Afternoon Session of Public Hearing on Home Equity Lending
1:40 p.m. MS. SMITH: We're ready to launch the afternoon session. Thank you, for being here. If you were this morning, then you know that this is the fourth in a series of four public hearings that the Federal Reserve Board is holding on predatory lending, well, will home-equity lending, with a focus on predatory lending, and on looking at what uses the Board, the Federal Reserve Board, can make of its authority under HOEPA, and other regulations, for addressing some of the abusive practices that have been reported in the media, and in other forums, in recent months and weeks, and maybe going back years. This morning, we focused on regulatory initiatives in terms of authority that the Board can exercise under the Home Ownership and Equity Protection Act. This afternoon, we will take a slightly different focus on consumer, on community and consumer outreach and education. So this afternoon, as in the case of this morning, we have invited panelists who will, first of all, make opening statements; and, then, will engage with us on some suggestions for dealing with ways to inform consumers on how to avoid predatory lending practices in the first place. 165 My name is Dolores Smith. I'm the division director for Consumer and Community Affairs at the Federal Reserve Board in Washington. I will be the moderator for the afternoon session. For those of you who have just joined us, and we welcome you, this morning we did have a very interesting presentation of views, with differing perspectives, from our panelists. And, then, as in the case of this morning, we hope to learn from the panelists about any studies or research on the subprime or equity lending that would inform the Board in its deliberations. I'm going to start by introducing our panel, our Federal Reserve panel. I'm going to start with my extreme right, Joy Hoffman Molloy, who is the Public Information Officer and Community Affairs Officer for the Federal Reserve Bank of San Francisco. Then, to right, Sandy Braunstein, from the Board, who is assistant director and also the Community Affairs Officer for the Board. To my left, Jim Michaels, who is managing counsel; and Jane Ahrens, senior counsel, both of whom work on Truth In Lending Act matters at the Board. I'll say a little bit about the rules of procedure that we will be following, which will be following, which will be -- which will parallel the ones 166 that we used this morning. We will have opening statements from each of the panelists. They are asked to keep their remarks to three minutes, with the clear understanding that there will be an opportunity, as we engage in dialogue, for them to cover points that perhaps they can't encompass within the three-minute limitation. We do have a time keeper, Georgette -- and I have your name written down, and I -- Blathena, which I can spell but I didn't write down. Georgette will be giving you -- if you will sort of keep an eye on her -- a one-minute time warning; and, then, she will also will hold up a sign letting you know when your time has expired. If she holds the sign up and you're in the middle of a sentence, please complete your thought, but do bring it to a conclusion. So, with that, we will -- well, I'll also say that, the afternoon's agenda, we will be discussing these issues until 3:00 o'clock, at which time we're going into our open-mic session. And, again, we invite members of the audience, if you have not signed up to speak this afternoon, but do have an interest in doing so, then you can register -- you can probably, rather than going all the way downstairs -- check with one of our Federal Reserve people here in the room. Do we have anyone here now from the Federal 167 Reserve Bank? Well, yes, at the back of the room. So if you have an interest, if you will just speak with one of them, then it'll save you a trip downstairs. So with that, we will turn to Alan Fisher. I'll ask each panelist to introduce themselves with your full name, for the record; and, also, the name of the organization that you represent. STATEMENT OF ALAN FISHER, EXECUTIVE DIRECTOR CALIFORNIA REINVESTMENT COMMITTEE MR. FISHER: Thank you. My name is Alan Fisher. I'm the executive director of the California Reinvestment Committee. We're a coalition of more than 200 nonprofits in the state of California. I appreciate very much the Federal Reserve holding these hearings. I think this is another opportunity to highlight the sort of predatory practices that destroy neighborhoods in California, and that ruin the one asset that many people have. I think consumer education plays an important role. And I think some of that was talked about this morning. I think that The Fed can continue to play a good role with that, within its conferences, and really maybe bringing consumer activists there. People like some of the folks who are on panels, and others, to talk about 168 what they're seeing in the community, and educate many of the bankers. VOICE: Speak into the mic. MR. FISHER: I thought I was, sorry. That's better? Get closer? But I think, at the same time, I wanted to talk a lot more about The Fed's role, and about the kinds of things that I think The Fed could do beyond HOEPA. From my own experience in talking to people, consumer education is very useful, but many people don't take advantage of it. And for many elderly people, some charming person on the phone, who assures them this solves their problems, it's only later that they find out they're losing their home. So I think that The Fed, you know, it's very good that these hearings are happening, but the next step really should be, I think, a study, that The Fed has the ability to do with subsidiaries of the holding companies: Bank of America, US Bank, Wells Fargo, and now, I guess, this week, we now have City Group owning Associates. The Fed should really look at those practices because I think what you're hearing over and over today is: No one knows all of the details. CRC is embarking on a small study, doing interviews with a few hundred people around California 169 this year. But I think, really, The Fed can go in and play an historic role in the way you did in 1982 in Boston, with the HMDA research, and really show what's going on. I also think that HMDA needs other categories that would reflect subprime lending. Something that shows whether it's subprime or not, whether it's the FICA score, whatever, foreclosures, fees, things like that, insurance. And I think that you need also to expand the definition of unfair and deceptive practices. I think that's some of what people are getting, a further definition of what subprime is, what predatory is. CRC has negotiated with a number of large banks, which have subprime subsidiaries' referral agreements, where, because there are many people who should be conventional borrowers, who get lumped into subprime, either because of the neighborhood they live in, or because of their color, their age, or the broker they run into. But none of these have yet been implemented. So it's very nice wording, but I think that's another thing that The Fed could look at. I mean, on top of all the other things that are being talked about, people who could get conventional loans are not getting them. I think the other couple things, quickly, are that -- I mean, I just got, I just got an equity line for 170 myself. I wanted the money right away. But I couldn't get it right away because that wasn't how the bank operated. So to blame these things on HOEPA it seems to me to sort of skews the discussion. I also think -- we haven't heard as much here, but my colleagues across the country have said that, in other situations, mortgage lenders are saying that they'll pull out. And I think is that predatory lenders pull out, yes; that'll be great for the state. Thank you. MS. SMITH: Ms. McKinney. STATEMENT OF FRANCINE MC KINNEY, PRESIDENT HOME BUYER ASSISTANCE CENTER MS. MC KINNEY: Good afternoon. My name is Francine McKinney. I'm the president of Home Buyer Assistance Center. And I just appreciate the fact that I was invited to participate here on the panel today, particularly to talk about such an important issue that's affecting many of the families here in the Bay Area. My organization primarily provides education and counseling for the community related mostly the initial home purchase. But what we are finding is that there are predatory lending practices, of course, in refinances; but also in the initial home buying process. 171 One of the things I think should change about the law is that it should also include the home purchase, as well. What we're seeing is clients of ours who have blemishes on their credit report that aren't serious. But, when they meet with the lender or a mortgage broker, they are told that, because they have these blemishes on their credit report, the only type of loan they can apply for is a high-cost loan. So that's a pattern that I'm seeing that's been going on for some time now. And because they don't have the education in advance, they think those are the only loans they can actually qualify for. So one thing is, I know there was, in some of the notes that I received, the point about counseling being applied, being provided a few days prior to closing on some of these loans. I really think that counseling should start at the application. Because, if the applicant is not educated when they start the process, when it's time for the loan to close, they're going too far in it and too anxious to get the money that they've actually applied for. So it's more likely that they're going to go ahead and accept that loan at that point, versus, if they were educated early on in the process and were really aware that that was not a good loan for them to apply for. 172 The other thing is, when we talk about counseling being provided for these applicants, there are several nonprofit organizations around the country that do counseling. The problem is we're always looking for funding. So we cannot do the kind of marketing and outreach that really needs to take place in the communities to reduce some of the problem that we're seeing. Some of these mortgage brokers are going door-to-door. They're sending out regular mailings all the time. We don't have the funding to do that. So marketing really needs to be increased so that people can become more aware of what's going on and become more educated about the types of loans that they might be applying for. But, then, just in terms of being able to provide the service to counsel some of these victims of predatory lending there aren't enough resources available for the organizations to be able to do that. MS. SMITH: Thank you very much. Mr. Carl. STATEMENT OF CHESTER CARL, CHAIRMAN NATIONAL AMERICAN INDIAN HOUSING COUNCIL MR. CARL: Thank you. Chester Carl, Chairman, National American Indian Housing Council. Before I begin with my statement, I'd like to 173 introduce three guests that I have with me. I have two members of the Navajo Housing Authority Board Commission, the Chairman, Mr. Johnny Naize; the secretary of the Board, Gill Arviso; and Jane DeMarines, who directs the mortgage program at National American Indian Housing Council. Members of the Federal Reserve Board, honored speakers and guests, I am here today as chairman of the National American Indian Housing Council, representing Native Americans, one of the groups with the severe housing needs in the country, and of the most with the greatest potential risk for predatory lending. First of all, I'd like to applaud the Federal Reserve for undertaking this hearing, to five the public and groups, such as mine, an opportunity to tell our story. As undeniably the most underhoused and the most undermortgaged group in the United States, we're glad you want to hear our comments. We also know that our members are victims of abuse. We have conducted a study a survey of our membership, and we'd like to provide some of that information and examples of predatory lending practices. Let me summarize some of these results, which includes roughly 10 percent of the tribes. Some of the tribes that we surveyed did not respond because they have yet to experience mortgage lending. 