FRB: Federal Reserve Bank of Atlanta - July 11, 2006 - Transcript

Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of Atlanta
1000 Peachtree Street N.E., Atlanta, Georgia 30309
July 11, 2006

Agenda | Transcript

Pages 1-25 | 26-50 | 51-75 | 76-100 | 101-125 | 126-150 | 151-175 | 176-200 | 201-226

Transcript	Line	Page
THE FEDERAL RESERVE BOARD	1	1
	2	1
	3	1
	4	1
	5	1
convenes the	6	1
	7	1
	8	1
	9	1
	10	1
PUBLIC HEARING RE:	11	1
	12	1
BUILDING SUSTAINABLE HOMEOWNERSHIP:	13	1
RESPONSIBLE LENDING AND INFORMED CONSUMER CHOICE	14	1
	15	1
	16	1
	17	1
	18	1
	19	1
	20	1
	21	1
	22	1
	23	1
The verbatim transcript of the Public Hearing held	24	1
	25	1
before Charlene M. Hansard, CCR-CVR, Certified Court	26	1
	27	1
Reporter in and for the State of Georgia, at the	28	1
	29	1
Federal Reserve Bank of Atlanta, 1000 Peachtree Street,	30	1
	31	1
N.E., Atlanta, Georgia, at 8:30 a.m. on July 11, 2006.	32	1
	33	1
	34	1
	35	1
	36	1
	37	1
	38	1
	39	1
	40	1
	41	1
	42	1
	43	1
	44	1
	45	1
NANCY LEE & ASSOCIATES	46	1
Certified Verbatim Reporters	47	1
P. O. Box 451196	48	1
Atlanta, Georgia 31145-9196	49	1
(404) 315-8305	50	1
C O N T E N T S	1	2
	2	2
	3	2
PARTICIPANTS...............................................4	4	2
	5	2
	6	2
WELCOME AND OPENING REMARKS	7	2
Sandra Braunstein.....................................8	8	2
	9	2
	10	2
THE IMPACT OF FEDERAL AND STATE PREDATORY LENDING LAWS AND	11	2
DEVELOPMENTS IN SUBPRIME LENDING: CONSUMER AND INDUSTRY	12	2
PERSPECTIVES	13	2
Sandra Braunstein....................................14	14	2
Barbara Kent.........................................18	15	2
William Brennan, Jr..................................22	16	2
Gail Burks...........................................26	17	2
Harry Dinham.........................................30	18	2
Wright Andrews.......................................33	19	2
	20	2
	21	2
NONTRADITIONAL MORTGAGES: UNDERSTANDING THE MARKET AND	22	2
INFORMED CONSUMER CHOICE	23	2
Sandra Braunstein....................................78	24	2
Doug Duncan..........................................79	25	2
Glenn T. Costello....................................83	26	2
George A. Reynolds...................................87	27	2
Ken Logan............................................90	28	2
Alys Cohen...........................................95	29	2
Kathleen Crawford....................................98	30	2
Mike Wright.........................................102	31	2
Allen Fishbein......................................104	32	2
	33	2
	34	2
THE IMPACT OF DISCLOSURES ON CONSUMER CHOICE	35	2
Sandra Braunstein...................................146	36	2
Vanessa Gail Perry..................................147	37	2
John C. Kozup.......................................150	38	2
Patricia McCoy......................................154	39	2
Janis K. Pappalardo.................................157	40	2
Susan Kleimann......................................161	41	2
	42	2
	43	2
	44	2
	45	2
	46	2
	47	2
	48	2
	49	2
	50	2
C O N T E N T S	1	3
	2	3
(continued)	3	3
	4	3
	5	3
OPEN MICROPHONE	6	3
Sandra Braunstein...................................197	7	3
Senator Vincent Fort................................198	8	3
Karen E. Brown......................................201	9	3
Adrienne Ashby......................................204	10	3
Nancy MacLeod.......................................207	11	3
Richard Brown.......................................210	12	3
William Vatavuk.....................................213	13	3
Nicole Cotton.......................................214	14	3
Dave Hall...........................................215	15	3
Paula Harrison......................................216	16	3
Stella Adams........................................218	17	3
Larry Cherry........................................220	18	3
Derrick Bozeman.....................................222	19	3
	20	3
	21	3
ADJOURN .................................................225	22	3
	23	3
	24	3
CERTIFICATE OF REPORTER..................................226	25	3
	26	3
	27	3
	28	3
	29	3
	30	3
	31	3
	32	3
	33	3
	34	3
	35	3
	36	3
	37	3
	38	3
	39	3
	40	3
	41	3
	42	3
	43	3
	44	3
	45	3
	46	3
	47	3
	48	3
	49	3
	50	3
P A R T I C I P A N T S	1	4
	2	4
(By Group, in Alphabetical Order)	3	4
	4	4
	5	4
FEDERAL RESERVE BOARD:	6	4
	7	4
Sandra F. Braunstein	8	4
Director, Division of Consumer and Community Affairs	9	4
Board of Governors of the Federal Reserve System	10	4
	11	4
Joan Buchanan	12	4
