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
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Pages 1-25 | 26-50 | 51-75 | 76-100 | 101-125 | 126-150 | 151-175 | 176-200 | 201-226
| Transcript | Line | Page |
|---|---|---|
| recommend laws which would simply ban all abuses for all | 1 | 26 |
| loans. For example, laws should outlaw lending to borrowers | 2 | 26 |
| who can't pay and not qualify the prohibition by requiring | 3 | 26 |
| proof of a pattern and practice. Just make it illegal in | 4 | 26 |
| every case, period. | 5 | 26 |
| We need laws which allocate risk fairly among the | 6 | 26 |
| participant -- among all the participants in the process, | 7 | 26 |
| not heaping the risk on the homeowners with no risk for | 8 | 26 |
| others down the line. Therefore, laws must impose assignee | 9 | 26 |
| liability for violations. Purchasers of loans and investors | 10 | 26 |
| in securities will not participate in the system if this | 11 | 26 |
| happens, and we think that's the way to stop these poisonous | 12 | 26 |
| loans being marketed to vulnerable homeowners. Thank you. | 13 | 26 |
| MS. BRAUNSTEIN: Okay. Thank you very much, and | 14 | 26 |
| we'll get back to a lot of those issues. Gail? | 15 | 26 |
| MS. BURKS: Good morning. My name is Gail Burks. | 16 | 26 |
| I'm president and CEO for Nevada Fair Housing Center, Las | 17 | 26 |
| Vegas, Nevada. I also serve on the board of the National | 18 | 26 |
| Community Reinvestment Coalition and Economic Justice Trade | 19 | 26 |
| Association with over 600 members across the country. | 20 | 26 |
| We've submitted written comments, and I've divided | 21 | 26 |
| my public comments today into four sections. First, I'd | 22 | 26 |
| like to talk about the emerging legal trends that we're | 23 | 26 |
| seeing and why current law is not adequate; second, the | 24 | 26 |
| inadequacy of state anti-predatory lending statutes; third, | 25 | 26 |
| the economic impact of not doing anything; and then look at | 1 | 27 |
| proposed solutions that we think would fix the problem. | 2 | 27 |
| There's been an emerging trend in consumer abuses | 3 | 27 |
| since 2001, when we first started to address predatory | 4 | 27 |
| lending issues. In Las Vegas in the anti-predatory lending | 5 | 27 |
| program that we operate, we have seen that subprime lending | 6 | 27 |
| is generally where many of the predatory lending problems | 7 | 27 |
| start. Now, we need responsible subprime lending. It's a | 8 | 27 |
| necessity. | 9 | 27 |
| But when a disproportionate amount of loans -- | 10 | 27 |
| subprime loans are made to persons in protected class groups | 11 | 27 |
| that's where we have a problem. For example, when we look | 12 | 27 |
| at 2004 Las Vegas HMDA data, we see disparities among | 13 | 27 |
| borrowers of varying races. 23.22 percent of the loans made | 14 | 27 |
| -- of all loans made were -- of subprime loans made were | 15 | 27 |
| made to Hispanic borrowers. 22.46 percent of all loans made | 16 | 27 |
| were subprime, and those were made to African-American | 17 | 27 |
| borrowers. 18.14 percent of all loans made were subprime | 18 | 27 |
| and made to Native American borrowers. | 19 | 27 |
| In short, there's a disparity of about 10.61 | 20 | 27 |
| percent between Hispanics and whites and a difference of | 21 | 27 |
| 19.07 percent in first liens to African-Americans, and | 22 | 27 |
| that's when you control for income. So it's not just about | 23 | 27 |
| low income people. It crosses income lines. | 24 | 27 |
| On a national level from 2004 -- February 2004 to | 25 | 27 |
| June 2006, the National Community Reinvestment Coalition | 1 | 28 |
| conducted a study in several large metropolitan areas -- LA, | 2 | 28 |
| Chicago, St. Louis, and Atlanta -- and documented the | 3 | 28 |
| differences in treatment based on race by brokers. Brokers | 4 | 28 |
| make up 70 percent or account for 70 percent of the loans | 5 | 28 |
| made in this country. So any regulation has to include a | 6 | 28 |
| coverage for brokers. | 7 | 28 |
| In that study it was found that 73.3 percent, when | 8 | 28 |
| you control for race, in the control groups 73.3 percent of | 9 | 28 |
| the control group of whites were given or had all types of | 10 | 28 |
| loans discussed. However, when you look at the protected | 11 | 28 |
| group, African-Americans, only 30.6 percent of that group | 12 | 28 |
| received information about all available loans. | 13 | 28 |
| If we turn to the other issue and perhaps the | 14 | 28 |
| biggest trend in predatory lending since 2001 and look at | 15 | 28 |
| the back end, the servicing, we see a huge increase in | 16 | 28 |
| foreclosures and a huge increase in abuses. Some of the | 17 | 28 |
| abuses that we see in Las Vegas and around the country | 18 | 28 |
| include the failure to credit payments properly. We see | 19 | 28 |
| agencies popping up with government sounding names, such as | 20 | 28 |
| the Fair Lending Assessment Center, that offers to assist | 21 | 28 |
| consumers who are in foreclosure. But actually what happens | 22 | 28 |
| is it results in the transfer of the consumer's property | 23 | 28 |
| generally without their knowledge through the use of powers | 24 | 28 |
