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

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aren't broke. I wouldn't try and change that. The one-year	1	126
ARMs -- The one-year ARMs, they are underwritten to the	2	126
fully indexed rate or the second year adjustment, and that	3	126
has always been an underwriting guideline for the industry,	4	126
as well. So I would keep it the way it is.	5	126
MR. WRIGHT: I'm jumping in here, also. I totally	6	126
agree with you, Kate. What I think the vast majority of	7	126
realtors do -- I know that certainly with my agents I can	8	126
speak specifically -- that is part of the initial interview	9	126
is asking not only the type of home the consumer's looking	10	126
for, but you know, how do they plan to be there, what are	11	126
their long term objectives. And I think it makes no sense	12	126
whatever to somebody that is going to be working maybe for a	13	126
large corporation whereby by standard practice, they're	14	126
moved within a five-year period of time.	15	126
It may make total sense for their financial	16	126
structure to go with some sort of an ARM or an interest only	17	126
that may not index up until five or seven years out.	18	126
They're not going to be in that house. And so to look at	19	126
worst-case scenario 30 years out, basically prevents them	20	126
from getting into that house, which I think is not good for	21	126
anybody.	22	126
MR. LOGAN: I'll make a comment on this one, as	23	126
well, probably more as a personal comment than as a NHEMA	24	126
position. But you know, when you try to do a calculation as	25	126
you described if you use worst-case scenario, you know, you	1	127
have a numerator and a denominator on certain of the	2	127
equations, and you'd be having to assume a certain probable	3	127
increase in income. You would have to be assuming probably	4	127
zero prepayment of the principal, which would certainly	5	127
impact what the payment might be at the time of that worst-	6	127
case scenario.	7	127
And so, the amount of assumptions that would have	8	127
to go into that calculation if you tried to do much in the	9	127
way of saying this is what your payment would be would just	10	127
simply be inaccurate in any really material manner, unless	11	127
throughout regulation you stipulated you had to -- everybody	12	127
had to assume the same exact presumptions, none of which are	13	127
very likely to occur, but you would have to at least	14	127
establish some standard to do the equation on, so it has	15	127
actual comparability and usefulness.	16	127
The other aspect of it would be in terms of	17	127
qualifying. You know, if you give borrowers the explanation	18	127
of this is the payment, and just as a quick example, on a	19	127
typical $200,000 loan done at 7 percent, and if they believe	20	127
that they're going to be in that house three to five years,	21	127
the amortization alone is about $6500 in principal. So they	22	127
could save $163 a month on their payment if they chose that.	23	127
And the trade off is they would not amortize that	24	127
loan $6500. Well, if they happen to be intending to move --	25	127
move up, you know, various things could be going on there	1	128
that would impact that. So it would take so many	2	128
assumptions, which could be done. But the fact is that the	3	128
ten-year historic average is already provided on ARMs. And,	4	128
you know, to the extent that that history repeats itself or	5	128
gives you some indication of what's going to go on, it would	6	128
seem that that look back would be as valuable as any sort of	7	128
very hypothetical equation you might calculate.	8	128
MS. COHEN: The discussion that we're having now	9	128
I've often heard in the context of a related question. I	10	128
appreciate your question, Jim. And the related question is	11	128
about well, what about if someone has a 228 or a five-year	12	128
ARM and they know that they're moving in two years. And the	13	128
last time I heard that question posed was at the FTC	14	128
workshop. And one of your colleagues, April Bresla	15	128
(phonetic) at another agency said the following, you are	16	128
requiring that person to move in two years. You're not just	17	128
allowing them to move in two years.	18	128
And so part of the question here is, what does it	19	128
mean to say I know I'm retiring in two years. What if your	20	128
wife ends up with a medical condition and you can't retire	21	128
in two years? So people have projections, but they're not	22	128
always what's going to happen. Clearly, the worst-case	23	128
scenario is not going to be what everyone experiences. But	24	128