Assistant Vice President	13	4
Federal Reserve Bank of Atlanta	14	4
	15	4
Leonard Chanin	16	4
Associate Director, Division of Consumer and Community Affairs	17	4
Board of Governors of Federal Reserve System	18	4
	19	4
Jim Michaels	20	4
Assistant Director, Division of Consumer and Community Affairs	21	4
Board of Governors of the Federal Reserve System	22	4
	23	4
Juan Sanchez	24	4
Assistant Vice President and Community Affairs Officer	25	4
Federal Reserve Bank of Atlanta	26	4
	27	4
	28	4
PANELISTS:	29	4
	30	4
Wright Andrews	31	4
National Home Equity Mortgage Association	32	4
	33	4
William Brennan Jr.	34	4
Director, Home Defense Program	35	4
Atlanta Legal Aid	36	4
	37	4
Gail Burks	38	4
Executive Director, Nevada Fair Housing Center	39	4
Board Member, National Community Reinvestment Coalition	40	4
	41	4
Alys Cohen	42	4
Staff Attorney	43	4
National Consumer Law Center	44	4
	45	4
Glenn T. Costello	46	4
Managing Director	47	4
Residential-Mortgaged Backed Securities Group	48	4
Fitch Ratings	49	4
	50	4
P A R T I C I P A N T S	1	5
	2	5
(Continued)	3	5
	4	5
	5	5
Kathleen Crawford	6	5
Consumer Protection Chair & Affordable Housing Chair	7	5
National Association of Mortgage Brokers	8	5
	9	5
Harry Dinham	10	5
President	11	5
National Association of Mortgage Brokers	12	5
	13	5
Doug Duncan	14	5
Senior Vice President and Chief Economist	15	5
Mortgage Bankers Association	16	5
	17	5
Allen Fishbein	18	5
Director, Housing and Credit Policy	19	5
Consumer Federation of America	20	5
	21	5
Barbara Kent	22	5
Director, Consumer Affairs and Financial Products	23	5
New York State Banking Department	24	5
	25	5
Susan Kleimann	26	5
President	27	5
Kleimann Communication Group	28	5
	29	5
John C. Kozup	30	5
Assistant Professor, Department of Marketing	31	5
Director, Center for Marketing and Public Policy	32	5
Villanova University	33	5
	34	5
Ken Logan	35	5
Chairman-Elect	36	5
National Home Equity Mortgage Association	37	5
	38	5
Patricia McCoy	39	5
Professor of Law	40	5
University of Connecticut School of Law	41	5
	42	5
Janis K. Pappalardo	43	5
Economist, Bureau of Economics	44	5
Federal Trade Commission	45	5
	46	5
	47	5
	48	5
	49	5
	50	5
P A R T I C I P A N T S	1	6
	2	6
(Continued)	3	6
	4	6
	5	6
Vanessa Gail Perry	6	6
Assistant Professor	7	6
George Washington University	8	6
School of Business and Public Policy	9	6
	10	6
George A. Reynolds	11	6
Senior Deputy Commissioner	12	6
Georgia Department of Banking and Finance	13	6
	14	6
Margot Saunders	15	6
Of Counsel	16	6
National Consumer Law Center	17	6
	18	6
Mike Wright	19	6
Managing Broker	20	6
Prudential Georgia Realty	21	6
National Association of Realtors	22	6
	23	6
	24	6
AUDIENCE SPEAKERS:	25	6
	26	6
Stella Adams	27	6
North Carolina Fair Housing and Community Reinvestment	28	6
Association of North Carolina	29	6
	30	6
Adrienne Ashby	31	6
Atlanta Legal Aid Society	32	6
	33	6
Karen E. Brown	34	6
Atlanta Legal Aid Society	35	6
	36	6
Richard Brown	37	6
North Carolina Fair Housing and Community Reinvestment	38	6
Association of North Carolina	39	6
	40	6
Derrick Bozeman	41	6
	42	6
Larry Cherry	43	6
University of Life Itself (Consumer Advocacy)	44	6
	45	6
	46	6
	47	6
	48	6
	49	6
	50	6
P A R T I C I P A N T S	1	7
	2	7
(Continued)	3	7
	4	7
	5	7
	6	7
Nicole Cotton	7	7
North Carolina Fair Housing and Community Reinvestment	8	7
Association of North Carolina	9	7
	10	7
Senator Vincent Fort	11	7
39th District, State of Georgia	12	7
	13	7
Dave Hall	14	7
North Carolina Fair Housing and Community Reinvestment	15	7
Association of North Carolina	16	7
	17	7
Paula Harrison	18	7
North Carolina Fair Housing and Community Reinvestment	19	7
Association of North Carolina	20	7
	21	7
	22	7
Nancy MacLeod	23	7
Atlanta Legal Aid Society	24	7
	25	7
	26	7
William Vatavuk	27	7
North Carolina Fair Housing and Community Reinvestment	28	7
Association of North Carolina	29	7
	30	7
	31	7
	32	7
	33	7
	34	7
	35	7
	36	7
	37	7
	38	7
	39	7
	40	7
	41	7
	42	7
	43	7
	44	7
	45	7
	46	7
	47	7
	48	7
	49	7
	50	7
P R O C E E D I N G S	1	8
8:46 a.m.	2	8
MS. BRAUNSTEIN: Good morning, everybody. I think	3	8
we're going to get started. And I'd like to welcome you to	4	8
what is the final public hearing under the Home Ownership	5	8
and Equity Protection Act or HOEPA as it's known. We have	6	8
held three previous hearings: one in Chicago, one in	7	8
Philadelphia, and one in San Francisco. And they've all	8	8
been extremely helpful and extremely enlightening for us.	9	8