| of attorney and through the use of other scams that | 25 | 28 |
| basically places the scammer's name on the property. | 1 | 29 |
| We also see an increase in the payment just to get | 2 | 29 |
| a forbearance agreement. In the end, forbearance agreements | 3 | 29 |
| result in foreclosure, especially in non-judicial | 4 | 29 |
| foreclosure states when consumers are unable to complete the | 5 | 29 |
| forbearance agreement that was improper and violated | 6 | 29 |
| circumstances in the first place. With respect to state | 7 | 29 |
| laws, there are only seven states that have good anti- | 8 | 29 |
| predatory lending laws, and Nevada's not one of them. And | 9 | 29 |
| that results in an issue, as well. | 10 | 29 |
| Finally, some of the solutions. We think we have | 11 | 29 |
| to have a law that has assignee liability, but we also have | 12 | 29 |
| to have the ability to resolve cases, in other words, to | 13 | 29 |
| provide consumers a choice in terms of the avenue for | 14 | 29 |
| resolving their foreclosure problem. Even though we have | 15 | 29 |
| the right of rescission currently under truth and lending, a | 16 | 29 |
| consumer still has to have a loan if the original loan is | 17 | 29 |
| rescinded. | 18 | 29 |
| We think we need to improve disclosure, we need to | 19 | 29 |
| include broker fees and YSPs, even those paid by the lender | 20 | 29 |
| in any legislation we adopt, and we need to enhance the | 21 | 29 |
| quality of HMDA. We need to look at credit scores in order | 22 | 29 |
| to determine what classes are receiving adequate loans. | 23 | 29 |
| Thank you. | 24 | 29 |
| MS. BRAUNSTEIN: Thank you. Harry? | 25 | 29 |
| MR. DINHAM: Yes, ma'am. Good morning. I am | 1 | 30 |
| Harry Dinham, president of the National Association of | 2 | 30 |
| Mortgage Brokers. Thank you for inviting NAMB to speak on | 3 | 30 |
| the impact of federal, state predatory lending laws and | 4 | 30 |
| developments in subprime lending. | 5 | 30 |
| NAMB is the voice of the mortgage broker industry. | 6 | 30 |
| We have a longstanding commitment to a professional and | 7 | 30 |
| ethical industry that serves the consumer. We, too, are | 8 | 30 |
| troubled by the actions of a few bad actors that inhabit | 9 | 30 |
| every single segment of our mortgage marketplace, be it | 10 | 30 |
| broker, mortgage banker, lender, or depository banker. NAMB | 11 | 30 |
| believes to truly resolve the issues of today, we must have | 12 | 30 |
| a joint effort from all three components of the marketplace: | 13 | 30 |
| the government, the industry, and the consumer. | 14 | 30 |
| Unfortunately, many industry critics have based | 15 | 30 |
| all the problems that consumers have with the current | 16 | 30 |
| shopping process, products, and disclosures within one point | 17 | 30 |
| of this triangle, the industry. In doing so, they have | 18 | 30 |
| ignored a vital role that government and consumers have | 19 | 30 |
| throughout the loan origination process. NAMB believes any | 20 | 30 |
| proposed solution should involve all three points of the | 21 | 30 |
| triangle. | 22 | 30 |
| First the role of government. We have witnessed a | 23 | 30 |
| great expansion in our mortgage finance industry, expanding | 24 | 30 |
| product choice and distribution channels, adding robust | 25 | 30 |
| competition, and greatened pricing options. Unfortunately, | 1 | 31 |
| this expansion has led to some corresponding rise in the | 2 | 31 |
| number of uneducated and unlicensed originators. While | 3 | 31 |
| states are increasing requirements for brokers, they | 4 | 31 |
| continue to exempt officers of banks and lenders from | 5 | 31 |
| important standards. | 6 | 31 |
| I make this point because consumers do not know | 7 | 31 |
| the difference between a broker, mortgage banker, lender, or | 8 | 31 |
| even a depository banker. There's little difference between | 9 | 31 |
| them. We are all competing distribution channels. | 10 | 31 |
| This is why government should ensure that every | 11 | 31 |
| single mortgage originator is licensed and required to | 12 | 31 |
| complete both pre-employment and continuing education | 13 | 31 |
| requirements. Consumers deserve an educated originator, | 14 | 31 |
| regardless of the distribution channel chosen. Every | 15 | 31 |
| originator should also submit to criminal background checks | 16 | 31 |
| so that bad actors do not move freely from one channel to | 17 | 31 |
| another. | 18 | 31 |
| We must also create and implement a well-designed, | 19 | 31 |
| well-tested consumer disclosures that are effective shopping | 20 | 31 |
| tools. For example, we should revise the GFE so that it | 21 | 31 |
| mirrors the HUD-1. It's one page in length, provides | 22 | 31 |
| valuable information to the consumer, meaningful closing | 23 | 31 |
| cost estimates, and monthly payment. Of import, any new GFE | 24 | 31 |
| must treat the disclosures of rate, fees, costs, and points | 25 | 31 |
| uniformly, regardless of distribution channel. Only then | 1 | 32 |
| will we give meaning to the ability to comparison shop. | 2 | 32 |
| This leads me to a topic of great debate, | 3 | 32 |
| compensation. The truth is that all originator types -- | 4 | 32 |
