standard that's not being met in terms of, you know, if you do have a right to redeem the property, if you do have a right to cure the deficiency, does that notice clearly state that and tell you what your deadline is for doing so. I presume in a lot of states that is true: when you have those rights, you're told that. But if you're not, the question is: Should you be? MR. SANDS: I guess, theoretically, it sounds great, but obviously the issue is another notice. And it really, in my practice, you know, typically we see loans when they're problems on the front end we're trying to fix. Not so much at the foreclosure time. But if we're dealing with foreclosure issues, I don't think that that would have made a heck of a lot of difference. Probably, I'd just turn it over to the consumer representatives and ask them whether it makes a difference. I just don't see that it would make a difference in the type of -- in the phone calls I've been through, the transactions I've been through, that it wouldn't have made a difference one way or the other. MS. WIDENER: I'd certainly like to encourage you to, in whatever way you can, pull off the establishment of a minimum standard. In addition, I think the foreclosure -- and I may not be understanding you; but 147 I'am assuming that you're saying that you would require a foreclosure notice to the borrower in a timely fashion that covered basic information that's considered to -- MR. MICHAELS: Right. MS. WIDENER: Okay. And in addition to all of that, I think the foreclosure notices should have to go to second, to other main holders. There are, for example, deed restrictions on property when borrowers have been recipients of nonprofit and local government benefit programs. And at present, not every state has to notify those lien holders. And if, for example, the NeighborWorks Network is one of those that has a great deal of those, and, when the states don't have to -- when the lender does not have to notify us, it's too late. The property has been sold, foreclosed on, it's gone, and these lien holders are wiped out. Whereas, if there were notification and we knew the property was in trouble, it would give us an opportunity to go in and help the borrower. MR. MICHAELS: I want to ask you about that. That's interesting that you bring that up. Because the question is: Is that lien holder receiving less notice than the consumer? Or is the same problem and neither one of you is receiving notice? MS. WIDENER: I don't know what the consumer 148 necessarily got. We don't always know. Sometimes, we can't get the consumer to talk with us partly because they're so embarrassed that this really happened. So I -- but we get nothing in some of these cases. In a recent case that I've tried to pursue in Texas, we were told unequivocally by the lender the law did not require them to notify us, and they refused to give us any information. MR. MICHAELS: Mr. Bley. MR. BLEY: Of course, we are much more interested, in the state of Washington, in dealing with the issue of predatory practices, rather than imposing additional requirements on those who may have HOEPA loans. But in that context, what I understand is that a borrower in the foreclosure process, may not even be foreclosure process, but if they can show deception or abuse at origination, there's a right of rescission in the three years. In the real world, predatory lenders are going to conduct their practices for about a year or a year and a half before the regulators even get an idea that there might be a problem. It just takes that long to go through the examination process. And then it takes, at a minimum, another half-year, or a year at the minimum, to build the case, another two-and-a-half years. Then, we're just 149 starting the administrative procedure action. So these cases are difficult, they're confrontational, they're complex. What's very frustrating for us is that we can get through to the process of finally being able to prove the case from the three-year right of rescission. So we would strongly advocate an extension of that three-year right of rescission. And, incidentally, I would suggest -- I think it was Robert who brought up the issue of imposing some discipline on the securities markets that are buying these securitized loans. I think that would be some self-regulation effect if that rescission period was long enough that it made a difference in their decision to buy those loans. If there was exposure on predatory loans that those loans, those loans could be rescinded. MS. DELGADO: Mr. Bley, the secondary markets do pay attention to them. I just thought you would want to know that there's a list of things that they have to comply with, and one of them is a rescission period. MR. BLEY: And I'm suggesting to you that, from a practical standpoint, three years is not long enough because of the difficulty it is to put these cases together. MS. DELGADO: Right. And it may not. MS. WIDENER: I agree. Three years is not long 150 enough. MR. RANKINS: Let me make another comment here. Once again, in my opening statement, if we go beyond that three years, we're going to have a problem with investors staying in this subprime market. That three-year rescission period is part of the reason a lot of people have exited from this market. It's going to have an adverse effect upon the consumer. Three years is a lifetime in this industry. I would not like to see it expanded at all. I think we've got to be very careful. There are a lot of good things we can do, but we've got to be very careful what we impose on investors and lenders. Because, if they exit the