And we're looking forward to today's hearing	10	8
because we have a lot of very good panelists that will be	11	8
joining us during the day. And the purpose of these	12	8
hearings is to really look at the home equity lending	13	8
markets and the adequacy of existing regulatory and	14	8
legislative provisions for protecting the interests of	15	8
consumers, in particular, low and moderate income consumers.	16	8
What we've done through these hearings is really	17	8
explore three major topics. We have been looking at the	18	8
impact of the HOEPA rules, and that's both the federal HOEPA	19	8
rules that we have, as well as other predatory lending laws	20	8
that have been enacted on state and local levels. We've	21	8
also been looking at non-traditional products. And as we	22	8
know, there's been a real boom in the existence of non-	23	8
traditional mortgage products, things like interest only	24	8
loans, option ARMs, and other kinds of variations on those	25	8
themes and an emergence -- a strong emergence of reverse	1	9
mortgages.	2	9
And we've been looking at those products, too, and	3	9
in particular, is there adequate information out there for	4	9
consumers and do they understand the implications of these	5	9
products. And we've also been looking at how consumers	6	9
select lenders and products, especially in the subprime	7	9
markets, how they go about shopping, if they shop, push	8	9
marketing issues, and other issues around the whole issue of	9	9
selection of products and services.	10	9
For these hearings we basically have four	11	9
objectives. We want to try to assess the effectiveness of	12	9
changes that we made to the HOEPA rules in 2002. We are	13	9
required by statute to conduct these hearings on a regular	14	9
basis. And frankly, the last time we did them was in 2000,	15	9
and we purposely waited six years to do this because we	16	9
wanted to wait to give time for the changes that we made in	17	9
2002 to take effect and to see if there's been any impact,	18	9
either on the availability of credit to consumers or if	19	9
there's been an impact on the lessening of abusive	20	9
practices. And we've been talking about those issues.	21	9
We're also gathering information for a pending	22	9
review that we are planning of regulation Z, in particular,	23	9
the closed-end credit rules around mortgage disclosures.	24	9
And we want to -- Through these hearings, another objective	25	9
of ours is to determine where additional education,	1	10
information, both materials, activities are needed and what	2	10
those might be for consumers. And then also we're trying to	3	10
identify where there are mortgage lending issues that would	4	10
lend themselves to additional research and to try and	5	10
encourage that research, possibly internally through the Fed	6	10
or externally through other organizations. And I know today	7	10
we're going to be spending quite a bit of time talking about	8	10
research around consumer behaviors in our third panel.	9	10
These hearings are particularly important right	10	10
now because of the development over the last years of	11	10
extremely complex products. And on the one hand, that's	12	10
been a positive development because certainly more people	13	10
are getting credit and have access to credit than ever have	14	10
before in history. However, we also know that if those	15	10
products are not utilized appropriately, they can be fraught	16	10
with problems for consumers and can have some bad results.	17	10
So we really want to look at these issues and try to figure	18	10
out, you know, what is best going forward and what we can do	19	10
in terms of our authority as regulators.	20	10
This -- The whole mortgage lending process really	21	10
has shared responsibilities. And there are roles obviously	22	10
for the consumers through consumer education, through	23	10
shopping, through finding out as much information as they	24	10
can, through taking care of their personal finances and	25	10
making sure that their credit records are the best that they	1	11
can be, through the lenders for acting responsibly, for not	2	11
abusing vulnerable consumers, for presenting information as	3	11
clearly and as accurately as possible for consumers.	4	11
There's also roles for consumer and community groups who	5	11
have access to consumers and certainly present a lot of	6	11
services to those consumers.	7	11
And then there's a role for the regulators. And	8	11