what we're seeing is someone's impression now about the	25	128
future is assumed to be true.	1	129
We're also worried about the fact that the LIBOR	2	129
keeps going up. I've looked at the history of the LIBOR	3	129
over the last couple of decades. It's clear it won't always	4	129
go up, but right now it is. And that seems relevant to the	5	129
discussion also.	6	129
MR. MICHAELS: I'd like to take this discussion	7	129
and move it a little towards the disclosure question, which	8	129
is that for those of you who don't believe underwriting	9	129
based on worst-case scenario is either feasible or makes any	10	129
sense, you know, what does disclosing a worst-case scenario	11	129
do to a consumer in terms of making them focus on	12	129
affordability because really we've heard a lot of discussion	13	129
about disclosures of worst case, and I've actually heard	14	129
someone in the industry say that makes some sense.	15	129
MR. WRIGHT: You're looking at me?	16	129
MR. MICHAELS: Well, I thought I saw -- I thought	17	129
I saw in your statement --	18	129
MR. WRIGHT: It certainly makes sense from my	19	129
perspective. I think the cross cutting issue is clearly	20	129
marketing. Lenders don't want to unnecessarily -- It's kind	21	129
of like the auto industries years ago. They didn't talk	22	129
about auto safety because even if they thought their car was	23	129
a little safer than another car, they didn't want the	24	129
consumer to start thinking about safety. And that's what we	25	129
have going on here. They don't necessarily want to direct	1	130
people to thinking about what the maximum mortgage payment	2	130
they may have to pay. But I think to make the case against	3	130
providing that type of disclosure to consumers really	4	130
doesn't stand up.	5	130
But you know, this notion of choice, I think,	6	130
really has to -- has to be probed a little bit because what	7	130
we found in research we looked at was that the income levels	8	130
were really critical, that, you know, consumers above	9	130
$75,000 in annual income viewed non-traditional products as	10	130
a financial option. You know, some of the considerations	11	130
that we hear around the table here, they made choices:	12	130
well, I'm going to be here, I'm going to move.	13	130
But for the consumers that had non-traditional	14	130
mortgages under 75,000, overwhelmingly they said, this was	15	130
the only way I could afford that house. This was not an	16	130
option. And they took it on because they had no other	17	130
choice. They're relying on home price appreciation to	18	130
enable them to continue to make higher payments should they	19	130
come, and that's a risky proposition for consumers. And	20	130
certainly, that's the kind of proposition that needs to be	21	130
fully disclosed.	22	130
But I think, you know, underwriting that takes	23	130
into account a borrower's realistic prospects for being able	24	130
to entertain higher payments down the line is absolutely	25	130
critical because if we don't provide that, you're	1	131
essentially -- and by the way, lenders have told us that	2	131
they do account for that. They call it a fudge factor. I	3	131
don't know what that means. I don't know how precise that	4	131
is. But lenders tell me for part of their underwriting, and	5	131
these are lenders who you would think of as being very	6	131
prominent, that they do account for. So I think at least	7	131
looking at that issue and figuring out how far we can go	8	131
beyond a -- the fully indexed rate makes a lot of sense.	9	131
MR. DUNCAN: I would just like to bring up	10	131
something that Ken mentioned earlier when he held up his	11	131
package of things that has to be signed. I don't think	12	131
there's any disagreement of any of us at the table that	13	131
consumers should have clear information on which to act.	14	131
There's disagreement on exactly what that means. What's	15	131
composed? But I think we all agree that a well-educated,	16	131
well-informed consumer with the power of information to shop	17	131
will always get a better deal than a consumer that doesn't	18	131
have that. So I think it's an issue of what's in that.	19	131
Is the worst-case scenario a piece of that? I	20	131
don't know. All the things that Ken said makes sense in	21	131
terms of how you arrive at that, what the standard is. I	22	131
would say that in terms of the magnitude of the problem,	23	131
while we have lots of anecdotes and anecdotes are very	24	131
useful for illustrating a point, something to be looked	25	131
into, they're not a good basis for public policy.	1	132
And our data -- broad-based data, which we've been	2	132