| brokers, bankers, lenders, credit unions -- receive direct | 5 | 32 |
| compensation, indirect compensation, or a combination of | 6 | 32 |
| both. Regrettably, only mortgage brokers currently disclose | 7 | 32 |
| both direct and indirect payments. With other originators, | 8 | 32 |
| the back end compensation that they all earn is not | 9 | 32 |
| disclosed. This jagged approach creates nothing but | 10 | 32 |
| consumer confusion. Again, to make comparison shopping | 11 | 32 |
| meaningful, all channels should provide the same | 12 | 32 |
| disclosures. | 13 | 32 |
| A rule of industry. Industry must remain | 14 | 32 |
| innovative and knowledgeable to sustain a competitive | 15 | 32 |
| marketplace. It is competition that drives education, | 16 | 32 |
| drives choice, and ultimately drives lower price. A | 17 | 32 |
| competitive market tells the consumer to shop and compare. | 18 | 32 |
| If consumers shop, then they will learn about the products | 19 | 32 |
| and choices available to them. If consumers shop and | 20 | 32 |
| compare, then they will have questions to ask. | 21 | 32 |
| But so far, much of what we hear is focused on | 22 | 32 |
| protecting the consumer by restricting or eliminating | 23 | 32 |
| lending practices. Let me be clear. Pricing and product | 24 | 32 |
| does not equate to abusive lending, especially in a | 25 | 32 |
| competitive marketplace like the one we have today. | 1 | 33 |
| We should refrain from any measure that seeks to | 2 | 33 |
| use price fixing as a solution. Such a measure would do | 3 | 33 |
| nothing more than generate anti-competitive conduct and | 4 | 33 |
| distort the marketplace. The industry must also be vigilant | 5 | 33 |
| to comply with state and federal laws, follow best | 6 | 33 |
| practices, be honest, and treat consumers with respect. | 7 | 33 |
| Lastly, but most importantly, we cannot and should | 8 | 33 |
| not continue to ignore the role of the consumer. We must | 9 | 33 |
| advocate for financial literacy in this country, starting at | 10 | 33 |
| the middle school level. This means we must allocate funds | 11 | 33 |
| dedicated to the middle and high school financial literacy | 12 | 33 |
| program. We must arm consumers with the knowledge and tools | 13 | 33 |
| necessary to make informed financial decisions that fit in | 14 | 33 |
| the context of their life circumstances. | 15 | 33 |
| At the same time, we must -- we must be careful | 16 | 33 |
| not to rob this innovative and dynamic industry of the | 17 | 33 |
| ability to remain a free and capitalist market that it has | 18 | 33 |
| today brought affordable credit to more socio and economic | 19 | 33 |
| classes than ever before in the history of our consumer | 20 | 33 |
| credit system. Thank you. | 21 | 33 |
| MS. BRAUNSTEIN: Thank you very much. Wright? | 22 | 33 |
| MR. ANDREWS: Okay. Good morning. I am Wright | 23 | 33 |
| Andrews, Washington Counsel to NHEMA, the National Home | 24 | 33 |
| Equity Mortgage Association, which represents about 225 | 25 | 33 |
| mortgage lenders, amounting to about 80 percent of the non- | 1 | 34 |
| prime mortgage loan business. NHEMA's members have provided | 2 | 34 |
| literally billions of dollars in mortgage credit helping | 3 | 34 |
| millions of Americans, many of whom could not otherwise | 4 | 34 |
| qualify for conventional loans, purchase homes, and meet | 5 | 34 |
| other important financial needs. In 2005 non-prime | 6 | 34 |
| originations exceeded 718 billion, which is about 25, 27 | 7 | 34 |
| percent of the overall mortgage market, and about 40 percent | 8 | 34 |
| of these loans were for home purchase. | 9 | 34 |
| Yes, there are some problems out there and some | 10 | 34 |
| abuses. No question about that. But we believe that there | 11 | 34 |
| is tremendous good done by this industry and that the vast | 12 | 34 |
| majority of the loans are not abusive. They are fairly | 13 | 34 |
| priced. We see foreclosures more in the three or four | 14 | 34 |
| percent range. I'll let the economists discuss that later | 15 | 34 |
| today, as opposed to some of the rates that others are | 16 | 34 |
| suggesting. | 17 | 34 |
| We would suggest that policy makers take great | 18 | 34 |
| care in ensuring that any legislative and regulatory changes | 19 | 34 |
| are not in any way unnecessarily or otherwise going to have | 20 | 34 |
| adverse effects on this important market segment. This | 21 | 34 |
| morning I'm going to focus primarily on a few comments on | 22 | 34 |
| the state anti-predatory lending laws. | 23 | 34 |
| Given the congressional failure to update HOEPA, | 24 | 34 |
| which I think almost all sides agree is weak and does not | 25 | 34 |
| cover an adequate range of either loans or potential abuses, | 1 | 35 |
| it's not surprising that many states have, in fact, passed | 2 | 35 |
| laws to try to get at some of the potential problems out | 3 | 35 |
| there. State laws have, as I think an earlier witness | 4 | 35 |
| indicated, generally followed the HOEPA model but have | 5 | 35 |
| tended to add additional restrictions and I think most | 6 | 35 |
| significantly have lowered the points and fees trigger from | 7 | 35 |
| -- generally from eight percent to five percent and added a | 8 | 35 |