market, there's going to be only a few of us that remain in the market. Now, those things that we impose on those consumers, some of those things I can control, some of those things I can't. If I offer 9.5 interest rates because I am of investors, and those investors exit, and I have to start offering 12.5, that's adverse to the consumer. So we've got to be careful on expanding the three-year rescissions, and things of that nature. MR. COURSON: We, going back to the foreclosure issue, we have -- it was discussed as part of the mortgage reform and with consumers groups, and we have, in our package, our comprehensive reform package that we're 151 preparing to come forward with, a provision in there that talks about -- the concern in many cases of foreclosure is the loss of equity, where we have substantial equity and the lender is coming in, the creditor comes in and tries to grab that equity. So we have a provision that says that, if, in fact, a loan-to-value is less than 80 percent where there is some substantive equity in the property to the consumer, that they would be given, there would be, in this federal statute, a notice given at the time of the default, saying your loan is in default. We're proceeding with foreclosure. You have the opportunity to sell your home, dispose of your home, to satisfy your debt, and given some specific period of time to do that, no longer continuing on with the foreclosure process. Obviously, moving forward through the foreclosure process, but noticing and giving the borrower an opportunity to protect that equity. MR. MICHAELS: All right. I'd like to spend the rest of the time we have this morning talking about enforcement. The subject comes up over and over again about improving enforcement. Because, really, the question is how? What specifically can be done? And more particularly, what specifically can the Federal Reserve Board do to enhance or improve enforcement efforts? MS. BOSE: All I can tell you is that the 152 enforcement is so inadequate that there's not even the ability to audit what's going on, on a day-to-day basis. That's why I said in the very beginning I don't see how we can impose more stringent laws until we're able to at least have an adequate enforcement procedure. But one of the things that I wanted to emphasize was that, when I said industry self-regulation, I was talking specifically about our best business practices initiative that NBA and NAMB have been working on, which I think will quite interesting and very effective. Part of it involves the proposed registration of all originators to isolate the problem of originators. So that all originators, everyone who originates loans, will be registered. If there are problems associated with those loans, they will be able to create a history. And we will be able to identify those and do something about it. But, right now, we can't even identify them. They just move from company to company. And I think it is in the origination, a great deal of the problems are at the origination table. The other comment I wanted to make is the plethora of disclosure forces us, as originators, to interpret them. People say: I don't understand these. Would you tell me what they mean? I've got 20 pieces of paper here and I have to explain it to them because they 153 can't even begin to shuffle through it all. So you're imposing on originators certain responsibilities that they shouldn't have, and opening opportunities to misrepresent those things. Thank you very much. MR. BLEY: I've been talking about this all morning, so I don't want to repeat myself. But, again, I'd refer you to our comment to the ANPR of the OTS. I would be very concerned, so far, in the area of the OTS, the Office of Thrift Supervision and the Office of the Comptroller of the Currency, who have been very aggressive in interpreting federal laws that preempt the states. Whether I'm going to get into public policy next, I won't. But, for now, most of those preemptions have been in the area of eliminating terms. I very much hope that federal agencies will not get into the area of preempting states' ability to enforce the manner in which these loans are made. I think you'll see a very significant diluted effect in the ability of the states to regulate this. We've done 100 enforcement actions in the last year, and we're a small department. We can get it done. We think there's less predatory lending in the state of Washington as a result of it. How you do that? Again, I'll refer you to page 7 of our comment to the OTS, where we list what's in our 154 Mortgage Broker Practices Act. It isn't perfect, but it's a good start. A comment on that, I'll give you, again, is that these are heavily fact specific. These are difficult cases. They take a long time to prosecute, and it costs money. For those of you -- I've heard unanimous opinion of the industry that says that, you know, this is the way to do it. Understand that it's you that pays for the enforcement actions. So you'd have to be willing to come to the table in your states and say we're willing to fund more FTEs, more full-time equivalents, for the states to pursue these actions. MR. SANDS: John, let me just ask a quick question. Do you guys post your enforcement action somewhere publicly, like on-line. Often, in cases, we have clients that say so-and-so wants to do business with us. We do business in the state of Washington, how do we go about finding out if you're not taking enforcement action against, or you haven't taken enforcement action? MR. BLEY: Yes or no, Mark? MR. THOMSON: They can call us. It's not posted on the net, but they can call us. MR. BLEY: It's not posted on the web yet, but they can call us. Maybe that's a good idea. MR. MICHAELS: I've got Peggy, and if you hadn't raised your hand, I was going to call on you anyway. 