174 Sixty-five percent of the respondents said their members were victims of predatory lending practices, most notably specific examples, such as this. Respondents reported examples of housing interest rates as high as 25 percent. They reported that tribes within their state cannot get conventional loans and they can only get HUD loans. And they do not anticipate getting conventional home loans for 10 to 15 years. Many lending institutions do not even consider working with Indian people. Most home loans, or mortgage home loans, are offered at interest rates of 18 to 24 percent. Home improvement loans were offered at 25 percent. Behind the stories and behind the data are stories that are more revealing. There was a parent of a double amputee who owned his home outright after payments of 30 years; but, then, lost it through abusive practices and predatory lending. The survey paints a grim picture that we know to be true. As head of the Navajo Housing Authority, I have watched my reservation seek banking services that others take for granted. The Navajo Reservation spans an area the size of the state of West Virgina and has a population of a quarter-million people. But we only have four banks 175 and one credit union. My point is that Indian Country already suffers neglect of the nation's financial system and is undercaptialized and misunderstood. The lack of banking services creates fewer credit options, and this leads to predatory lending practices. We know in Indian Country we have 38,000 qualified home buyers right now. But, often, the families, because of few financing options, fall victim to mobile home dealers selling homes at high interest rates. If some of our people are poor, well, then, they deserve the same housing benefits and the financial services as urban poor. There are things that we're doing, and I'd like to share those with you. One of them is in the program of homebuyer education, where we train approximately 100 tribes per year. We do this through workshops, training staffs so others can also be provided that same training. We also provide downpayment assistance for families to get involved in home ownership programs. Before I finish with some of the opportunities that I have to speak before you, I'd like to also provide some recommendations. These recommendations are: To provide greater enforcement of lenders to meet requirements of the Home Ownership and Equity Protection Act in Indian Country. Enforcement to require lenders to 176 provide fair rates, repayment terms and reasonable insurance does not happen in Indian Country. The Federal Reserve Board, to seriously consider a study specific to geographic Indian areas to determine whether lenders actually work with Native American communities. Recognition that Indian Nations have sovereign rights to enact laws. I also urge this Board to assist with a pilot program and resources to insure compliance. Create rewards for banks who provide fair lending to Indian County, provide incentives. Assist banks in creating consortia for lending to Indian Country, and to provide technical assistance to new banks on and near the reservations. The tribes are not unsophisticated. Our dream of a home is, to an individual, is our long-held traditional belief that the home is the center of our lives. We hope the Federal Reserve Board will use their powers to help interrupt the cycle of abuse that has manifest itself in predatory lending. Thank you very much. MS. SMITH: Thank you very much. Ms. Lamberti. // // 177 STATEMENT OF CHRIS LAMBERTI, MEMBER BOARD OF DIRECTORS, AARP MS. LAMBERTI: Good afternoon. I am Chris Lamberti, a member of the AARP Board of Directors. I'm here today to discuss consumer education and counseling options that may help borrowers to protect their self-interest when obtaining home-equity loans. Getting or refinancing a home-equity loan can be a trying experience for borrowers. It may also pose a significant risk to their ownership. The investment in home ownerhsip among older Americans is substantial. For many, it's the largest financial asset they have. Before we begin our panel discussion, I would like to make three basic points regarding risk to homeowners that are associated with high-cost home-equity loans. First, more work needs to be done in defining and measuring home-equity loans that are priced at interest rates and contain fees that cannot be justified by the borrower's credit risk. It is for those who already have been, or will be, victimized that enhanced legislative protections and tighter regulatory enforcement are important. Sttutorily-based consumer protections have a sentinel effect on lenders, but a consumer's right to 178 secure relief and restitution are premised on them. The second point I wish to make is that consumer education and housing finance counseling would probably benefit us all, but are particular importance services for those who are the most vulnerable to high-cost lending. Those victimized are often the older, less affluent, less well educated, whose primary financial asset is the equity in their home. We need not wait for additional research to do something beneficial, but do need additional appropriations. It is already possible to identify from an examaintion of existing HOEPA case proceedings and settlements an array of lending circumstances and practices that can represent substantial risk to a potential borrower. AARP believes in consumer education and counseling, and invests in them, for its members and for the broader community of mid-life and older American we serve. I hope to talk more during our discussions about a consumer education program AARP has been developing for a particular type of home-equity loan designed specifically for older Americans, called a reverse mortgage. The efforts that the Association has made in partnership with HUD, and others, to provide effective counseling to borrowers may be adaptable elsewhere. I have attached some additional materials regarding this 179 program to my written statement. And third, however useful education, counseling, community outreach may be, these efforts alone are not sufficient to curtail the problem linked with the high-cost equity loans. Many of the individuals and families, who have suffered the most from the disruptive financial practices commonly referred to as predatory lending, are also those with the weakest public policy voice. I'm looking forward to our panel discussion. MS. SMITH: Thank you. Mr. Hornburg. STATEMENT OF STEVEN HORNBURG, EXECUTIVE DIRECTOR RESEARCH INSTITUTE FOR HOUSING AMERICA MR. HORNBURG: Hi! I'm Steven Hornburg. I'm the executive director of the Research Institute for Housing America. I'll try to talk very fast, because I know what it's like on both sides. [Laughter.] I'm hell on transcribers. I appreciate the opportunity to release some preliminary findings from a national study that the Institute is going to be publishing soon. It really asks the question: Who is using the subprime market, and why are they using it? Why are they there? We have submitted 180 a copy, an advanced copy, for the record. There's very little in terms of national studies. We've heard a lot of on-the-ground evidence today. But in terms of the national look at the statistics, I'm only aware of one other study that's been done by Freddie Mac on this question. So, what was done in this study we're going to publish is that it looks at home purchase fixed-rate mortgages below the FHA limit, and segments of market into prime FHA and subprime. It uses a standard mortgage choice estimation model, but the real innovation is the inclusion of HUD-defined subprime lending and the actual credit histories and scores of the borrowers. And in plain English, the model takes the data and essentially mimics the underwriting decision to predict the probabilities of borrowers using each of the market segments that are discussed. The data is drawn from HUD databases that they use to update their FHA actuarial model. The findings are two: First of all, based on the study, it looks like the market essentially is working. Credit scores and histories, downpayment constraints and income explain the mortgage choice and the use of a particular market or product type. So, for instance, for the subprime market, credit scores and 181 histories and non-real-estate debt are really the most important determinants for use in the subprime market. So there, you find credit and compare borrowers that have bankruptcies, legal claims or judgments against them, there are excessive delinquencies. For the FHA market, the most important determinant seems to be downpayment and income. So that essentially means borrowers with low income, low wealth but adequate credit scores utilize that market predominantly. Which these findings essentially echo the Freddie Mac findings, and I quote: "Risk is clearly the single most important determinant of why borrowers end up with subprime loans." Now this leads into the second finding, and that is: Contrary to the stereotype of all subprime lending that sometimes seems to exist, the distribution of the market in terms of income roughly parallels the entire mortgage market. So about half subprime loans go to households with income over 80 percent of area and median income, while about half of all loans, all mortgage loans in the entire market go to that same household population. This aggregating the overall sample, though, there are some unexplained differences that have been found. For instance: compared to the overall sample probability, non-White Hispanic, and Hispanics, also are 182 less likely to use subprime, slightly less likely to use subprime market, while African-Americans and Asian-Americans are slightly more likely to use the subprime market. Differences between similarly situated borrowers could very well be technical issues. These types of studies have always had missing variable problems. So, for instance: While the borrower with an income may look like a prime borrower on paper, their lack of willingness to permit verification of their income could lead to low-doc, no-doc subprime products and put them into the subprime market. And while downpayments may appear large and therefore suggest a prime market allocation, the source of the downpayment, such as family gifting or out-of-country sources, could lead to use of a subprime product. So, the history of this literature is as more sophisticated studies, with more complete data are done, these unexplained differences tend to go away. But, nevertheless, such differences could suggest that borrowers may not be in the right market. So it's very important that we get a handle on this. These technical problems have to be addressed before any remaining unexplained differences can be properly interpreted. But the bottom line, again from this study, is clear: Risk dictates market assignment, which suggests that, overall, 183 the market is generally working. Thank you. MS. SMITH: Thank you very much. And with that, I will ask Sandy Braunstein to lead our discussion, lead off our discussion. MS. BRAUNSTEIN: Thank you. I'd like to extend my welcome to everybody, and thank you all for being here. And I'd like to start out by asking some questions about our major stated topic for this afternoon, which was consumer education and community outreach. And I know we've got a variety of folks here from a variety of groups. I would ask you, first of all, what we would like to know at the Board is: Have you observed any methodologies that have been particularly effective or useful in terms of outreaching to the preyed upon populations in terms of getting information and education out there? Because, what we have been hearing during the hearings, and also private meetings we're having, is that this is very difficult and it's hard to compete with the predatory lenders. We'd like to know if you've heard any successes or you've had any successes in this area. Chester, you look like you were going to say something? MR. CARL: Not necessarily at this point. But I 184 still can't -- the issue that's tabled for discussion is twofold, where my communities are at the level where the literacy of not only banking services, but also mortgage lending, has to start at grade level, high school level, to educate our Indian families the dos and don'ts of actually anything from checking book to what actually mortgage means. So we have encouraged other programs, and I would also encourage the Federal Reserve Board to support us in developing the literacy program that starts at that level. Beyond that, we have gone to home ownership programs to outreach through several nonprofits. What we find is that, a lot of times, when we worked with a nonprofit, they're very exclusive, for example: NeighborWorks Program. They're only catering to their employees to provide these types of certifications. So we have gone out there and pursued the curriculum program with the National American Indian Housing Council to provide this education. Also, at the same time, provide certification to the counselors, to educate them on mortgage financing. So we're basically doing that at this point. MS. BRAUNSTEIN: I'd just like to add something and we can discuss it later, but I don't know if you're aware that the Federal Reserve Bank of Minneapolis has 185 been working with First Nations to develop a financial literacy curriculum for Native Americans and that they've implemented at some of the tribal colleges. And I can talk to you more about it later, if you need information on it. Francine. MS. MC KINNEY: I think there are a couple of forms of outreach that tend to be effective. One is the community meeting. And by "community," I mean the neighborhood association meetings, meetings at the senior centers, and then community meetings that would vary depending on the locality in different areas. The other is really door-to-door. People knocking on doors to make sure that they are actually communicating with the potential victims of, or victims of, predatory lending. Because that's how some of them mortgage brokers actually operate, going around knocking on the doors. It's hard to get seniors to come out many times, or others who might be victims to come out, and really admit what's actually going on. But if someone knocks on the door, many of -- particularly the elderly like to talk, because perhaps they're living alone, or they don't get visitors very often, and they like to spend time talking. And, so, many times that's really a way to start to connect with some of the people in the community. 186 But it's certainly intensive and it's going to take a lot of effort in order to do that. MS. BRAUNSTEIN: Have you found -- we heard similar kinds of things in Boston where they're doing -- MS. MC KINNEY: Right. MS. BRAUNSTEIN: -- and they said that that kind of effort seemed to work the best. And we were wondering, do you find that written materials are helpful? Or how helpful are written materials? MS. MC KINNEY: I don't think written materials are that helpful unless you get someone into a room where you're particularly focused on some consumer education program, where you're educating specifically about a particular product or program. But I think, if you're mailing out literature or leaving literature at their door, I don't think it's been effective at all. MS. BRAUNSTEIN: Chris. MS. LAMBERTI: I understood that we were talking about two different ways. There was the education part, as well as the counseling. So let me just address first educational part. As I made the statement before, AARP does heavily invest in it. So I'm just giving you samples of it, and there's no one cure, definitely, for the nature of the beast here. So I'm giving an example of the material 187 we have developed. For home-equity loans, we have particular guidelines for avoiding scams. I think that's what we are trying to target first: Avoiding the problems and curing it later on. Fraud prevention kits for people, for borrowers, who want to get into home-improvement loans. We have developed videos which have been used by our counselors. At the moment, we also trying to -- we're in the process, actually, of producing a Spanish version of it. We have expanded quite a bit of the AARP web site in making more information available about home repair financing, which is particularly something the older people are interested in, as they have built up the equity in their homes, but repair needs to be done. Again, examples here, one web site is focused on the basic steps, so it's really written for consumers in easy language, easy to understand, making decisions. There are many different types of loans so it helps them to make a decision if they're using the home as an equity, which particularly something the elderly is looking into. And, then, which is really the main subject here, is understanding predatory lending. We have, at the very moment, we are working on the consumer guidelines on reverse mortgages, which I want to get into later when we 188 talk about the counseling. For the next year, we have already put aside a budget for this. So our side, having 34 million-plus members, plus the entire society, we are really working hard on it. MS. BRAUNSTEIN: When we talked about -- Francine had a comment about written materials. I was just wondering -- because I know AARP does put out a lot of written material -- do you find that beneficial for your members? MS. LAMBERTI: Again, I do not see that there's only one solution to it. Written material is supporting. We do have AARP chapters, where we get the word out. We have this -- that would be on one-to-one, more or less. As I said, this subject, later on, as we go into counseling, there's one-to-one again. So there are many vehicles how it could be done. One way alone is not enough. MS. BRAUNSTEIN: Steve. MR. HORNBURG: It depends upon what you want to do. And I'm a firm believer that there has to be some type of effect from homeowner counseling. Unfortunately, from a research standpoint, there has never been any good, rigorous analysis showing any kind of impact on, for instance, defaults or sustaining home ownership. I know that the NeighborWorks Program has a longitudinal study 189 that's going on that hopefully will be able to demonstrate some social benefits, as well as mortgage performance. I think, if your thinking of doing something under this specific focus of the HOEPA, you need to figure out are you looking to encourage fraud prevention, or are you looking to encourage general education about how to look for a mortgage? Or are you looking to help somebody sustain home ownership? Because, one of the big problems is that there are many variations on what homeowner education and counseling is. And the market has not been sorted out. There's actually a national organization that I hope that you're talking to at some point, the American Home Owner Education -- MS. BRAUNSTEIN: AHECI. MR. HORNBURG: AHECI, thank you. MS. BRAUNSTEIN: Yes. MR. HORNBURG: And they're doing a very admirable job to try to organize the market and rationalize it, and get to a point to understand what works and what doesn't, for what purposes. I don't think they're there yet, either. But they have developed some, you know, basic standards of practice and some model curricula that they're trying to dissemminate more broadly, to try to get to a point where it's more standardized. 190 MS. BRAUNSTEIN: Steve, let me do just one follow-up, and then Alan. You said that there's been no research to really show the benefits of this. Has there been, in your knowledge, research that shows that it's not? And the reason I ask this is because conventional wisdom I think has been that counseling is beneficial. I know that's why Fannie and Freddie instituted products where they required it. And, you know, other banks have instituted products where they've required some kind of counseling at some time. There was a general feeling that that would help the performance. I was just wondering if you've heard anything differently. MR. HORNBURG: I have not heard of public work, nor proprietary studies, that have done that. In fact, we did our annual conference on housing opportunity just this last year in partnership with AHECI. And just for further background, you can look on our web site at housingamerica.org, because there's actually video clips from the conference. The basic -- one of the studies that we released there answered questions that have been nagging me for quite awhile, and that is: In the absence of any type of research that specifically shows that mortgage performance is enhanced -- okay? -- why is there such an investment? 191 You mentioned Freddie and Fannie, you mentioned banks, et cetera. And the researchers came back to me and basically said; We can't answer the question in terms of mortgage performance; but looking at it, the counseling and the partnerships it entails, gives some non-economic benefits to financial institutions. No. 1, it helps satisfy CRA and affordable housing requirements. It brings people, who are creditworthy and mortgage-ready to their loan officers, basically, so that they reduced screening costs. It helps them access communities better, working in partnerships with nonprofits that have the trust of the communities to get to some of these underserved markets where they haven't been traditionally able to get access or loans to go out and work on it. So it really has some non-economic benefits to expanding the market. And that they attribute to the reason for heavy investment in it. Not the mortgage performance. MR. FISHER: I don't know if I'm understanding Steve correctly or not. But I would agree that I think just consumer education is not enough, and there really needs to be oversight of the institutions. But I think on the consumer education, I think it's there's so much variety in what takes place. I mean, I know that Fannie Mae had a four-hour training, but we 192 heard that, in many cases, people just had to fill out the test. They never really had it. And that wasn't the fault of Fannie Mae. That was the financial institutions. So think that, you know, you really, to do a study like, you know, in this sort of case, you would really need to look at what's going on. I think there were two quick things I wanted to say, and one is: Since you're in California, there are a tremendous variety of people in California and cultures. And so to do something properly here, there are a variety of languages that need to be used. If I remember correctly, LA General Hospital, they have to be able to supply translators for 30, or so, languages, and there are a lot of cultural issues. So I think it's -- I mean, that's something else that needs to be in there, particularly for California, but lots of other places. And I think that also there is the issue of scope. As Francine was saying earlier, there isn't enough funding to really do this, the consumer education, in the way it needs to happen. Many financial institutions are cutting back and saying to consumer counselors: If you aren't referring to me, then I'm not giving you funding. And, so, I think that, you know, this may be something The Fed wants to look at, as well, as sort of what is the scope of this and what are the terms. Because, to me, 193 grant making shouldn't be marketing money. You know, it should be one or the other. MS. HOFFMAN MOLLOY: Francine, may I ask you a question about those community meetings that you hold? Do you actually target current home owners? MS. MC KINNEY: When we do the -- MS. HOFFMAN MOLLOY: Yes. MS. MC KINNEY: What we're doing right now is primarily only attending meetings that are held in the different communities, well in Oakland, which is where we primarily work, and different communities making presentations. And, so, typically, you're having home owners from those particular communities that are attending those meetings. MS. HOFFMAN MOLLOY: Okay. The questions is, then: How do we actually get to those individuals who are most vulnerable? I know a lot of organizations are starting to work directly with churches and different forums. MS. MC KINNEY: Right. MS. HOFFMAN MOLLOY: Just another