that's what we're looking at, especially now is what our	9	11
role is in terms of our rules and guidance and other kinds	10	11
of things to help the markets run more efficiently.	11	11
So with that, I would like to introduce the panelists	12	11
and talk a little bit about the procedures for today's	13	11
hearing. My name is Sandy Braunstein. I am the director of	14	11
the Division of Consumer and Community Affairs at the	15	11
Federal Reserve Board in Washington, D.C. I will be	16	11
chairing the hearing today.	17	11
With me from Washington from the Federal Reserve	18	11
Board is Leonard Chanin who is the associate director of the	19	11
Division of Consumer and Community Affairs, and he is	20	11
associate director for the regulations area. And also with	21	11
us is Jim Michaels, who is the assistant director for	22	11
regulations in the Division of Consumer and Community	23	11
Affairs. We are also joined by Joan Buchanan from the	24	11
Federal Reserve Bank of Atlanta, and we're really pleased to	25	11
have her here. And she's an assistant vice president and is	1	12
over the consumer compliance area here at the Federal	2	12
Reserve Bank of Atlanta. And let me just say that we want	3	12
to thank the Federal Reserve Bank of Atlanta and all its	4	12
staff for the excellent job they're doing of hosting us	5	12
today and for allowing us to come here and have this	6	12
hearing.	7	12
The way we're going to conduct this hearing is	8	12
that we will go into our first panel and we -- each panelist	9	12
will have five minutes for opening statements. We do have a	10	12
time keeper. I want to alert the panelists to our time	11	12
keeper, who's sitting right there with the box with the big	12	12
light bulbs on top, should be very visible.	13	12
We are going to stick to the time table of five	14	12
minutes for your opening. If you go past that, I will cut	15	12
you off. But you can -- If you want to submit longer	16	12
comments for the record, you can feel free to do so. And	17	12
also, I want to let the public know that we're accepting	18	12
public comments of any length -- public, written comments.	19	12
You can feel free to submit those until August 15th is the	20	12
deadline for that, and those can be any length you want.	21	12
So the panelists will have five minutes. The time	22	12
keeper, Wayne, will give a yellow light at four minutes,	23	12
when you have one minute left and then the red light when	24	12
your time is up. And so I would ask you to kind of, as	25	12
you're doing your remarks, keep an eye on the box.	1	13
We will have three panels today. And the topics	2	13
that we're going to be discussing today are the first panel	3	13
we're going to be talking about the HOEPA rules and other	4	13
predatory lending laws, state and local, and the	5	13
effectiveness and where we may need to do some other kinds	6	13
of things and what else is needed in the markets. We're	7	13
going -- The second panel will deal with the non-traditional	8	13
mortgage products. And the third panel is going to be	9	13
discussing research on consumer behavior research.	10	13
At 3:00 o'clock today we will have an open mike	11	13
session. And there is a sign-up sheet outside in the	12	13
hallway for that. If you want to speak, anyone who wants to	13	13
can speak during the open mike session, but you need to sign	14	13
up on the sign-up sheet.	15	13
Each speaker will have three minutes for their	16	13
remarks. And there again, if you have longer remarks,	17	13
you're welcome to submit them in writing for the record and	18	13
we will accept those until August 15th. But I will remind	19	13
-- make periodic reminders during the day about the open	20	13
mike sign-up sheet, so feel free to sign up.	21	13
And with that, I think we're going to start. What	22	13
I would ask is for each panelist to introduce themselves.	23	13
We're going to start from this end. Margot, you're going to	24	13
go first. To introduce yourself and your organization for	25	13
the record.	1	14
We also, by the way, have a court reporter here	2	14
who's over there talking into the horn. And just also for	3	14
the public to know that these transcripts, we are going to	4	14
have transcripts of each of the four hearings. The	5	14
transcripts will be public documents. We will be making	6	14
them available on our website -- on the Federal Reserve	7	14
website. So you're free to access those. It takes a few	8	14