155 Which is, from the FTC's perspective, what will help the FTC in its enforcement efforts? Is there some additional data that they need to have, a public data source, a non-public data source, that would help tie down where the problems are? MS. TWOHIG: I guess I can say a couple of things on enforcement. Can you give us more money? [Laughter.] MR. LONEY: We can't give you any money. MS. TWOHIG: Given that, but there are some things that would be helpful. It is very difficult for us to know, because it's not required to be reported under HMDA or anywhere else, where the lenders are that are making the higher cost loans, and to the extent that is associated -- not always, but sometimes -- with problem practices. That is something -- if we had more information on that, that would be very helpful. In addition, the Commission, a couple of the recommendations in the Commission's statement I think go to this. I mentioned already, and I won't repeat it, in terms of the documentation that would be helpful to be required for, on asset-based lending issues. In addition, the Commission's statement talks about mandatory arbitration. That's not Commission enforcement, but I think that's very much in recognition 156 of the fact that our resources are limited and we can only do so much. It's very important for consumers to be able to protect their rights themselves. And we think mandatory arbitration limits that too much, at least for HOEPA loans. And beyond that, I think some of the other recommendations also go to things that would help, like clarifying what the pattern or practice is. We think that the appropriate standard for pattern and practice would be something along the lines of the Fair Housing Act, and other civil rights statutes, and not the standard that has been interpreted by one court that would make that standard hold. The Newton Case would make our enforcement job extremely difficult. So there are some of the recommendations of the Commission has made do go to things that we think would be helpful to make our job easier. But that's just from the Commission's perspective. I'm not sure if there's anyone here who could speak to some of the private plaintiff's ability to go after deceptive practices. Because we have the FTC Act. So we can, if we see deceptive practices, we do have the authority we need now to go after that. And I'm not sure that's the case for private plaintiffs in all states. I'm not an expert on that, so I just put that out there as one idea. 157 MR. MICHAELS: Did you qualify that with "if we see"? The question is: When you have the opportunity to see those, what helps you focus in on them? MS. TWOHIG: Well, there's a variety of ways we target lenders for investigation. I think it's very important for the lenders out there to know also that we sometimes look at lenders, not necessarily because we know there's a problem. It's more like in the nature of an examination, and we have to explain that to lenders sometimes when we start doing an investigation. With that said, there are some things that cause us to look sometimes at certain lenders. That can be consumer complaints. That can be information we get from some state regulators or other enforcement entities. We had, for example, a very good, cooperative relationship with the Kentucky State regulators that told us about some of the problems that led to at least two of our HOEPA cases and Operation Home Equity. So we obtain information from various sources and it's very, you know -- I don't know if hit or miss is the right word; but it's not, it's certainly not complete information. There is information where we can find it in consumer complaints and by talking to other people who are in the field. But there isn't any data we can use, right now, to try to better target our enforcement efforts. And I think, if there were reporting 158 required of the cost of the APRs, for example, under HOEPA, it would help us. MR. MICHAELS: Does there need to be some better information sharing, or some formal network for information sharing, among state regulators who regulate and license mortgage lenders, non-bank mortgage lenders particularly, since they're the ones who are being examined? MS. TWOHIG: There already is, I think, quite a bit of information sharing. We try to talk to the state regulators as much as possible. And I'm not sure whether a more formal setting would help that. It might. I mean,I think that information sharing is very beneficial, and I think it can help leverage resources, combine resources, in a way that it does help with the problem. MR. MICHAELS: Can I ask a question on that? You mention mandatory arbitration a couple of times. Are you talking about all mandatory arbitration, or are you talking about abusive mandatory arbitration? And, when I say "abusive mandatory arbitration," I would give as an example arbitration clauses that have choice of form clauses, being the hometown of the lender, or, you know, things like that, which I, which I consider to be abusive. But are -- you're not talking about getting rid of all mandatory arbitration clauses, are you? 159 MS. TWOHIG: The Commission has recommended that mandatory arbitration provisions be prohibited in HOEPA loans, and it's for a number of reasons. But it's, in large part, because we think that mandatory arbitration can have the effect of essentially very much limiting the consumer's