question about the issue of post-loan counseling. So we heard a lot this morning, despite the fact that we were focusing very much on the technical aspects of the HOEPA regulation, we heard a lot about, you know, the fact that people are so 194 desperate to get the loans that they don't care to be educated. They resent the fact that there are even ties to some kind of formal counseling. And I'm sure that you've experienced that. In your -- you know, I know you've been doing this for a long time. How do you get people motivated to not only go through the process of home-purchase counseling, but once they own their home, how do you get them motivated to understand all of the aspects that follow the actual signing of the documents? How do you keep them hooked in? MS. MC KINNEY: Well, part of our pre-purchase education process includes a pretty thorough review of documents that they would be signing that show where the costs are for the loan that they're applying for. So we educate them in advance so they'll know when they're applying for the initial loan. But, then, we also talk to them about if they want to refinance later on, or if they want to get a home-improvement loan. So they already know how to read those documents, where certain fees are going to show up in the event that that happens. But we also keep in contact with all of our clients as part of our post-purchase program. We call clients every 90 days during the first two years of home ownership, for a couple of reasons: (1) because, once escrow closes, they're going to get letters 195 from many different companies, not only pre-approved credit card offers, but offers to get equity lines, 125 percent loans, equity loans on the property. So we want to make sure that, if we're in close contact with them, that if some of those things come in the mail, they're talking to our counselors about it. We want them to know that we're available for them to ask questions if they need any help, or if they run into any financial difficulties. So one is to be available in the event that something does come up where they are experiencing some problems; but the other is to keep the line of communication open so they'll know that, if they have any questions, they can contact us. MS. HOFFMAN MOLLOY: Can I ask one other quick question? With the increase in home values, let's use the Bay Area as an example we all know well, with people being able to buy in places in Oakland, for instance, and they are seeing equity, are you seeing -- are they somehow specifically targeted by a lot of these companies we're talking about with marketing materials? We're hearing that they're sort of tapping into that equity early on. Is there any counseling going on around that? MS. MC KINNEY: Well, I think probably everybody is getting something in the mail from some of these 196 companies. MS. HOFFMAN MOLLOY: Oh, yeah. MS. MC KINNEY: And many of the clients that we work with have also used some kind of assistance program. And if they've used some kind of assistance program, they can be limited in terms of getting additional loans on the property, or taking out new loans. MS. BRAUNSTEIN: I'm sorry, Chris. MS. LAMBERTI: Allow me to make a statement. MS. BRAUNSTEIN: Sure. MS. LAMBERTI: Your question about education here, what is the best type of education. And I think in terms of I'm wearing a size 4 to 6, and, once in awhile, I'm supposed to wear one size fits all. It just doesn't fit. So when it comes to education, I would say most likely the well-educated will pick up on education much faster. But what we are concerned, particularly in AARP, is the group of people who are low-income, who have a harder time and who really need additional counseling. So education, by its own, would not be enough, definitely not. Plus regulation and legislation. But, anyway, education itself wouldn't do it. MS. BRAUNSTEIN: Have you, those of you who were actually doing counseling, or associated with counseling programs, do you find -- we've heard a lot about 197 counseling and trying to get to somebody before they get caught up in one of these deals. But have you found cases where you've been able to reach somebody before they've signed papers, and, even though you've gone over a detailed explanation of why maybe this is a bad loan, that somebody enters into it anyway, possibly because of lack of alternatives, or, you know, needing the money? Is that a big problem around here? Francine? MS. MC KINNEY: I have had that experience. And even though this person had gone through our whole education program, we did one-on-one counseling with them several times, helped them get their credit cleaned up, and two years after they got into the home they were approached, and they were going to end up with about $20,000. And, so, we actually had loaned them some downpayment assistance. And the company contacted us because they wanted us to subordinate ours when they were refinancing the first loan, and I wouldn't agree to do that. And, so, since I wouldn't agree to subordinate, they just put me in first position and put their loan in second position, because mine was going to go away after five years. I talked to our client and I actually had the lender fax me a copy of the good-faith estimates so I 198 could see what all the costs were. There was a single-premium life insurance. Three thousand dollars for that. And they had convinced this woman that she -- it was absolutely necessary because she had a daughter and she wanted to make sure she was taken care of in the event that something happened to her. The fees were astronomical. So the entire cost for the loan -- it was $20,000 she was actually going to be applying for, getting cash out technically, but she was going to get $9,000. So the other $11,000 was for fees and insurance. But she went ahead with it anyway, because she wanted some money. So that's the thing. And she was unemployed at the time. She was on disability. So they were giving her a loan on the property, where she was off from work. She was disabled, and she needed some cash. So she was just willing to sign. MS. BRAUNSTEIN: Chester. MR. CARL: The story that Francine provides is a picture that we often experience. Not necessarily through mortgage refinance, but more in an entity like a finance company. Not only is life insurance, credit life insurance, a part of that, but disability insurance is a part of that. Then you also find that it's anywhere from 32 percent, 25 percent interest rate. And only because the opportunity to have banks provide loans in Indian 199 Country, no; it's not there. And that's the basic type of loans families have to undertake to provide renovation for their homes. MS. BRAUNSTEIN: Chris. MS. LAMBERTI: It's quite obvious that you are looking for data, and I've always supporting having date on hand to make decisions, or whatever. In this particular case, if we were having another meeting two years from now, I could assure you that I probably would come with data in a different type of format, and that's about the reverse mortgages. As you may be all aware, new standards have been developed there, and that's really the benchmark. Before you have any standards, it's hard, really, to measure anything. So the standards have been developed and AARP has been very successful in being the leader there, and making sure that there are exams that we have for certified counselors in the future. And I think once we have all this in place here, then we can really determine the number of applicants who were just desperate to get their loan because they wanted it, rather than being able to afford it, that they made a decision based on knowledge. Maybe they decide, then, if I cannot afford it, I'd rather wait. So we are talking in terms of a transition 200 period. Although the reverse mortgage is rather a small portion of that, again, it's something we can learn from. In general, that program has been rather successful. There's some data now available, and this is something you may want to look into that could be adopted into HOEPA loans. It's just some kind of idea I wanted to share with you here. MS. BRAUNSTEIN: One of the things that we would like to learn, our real, kind of bottom line here I think, is: We'd all like to hear what basically you think The Fed can do in regard to consumer education. We've heard, you know, a lot of talk this morning about the different kinds of things we can do with our regulatory authority. But we're trying to hear something here this afternoon as to what our role would be in the consumer education, community outreach area. So, who would like to go first? Steve. MR. HORNBURG: I would certainly encourage you to work with AHECI. I think that they're really tilling the soil to try to answer some of the basic questions about what works, what doesn't work, what ought to be required as a minimum, so you don't have, you know, a 20-minute phone conversation qualifying as counseling, and you get an idea, you know, of what purposes you're trying to address, what goals you're trying to address. Again, I 201 go back to are you trying to address fraud prevention? Are you trying to address general financial literacy, et cetera? The other thing I suggest is: You all have a great research capacity. I think it's -- I know the Philadelphia Fed, for instance, a researcher there I worked with before came by and talked to me the other day. They're doing some exploration into what's known and what's not known about counseling with an eye cast towards possibly doing some research in the area to get a better handle on it. The Fed's research has always been fantastic. You've got the capacity. I think, working in partnership with the community that's doing the counseling, you can make some real strides there, too. MS. BRAUNSTEIN: Thank you. Francine. MS. MC KINNEY: I did want to agree. Working with AHECI I think is a good idea, because they are moving towards standardized guidelines for counseling. And I think that's correct, a four-hour, a two-hour -- whatever it is -- conversation should not be considered counseling. But, then, also, AHECI is trying to come up with a standard for counseling; however, the lenders still have to buy in. And, so, I know initially, when certain -- when Fannie Mae came out with their guidelines for home-buyer education, and just as Alan was mentioning, 202 someone could complete four worksheets in the back of the Fannie Mae workbook and they could still issue a certificate. So I think the work that AHECI is doing is good work, but if the lending community is not going to buy in, then the work is all in vain. And I know the lenders I've been working with have been working with AHECI, too. I know lenders are all involved, they're all on board. But I asked the question at one of the AHECI meetings, does this now mean that that is going to be the certification that lenders are going to require? And no one could answer that question. So I do have some concerns about that. Marketing, I think, just as Chris mentioned, there are different types and methods of reaching people. I think marketing is still important. Just as community education is, one-on-one counseling is; but I think one way that The Fed might be able to help is with marketing. And, then, also, supporting additional funding for counseling. And by counseling, I generally mean not workshops, but I mean one-on-one counseling. It's one thing to do workshops where you're educating in a large group, but it's really the one-on-one counseling that really helps people. Because they get a clear understanding of their particular situation and the things 203 that they actually need to be looking at. MS. BRAUNSTEIN: Chester. MR. CARL: In regards to consumer education, I know banks do a tremendous job of marketing equity loans, and so on. But on the same token, there's not a whole lot of marketing that goes on against predatory lending. And I think that's one that should be pursued by The Fed, as far as protection the consumer may have in regards to predatory lending. Also, with regard to that is knowing the specifics of predatory lending abuses that happen in