| number of additional items, such that you have a dramatic | 9 | 35 |
| reduction in real terms in the points and fees trigger. The | 10 | 35 |
| practical effect of this has been to force lenders to | 11 | 35 |
| restructure their loan pricing, and we believe that this | 12 | 35 |
| clearly limits borrowers' financing choices and often | 13 | 35 |
| adversely affects affordability. | 14 | 35 |
| In brief summary, some of the impacts of the laws | 15 | 35 |
| or consequences are, one, lenders generally do not make high | 16 | 35 |
| cost loans nor do secondary market purchasers buy these | 17 | 35 |
| loans. Two, state laws actually provide far fewer | 18 | 35 |
| protections than many people think because the only loans | 19 | 35 |
| that generally are made are those that aren't subject to the | 20 | 35 |
| high cost restrictions, and therefore, the protections don't | 21 | 35 |
| apply. | 22 | 35 |
| Three, as I just indicated, we believe that | 23 | 35 |
| financing choices are limited. Loans are re-priced | 24 | 35 |
| essentially by forcing more of the upfront fees into the | 25 | 35 |
| interest rate, and this ends up such that the price of the | 1 | 36 |
| loan in terms of interest rate is higher, the monthly | 2 | 36 |
| payment is higher. Bottom line, we think that most lenders | 3 | 36 |
| can -- most borrowers will still get a loan, but they will | 4 | 36 |
| pay higher rates. | 5 | 36 |
| There are many borrowers, however, who will not be | 6 | 36 |
| able to get the loan because the higher monthly payment is | 7 | 36 |
| such they cannot qualify under debt to income or residual | 8 | 36 |
| income test. And they have to shift to a smaller loan, buy | 9 | 36 |
| a smaller house, or maybe not get a loan. | 10 | 36 |
| Point four, the state laws do not apply to many | 11 | 36 |
| borrowers because of the federal preemption for federal | 12 | 36 |
| depositories. Point five, the patchwork of state laws, we | 13 | 36 |
| believe, is uneven and has caused a lot of burden and | 14 | 36 |
| additional costs to industry. Point six, we think that one | 15 | 36 |
| of the best things the state laws have done is they have | 16 | 36 |
| heightened sensitivity to these issues and many companies | 17 | 36 |
| have adopted voluntary practices applicable to all their | 18 | 36 |
| loans to get at this. Finally, NHEMA believes that it would | 19 | 36 |
| be best for Congress to pass a comprehensive federal anti- | 20 | 36 |
| predatory lending law to address these issues. Thank you. | 21 | 36 |
| MS. BRAUNSTEIN: Thank you very much. Okay. I'd | 22 | 36 |
| like to ask some questions and then I'm also going to open | 23 | 36 |
| it up to my panelists to -- fellow panelists to ask | 24 | 36 |
| questions. | 25 | 36 |
| Margot, I'd like to start back with you. You were | 1 | 37 |
| talking about the fact that in what you have seen, you don't | 2 | 37 |
| feel that the loans are really priced according to risk, | 3 | 37 |
| that the premiums are added on just because they can get | 4 | 37 |
| them from the borrowers; is that correct? And I was just | 5 | 37 |
| wondering -- But then, at the same time, you're saying that | 6 | 37 |
| a large number of these loans go bad. So I guess I'm trying | 7 | 37 |
| to figure -- You know, the industry might say, well, that | 8 | 37 |
| indicates that yes, they are risky and that we are pricing | 9 | 37 |
| according to risk. So I'm trying to kind of figure all that | 10 | 37 |
| out. Can you talk about that a little bit? | 11 | 37 |
| MS. SAUNDERS: Yes. Thank you for -- I think | 12 | 37 |
| they're priced regardless of risk, that the high price is | 13 | 37 |
| obtained from borrowers from whom they can be obtained from | 14 | 37 |
| and the losses that result from those loans are used as the | 15 | 37 |
| justification for the high price. I have seen dozens and | 16 | 37 |
| dozens of loans with very high prices made to people who had | 17 | 37 |
| very high credit ratings. I think those people were just | 18 | 37 |
| more vulnerable. | 19 | 37 |
| I've also seen many, many loans that are made to | 20 | 37 |
| people who have run into problems. And they were -- The | 21 | 37 |
| regional credit rating of those borrowers was indeed much | 22 | 37 |
| lower, so there was a justification based on risk-based | 23 | 37 |
| pricing models for charging those borrowers higher. My | 24 | 37 |
| point is, however, that when a lender makes a loan or dozens | 25 | 37 |
| or hundred -- dozens of -- thousands of loans, charges | 1 | 38 |
| higher for all of those loans knowing that some great | 2 | 38 |
| percentage of those loans will head to foreclosure, that's | 3 | 38 |
| not good public policy to make the loans knowing that 8, 10, | 4 | 38 |
| 12 percent of -- 12 percent of them will over the course of | 5 | 38 |
| the following next five years end up either being required | 6 | 38 |
| to be refinanced or forced into foreclosure. | 7 | 38 |
| The losses that result from a particular loan that | 8 | 38 |
| is made to a particular borrower are made up for by the | 9 | 38 |
| industry by the high prices charged elsewhere. And | 10 | 38 |
| therefore, yes, you can justify making a higher -- Margot | 11 | 38 |