weeks to get them up and running. But we will have	9	14
transcripts of all four hearings.	10	14
So for the record, I would ask that you state your	11	14
name and your organization and then go into your opening	12	14
remarks, and we'll start. Margot?	13	14
MS. SAUNDERS: Thank you, Sandy. It's nice to be	14	14
here. I'm Margot Saunders from the National Consumer Law	15	14
Center. There are piles of consumer loan documents on my	16	14
desk and the shelves surrounding it in my little office. In	17	14
the past few months alone I have closely examined the	18	14
microscopic details of mortgage transactions from	19	14
Pennsylvania, New Jersey, Georgia, West Virginia, Missouri,	20	14
Ohio, Texas, Illinois, Virginia, Florida, as well as other	21	14
states. So I feel like I have a pretty good hold on what's	22	14
going on in the country in subprime mortgage lending, just	23	14
from what comes across my desk.	24	14
These detailed analyses of dozens of home loans	25	14
illustrate to me and to the National Consumer Law Center one	1	15
overwhelming fact. The mortgage system in this nation is	2	15
irretrievably broken. While the people sitting around this	3	15
room may be able to obtain truly inexpensive non-abusive	4	15
mortgage loans, that's not the case for the tens of	5	15
thousands of subprime borrowers who are provided high cost	6	15
loans for amounts they do not need stripped -- which strip	7	15
precious equity from their homes to pay exorbitant fees and	8	15
costs, secured by loans on homes which are not worth the	9	15
amount of the loan.	10	15
The loans are generally priced much higher than	11	15
equivalent mortgages in the prime market, but they're not	12	15
priced this high because of the increased risk of the loan.	13	15
They are priced higher because the originator can exact this	14	15
extra amount from the homeowner. The price is not	15	15
commensurate with the risk. The price too often creates the	16	15
risk.	17	15
Consider these sad statistics. Of low income	18	15
households who became homeowners, 64 percent remained after	19	15
two years, compared with 88 percent of high income	20	15
homeowners. Over five years 47 percent of low income	21	15
homeowners remained in their homes compared with 77 percent	22	15
of high income. Compare this information with facts we're	23	15
all to familiar with, the scary increase in the raw number	24	15
of foreclosures for all types of homeowners, and we're met	25	15
with a new truth. Something new and different must be done	1	16
to preserve home ownership.	2	16
The entire mortgage industry has figured out	3	16
ingenious ways to make healthy profits from mortgage lending	4	16
without suffering a risk of loss. We think that the	5	16
subprime mortgage industry anticipates that there will be	6	16
defaults and forced refinancings and foreclosures and that	7	16
these anticipated losses are built into the cost of doing	8	16
business. The industry then protects itself from the	9	16
overall loss by charging everyone more. This means that the	10	16
industry is deliberately making loans, knowing that one in	11	16
eight, or thereabouts, of these loans will be headed to	12	16
foreclosure.	13	16
The ability of the mortgage industry to protect	14	16
itself from anticipated defaults and foreclosures by	15	16
charging everyone a higher price creates a marketplace where	16	16
the risks to homeowners are no longer parallel to the risks	17	16
to the lenders. The losses caused by defaults and	18	16
foreclosures to the industry are guarded against by simply	19	16
charging more. But the losses to the homeowner, the family,	20	16
and the community from these foreclosures is simply	21	16
devastating. This is fine as a business model, but it's bad	22	16
policy for the nation to allow it and facilitate it.	23	16
The mortgage industry uses deregulation,	24	16
preemption of state consumer protection laws, the holder in	25	16
due course doctrine, to evade responsibility for making	1	17
these bad loans. But the prime rationale for the continued	2	17
lack of regulation of mortgage lending is that we don't want	3	17
to hamper the healthy mortgage market in this nation. We're	4	17
here to tell you today that that's just what we want to do.	5	17
We must reign in the mortgage industry. It must	6	17
be regulated. It does the low income family no good to	7	17
invite them to participate in the American dream of home	8	17