regards to Indian Country. I don't believe there's information that's available to put on the table to say this is actually what's happened. One of my encouragements to the Federal Reserve Board is to create a partnership with other bank regulators to create a CRA Task Force specific to Indian Country. Oftentimes, I'm sure that the assessments that are done for CRA enforcement are done excluding Indian Country. So a lot of that information does not get out to the public, or out to the policy makers, as far as some of these shortfalls that are happening in Indian Country. MS. BRAUNSTEIN: Thank you. Alan. MR. FISHER: When I think about consumer education with The Fed, I usually think about your 204 research, like Steve was saying, and also the conferences. And it does seem to me, like I was saying before, that you have the opportunity here to really, you know, delve into the files of some of these banks and see what's going on and educate people. But, as well, it seems to me that a best practices approach -- with the consolidation of the industry, there's going to be more and more banks, like Bank of America, that are going to own equicredits, where their marketing, their sales, and their whole way of doing things is very different. What is the right way? To have cross-referral? What's the right way for the bank to look at the subprime entities so that it is not predatory. You know, what are examples of that? I think in your conferences, and maybe with this kind of research, those are kinds of things that are the way things work. MS. BRAUNSTEIN: Thank you. Chris. MS. LAMBERTI: I just want to point out that AARP did submit a special paper, a written document, addressing what The Fed could do. I want to make sure that it's available to you. MS. BRAUNSTEIN: Thank you. MS. LAMBERTI: Since there is no question -- MS. BRAUNSTEIN: Yes. 205 MS. LAMBERTI: -- let me expand a little bit about what we're doing at AARP. Our Public Policy Institute has a role, a model, on how the rate, high-cost rates can be better compared. And based on this, now, software had been developed. So, in the future, as there's no requirement right now to have one-to-one counseling, which is rather difficult, particularly in rural areas, we think, as technology allows us in the future, that software makes it somewhat easier where you would enter certain data and either an expert or even a layman could handle this most likely over the internet. So that is one additional avenue. Again, there is no one way one size fits all. There's another possibility to prescreen. And when we, in particular we think that there are two target areas where there's counseling necessary. That's the group that most likely cannot repay the loans, where their situation is rather fragile, so they can really make a better consumer decision. And the second group, which is not unusual that someone takes out a loan and they put a qualified, they could qualify for a better rate or a different type of loan. So those are the two groups we think would really benefit from counseling. You can't counsel everyone. Most likely, it's too expensive, but you could definitely target the groups. 206 MS. BRAUNSTEIN: With internet programs, do you have a concern about people's access to the proper equipment to utilize it? MS. LAMBERTI: Well, at first, it seems like. But my own experience, since I'm working with the elderly all the time, it is usually they relatives who have access, to the public libraries now they have access. There's bound to be someone, and the counselor himself who has access. So, again, it's not the one and only way, but it will help definitely as we move forward to the future. MS. BRAUNSTEIN: One of the things I just thought of, because, when Francine was talking, I thought of this, and again when Chris was, is that we -- one of the dilemmas that we face at the Board in terms of even getting regulatory changes, and this was alluded to this morning I think in conversation, is that, if we were -- it's an option that's been talked about to us, which is that we do require some type of counseling for anybody entering into a HOEPA loan. And I know, this morning, the panel discussed people's negative reactions to that. That was one side of the issue. And I was -- we were just wondering, too, about that. How -- do you have any suggestions as to how that would be worded? Because, as Francine mentioned and hearing Chris talk, there's counseling and then there's counseling. And it seems 207 that, if we wanted to insure that there was some type of real quality counseling, I mean, how? Do you have any suggestions as to how that could be addressed? Because, otherwise, if we put something in there and it just meant somebody could fill out three worksheets, I'm not sure that that would be beneficial. MS. MC KINNEY: I think it might be something that you would want to work with AHECI on. Because, since they are establishing standards for counseling -- MS. BRAUNSTEIN: And certification. MS. MC KINNEY: -- and certification, then I think it should be based on the -- MS. BRAUNSTEIN: HUD also has certification. MS. MC KINNEY: I know HUD is working along with AHECI, so -- MS. BRAUNSTEIN: Are they planning to combine them? MR. HORNBURG: I can't tell you. They are working in concert. I think they are trying to. MS. BRAUNSTEIN: Okay MS. MC KINNEY: And then the other thing I just wanted to mention, in terms of people being resistant to education, we found that to be the case, also, until they come in and they go through a workshop, or they sit down with someone and we seek one-on-one counseling. Then they 208 learn to appreciate what the benefits are. But initially it is difficult. Usually, we don't have anyone saying: Gee, what a waste of time. MS. HOFFMAN MOLLOY: Can we go back to -- I'm a little bit haunted by your story of the $9,000 from the $20,000 loan. I keep -- I'm sort of processing that and thinking, you know, I think about it. A brochure certainly wouldn't have solved her problem. And I heard recently that, if we could solve the world's problem with brochures, we would have done that a long time ago. We probably don't need a lot more brochures. But what is sticking with me is that, despite the fact that she went through the home-buyers counselings, and despite the fact that you intervened and sat down with her and said, "Here's the information," she still made the decision to take the $9,000 of the $20,000. MS. MC KINNEY: Right. MS. HOFFMAN MOLLOY: What I want to understand is, in your estimation, was that really the lender of last resort for her, given her disability payments and income, the cash-flow issues, was that really all she could have gotten? MS. MC KINNEY: I think that was the lender of last resort. And the reality is she probably should not have been borrowing on her home because her -- I went back 209 and looked at her credit report. She really had very little debt. And she had gotten an excellent deal, along with the down-payment assistance, when she purchased her home. So her house payment was very low. It was only about five-something. So her disability payment actually covered her house note and her other expenses. But someone came along and knocked on her door and said: Gee, you need a new fence around your house. So part of the money was going to build a new fence. The reality is that we aren't going to be able to help everyone. There are some people that are going to decide that they just want the money regardless of what it costs, and there's not going to be much that we can do. So we have to try and figure out how we can get to those that we actually can help. MS. HOFFMAN MOLLOY: Okay. MR. FISHER: I'd like to speak to that. I think, and I sense this point in this discussion, the strengths and weaknesses of the consumer counseling. You know, the consumer counseling lays it on the individual to make that decision, rather than a systematic kind of thing. We sort like -- you know, not that this is exactly right; but I mean that people have vices, like gambling. And, if gambling was not available, they wouldn't gamble. So, I mean, I hope that you look at systemic 210 issues and regulation, because there's never going to be enough consumer counseling to reach out to all the individuals. And even when it does, sometimes, it's different than what we really hope to do. So, hopefully, there will be regulation that can look at things and start judging what's really going on and limit the predatory, not all the subprime, but the predatory portion of it. MR. HORNBURG: I also go back to, again, to where the goals of the counseling, and you just spoke very eloquently. The goals of counseling aren't always to the borrower who, with the right terms, can become a home owner. It's empowering the consumer to make the right decision for themselves. And, sometimes, the decision is: I shouldn't borrow; I shouldn't become a home owner right now. The other side of the coing is: I know I made some dumb decisions in my life before, but there's got to be some role for consumers here without going too far to take that away. Because we all might look at somebody's individual circumstance and say: Gee, I wouldn't do that. Okay? But I know some people look at some decisions I made and say: I wouldn't do that. So just a little bit of rationality on the part of some. MS. LAMBERTI: This seems like a sidestep. I didn't notice on the bio it said that I was still with the 211 Tax-Aide Program as a volunteer. Well, I haven't been there for the last two years. However, allow me to just share with you some experience there. Because there, we have strict standards in the Tax-Aide Program, and we know that we help 1.6 million there, people. We definitely have numbers and how many penalties. We have maybe sometimes even divorces. So the point I want to make here is: If I look back, the program was started 30 years ago, with ten counselings, and now they're 1.6. So it takes a number of years, really, to get hold. If the counseling program is established, with standards, and qualified, the counselors, it would take a number of years. You can do all the advertisements in the world, but not everyone will appreciate it. That's the nature. However, if we can reach more and prevent more damage, then that's what we want to do. MR. MICHAELS: Chris, I think you raised this earlier, and I just want some support a little bit because of some things I've heard over the last couple years as we've talked about abusive lending and predatory practices in the traditional mortgage market. What do you think, generally, of the idea of user of first mortgages as a wider basis to avoid some of the predatory lending that goes on in the traditional 212 market? MS. LAMBERTI: Well, AARP doesn't believe that we should go back to it. We think it's very important that credit is available to anyone who can afford it. It's really the -- any kind of policy we establish that we want it to be fair. So when we refer to predatory and abusive lending, it's really abusive, though. That's what we want to do. We do not want to limit the lending. MR. MICHAELS: I guess what I was trying to get at is there's been some, I guess, belief that there are less, there are fewer opportunities for abuses in the reverse mortgage market. Maybe some of the people who are getting abused in the HOEPA mortgage market may be better off with reverse mortgages, depending on the circumstances. MS. LAMBERTI: Exactly, depending on the circumstances. It partly might be the reason because, first of all, the reverse mortgage market is rather small. As you know, it's about 1 percent only. And there, there is mandatory counseling. And we know, for a fact, that one out of three only will apply for a reverse mortgage. However, there's slightly a drawback on it because of the general reputation, because of predatory lending, there's some borrowers out there, potential borrowers, who would be eligible for a reverse mortgage and would help them, 213 but they're not going for it. So that's where we're concerned, too. It's not just only the one who had been victimized by the abusive lending, but also the ones who will be eligible and