surveying delinquencies and foreclosures since the early	3	132
1970s does not show a broad-based systematic problem at this	4	132
point. Obviously, we're -- a lot of these loan products are	5	132
newer, so we're looking to see what's going to emerge in	6	132
that arena. But I think we actually have a lot of agreement	7	132
at the table about some things that need to be done.	8	132
MS. BRAUNSTEIN: I'd like to take it back to	9	132
something, Doug, you just mentioned in terms of ideally	10	132
everybody having sufficient information in order to shop,	11	132
being the key word. And I'd like to have a little bit of	12	132
discussion about that because what we have heard is that	13	132
while it's possible that people, in general, do some	14	132
shopping for purchase money, there's, in fact, very little	15	132
shopping that goes on in terms of refis and that it's really	16	132
through push marketing that these things get done, that	17	132
they're approached by lenders, as opposed to going out and	18	132
looking for lenders. And I'd like to get some reaction from	19	132
everybody on that whole issue.	20	132
MS. CRAWFORD: Well, my customers shop because	21	132
they've already called several places before they call me,	22	132
and they want to know how much it's going to cost them, what	23	132
the rate's going to be, and what the payment's going to be.	24	132
And that's what they're interested in up front. And then	25	132
they start ask -- And they want --	1	133
MS. BRAUNSTEIN: How do they get to you?	2	133
MS. CRAWFORD: How do they get to me? I'm in the	3	133
phone book.	4	133
MS. BRAUNSTEIN: Phone book? So you're not --	5	133
MS. CRAWFORD: I don't --	6	133
MS. BRAUNSTEIN: -- pushing in neighborhoods	7	133
and --	8	133
MS. CRAWFORD: No. I don't do that.	9	133
MS. BRAUNSTEIN: And you're not -- They're not	10	133
coming to you through internet or they're coming to you --	11	133
MS. CRAWFORD: We have a website.	12	133
MS. BRAUNSTEIN: -- by telephone?	13	133
MS. CRAWFORD: We have a website. We don't do any	14	133
-- We don't do direct mail. We don't do any -- We don't	15	133
have a call center. We just -- They just come to me because	16	133
I've been there for 30 years.	17	133
MR. REYNOLDS: My observation and part of	18	133
preparing for this, I went to our consumer area and pulled a	19	133
couple of adjustable -- excuse me, interest only type	20	133
mortgage products to take a look at the disclosures. And my	21	133
observation is that the disclosures are fairly comprehensive	22	133
that are in most of the products. The problem, I think, is	23	133
there's such a volume of disclosures and the -- you know,	24	133
it's one thing if you're a regulator that's been involved in	25	133
the business for almost 30 years. It's another thing if	1	134
you're a consumer and not a sophisticated consumer. So I	2	134
really think the process needs to be simplified and that	3	134
certain standardized information be provided to consumers so	4	134
they do have the ability to better compare products between	5	134
individuals that are offering product.	6	134
MS. BRAUNSTEIN: And George, would that come	7	134
through -- If they're shopping, would that come through	8	134
disclosures or more through advertising?	9	134
MR. REYNOLDS: I think ultimately it needs to come	10	134
through the disclosure process because I just think it needs	11	134
to be simplified. There needs to be clear disclosures,	12	134
maybe fewer disclosures but more disclosures -- simple	13	134
language disclosures so that the consumer is aware of what	14	134
the optionality in the product is and so they can compare	15	134
competitive product to get the best deal for that consumer.	16	134
MS. BRAUNSTEIN: I want to -- Mike, on the same	17	134
topic of shopping, I wanted to get some opinions from you.	18	134
When you're dealing with customers are they asking you where	19	134
to go to get a loan, or do they generally have their own	20	134
ideas about where to go to get a loan?	21	134
MR. WRIGHT: It's some of both. It asks for	22	134
recommendations. But when it comes to shopping, I mean, I	23	134
would agree with what Kate had to say. I think today's	24	134
consumer, at least our consumer -- maybe Atlanta's	25	134
consumer's are a lot more savvy than others, but are	1	135
shopaholics when it comes to loan products. I mean,	2	135
literally up until the day or two before closing, they're	3	135
still, you know, on the internet, you know, calling around	4	135
and such as that. So I think that this notion that they	5	135
only go to one source and stick with whatever that source	6	135
provides to them just doesn't hold true. I guess	7	135