| has bad credit. You can justify making a higher priced loan | 12 | 38 |
| to Margot because you know there's a one in ten chance or | 13 | 38 |
| whatever that Margot will default. But if you know there's | 14 | 38 |
| a one and ten chance that Margot will default and lose her | 15 | 38 |
| house, then don't make the loan unless you can figure out a | 16 | 38 |
| way to avoid making a loan that will result -- has such a | 17 | 38 |
| high chance in foreclosure. In other words, we turned risk- | 18 | 38 |
| based pricing on its head. | 19 | 38 |
| MR. CHANIN: Margot, let me follow up on that | 20 | 38 |
| because risk-based pricing -- and I don't want to debate, | 21 | 38 |
| you know, kind of what goes into different pricing schemes. | 22 | 38 |
| But clearly, some consumers pay more for mortgage loans and | 23 | 38 |
| other financial products than other consumers. Sometimes | 24 | 38 |
| that correlates fairly highly with credit score or other | 25 | 38 |
| factors. | 1 | 39 |
| But the dilemma is -- Let's just take your example | 2 | 39 |
| of a ten percent default rate, which would be a pretty high | 3 | 39 |
| default rate or foreclosure rate. That means that if you | 4 | 39 |
| made a hundred loans, ten of those are in default or | 5 | 39 |
| foreclosure, but 90 of those loans are not. And what we, | 6 | 39 |
| you know, have to balance is the notion of expanding | 7 | 39 |
| opportunities to people who might not otherwise qualify for | 8 | 39 |
| credit. | 9 | 39 |
| That is, you know, 10 or 20 years ago there was a | 10 | 39 |
| great push to try and make credit available to more low and | 11 | 39 |
| moderate income individuals, and we want to make sure that | 12 | 39 |
| in structuring any guidance or regulatory changes and the | 13 | 39 |
| like that we don't constrict that marketplace. And in your | 14 | 39 |
| example, that might mean not making loans to 90 consumers | 15 | 39 |
| who don't go into default and foreclosure. So how do we | 16 | 39 |
| avoid that dilemma? And that -- You know, that would, I | 17 | 39 |
| think, be unfortunate from all points of view. | 18 | 39 |
| MS. SAUNDERS: Well, Leonard, as you know, the | 19 | 39 |
| National Consumer Law Center works with Legal Aid offices | 20 | 39 |
| and pro bono attorneys and private attorneys all over the | 21 | 39 |
| country, and what I'm trying to tell you today is we want to | 22 | 39 |
| constrict the marketplace. We are not doing our clients and | 23 | 39 |
| the low income homeowners across the country any good by | 24 | 39 |
| retaining access to credit, which is poison to them. We're | 25 | 39 |
| not talking about home ownership. We're talking about loss | 1 | 40 |
| of home ownership. | 2 | 40 |
| The whole market has changed. We are -- It is | 3 | 40 |
| now, as Bill was describing, a push market. And I think Ms. | 4 | 40 |
| Kent was describing, a push market where there are more | 5 | 40 |
| loans to be made than borrowers need to have made to them. | 6 | 40 |
| I have on my desk today -- I'm doing an expert report I'm | 7 | 40 |
| finishing up -- of a prototypical borrower that should never | 8 | 40 |
| have received a mortgage loan. A low income homeowner -- | 9 | 40 |
| actually, not a low income, $60,000 a year, family of four, | 10 | 40 |
| they went into a mortgage broker, had a low cost 7 percent, | 11 | 40 |
| $70,000 home loan, 27 years left on the home loan. They had | 12 | 40 |
| $5,000 worth of credit card debt. | 13 | 40 |
| They went to a mortgage who promised, come, we'll | 14 | 40 |
| help you. Mortgage broker said, sure, we'll help them. | 15 | 40 |
| They refinanced $5,000 worth of credit card debt, $11,000 | 16 | 40 |
| worth of car loans, gave them $8,000 to pay off some | 17 | 40 |
| relatives, ended up with $120,000 loan on a house worth | 18 | 40 |
| $75,000. The payments are $40 less a month. The home | 19 | 40 |
| equity is now in the negative numbers and will be in the | 20 | 40 |
| negative numbers for the next 15 years. Now, that is a | 21 | 40 |
| mortgage loan that didn't need to be made, and that is | 22 | 40 |
| typical. They save $35 a month and lost $40,000 worth of | 23 | 40 |
| home equity. | 24 | 40 |
| They're paying -- Just take the car loan. When | 25 | 40 |
| you refinance a car loan that has three years left to be | 1 | 41 |
| paid into a 30-year loan, you're paying $11,000 extra in | 2 | 41 |
| interest over the next -- for an extra 27 years. These are | 3 | 41 |
| not good loans. You need to restrict the marketplace. | 4 | 41 |
| MS. BRAUNSTEIN: And we're going to get back to | 5 | 41 |
| those issues. I just want to -- Barbara, I'd like to follow | 6 | 41 |
| up with you on a question. You made a statement that, in | 7 | 41 |
| general, even the state statute that you enacted in New York | 8 | 41 |
| has had very little impact, that it has limited impact, that | 9 | 41 |
| because of the low rates. So I just wanted to follow up | 10 | 41 |
| with you. What would you recommend if your statute didn't | 11 | 41 |
| work? What would you recommend at this point that you would | 12 | 41 |
| do going forward like in New York? | 13 | 41 |
| MS. KENT: Well, first of all, I guess I want to | 14 | 41 |