ownership only to allow them to be tricked out of that home	9	17
within a few years.	10	17
Financial literacy is not the answer. Tweaking	11	17
the federal laws that we have on the books that govern a	12	17
small piece of the mortgage market like HOEPA is also not	13	17
the answer. The mortgage market has changed significantly	14	17
since HOEPA -- in the 14 years since HOEPA was passed.	15	17
Problems have become much worse. We need wholesale	16	17
significant regulation.	17	17
To maintain home ownership, to maintain the	18	17
strength of home equity as a primary savings tool, the	19	17
mortgage industry must be required to underwrite mortgage	20	17
loans to ensure that the loan is appropriate to the -- for	21	17
the household. To accomplish this, we need strong but	22	17
deliberately vague standards like suitability to apply to	23	17
all loans. Additionally, all players in the mortgage market	24	17
must be part of the solution, just as they're now part of	25	17
the problem. There must be full assignee liability applied	1	18
to every mortgage loan.	2	18
We commend the Federal Reserve Board for the	3	18
substantial improvements to HOEPA and the aggressive	4	18
regulation of mortgage lending under HOEPA that you have	5	18
done since it was passed. These changes did -- The changes	6	18
in 2001 did have some positive affect on the industry,	7	18
specifically in the way they helped dry up the sale of	8	18
abusive credit insurance premiums. Now, we ask the Federal	9	18
Reserve Board to recognize the overall mess that the market	10	18
is in and to recommend to Congress that significant changes	11	18
be made in the regulation of mortgage lending. Thank you.	12	18
MS. BRAUNSTEIN: Thank you, Margot. Barbara?	13	18
MS. KENT: My name is Barbara Kent. I am from the	14	18
New York State Banking Department, and I'm here today on	15	18
behalf of the department and CSBS, the Conference of State	16	18
Bank Supervisors and thank you, I'm very pleased to be here.	17	18
When the Home Owners Equity Protection Act was	18	18
first enacted, it was an excellent first step. It focused	19	18
attention -- Oh, that wasn't smart. It focused attention on	20	18
the problems associated with high cost home loans, and it	21	18
provided a model of how to prevent abuses of such loans.	22	18
And yet, HOEPA as originally enacted or as amended	23	18
has had very little impact on subprime lending. Even when	24	18
interest rates were much higher than they currently are,	25	18
very few loans were priced either above the APR or the	1	19
points thresholds set forth in the statute. Moreover, the	2	19
statute did not address yield spread premiums or single	3	19
premium credit insurance. And open end credit plans,	4	19
including home equity loans, were not subject to the law.	5	19
Because of the high statutory thresholds, the loan	6	19
could be priced below the thresholds and yet, in truth,	7	19
still be an expensive loan. As a result, when the banking	8	19
department conducted its examinations of certain mortgage	9	19
lenders, we often found loans that were high priced but just	10	19
below the HOEPA thresholds so as to avoid compliance with	11	19
the law. Similarly, a large nationwide lender, among	12	19
others, used the fact that home equity loans were not	13	19
covered to create -- were not covered, created what were	14	19
termed piggyback or side-by-side loans.	15	19
If a borrower sought to refinance a loan, he or	16	19
she actually obtained two loans. The first loan, which was	17	19
for the majority of the amount sought, was priced to fall	18	19
below the HOEPA thresholds and, therefore, not be subject to	19	19
the law. The balance of the amount sought was lent in the	20	19
form of a high-priced home equity loan that almost always	21	19
was nearly entirely disbursed at closing. However, since it	22	19
was a home equity loan, the points and interest rates were	23	19
immaterial. The loan was not covered by HOEPA.	24	19
The more we examined these loans, the more	25	19
convinced we became that despite HOEPA, many -- many loans	1	20
had no apparent benefit to the borrower and demonstrated	2	20
patterns of abusive lending practices. But the loans were	3	20
in perfect compliance with the then existing state laws and	4	20
regulations that were hired -- highly disclosure oriented.	5	20
Clearly, other action was needed, and the state stepped into	6	20
the void to take this other action. They sought to curtail	7	20