predominantly because of the internet, they're aware there's	8	135
options out there and they shop them out.	9	135
I think that to your point, George, it would	10	135
probably be helpful to the consumer and certainly it would	11	135
be helpful for us as realtors helping the consumer is some	12	135
sort of standardization across the disclosure so that there	13	135
is -- you're really comparing apples to apples against	14	135
product. I mean, sometimes that can be a little bit of a	15	135
challenge to go through and try to really understand what	16	135
one is disclosing and one is not. So I think a standard	17	135
disclosure is something that we certainly would support.	18	135
MS. COHEN: Can I answer that? It may be that	19	135
there are subsets of consumers -- large subsets of consumers	20	135
who are shopping, particularly in association with	21	135
purchasing a home. But in Atlanta, Bill Brennan and Karen	22	135
Brown's office regularly sees people who did not shop at	23	135
all. They didn't even know they wanted a loan, and the next	24	135
thing they know they're losing their house. And so clearly,	25	135
there's more than one thing happening in the market.	1	136
What we see around the country from not only legal	2	136
services lawyers but also from pro bono lawyers and consumer	3	136
advocates, consumer lawyers is that many, many people when	4	136
they're refiing do not shop around. Frankly, most of my	5	136
Harvard educated friends in Washington didn't shop around	6	136
for a mortgage either. They went to their mortgage broker,	7	136
and they took the loan that the person -- to their realtor	8	136
and their mortgage broker told them -- you know, their	9	136
realtor told them who to go to for a mortgage broker, and	10	136
they just took whatever was given to them. And these are	11	136
people who you would think would shop around for loans.	12	136
So I'm not sure that it's always true that people	13	136
shop. But in the low and moderate income communities -- and	14	136
by the way, the same laws apply to them as everyone else,	15	136
and we need laws that protect them, as well as everyone else	16	136
-- they are not shopping, and they are being sold loans that	17	136
they don't understand. And if they do understand the	18	136
disclosures that they're getting, they're not relevant to	19	136
what happens at closing. And so part of what we see is	20	136
someone is told orally or in writing your loan is going to	21	136
be a fixed rate loan for 15 years or 30 years, and they show	22	136
up at closing and they've got 228 ARM.	23	136
And so something needs to happen so that the early	24	136
disclosure is accurate and relevant to what's happening to	25	136
the borrower. But in addition, we can't assume that the	1	137
disclosure is going to solve all the problems. Sandy,	2	137
herself, described these transactions as extremely complex.	3	137
Harry Dinham said we need training pre-hiring. And Mike	4	137
Wright said, we have new products weekly. There is no way	5	137
that the average person on the street, never mind all the	6	137
people in this room, should be expected to shop around and	7	137
understand new products weekly unless there's also an	8	137
obligation on the part of the originator to do an evaluation	9	137
for that person. May I say one more thing?	10	137
MS. BRAUNSTEIN: Of course.	11	137
MS. COHEN: I've heard from lawyers around the	12	137
country that their clients don't get the CHARM booklet. I	13	137
know Mike Bozeman's very proud of that book. He worked on	14	137
it. I just want to say people aren't getting it. And I	15	137
want to say that a lot people are not getting GFEs. They're	16	137
not getting early PILA disclosures when they should. If	17	137
it's not enforceable by a private cause of action, it often	18	137
doesn't happen.	19	137
MR. FISHBEIN: Sandy, could I make a comment as	20	137
well?	21	137
MS. BRAUNSTEIN: Sure.	22	137
MR. FISHBEIN: We've been looking at some of the	23	137
internet information that's posted by lenders on non-	24	137
traditional mortgages. I know you'll probably get into that	25	137
this afternoon. But what -- And this is really in the wake.	1	138
I know the guidance hasn't been adopted yet, but the wake of	2	138
guidance being issued by the agencies instructing that there	3	138
ought to be balanced information with clear portrayal of the	4	138
risks involved in these products, and that didn't come	5	138
across to us from many of these websites. Some had better	6	138
information than others, I would certainly say.	7	138
But on the whole, they didn't convey a sense of	8	138
risk for these particular kinds of products. They were more	9	138