| clarify that as interest rates are starting to go up, the | 15 | 41 |
| statute may become more relevant. But so far, it's primary | 16 | 41 |
| purpose has been to keep loans right below the threshold. I | 17 | 41 |
| think we need to take a different approach than a threshold- | 18 | 41 |
| oriented approach. | 19 | 41 |
| I don't think it's a disclosure approach. I, for | 20 | 41 |
| one, don't think that disclosures work. I think it's going | 21 | 41 |
| to have to be a substantive approach where some things are | 22 | 41 |
| allowed and some things aren't allowed. | 23 | 41 |
| And the -- I mean, the easy answer is to say that | 24 | 41 |
| we would just lower the thresholds, but I don't think that | 25 | 41 |
| that is a suitable answer. I think we have to ban certain | 1 | 42 |
| practices in any loan, even if it's priced at 3 percent -- | 2 | 42 |
| fixed rate 3 percent, it just shouldn't have certain | 3 | 42 |
| provisions. And we can discuss, argue what those provisions | 4 | 42 |
| should be, but I think they should just be illegal in any | 5 | 42 |
| loan. | 6 | 42 |
| MS. BRAUNSTEIN: Do you want to give a couple | 7 | 42 |
| examples? | 8 | 42 |
| MS. KENT: Sure. I think no matter what the loan | 9 | 42 |
| is, it has to be underwritten for affordability. And with | 10 | 42 |
| the new non-traditional mortgage products, I think it has to | 11 | 42 |
| be underwritten for affordability when the increase comes, | 12 | 42 |
| not just affordability now at the so-called introductory | 13 | 42 |
| rate. | 14 | 42 |
| MS. BRAUNSTEIN: And do you define affordability | 15 | 42 |
| as showing ability to repay? | 16 | 42 |
| MS. KENT: Yes. Well, showing ability to repay | 17 | 42 |
| and we -- but that can be a very vague standard. I would | 18 | 42 |
| use the two -- I would use the two tests in the New York | 19 | 42 |
| statute, which are 50 percent of gross month -- your | 20 | 42 |
| mortgage payment cannot exceed 50 percent of your monthly | 21 | 42 |
| gross income -- excuse me -- and it cannot exceed your | 22 | 42 |
| discretionary -- your leftover money cannot exceed the VA | 23 | 42 |
| guidelines. | 24 | 42 |
| The Veterans Administration has published residual | 25 | 42 |
| income guidelines, and they're really quite low. If you | 1 | 43 |
| don't have that much money leftover after you've made your | 2 | 43 |
| monthly mortgage payment, you will -- something -- you'll | 3 | 43 |
| either not be eating or paying your other bills or you will | 4 | 43 |
| be going into foreclosure because they are calculated by | 5 | 43 |
| family size and by geography. And they're, as I say, on the | 6 | 43 |
| low side. | 7 | 43 |
| So I would say the major one has to be | 8 | 43 |
| affordability and affordability when the increase is going | 9 | 43 |
| to come, and that affordability should be for everybody's | 10 | 43 |
| income, or you could have a very high limit cut off. I | 11 | 43 |
| mean, there does come a number where affordability may not | 12 | 43 |
| be -- it may not be an issue. | 13 | 43 |
| MS. BRAUNSTEIN: Thank you. | 14 | 43 |
| MR. MICHAELS: Let me just ask a follow-up | 15 | 43 |
| question on that because a number of years ago when we | 16 | 43 |
| talked about -- when were having HOEPA hearings and we | 17 | 43 |
| talked about affordability tests and we talked about whether | 18 | 43 |
| a particular percentage test for debt to income ratio would | 19 | 43 |
| work, one of the concerns, I think, was expressed was if you | 20 | 43 |
| had a numerical test whether or not there would be a | 21 | 43 |
| presumption that falling just below that number made it | 22 | 43 |
| automatically affordable, and I guess there was some | 23 | 43 |
| reluctance by people to sign on to a strict numerical test, | 24 | 43 |
| which would create a presumption of affordability if the | 25 | 43 |
| test was met. Does your law deal with that? | 1 | 44 |
| MS. KENT: Yeah. It specifically does not create | 2 | 44 |
| a presumption of affordability. There is no safe harbor, if | 3 | 44 |
| that's what you're asking me. And I think that the -- I | 4 | 44 |
| think a lender would be very safe in New York. I mean, | 5 | 44 |
| there is no specific safe harbor, and it doesn't create a | 6 | 44 |
| presumption, but I think if there was less than 50 percent | 7 | 44 |
| and it met the VA residual guidelines, I think practically | 8 | 44 |
| speaking as a regulator there would be nothing we could do. | 9 | 44 |
| What more could we have asked of the lender, assuming -- I | 10 | 44 |
| guess I'll put in one other caveat. If it's one of these | 11 | 44 |
| non-traditional products that they had done that for the -- | 12 | 44 |
| for when the income is -- when the mortgage payment is going | 13 | 44 |
| to go up. I don't know what else a lender could do. | 14 | 44 |
| MS. BRAUNSTEIN: Bill, I wanted to ask you about | 15 | 44 |
| some of the things that you talked about that you've seen in | 16 | 44 |
| loans that have come to you are basically fraudulent | 17 | 44 |
| practices, like people misstating incomes, you know, having | 18 | 44 |
| bad information in paperwork, and things like that. And | 19 | 44 |
| aren't there already adequate laws to protect those kinds of | 20 | 44 |