stay away from it. As you said before I made the statement, it's circumstances. MR. MICHAELS: You alluded earlier to something, and I guess AARP was doing in terms of reverse mortgages. And I don't remember exactly what you said about it. It was something about a program established and it would create more data. Could you elaborate on that? MS. LAMBERTI: Well, you're always -- when was it? About a year ago, they were trying to establish standards, first of all. And, so, we supported this. We said, well, you can only do qualified counseling if there are certain standards in place. And at that moment, we were inviting counselors to participate in a test to see if they qualified, and only about 300 to 400 did actually qualify. And we, in AARP, tried to call a small group, like 20 or 30 out of this group, train them and make them available for networking, to be trainers of someone else for consumer hotlines and 800 numbers. So we think it's important to have certified, qualified counselors, because the result really depends on the quality of the counselor. And we have noticed there's not a wide understanding of what reverse mortgages are. And, for 214 some, they're good; and for some, they are not. And if someone is over 62 and takes out a reverse mortgage, it would also be eligible for another type of loan. They may want to take another loan. So counseling would bring this out, and it gives them the option to decide what's the best one. MR. MICHAELS: You had said something about in two years, we'll have better data. What specifically were you referring to? MS. LAMBERTI: Now that we have established standards here, and we have qualified counselors, then, this was more or less a benchmark that we could say, okay, from here on the number of qualified counselings, how many did not take the loan out based on this. So, it's a different understanding now that we have standards. MS. BRAUNSTEIN: Chester, you wanted to say something? MR. CARL: Yes. I would strongly support the encouragement to have standards in counseling, but also policies to support that. But in addition to that, I still need to note, for the record, that in Indian Country, not only do we need to provide education to consumers, but also education to financial institutions. That's something we're in dire need of. I would also, along that line, encourage 215 financial institutions to partnership with tribes to identify the consumer education programs that's relevant to each sovereign nation. I think that's the only way we reach the people that are in dire need of housing in Indian Country. MS. BRAUNSTEIN: Thank you. MS. SMITH: Any other comments or observations from any members of our invited panel? (No response.) Well, if not, we thank you very much for coming here this afternoon to offer us your views. And we thank also members of the audience who have taken an interest in this area. We're going to -- shall we take a break, or do we continue? Why don't we take a 10-minute break, and then we will reconvene with the open-mic session. [Recess.] MS. SMITH: Okay. I think we are ready now for our open-mic session. And I'll read the order of the names, and then you can approach the mic, and we'll call the name again in case there's any confusion. I have Terry Macken, Stephen Cogswell, Barrett Bates, George Duarte, Louis Bruno, Milton Hodge, Linnie Cobb, Howard Beckerman, Jim Bleisner and Shanelle Coleman. So Terry Macken, if you are in the room. 216 Let me mention that our timekeeper has moved up here so that we can -- so that the speakers will be able to see the one-minute and the time's-up mark. We have John Olson taking over as timekeeper. So, with that, if you will introduce yourself and start your three minutes. STATEMENT OF TERRY MACKEN MR. MACKEN: Good afternoon. My name is Terry Macken. I'm a mortgage broker, for 30 years. We do asset-based lending, and have for 30 years. We do not check credit and income, nor do we charge a pre-pay. Everyone talks about how lowering the triggers on APR, on the points and fees section, is valuable because it will bring more loans under HOEPA coverage. That's nonsense. That is not the solution. Almost all the cases complained about today, and in the earlier hearings, were probably illegal in one form or another. We wouldn't be having these hearings if the various regulators would enforce the laws, existing laws. That's what discourages these things. Lowering the triggers won't decrease the fraud. What it will do, as many speakers here have acknowledged, is cut down on the number of loans available to folks who need them the most. These things are illegal, but the actions only decrease when the 217 enforcement increases. The biggest single deterrent to a lot of these problems is adequate disclosure of what a loan is and is not. Some of these disclosures should be on the application, right above where the borrowers signs there names. Then, if there is something a borrower doesn't like, they don't sign the application and can go elsewhere. We have submitted proposals on what we feel would help in this area. As a broker for 30 years, making pure equity loans, where we don't check credit or income, what concerns me most is a blatant discrimination in so many of these proposals. Why are you treating subprime lenders as second-class citizens? Why are so many things verboten for subprime lenders that are universally accepted when an A-paper lender does them? Things, such as stated income, where everyone knows that the income is questionable, or wouldn't be done that way. Take such as negative amortization loans. Many home owners wouldn't be if it weren't for this type of loan. They'd still be paying rent somewhere instead of getting on board with inflation through home ownership. Interest-only loans keep payments down on short-term loans where the borrower needs some money for a short term, and the investor is unwilling to loan for more 218 than one to five years. We look at these as interim loans. We make a lot of them to help people over a rough spot, for whatever reason, until they qualify for a 3-year loan at its lower rates. And what's wrong with making more than one loan to a person? It's not impossible, you know, that their situation might change and they may need money again before they thought they would. Is there no one here that's ever had to refinance a loan? There seems to be a number of myths being bandied about on the subject of predatory lending that would have one believe all sorts of things that are not true. I hear a lot of people talk about the higher foreclosure rates on subprime loans by the same people that the rates are too high. Folks, the rates are higher because of the foreclosures. No lender wants foreclosures. They mean a loss of time and money. The higher rates are an offset to the risk. Now many of the speakers today, and in other hearings, want to penalize the broker for not giving an unemployed person, with bad credit, the same rate as A-paper lenders do. Incredible. You need to walk a mile in my shoes. People say you should check a borrower's income. A-paper lenders don't have to, so why should subprime? The reason many people are subprime is because they've 219 lost their job. Some people are out of work for quite awhile because of their specialty or even their age. Is there something wrong with helping these people? Or would you prefer they lose their homes to a foreclosure? Balloon payments are verboten for subprime lenders. Why, if they're okay for A-paper lenders? The business about not being able to rewrite your own loans is 180 degrees opposed to the American idea of doing such a good job that a client will want to come back to you. That applies to any business, phones, computers, eyeglasses, doctors, et cetera. Why say loan brokers can't do the same thing? Many of these proposals are so discriminatory as to be un-American. In closing, I'd like to say that no one would object to disclosures if it weren't for the discrimination that accompanies them. They are discriminatory and unfair to mortgage brokers. They're discriminatory and unfair to borrowers. People are entitled to know about their loans, just like other things they buy. But you shouldn't try to put the people out of business that do the disclosures. Thank you. MS. SMITH: Thank you very much. Mr. Cogswell. STATEMENT OF STEPHEN COGSWELL MR. COGSWELL: My name is Steve Cogswell. I'm 220 with Sentinel Fair Housing. We're a housing counseling agency in Alameda. We're also do fair housing enforcement in the same area. We're aligned with the National Fair Housing Alliance and we're also involved in with the California Reinvestment Committee in their predatory lending project. Just want to make several comments, very quickly, I hope. We found ACORN published a study a couple of years ago, say 1998, with market share for subprime lenders representing about 2 percent of the lending in Oakland. We've gone through with those lenders and taken a look at their foreclosure rates, and they represented about 13 percent of the foreclosures that are currently going on, or at least occurred in the first six months of this year in the county of Alameda, actually. This is preliminary data, and actually grossly understates the actual share of both the market share subprime lending within the area because we were able to identify a number of non-reporting subprime lenders that are current, that are doing business in Oakland and Alameda, but are not reporting their market share analysis that ACORN did. Relative to the recommendations here, and specifically I want to speak to enforcement, we very strongly support the idea that subprime lenders be 221 included and be required to do underreporting so that we can actually get some market share data that is of a reasonable nature. Secondly, I would strongly recommend that people look at the FHA foreclosure reporting requirements of the Cranston-Gonzales Bill, and the data that comes out of that, which is very similar to HMDA data, but includes the foreclosure statistics for FHA loans. It's available by Census Tracks. But it has a model for reporting of foreclosure data. And that, then, also goes to the enforcement. If you know who these folks are, we can take a look at that. Earlier today, one of the lenders who was here was a lender that I looked at very closely with that data, because it appeared to me that they were doing predatory lending. And, indeed, on a closer look, they were not. Okay? I have to say that. But it does raise a red flag and give you at least the initial capacity to be able to look at these things for enforcement. Thank you. MS. SMITH: Thank you very much. Mr. Bates. STATEMENT OF BARRETT R. BATES MR. BATES: Hello! My name is Barry Bates, and 222 I'm a 28-year veteran of the mortgage industry in appraisals. But, also, in the last 15, working for major, regional and national lenders engaged both in prime and subprime lending. And I thought I'd share a little experience that I've had along these lines with regard to predatory lending and the rate and fee triggers in HOEPA. The rate and fee triggers seem to address primarily the issue usury, high rates, high fees, that are unconscionably high, and drive a borrower into foreclosure. But I would submit that it really is about the inadequate controls over the front-end, incentive-commissioned loan originators. And I would argue that, as these agents, it's really a breach of sound business practices and a structural problem in the mortgage industry, rather than it is a breach of trust at the point of origination. Predatory lending may indeed be. Instances of it may be anecdotal. But I believe that either through the SEC and through the securitization of subprime loans it is possible to gather evidence through that conduit in order to determine, for example, whether, what percent of loans are covered by HOEPA; and, also, what foreclosed loans resulted from these types of practices. On the prime lending side, the Office of the Comptroller of the Currency, the NCUSA, the FDIC, OTS, 223 Fannie and Freddie, the Federal Home Loan Bank, all have the ability to examine these types of loans. But it does