of option-oriented advertisements, and I think that in my	10	138
mind shows a certain limit of best practices operating here	11	138
in the marketplace and that if -- if lenders had more	12	138
specific instruction or rules that were established about	13	138
the nature of these advertisements, I think you'd see an	14	138
improvement in the kind of information that's currently	15	138
provided just across the board through the internet.	16	138
MR. CHANIN: Let me ask a question for Allen and	17	138
Alys. Excuse me. Both of you mentioned that the board	18	138
should exercise UDAP, unfair and deceptive authority. I	19	138
assume you meant promulgate rules because the board does	20	138
enforce that with respect to member banks and terms of	21	138
examinations and like.	22	138
And my question is, there is obviously great	23	138
difficulty in trying to construct rules that prohibit a	24	138
practice and yet don't sweep too broadly and prohibit	25	138
legitimate practices and that don't also end up doing	1	139
nothing. But on the coverage of UDAP in terms of our rules,	2	139
it's somewhat limited. That is, it only applies to	3	139
depository institutions, banks, and even then, only some	4	139
banks. It doesn't apply to thrifts. It applies to national	5	139
banks and FDIC and Fed-examined banks. It doesn't apply to	6	139
thrifts. It doesn't apply to secondary market: Fannie and	7	139
Freddie, or any other secondary market entities. It also	8	139
wouldn't apply to brokers. It wouldn't apply to non-	9	139
depository institutions.	10	139
So my question is, given all that, I mean -- and	11	139
there is no private right of action. So is it -- You know,	12	139
is it of some value given those inherent limitations on our	13	139
UDAP authority?	14	139
MR. FISHBEIN: Well, I would say yes, I think you	15	139
correctly noted the limitations. And you know, other	16	139
agencies like the OTS and the FTC could adopt their own	17	139
practices, as well in this area -- excuse me, their own	18	139
rules in this area, as well. But I think you laid out the	19	139
limitations. But I think experience has shown in a number	20	139
of areas of consumer regulation that in an agency like the	21	139
Fed striking out and establishing certain standards as they	22	139
apply to depository institutions would have influence over	23	139
the rest of the market, and perhaps, bring other market	24	139
practices along with the depository institutions.	25	139
MR. CHANIN: Alys, any -- You want to disagree	1	140
with that one because I'm going to come back with a comment.	2	140
MS. COHEN: I want to agree with everything Allen	3	140
said.	4	140
MR. CHANIN: I want to also, but.	5	140
MS. COHEN: I don't want you to sick your dog on	6	140
me.	7	140
MR. CHANIN: I don't have a dog anymore.	8	140
MS. COHEN: The way I read 15 USC 1639 (l)(2),	9	140
which of course, I have right here in this little book, it	10	140
says the following: The board by regulation or order shall	11	140
prohibit acts or practices in connection with (A) mortgage	12	140
loans that the board finds to be unfair, deceptive, or	13	140
designed to evade the provisions of this section, meaning	14	140
HOEPA, I believe, and (B) refinancing of mortgage loans that	15	140
the board finds to be associated with abusive lending	16	140
practices or that otherwise are not in the interest of the	17	140
borrower.	18	140
I took that to be something that you could do that	19	140
could apply to all institutions and not only that would	20	140
apply to a limited number. To the extent that you would do	21	140
something that only applies to a limited number of	22	140
institutions, the same way Fannie and Freddie said no more	23	140
single premium credit insurance but it didn't apply to	24	140
everyone, it had a huge affect on the market. But to the	25	140
extent that you can have a change in the market for	1	141
everyone, that would be greatly welcome.	2	141
MR. CHANIN: Okay. And there is for the audience,	3	141
if you haven't fallen asleep already, there is an	4	141
independent authority under HOEPA dealing with unfair and	5	141
deceptive.	6	141
MS. COHEN: That's shorter than what I said.	7	141
Thank you.	8	141
MR. CHANIN: Yeah. The follow up is, you know, if	9	141
we were to use this authority under the general unfair and	10	141
deceptive, you know, some of the issues identified by the	11	141
prior panel seem to in other locations where we have had	12	141
these hearings have identified not depository institutions	13	141
but loan brokers or independent entities as the source, if	14	141
you will, of some of these issues and problems. And so the	15	141