| things? Aren't there legal means to -- | 21 | 44 |
| MR. BRENNAN: We have state licensing agencies. | 22 | 44 |
| For example, Georgia has the Department of Banking and | 23 | 44 |
| Finance. The people who work there are good people. They | 24 | 44 |
| are well intentioned, but I can tell you right now I | 25 | 44 |
| wouldn't dream of sending a case over to these people for | 1 | 45 |
| some sort of enforcement or even criminal enforcement | 2 | 45 |
| because nothing happens. You know, our sense is that we | 3 | 45 |
| can't take this case to a district attorney. They tell us | 4 | 45 |
| that they're too involved in violent crime, rape, and | 5 | 45 |
| murder. | 6 | 45 |
| The answer is no, we don't have any resources that | 7 | 45 |
| are available to address that aspect of what we're seeing. | 8 | 45 |
| And I must say, we're seeing it in the majority of the cases | 9 | 45 |
| that walk in the door. We have a UDAP law in Georgia, which | 10 | 45 |
| is not very effective. It doesn't help us there. And so, | 11 | 45 |
| just to give you the answer, I mean, I wish I could pick up | 12 | 45 |
| the phone and call somebody to say, look, we're finding | 13 | 45 |
| falsified applications, falsified income, and they'll do | 14 | 45 |
| something about it. But that's not what's happening. | 15 | 45 |
| I had a lady who lost her job at a credit union | 16 | 45 |
| because she had applied for a mortgage loan to buy a house. | 17 | 45 |
| When she didn't get it because of a delay, she went to | 18 | 45 |
| another mortgage company and did a get a loan and bought a | 19 | 45 |
| house. It was a house I thought she couldn't afford, by the | 20 | 45 |
| way. But in any event, there was a falsified application on | 21 | 45 |
| the first loan, and it got to a company in Chicago that | 22 | 45 |
| called her employer at the credit union and said she lied on | 23 | 45 |
| her application, and she lost her job. She was threatened | 24 | 45 |
| with the loss of the job. | 25 | 45 |
| Now, I did go to the Banking Commission with that | 1 | 46 |
| case, and they did step in. They took the license away from | 2 | 46 |
| the broker in that case, but that's the only case I've ever | 3 | 46 |
| gotten any kind of relief from. If I approach them with | 4 | 46 |
| what we're seeing every day, I don't think we would get much | 5 | 46 |
| help. | 6 | 46 |
| MS. BRAUNSTEIN: Okay. Thank you. Gail, you | 7 | 46 |
| mentioned that of all the states with laws that you -- you | 8 | 46 |
| used the number there were only seven that had effective | 9 | 46 |
| laws. And I was wondering which ones those were and what is | 10 | 46 |
| it that makes those laws effective. | 11 | 46 |
| MS. BURKS: The laws -- The states with effective | 12 | 46 |
| laws are North Carolina, New Jersey, Massachusetts, Ohio | 13 | 46 |
| just passed one, New Mexico. What makes those laws good is | 14 | 46 |
| the fact that, one, they address different practices that | 15 | 46 |
| specifically go to, for example, how much consumers are | 16 | 46 |
| charged. They give consumers a cause of action, a way out. | 17 | 46 |
| New York has a good law, as well. | 18 | 46 |
| Three, they look at specifically practices, some | 19 | 46 |
| of them, of brokers. Four, they have a good definition of | 20 | 46 |
| points and fees. None of them get to yield spread premiums | 21 | 46 |
| paid by the lender, specifically. And the biggest part is | 22 | 46 |
| they have enforcement. Private rights of action for | 23 | 46 |
| consumers, that's what makes them a good law. | 24 | 46 |
| Some of the bad laws, what makes them bad is they | 25 | 46 |
| are too restrictive. They only apply to HOEPA, and HOEPA is | 1 | 47 |
| not where we're seeing most of the action today in terms of | 2 | 47 |
| predatory lending. That's what makes a bad law. | 3 | 47 |
| MS. BRAUNSTEIN: Okay. Thank you very much. | 4 | 47 |
| Harry, you talked about some of the recommended practices | 5 | 47 |
| that your organization has, you know, put forward. And I | 6 | 47 |
| know we've heard this in other hearings, too, about saying | 7 | 47 |
| that people can't tell the difference between a broker and a | 8 | 47 |
| lender, and that for that reason everybody should have | 9 | 47 |
| criminal background checks and licensing and things like | 10 | 47 |
| that. And I just wondered, one of the things that seems to | 11 | 47 |
| me that may differentiate, though, is that if a lender's | 12 | 47 |
| working in a financial institution, don't the financial | 13 | 47 |
| institutions generally as part of their hiring process and | 14 | 47 |
| due diligence do the criminal background checks, and | 15 | 47 |
| whereas, you've got brokers out there running around and | 16 | 47 |
| nobody's checking up on them? | 17 | 47 |
| MR. DINHAM: Some of your depository institutions | 18 | 47 |
| do do background checks at that point. I think mainly the | 19 | 47 |
| officers of the banks, our main concern is the -- is the | 20 | 47 |
| educational requirements and the licensing of those people | 21 | 47 |
| so we're all under one standard at this point. I think the | 22 | 47 |
| consumer is really being done a disservice because it's | 23 | 47 |