predatory lending by enacting regulations and statutes on	8	20
the state level.	9	20
North Carolina adopted a statute modeled on HOEPA,	10	20
but which went significantly further. There were draconian	11	20
predictions that subprime lending would dry up in North	12	20
Carolina, a contention that North Carolina vigorously	13	20
disputes and claims is not true. For us in New York, the	14	20
action was -- the decision we had to make was what action	15	20
could we take that would not dry up credit and yet stop	16	20
abusive lending.	17	20
Ultimately, we adopted a regulation which then a	18	20
few years later in 2003 became a statute. The statute had	19	20
-- was modeled after HOEPA but had significant differences.	20	20
During this time period, many other states also adopted	21	20
state statutes. And they tended to have a lot of things in	22	20
common in their differences from HOEPA. They had lower APR	23	20
thresholds, lower point thresholds.	24	20
They -- In New York home equity loans were	25	20
included, financing of single premium credit insurance was	1	21
prohibited, yield spread premiums were included in the	2	21
definition of points and fees, and there were numerous	3	21
prohibitions of a substantive nature on what it meant to be	4	21
affordable and what it meant to -- what you could do as a	5	21
lender if you were refinancing a loan. And yet, similarly	6	21
to HOEPA, the new law and regulation -- excuse me -- has	7	21
also had unlimited impact on the marketplace.	8	21
The interest rate environment is fairly low and	9	21
continues to remain fairly low. And so, loans are being	10	21
made right below the threshold -- right below the threshold	11	21
set forth in the statute. This allows loans to continue to	12	21
be made that are -- have abusive lending practices within	13	21
them. In addition, we now have all sorts of new products on	14	21
the market, which we believe are dangerous to the -- to the	15	21
unsophisticated borrower.	16	21
As a result, we believe that although there have	17	21
been many improvements made, there have been enforcement	18	21
actions that some practices that were common not too long	19	21
ago have changed and that in some respects, the mortgage	20	21
market is better than before, that further changes are	21	21
needed to protect consumers and home buyers from the	22	21
products that are right below the threshold and from the new	23	21
interest -- new types of mortgage products. Thank you.	24	21
MS. BRAUNSTEIN: Thank you. Bill?	25	21
MR. BRENNAN: My name is Bill Brennan. I'm happy	1	22
to be here today to tell you what we're seeing. I've been	2	22
the director of Atlanta Legal Aid's Home Defense Program for	3	22
18 years. We screen and take on cases involving predatory	4	22
mortgage lending, foreclosure rescue scams, and home	5	22
purchase fraud. We help a lot of homeowners facing	6	22
foreclosure.	7	22
We've investigated hundreds, maybe thousands of	8	22
mortgage loans over the years. From our vantage point we	9	22
get a real sense about what's happening on the ground with	10	22
mortgage lending in the metro Atlanta area. Here is what we	11	22
are seeing.	12	22
For the past four or five years, above all other	13	22
lending abuses we see, we have seen a huge increase in	14	22
lending without regard to the borrower's ability to pay. To	15	22
the extent that for all the intake we do with clients, the	16	22
first question we always ask is -- of our clients is, what	17	22
was your income when you got the loan, what was the loan	18	22
amount, and your monthly payment. The answer is virtually	19	22
always the same. They have loans they can't afford.	20	22
Just as credit card banks 20 years ago made an	21	22
intentional conscious corporate decision to begin lending	22	22
without regard to the customer's ability to pay, to issue	23	22
multiple cards to individuals, to drastically raise credit	24	22
limits, in short to increase volume as a way to dramatically	25	22
increase profits knowing that the defaults would also	1	23
increase, but choosing to let that happen in the service of	2	23
the higher goal of increased profits, we now see the	3	23
mortgage lenders, particularly subprime lenders,	4	23
intentionally deciding to go down the same path with tragic	5	23
consequences for home buyers and owners.	6	23
What we see is that the mortgage lending system	7	23