little good because they're looking at the federally regulated lending industry, primarily engaged in prime lending, and which have been adequately overseen since the S&L debacle in the 1980s, and the inculcation of the Federal Financial Institutions Recovery Reform and Enforcement Act of 1989. I would submit that two questions only need to be asked in order to determine whether a loan is predatory. But I'd say the definition of predatory lending is any business practice related to the origination of a mortgage which creates economic benefit for the originator at the actual or probably expense of the borrower's financial stability. And I think that those things can be concretely determined (1) by asking the question did the borrower gain a tangible benefit from this loan? If it's a debt-consolidation loan, did their gross net ratio go up or down after the mortgage was instituted? If it was home improvement, were the monies released to the contractor instead of to the borrower? If it's a cash-out mortgage, what is the LTV and what is the highest LTV that this borrower could stand? The other major question from my perspective is: Who controlled the valuation of the property? As long as 224 incentive-loan originators are controlling the hiring of appraisers, are controlling the transmittal of the credit report to an underwriter, or the transmittal of some of the underwriting rules prepared up front, this is a predatory lending and will not be a problem that will be resolved in the near future. So I don't see the necesssity to reduce the triggers at this point because I think the overriding problem is really in business structure. Thank you. MS. SMITH: Thank you very much. Mr. Duarte. STATEMENT OF GEORGE DUARTE MR. DUARTE: Good afternoon, ladies and gentlemen. Thank you for allowing this opportunity. My name is George Duarte, and I own a mortgage brokerage company here in the Bay Area, Fremont. And I'm the immediate past-chairman of the Legislative Committee for the California Association of Mortgage Brokers. And I'm glad that you're having this hearing today, and I'm glad to be able to participate. I just wanted to go over a few points that I've observed and that are important to our Association of Mortgage Brokers. One is that we are absolutely against predatory lending practices. Second is that we feel that a consistent enforcement of existing state and federal 225 regulations and laws would go a long way towards -- as part of alleviating the process. The definition of predatory lending is a very important situation, and would go a long way towards, again, addressing the situation in that, first, you need to define what the problem is, and then be able to quantify it to see to what extent to remove the emotionality out of the debate. I was very impressed with the definition from the state of Washington of predatory lending: Deceptive and fraudulent practices in mortgage loan origination. And, ultimately, it doesn't really matter how many laws and regulations there are, if you have a license and who you work for. If you're an individual or a company that has the intent of creating an illegality and taking advantage of a consumer, then you're a bad person and you're going to do that whether there are laws against it or not. So what's important is to create an environment so that those activities will be able to be found out and will be enforced. We also advocate plain English disclosures. This would go a long way in alleviating the problem. Again, as the gentleman from Washington alluded to earlier today, to get those plain English disclosures out at the beginning of the loan process very clearly so that the 226 borrower would understand what the terms are of the loan in nice, big print, so it would make it much more difficult to obfuscate what the consumer is getting, so that they'll know what they get at the end of a loan process. We would encourage that the Federal Reserve encourage and assist industry efforts at self-policing, elimination of dishonest loan originators and current consistency of disclosure requirements for all mortgage loan originators regardless of what industry group they belong to -- be it banks, mortgage brokers, finance companies, home-equity lending. Have the same rules and regulations apply to all originators to the consumers, that the consumer will be consistently understanding what's happening. I would also urge that you do not reduce the consumer's choices by eliminating different features of loan programs, prepayment penalties, balloon payments. These can all be useful tools in providing services to individual consumers being able to tailor a loan to an individual consumer. In terms of counseling, where counseling and education is very good, but we're very concerned that counselors be properly educated. That somebody just doesn't read a pamphlet, fill out a form, and then, all of 227 a sudden, they're a counselor. Mortgage loans can be quite complex, especially when applied to a particular individual; and, therefore, the people doing the counseling should be properly educated. Thank you very much for the opportunity. MS. SMITH: Thank you. Mr. Bruno. STATEMENT OF LOUIS BRUNO, ESQ. MR. BRUNO: Good afternoon. My name is Lou Bruno. I'm a private attorney in Escondido, California. I have a couple of quick observations and nine points I thought I would try and raise in response to the questions by the Board. There's been a long question as to the effectiveness, as discussed in terms of HOEPA here. There's been articles on the effectiveness of TILA. I think one of the problems you all have in finding the benefit of TILA at this time, and HOEPA, is your looking at the consumer at the beginning of the transaction. It would be nice if the consumers understood enough about the loan process and they felt and realized what options they had that they could go into the deal fairly, squarely, and understand it. I think the key benefits we've had from TILA, and that we are seeing from HOEPA, come at the end, 228 especially the power to rescind. Testimony given here this morning, by Countrywide, made it very clear that damages are not sufficient. The testimony was: We have a lot of frivolous actions where we pay the attorneys fees. If you paid the attorneys fees, he had the violations. He didn't believe that he had any substantive violations. To address the questions of the panel, the first question was on education. Based on what I've just said, I would recommend that this panel has to understand the tremendous advantage you have. You know TILA exists. I have had real estate brokers tell me: You don't mean you can actually rescind? I have had a federal judge ask me: Do you, are you serious that TILA allows you to rescind alone? That's the kind of background that you're trying to educate consumers in. They go to a counseling and, if they go for a second opinion, where are they going to go? The National Association of Consumer Attorneys? I have checked through their directory and there are some stated that have absolutely no attorneys that are members that are listed. How do you find the attorney who knows what TILA is and how to enforce it, and even evaluate it? I would suggest that increased news coverage of enforcement efforts by the different enforcement agencies will help build awareness, as well. Certifying attorneys as specialists also gives 229 -- it creates a heading in the listings where boards will know where to refer. Statute of Limitations, as far as applying this is one of the keys. Beach v. Ocwen is currently being interpreted by many federal judges to mean that you must both rescind and file your lawsuit within three years. They don't understand the philosophy. They don't understand the limitations of Beach v. Ocwen. A clarification by the Board, in that point alone, would help. Furthermore, a clarification of the Board supporting Beach v. Ocwen as to the application of state remedies would also be helpful. As to the triggers, the other problem we've come into is: While you are putting limitations, it is often interpreted as a license. Anecdotal evidence that I have indicates that there is -- if I can have leave to finish, I'll rush? I'm sorry. Anecdotal evidence I have indicates -- I have one expert on a totally different case, who is attempting to prove a HOEPA violation. He has to prove 21 percent. The highest he can go is 20.5. That has to be dramatically above whatever the state regulation is. But because he can't quite get to the limit you have drawn, he is ready to look at no violation. I think one of the 230 remedies to that would be a differentiation recognized by the Board of a de facto violation, and then per se violations being defined by specific numbers in the triggers. That would allow any attorney, who is attempting to defend a foreclosure, to say: I've got issues of fact. I cannot get a summary judgment based on actual, clear-cut violation. But there is still an issue, especially as some of the testimony you had today. The borrower doesn't believe they have a choice. How can you actually say they had fair disclosure? One of the things I would suggest that should be added to the form is the credit rater. You are A paper, you are B paper, you are C paper. Let them know what their rating is, and is there any other source that they are likely to be able to go to? If that's required to be shown to them, they will understand yes, I do have a choice, or not. They do understand when they've been abused at the end. As to the rescission, the testimony that there is a SWAT Squad that rushes into avoid foreclosures, I've never seen it. I've never met anybody that has. It would help if lenders were required, or were given, direction. If you want to avoid the effect of rescission, here's where you go for judicial relief. At the current time, 1635, and the regs, are totally silent as what to happen 231 if the lender ignores the rescission. Also, on the definition of tender. I've had a lender actually try and tell me that I need to surrender a $750,000 home to tender on a $400,000 note that was rescinded after 3 years. Proper rescission amount should have been about $290,000. MS. SMITH: What number are you on? MR. BRUNO: Six. MS. SMITH: Can you just read the rest? MR. BRUNO: Basically, as far as -- I think I may have -- one final request, I would make -- and I think the rest of it may be by implication -- is the statutory damages provided in TILA. It would be helpful if the Board were to clarify that statutory damages are not a replacement for a prohibition of punitive damages. Even those few modifications that can be addressed either in comments or rules would give the few attorneys that do know what is involved with TILA a chance to have a fair shot at presenting their case. Thank you. MS. SMITH: Thank you very much. Mr. Hodge. STATEMENT OF MILTON HODGE MR. HODGE: Good afternoon, folks. I'm here from ACORN, as a member of the ACORN Association. And I 232 would like to take this opportunity to invite all of you here to join ACORN. You're all very knowledgeable, and we welcome you. We have three young ladies back there that will be glad to write you up. No question about it. Now to get down to business here. I am interested in the predatory lending associated business here. Because, when my wife was living, we got involved with a finance company. We had a balloon payment at the end of what we thought was the final payment. So my wife went in to pay it. When she came out, she came out crying. So I said to her, "What happened?" She said. "We owe fifteen hundred dollars more." So I parked the car. I was double-parked. I parked the car and I went in. The people told me that we had to come up with fifteen hundred dollars in a hurry. Well, we didn't know where we were going to get it. But, overnight, we thought about it, so we mortgaged the house through the Bank of America. They came to our aid and we got out of that. We learned from experience. From then on, we watched everything we did. Not that we were that intelligent. I'm not an intelligent man; I'm an old man. See, I wasn't that either. But the facts was that we learned from that