| assumed just because they're a depository institution that | 24 | 47 |
| they know all about mortgage lending at that point. And we | 25 | 47 |
| think there needs to be pre-hiring education and continuing | 1 | 48 |
| education for those people also. | 2 | 48 |
| MS. BRAUNSTEIN: Okay. Thank you. Wright, I have | 3 | 48 |
| a question. At the end of your statement in terms of your | 4 | 48 |
| recommendations, you said that there should be a federal | 5 | 48 |
| predatory lending law. I was wondering in your mind or for | 6 | 48 |
| your organization, what do you think that should include? | 7 | 48 |
| MR. ANDREWS: Well, again, as I think you're | 8 | 48 |
| aware, there have been various proposals in Congress and, | 9 | 48 |
| you know, I think we will see more. But I think basically | 10 | 48 |
| you need a broad federal standard that provides effective | 11 | 48 |
| protections. Now, to do that, you -- I personally think, | 12 | 48 |
| and NHEMA has taken no position on this, but I personally | 13 | 48 |
| think that you are almost certainly going to have to go to | 14 | 48 |
| covering more than is covered under the current threshold | 15 | 48 |
| approach. I think as Barbara's suggesting, there are -- if | 16 | 48 |
| the practice is abusive, it should be prohibited. | 17 | 48 |
| I think you will have to look toward having | 18 | 48 |
| things, such as a borrower benefit test, clearly a stronger | 19 | 48 |
| repayment ability test, one that will probably deal with | 20 | 48 |
| both a DTI type test and residual income. I think in that | 21 | 48 |
| you are likely and should see something to clarify the | 22 | 48 |
| debate that has occurred with respect to stated income | 23 | 48 |
| loans, how far that should be. | 24 | 48 |
| There will obviously have to be some congressional | 25 | 48 |
| evaluation of how far one should go on the assignee | 1 | 49 |
| liability issue. Now, Margot and a number of the advocates | 2 | 49 |
| want full assignee liability. Industry generally takes the | 3 | 49 |
| opposite approach, but I think there may be some limited | 4 | 49 |
| assignee liability that is workable. The big concern there | 5 | 49 |
| remains that industry could find itself without adequate | 6 | 49 |
| sources of low cost funding, which means you can't make the | 7 | 49 |
| loans to folks, etc. | 8 | 49 |
| Those are some of the things. One of the big | 9 | 49 |
| issues obviously that is talked about, it's been mentioned | 10 | 49 |
| here today, and again this is one that industry does not | 11 | 49 |
| have a position on yet, but is the suitability issue. That | 12 | 49 |
| is the mantra of the advocates we hear around the country, | 13 | 49 |
| as well as in Washington. I think the issue there is going | 14 | 49 |
| to be how you would define something. You know, do you have | 15 | 49 |
| fiduciary responsibility? No, I don't think so. But maybe | 16 | 49 |
| there is something in between. I think these issues that | 17 | 49 |
| will have to be worked out and looked at. But I think we're | 18 | 49 |
| moving beyond the traditional HOEPA very clearly in my | 19 | 49 |
| opinion. | 20 | 49 |
| MS. BRAUNSTEIN: I would like to spend a few | 21 | 49 |
| minutes on suitability because I think that's a really | 22 | 49 |
| important issue. And it's come up, not just here, but in | 23 | 49 |
| every hearing that we've done, that has been a huge issue. | 24 | 49 |
| And so I would like to hear some of the different views of | 25 | 49 |
| the industry and the consumer groups on what would be | 1 | 50 |
| contained in a suitability standard, how would that work. | 2 | 50 |
| And also, at some point, Barbara, I'd like to hear your | 3 | 50 |
| comments because when -- if you have feelings about that | 4 | 50 |
| because that's not something you mentioned in relation to | 5 | 50 |
| the New York law in terms of local law. But I don't know | 6 | 50 |
| who wants to start, but I'd like to hear some discussion. I | 7 | 50 |
| don't know. Margot or Bill, you both raised suitability | 8 | 50 |
| standards in your comments and how would you see that | 9 | 50 |
| working and how would that be -- | 10 | 50 |
| MS. SAUNDERS: Would you like me to start? | 11 | 50 |
| MS. BRAUNSTEIN: Whichever, that's fine. | 12 | 50 |
| MS. SAUNDERS: We have worked within the structure | 13 | 50 |
| of HOEPA for years and with the various tests like net | 14 | 50 |
| tangible benefit that have come up through -- with the | 15 | 50 |
| states and tried for many years to construct clear language | 16 | 50 |
| that would guide the industry on what are good loans and | 17 | 50 |
| what are bad loans. And we find that there is no clear rule | 18 | 50 |
| that you can -- that we can come up with, that our best | 19 | 50 |
| minds -- and we have some very good minds around the country | 20 | 50 |
| -- can come up with that would truly stop the bad loans from | 21 | 50 |
| being made. | 22 | 50 |
| So what we've done instead is decided we need a | 23 | 50 |
| vague standard. We need a deliberately vague standard that | 24 | 50 |
| we could -- I've been calling it the grandmother standard. | 25 | 50 |
Nancy Lee & Associates, Atlanta, Georgia, 404-315-8305
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