question is, would we, in a sense, be effectively addressing	16	141
something if, you know, we don't reach those players. You	17	141
may have already answered that.	18	141
MR. FISHBEIN: You know, again, I think you're	19	141
highlighting the limitation, and I want to kind of hedge my	20	141
earlier comment in light of some, you know, additional	21	141
examination of the scope of Fed authority in this area. But	22	141
I do think that a statement by federal regulators that goes	23	141
beyond saying we have a problem with certain practices are	24	141
unfair and deceptive. You know, I think you're being	25	141
bashful. I think we'll have a real impact on the industry	1	142
across the board. Maybe the industry representatives might	2	142
have a different view, but I think it would change	3	142
practices.	4	142
MR. REYNOLDS: Can I make a comment? From a	5	142
regulatory perspective, we -- in the examination process on	6	142
the banking side, we have approximately 280 state chartered	7	142
banks. And we routinely look at predatory lending practices	8	142
as a part of our examination process on the banking side and	9	142
quite frankly have not observed any practices that we would	10	142
characterize as predatory, even though we look at it in the	11	142
exam process, we look at the use of various predatory	12	142
practices like pre-payment penalties, the use of	13	142
unsuitability in terms of loan products, that type of thing.	14	142
We don't see that on the -- on the financial	15	142
institution side. So I think you raise a legitimate	16	142
question about whether or not you would be imposing a burden	17	142
on institutions that, quite frankly, haven't demonstrated	18	142
that they have issues in that area when probably the issue	19	142
is more related to mortgage lenders and brokers than it is	20	142
insured depository institutions.	21	142
MR. FISHBEIN: If I could just amplify for a	22	142
second on what I said. I didn't address the point about	23	142
mortgage brokers. And you know, clearly what I laid out is	24	142
that I think there ought to be fiduciary like obligation for	25	142
mortgage brokers to their borrowers, and that is an issue	1	143
that needs to be dealt with directly. I have heard it say	2	143
because the guidance did address the issue of oversight by	3	143
lenders of their brokerage force that there's been	4	143
considerable push back by the industry in the public	5	143
comments that have been submitted.	6	143
And I think that just underscores this issue, that	7	143
we have a major change in the marketplace from years ago	8	143
when the -- the Reg Z disclosures were written, and we	9	143
haven't developed a series of public policies and standards	10	143
to catch up to those changes in the marketplace. And	11	143
there's no more -- There's no area more obvious in our view	12	143
than the brokerage channel and the role that they play in	13	143
mortgage originations today.	14	143
MS. BRAUNSTEIN: Thank you.	15	143
MR. DUNCAN: If I could just -- While I'm not an	16	143
attorney, so I don't know -- I have a worse liability. I'm	17	143
an economist. I did want to say that there is -- there are	18	143
some disciplines that are in place by market structure to	19	143
prevent some of the problems. And those are that the	20	143
secondary market assesses the relationship between achieved	21	143
yield and expected yield, and the pricing on product that	22	143
comes to the market where achieved yield is significantly	23	143
less than expected yield flows back down to the origination.	24	143
Through the broker channel, the way that works is	25	143
the lender who's the aggregator of broker business runs	1	144
score cards on the brokers. And if the product that's	2	144
causing them problems on the secondary market comes from	3	144
specific brokers, they get cut out of the business through	4	144
the score cards. Now, what does not happen is something, I	5	144
think, it was Alys referred to earlier is that there's not a	6	144
national registry of where the bad actors are. So they can	7	144
leave the -- the business in one place and re-enter in	8	144
another place.	9	144
And so that's a -- something that we care about	10	144
and would like to see rectified so that it can improve the	11	144
market. But it's not without disciplines. In addition to	12	144
which, if a set of borrowers are being priced up through	13	144
some mechanism, which is beyond the market assessment of	14	144
risk, then what happens is prepays on those kinds of	15	144
securities are much faster, and so that's another way in	16	144
which the market will eventually drive that pricing down.	17	144
MS. BRAUNSTEIN: George, were you getting ready	18	144