experience. And if you could open this 233 to a point where the lender would have to specify that there is a balloon payment, that he would be flipping the loan. So we want to get this on record now. Bring it into focus where the simple people can deal with it. All of you here are very knowledgeable, but, as I say, if you want to join ACORN, I don't want you over 80, because I don't want nobody telling me: Sit down, Boy! You don't know what you're talking about. [Laughter.] Thank you. MS. SMITH: Thank you very much. Linnie Cobb. STATEMENT OF LINNIE COBB MS. COBB: Good afternoon, each and everyone of you. I'm very happy to be here, to be able to speak on behalf of our community. I'm Linnie Cobb, and I am a member of Oakland ACORN. And I'm here today on behalf of the California ACORN. We are a community organization of low- and moderate-income people, and we are coming together to make changes in our neighborhoods in Oakland, San Jose, Sacramento and Los Angeles. We have been working hard to keep our neighborhoods safe from predatory lenders, or subprime mortgage lenders who prey on our communities by convincing 234 residents to sign up for bad loans, which result in our neighbors losing their homes. We call on the Federal Reserve to take action against predatory lenders that are destroying our dreams of home ownership. At ACORN, our knowledge of predatory lending comes directly from the community. We organize our neighborhoods house by house, and block by block. Unfortunately, we have found far too many of our neighbors who have become victims of predatory lending practices. I would like to share with you just a couple of the reasons why this is so important to us. The first of these reasons is: Estella Padenas, of Salinas, California. Estella heard about the company, Beneficial, through a neighbor. She got her loan in 1994 at an interst rate of 8.5 percent. The loan agents made some mistakes on the papers, and had her sign several blank pages, promising that they would fill in the correct numbers. Estella began to suspect a problem last year when Household Finance took over her loan and payments jumped from $1,200, to $1,800 per month. She soon realized that her interest rate was adjustable and had risen to 14.5 percent. Worse still, her original loan had a balloon payment of $89,000 at the end of the 15-year loan. There's another one. Eddie Moore, of 235 Sacramento, is another reason that predatory lending must be stopped. She got her loan with Beneficial to pay off some bills. She had missed a house payment and needed to pay her house. Her credit was not perfect because her husband had leukemia. When she went to Beneficial, she ended up with a 25 percent interest rate on the $20,000 that she originally borrowed. The loan required $76,000 to get it paid off. This was as much as the original value of the house. Since then, Mrs. Moore has refinanced and has been flipped to American Loan, Ameriquest and Aurora. Victims of predatory lending often find themselves being flipped faster than can even keep track of. And, finally, I want to share just a few words with you about Rodina Tucker, a resident of Oakland. Rodina's original loan was with Universal. She needed $7,100 to pay off her taxes. The agent convinced her to include $7,500 in debt consolidation, bringing the loan to $15,000. Then they insisted on $5,000 for pocket money and household bills. Rodina had a previous loan of $15,000 from the city, and Universal wanted her to fold this into her loan. Even though Rodina said, "No," the lender contacted the city anyway and said they could add it to her loan and subordinate the loan for 30 years. Now, several years and numerous flips later, Rodina owes 236 more than ten times what she originally borrowed. Her loan was with one company, for such a short time, that she didn't even get to make one payment on it before it was sold to somebody else, and her payments went up again. These are just a few of the reasons that predatory lending must be stopped. ACORN calls on the Federal Reserve to make immediate action to protect our neighborhoods. There is no time to waste. We must take action before even one more victim falls prey to the dangerous tactics of these lenders. And we must take action to protect the American dream of owning a home. And I thank you very much for listening. MS. SMITH: Thank you very much for appearing. MS. COBB: Thank you. MS. SMITH: Mr. Beckerman. STATEMENT OF HOWARD BECKERMAN MR. BECKERMAN: Good afternoon, ladies and gentlemen. My name is Howard Beckerman. I am a mortgage broker, loan originator in California. I'm with the California Association of Mortgage Brokers. I work in the East Bay, although I do loans throughout the state. I have been doing loans for about 8 years. I'm also a consumer. I own my home in 237 California. I owned my first home in California 15 years ago. I needed a negative amortization loan to get that home. I needed a prepayment penalty to bring the rate down. I was very happy to get it. It was disclosed to me, and it's worked out quite well. I'm here to talk about what we perceive as predatory lending, what modifications in HOEPA can do for it or can not do for it, and what we can do as an industry. What the Federal Reserve, as an industry, can do to help people get reasonable loans at terms that they can live with, that they can keep in their home. I've got to tell you that my license is by the Department of Real Estate here in California. That means I have a fiduciary responsibility to my client. Many originators, many banks, many finance companies do not have that license. They do not have the responsibility to the client that I do. Because of that, as part of my job, I provide counseling. If the client comes to me early enough in the process, we can get them what would be called an A-paper or prime loan. If they come to me a little bit later in the process, unfortunately, subprime is the alternative. And we get them the best loan that we can. As far as predatory lending, I've heard a lot of different examples, and all the examples you've heard 238 recently are examples of predatory lending. But to define it, it's tough. I think there was a United States Supreme Court Justice who, to paraphrase, said: I'll know it when I see it. And I have seen some very bad loans, and I've seen some loans that horrify me, both on the subprime and the prime area, where clients were charged higher rates then they needed to be charged -- whether it be at 7 percent or 15 percent. What had benefitted consumers the best is competition. HOEPA itself has been ineffective in my experience. In the years that I've been doing loans, I've done 2 HOEPA loans. The only thing that HOEPA has done has been to delay the process three extra days. The client changed no terms. HOEPA does not attack the predatory lenders. They find ways to commit fraud no matter what the triggers are going to be. So lowering the triggers will not prevent fraudulent predatory loans to happen. They will work either within the laws to extend clients out too far, or they will simply commit crimes. Then it's up to enforcement to find them. The solutions to the problems that we've heard is: I advocate registration and licensing of every loan originator in the country. If we all have a fiduciary responsibility, then, when we sign a loan application as the originator, we are putting our license, we are putting 239 our livelihood on the line. That will make a big difference. I'd also like to see credit counselors certified. There are a lot of good credit counselors out here today. But I have met some who, even though they are trying to do good, give inaccurate information to customers, and wind up causing them to pay higher rates. The second most important thing would be to simplify disclosures. The gentleman, who was here this morning from Washington State, had a two-page form which goes a long way to simplifying disclosures to consumers so they understand what their rate is, what their payment is going to be. TILA and APR, which were very good 30 years ago, are antiquated in today's mortgage market. They are difficult to understand, compute and really do not help consumers. I'd also ban any form of credit life insurance, especially the single pay, from being packaged with the mortgage. In fact, if you wanted to do it right, you would ban any ancillary service from being packaged with a mortgage, whether it be a free credit card, whether it be any kind of home-improvement possible. Leave the mortgage as it is. Let the consumer make the decision about other items after the loan has closed. I see my time is up. I will submit written 240 discussions on other things. I'd like to thank you for listening. MS. SMITH: Thank you very much. Mr. Bliesner? (No response.) Ms. Coleman. STATEMENT OF SHANELLE COLEMAN MS. COLEMAN: Good afternoon. My name is Shanelle Coleman, and I'm a member of ACORN, community organizations. We are fighting against predatory lending because we've seen what it's done to the people in our neighborhoods, to the families who've been ripped off for tens of thousands of dollars, and to others who have lost their homes. We're pushing our campaign in the Bay Area and across the country to rid our communities of predatory lenders. We're targeting problem lenders with actions, pushing them to improve their practices, and urging Wall Street to show some responsibility. We're supporting legislation at local, state and national levels to crack down on predatory lending. We're here today because our neighborhoods need the Federal Reserve to do its part against predatory lending. It's been six years, since HOEPA passed, and The 241 Fed is only starting to look at using its authority under the law. But this is definitely a case of better late than never. We call on The Fed to live up to the responsibilities to our community and take the following steps: First: Change the fee threshold to better reflect the subprime industry works. The Fed should count yield spread premiums and excessive prepayment penalties as fees. Second: To lower the APR threshold to Treasury plus 8 to cover more high-cost loans. Third: To provide a strong definition of unfair and deceptive practices. The Fed should outlaw enormous rip offs of single-premium credit insurance. It should prevent loan flipping, and prohibit lenders from making any loans that they know borrowers cannot repay. These changes will strengthen the consumer protections of HOEPA, and provide those protections to more borrowers in higher coat loans. We are counting on The Federal Reserve to help protect more home owners and the neighborhoods from abusive loans. We also need The Fed to push banks to be more active in our community so that people have more choices. We will continue to organize and take action in order to 242 protect our communities and provide our neighborhoods with decent loan so that all families can have a chance to buy a home and the ability to keep it. Thank you. MS. SMITH: Thank you very much. That is -- that's the end of the list that I was given of people who had signed up previously. Is there anyone in the audience who has not signed up but who would like to take advantage of our open-mic session? If so, would you raise your hands? (No response.) If not, I thank very much everyone who has participated in our open-mic session. Again, thanks to everyone else who came to listen. The comment period on our proposal officially closed on September 1. But if any of you have comments that you would like to submit for consideration, then we invite you to do so as soon as possible. The comments will be considered to the extent that we can. So, with that, we are adjourned and, again, thank you very much. (Whereupon, at 3:45 p.m., the hearing was concluded.) 243 C E R T I F I C A T E I hereby certify that this is the transcript of the proceedings held before the BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM on Thursday, September 7, 2000, at San Francisco, California, and that this is a full and correct transcription of the proceedings. JAMES W. HIGGINS, CVR
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