ability to assert their rights. There's sometimes very high cost to arbitration. There's sometimes the inability to obtain attorney's fees, which we think they can't get counsel in the first instance. There's limitations on class actions. There's no review of arbitrator's decisions that's required, or very limited review, is my understanding. And, so, it doesn't really help set a precedent and law in this area for other consumers that might be taken advantage of in abusive lending practices. So we think there's a lot of problems with -- and we're talking about mandatory arbitration. MR. MICHAELS: I understand. MS. TWOHIG: Not talking about where the consumer is given the option at the time the dispute arises to pursue arbitration. We think that's fine, you know, for voluntary arbitration to settle disputes is probably a very good thing. But mandatory arbitration agreements in the kinds of circumstances I'm talking about -- we're talking about the consumers where it is very 160 unequal bargaining position. They sometimes desperately need the money. And your talking a bout a provision that would require them to look ahead for an uncertain, possible future event, and try to analyze that in the context of whether to walk away from the table and not take that money. And we think it's unrealistic to expect consumers to shop if, indeed, they have any market power in that market based on that kind of provision. So those are some of the reasons why the Commission has recommended that mandatory arbitration provisions be prohibited in HOEPA loans. MR. SAMUELS: If I may respond just briefly, and I know I'm not going to make any friends with the private lawyers sitting at the table. But our experience has been very different with regard to mandatory arbitration. Sitting on our side of the table, I will tell you that we spent a lot of time and money on court actions, on issues that I'm going to say, without fear of being contradicted, are frivolous. And we find that arbitrations -- again, I want to make clear that I'm talking about non-abusive arbitration provisions, where, really, the only thing that is limited is where the dispute is litigated, is arbitrated, I should say, where we do not limit damages, we do not limit causes of action, et cetera, et cetera. But it tends to be a very, a much more inexpensive 161 process. Also, it does deter, in our experience, some of the more frivolous actions. And, even though we get out of the frivolous actions with no liability, the attorney fees that we are forced to pay in a regular court action are really quite onerous for us. And, frankly, it causes our overall costs of lending to be, you know, to be higher. So I would ask if there is a study on arbitration clauses to look at it from both sides, because I think the lending community would have a very different view. Again, we would want them to be fair arbitration clauses, but I think that they do have some benefits both to the consumer and also to the lender. MR. MULLIGAN: Well, from the private lawyers perspective, we started to listen to that argument. I mean, start, the moment that these lenders, and other consumer-oriented firms, not just lenders, to start reporting the results of their arbitrations. Until that happens, all we've got is our experience, and that's really bad. MR. LONEY: If we may have to, we have to have the last comment. MR. BLEY: I think it will be. You're talking about enforcement action. You're talking who is accountable for doing the enforcement action. And let's 162 be frank about it. I think the primary way to accountability on enforcement action falls to the states, and falls with the FTIC, FTC. I'm not here to I'll let the FTC's records speak for itself. And I'm not here to defend or talk about -- I'm not here to defend the states' actions, either. I'll give you, I'll raise one issue, though. I frankly do not think that the states' enforcements actions in this area are inadequate. I think there's two reasons for that. I think one of them is performance. They're simply some states that abhor confrontational aspects of enforcement. But it cannot just stay there. Part of the accountability has to rest with the industry itself for not going into the state governments and supporting those agencies for greater resources to do enforcement actions. I think the will is there for many states, but the funding needs to be there. But I have told my division director that we have to be more like warriors and less like pencil nicks, when it comes to enforcement actions on this issue. Thank you. MR. LONEY: Pencil nicks? [Laughter.] Well, we'll have to let that be the last question. 163 [Laughter.] First of all, I want to thank all of you folks that have participated, for the energy and intellect and experience you've brought to the table. I think that we're clearly going to find it useful in the deliberations that we face going forward. I want to thank my colleagues on the panel up here. I think it's been a very useful morning. Let me just say that we are going to take -- I think half hour? -- a half-hour only for lunch. So we're going to have to be back here around 1:30. If any of you in the audience want to sign up for the open-mic, I remind you that the sheet is down in the west entrance. So you might take this opportunity to do that. Again, thank you all very much, and we'll be in recess for about 30 minutes. (Whereupon, at 1:05 p.m., the meeting was adjourned, to reconvene at 1:30 p.m., this same day. 164
September 7 hearing on home equity lending |
Afternoon session |
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