to --	19	144
MR. REYNOLDS: One issue that I was going to	20	144
mention, the Conference of State Bank Supervisors is	21	144
currently in the process of setting up a mortgage licensing	22	144
process that we hope will add some uniformity and cut down	23	144
on the situation of bad players leaving one market and	24	144
entering into another. And so we have -- We're active	25	144
supporters of that in this state and have provided support	1	145
to get that underway. So we think that may address some of	2	145
those issues.	3	145
MS. CRAWFORD: But at this time the group is only	4	145
going to use the one -- for the registry the people that are	5	145
already licensed in the states, if I'm correct on that.	6	145
It's not -- And so it's not all originators. It's just	7	145
who's licensed now. It's not mortgage bankers. It's not	8	145
banks. It's not credit unions. It's not finance companies	9	145
if they're not under the guidelines.	10	145
It's not everybody that takes a 1003, and that's	11	145
what I think should happen. Everybody should be tracked,	12	145
not just the mortgage broker or the mortgage banker. But	13	145
anybody that handles that customer's application should be	14	145
tracked because if they leave a mortgage broker and go to a	15	145
credit union, they fall into the cracks because the credit	16	145
union's not going to be in that registry or if they go	17	145
through a national bank. And not all national banks check	18	145
out their employees.	19	145
I know this for a fact for the people that work in	20	145
my town. I mean, we wouldn't hire them, but they're hired	21	145
by banks. So, it needs to -- That registry needs to have	22	145
all originators in it, not just that segment of the	23	145
industry. Please take that back to them.	24	145
MR. REYNOLDS: Well, I -- I appreciate that. I	25	145
would point out, though, that the banking industry is	1	146
probably the most -- one of the heaviest regulated	2	146
industries in terms of the amount of supervision. You know,	3	146
we have a very active examination program for our banks and	4	146
credit unions in this state, and we go in most of them every	5	146
year or every 18 months. And therefore, I would	6	146
respectfully contend that they -- that the officers in those	7	146
institutions are already very highly supervised.	8	146
MS. BRAUNSTEIN: Okay. Well, unless my co-	9	146
panelists have any other questions, I think we're going to	10	146
end this a few minutes early, and I want to thank our	11	146
panelists today for a good discussion. Thank you all. We	12	146
will now take a break for lunch for the hearing. We will	13	146
reconvene at 1:30 with our third panel. Thank you.	14	146
(A short break was taken from 12:21 p.m. to 1:34	15	146
p.m.)	16	146
MS. BRAUNSTEIN: Welcome back to those who	17	146
rejoined us, and we're going to get started with our third	18	146
and last panel of the day. I just wanted to make a few	19	146
reminder notes. I want to remind anybody who's interested	20	146
in speaking at the open mike session to please sign up on	21	146
the sign up sheet outside and to remind you that you will	22	146
have three minutes for your presentation, but that you can	23	146
submit longer written comments for the record.	24	146
And with that, we're going to start our third	25	146
panel. We have -- By the way, Joan Buchanan has rejoined	1	147
us, who's assistant VP from the Federal Reserve Bank of	2	147
Atlanta and we're going to start our third panel. And the	3	147
same rules as before, five minutes for your opening	4	147
statements. Wayne's the time keeper. He will flash the	5	147
yellow light when it's four minutes, and then the red light	6	147
when your time is up. And with that, we can get started.	7	147
Vanessa, do you want to lead us off, please?	8	147
MS. PERRY: Sure. Sure.	9	147
MS. BRAUNSTEIN: And start please by introducing	10	147
yourself and your organization.	11	147
MS. PERRY: Okay. I'm Vanessa Gail Perry. I'm	12	147
assistant professor at the George Washington University	13	147
School of Business in Washington, D.C. And the purpose of	14	147
my remarks are just to point out some issues that have	15	147
arisen from decision research that relate to the redesign of	16	147
disclosures, particularly from mortgage and other close end	17	147
kinds of loans, specifically, what can we do to encourage	18	147
consumers to attend to and elaborate on disclosure	19	147
information.	20	147
There's some things we know about how consumers	21	147
make financial decisions that would be helpful in this	22	147
regard. For example, we know from research in consumer	23	147
behavior that consumers are more likely to attend to and	24	147