isn't working. As Margot said, it's broken. Underwriting	8	23
doesn't exist. Applications are falsified as to income and	9	23
assets. Actual income is grossly inflated. False jobs are	10	23
listed. Suitability goes out the window.	11	23
The result: loans made to borrowers who can't	12	23
pay; working class people, home buyers, and homeowners	13	23
refinancing with mortgages the lenders know will fail.	14	23
Especially despicable is lending to seniors and disabled	15	23
homeowners living on limited fixed income, Social Security,	16	23
and/or retirement income with refinances at amounts they	17	23
could never afford. A thousand a month income, 850 a month	18	23
in mortgage payments.	19	23
Adding insult to injury, we see these loans with	20	23
ARM features. ARMs should never be made to people living on	21	23
fixed incomes. They get these loans. They struggle to make	22	23
the payments. When the interest increases, as it has for	23	23
two years now, they tumble over the cliff. They face	24	23
foreclosure.	25	23
We see the -- By the way, the vast majority of	1	24
clients that we see are African-Americans, Latin Americans,	2	24
seniors, and disabled people. These are the folks that are	3	24
losing their equity, losing their homes. People like Ms.	4	24
Eloise Manuel and Agnes Martin, who you will hear more about	5	24
in the open mike session this afternoon.	6	24
Because of this broken system, foreclosures are	7	24
rampant. We are inundated with calls and walk ins in the	8	24
weeks before the first Tuesday of the month, foreclosure day	9	24
in Georgia. In Fulton County where Atlanta is located,	10	24
foreclosure ads reached their highest level in history, over	11	24
1,000, for the June '06 foreclosures.	12	24
Here's what we found in looking at these. We have	13	24
a chart on it. The bulk of these loans were originated in	14	24
'05. That means these loans aren't even lasting one year.	15	24
Why is this happening? We think we know why it's	16	24
happening. Because lenders have stopped underwriting, just	17	24
like the credit card banks have done. Driving this trend of	18	24
irresponsible lending is the system of bundling these	19	24
mortgages into pools and selling securities to investors.	20	24
Securities which are collateralized by the mortgages in the	21	24
loan pools. This has increased profits for originators	22	24
providing more capital to lenders and increased profits for	23	24
investors. The words goes out, we need to fill the pools.	24	24
But here's what we're seeing. There are not	25	24
enough eligible borrowers out there. Many are already maxed	1	25
out or fully mortgaged or are really not qualified for a	2	25
mortgage loan, but originators push market these loans to	3	25
the unqualified. Everyone profits except those who are	4	25
clients like our elderly African-American widow who loses a	5	25
home she has owned for 30 years because of a bad loan.	6	25
Where does she fit into this securitization scheme? We	7	25
would like to know.	8	25
Who buys these securities? One big concern we	9	25
have is that Fannie and Freddie are not only purchasing more	10	25
and more subprime high cost abusive loans, they are major	11	25
purchasers of the subprime securities issued. And they are,	12	25
therefore, capitalizing predatory lending in a huge way,	13	25
providing capital to this -- to sustain this broken system	14	25
that doesn't work to benefit borrowers.	15	25
What is the impact of HOEPA and the Georgia Fair	16	25
Lending Act, which we call GAFLA? Pretty much meaningless,	17	25
I have to tell you. We look at cases week in and week out,	18	25
and these laws do not help us see the abuses that we're	19	25
seeing, especially lending without regard to the ability to	20	25
pay.	21	25
Here's what we recommend. Laws which mandate a	22	25
return to legitimate underwriting and suitability standards.	23	25
Laws, for example, that would ban mixing ARM loans -- making	24	25
ARM loans to homeowners living on low fixed income. We also	25	25

Nancy Lee & Associates, Atlanta, Georgia, 404-315-8305

Pages 1-25 | 26-50 | 51-75 | 76-100 | 101-125 | 126-150 | 151-175 | 176-200 | 201-226

2006 Hearings

Building Sustainable Homeownership: Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of Atlanta 1000 Peachtree Street N.E., Atlanta, Georgia 30309 July 11, 2006

Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of Atlanta
1000 Peachtree Street N.E., Atlanta, Georgia 30309
July 11, 2006