elaborate on a message such as a disclosure if they have the	25	147
motivation, ability, and opportunity to do so.	1	148
First I'll talk about motivation. Consumers will	2	148
be motivated to attend to and to process disclosure	3	148
information if the information is personally relevant. That	4	148
is, the information pertains to the specifics of their	5	148
financial -- their financial situation. In addition,	6	148
consumers will be motivated to utilize disclosure	7	148
information if they perceive a high level of risk in the	8	148
transaction. Consumers will perceive a higher degree of	9	148
risk if the communication suggests that substantial	10	148
financial, social, or other interests are at stake.	11	148
Another point related to consumer motivation is	12	148
that paying off balances may not be a priority for	13	148
consumers. Many consumers are short term oriented and are	14	148
focused more on monthly payments than longer time horizons	15	148
or accumulated balances over time. Thus, information about	16	148
how much interest they will pay over years may not be	17	148
considered important.	18	148
So how do we motivate consumers to use disclosure	19	148
information? One way is to introduce disclosure information	20	148
with personally relevant statements that communicate risk	21	148
information. The statements that introduce the disclosure	22	148
of specific terms may be as important as the terms	23	148
themselves. For example, with this loan you will owe more	24	148
than you do now, and you may face higher monthly payments as	25	148
a sort of introductory statement.	1	149
Secondly, consumers will utilize disclosure	2	149
information if they have the ability to do so. We know from	3	149
recent research and financial literacy that we cannot assume	4	149
that consumers have a thorough understanding of financial	5	149
principles, such as APRs. In addition to limited financial	6	149
knowledge, there are some common biases and decision making	7	149
that affect the way consumers interpret disclosures.	8	149
First, consumers process price information	9	149
relative to some point of reference. Thus, information	10	149
about an APR of nine percent may be perceived as high or low	11	149
depending on the rate the consumer uses as a basis of	12	149
comparison. One such rate may be the prime rate, perhaps	13	149
average rates or other comparisons could be disclosed in	14	149
order to influence consumer perceptions.	15	149
Another bias that affects consumer decisions is	16	149
that negative language carries more weight in risky	17	149
decisions than positive or neutral language. So using the	18	149
words cost or payments may be more effective than using more	19	149
neutral terminology like rates and fees.	20	149
Finally, consumers will utilize disclosure	21	149
information if they have ample opportunity to do so. This	22	149
means consumers need enough time and attention to process	23	149
the information, and the message must be at an appropriate	24	149
level of complexity. In situations when consumers have low	25	149
motivation, repetition is always -- is often used, which	1	150
means actually repeating the same disclosure more than once.	2	150
Another way to reduce complexity is to prevent consumers	3	150
from having to do math. This creates a burden or possibly a	4	150
barrier to interpreting disclosure information.	5	150
So in summary, I'm glad to see that understanding	6	150
how consumers make financial decisions is a priority in the	7	150
review of Reg Z, and I look forward to this discussion.	8	150
MS. BRAUNSTEIN: Wow. Thank you. That was great.	9	150
We'll get back to some of those issues in the discussion.	10	150
Okay. John?	11	150
MR. KOZUP: Good afternoon. My name is John	12	150
Kozup, and I'm an assistant professor of marketing at	13	150
Villanova University and director of Villanova University	14	150
center for marketing and public policy research, an academic	15	150
research institute examining a variety of marketing and	16	150
public policy issues, including product labeling and	17	150
disclosure, advertising testing and regulation, intellectual	18	150
property and privacy concerns, signage and outdoor	19	150
advertising, and a host of other areas. I appreciate the	20	150
invitation to today's hearing on mandatory disclosure.	21	150
The primary focus of my research is in the area of	22	150
product labeling and disclosure. Currently my colleagues,	23	150
Elizabeth Crier and Michael Pagano and I are researching the	24	150
effects of summary disclosures in the mutual fund market.	25	150

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