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Public Hearing on Home Equity Lending
August 4, 2000

                                                     Volume I 
                                                     Pages 1 - 286
                            UNITED STATES OF AMERICA
                              FEDERAL RESERVE BOARD
              HEARING RE:  The Truth in Lending Act, The Home
                           Ownership and Equity Protection Act  
                           of 1994, and Predatory Lending 
                           Practices in the Home-Equity Consumer 
                           Credit Market.
              BEFORE:  Edward M. Gramlich, Board of Governors of 
                           the Federal Reserve System, Chairman of 
                           the Federal Reserve Board's Committee 
                           on Consumer and Community Affairs
                       Dolores Smith, Director, Federal Reserve 
                           Board's Division of Consumer and 
                           Community Affairs
                       Sandra Braunstein, Assistant Director, 
                           Federal Reserve Board's Division of 
                           Consumer and Community Affairs
                       Adrienne Hurt, Assistant Director, Federal 
                           Reserve Board's Division of Community 
                       James Michaels, Managing Counsel, Federal 
                           Reserve Board's Division of Consumer 
                           and Community Affairs
                       Richard Walker, Vice-President, Federal 
                           Reserve Board of Boston
                                    Held at:
                         Federal Reserve Bank of Boston
                               600 Atlantic Avenue
                              Boston, Massachusetts
                             Friday, August 4, 2000
                                    9:00 a.m.
                                Carol H. Kusinitz
                        Registered Professional Reporter

          1                         I N D E X
          2   SPEAKER:                                        PAGE
          3                   INTRODUCTORY REMARKS
          4   Dolores Smith                                      5
          5   Edward M. Gramlich                                 8   
          6                    OPENING STATEMENTS
          7   Jennifer Davis Carey:  Director, 
                Consumer Affairs and Business Regulation, 
          8     Commonwealth of Massachusetts                   13
          9   Thomas J. Curry:  Commissioner of Banks, 
                Commonwealth of Massachusetts                   16
              Steve Nadon:  Executive Vice-President and COO,   
         11     Option One Mortgage Corporation                 19
         12   Elizabeth Renuart:  National Consumer Law Center  25
         13   Howard Miselman:  Chairman, 
                 Massachusetts Mortgage Association             27
              William Gothorpe:  America's Community Bankers    31
              Bruce Marks:  Ceo and Executive Director,   
         16     Neighborhood Assistance Corporation of America  34
         17   Pam Kogut:  Assistant Attorney General, 
                Commonwealth of Massachusetts                   37
              Richard Gravino:  President, 
         19     Provident Consumer Financial Services           40
         20   Faith Schwartz:  Freddie Mac                      43
         21   Dwight Golann:  Professor of Law,
                Suffolk University Law School                   45
              Dennis Algiere: Vice-President of Compliance,
         23     CRA Officer, Washington Trust Company           48

          1                   I N D E X (Continued)
          2   SPEAKER:                                        PAGE
          4   Dolores Smith                                     51
          5   Discussion                                        52
              Dolores Smith                                     89
              Discussion                                        91
              James Michaels                                   133
              Discussion                                       135
                                AFTERNOON SESSION
                              INTRODUCTORY REMARKS
              Dolores Smith                                    192
                               OPENING STATEMENTS
              Norma Moseley:  Director of Housing Programs,  
         17     Ecumenical Social Action Committee, Inc.       194
         18   Nadine Cohen:  Lawyers Committee for Civil 
                Rights Under Law, Boston Bar Association       196
              Leonard Raymond:  Executive Director, 
         20     Homeowner Options for Massachusetts Elderly    198
         21   Tom Callahan:  Executive Director, 
                Massachusetts Affordable Housing Alliance      201
              Allen White:  Supervising Attorney, 
         23     Community Legal Services                       204
         24   John C. Anderson:  The Real Estate Analyst       207

          1                   I N D E X (Continued)
          2   SPEAKER:                                        PAGE
          3                CONSUMER OUTREACH EFFORTS,
                          CONSUMER EDUCATION CAMPAIGNS
              Dolores Smith                                    211
              Sandy Braunstein                                 212
              Discussion                                       212
                              PUBLIC PARTICIPATION
              Tim Davis: City of Boston Department 
          9     of Neighborhood Development                    264
         10   Daniel Ramgeet:  Massachusetts ACORN             266
         11   Ed France                                        269
         12   Leonard Alkins:  Boston NAACP                    271
         13   Jim Campen:  Associate Professor of Economics, 
                U. Mass. Boston                                273
              Andrea Luquetta:  Massachusetts Association of   
         15     Community Development Corporations             276
         16   Bruce Fitzsimmons:  Massachusetts Conveyancers 
                Association                                    281
                                     * * * *

          1                   P R O C E E D I N G S
          2            MODERATOR SMITH:  Good morning.  I think 
          3   we're about ready to start.  My name is Dolores 
          4   Smith.  I'm the Division Director for Consumer and 
          5   Community Affairs at the Federal Reserve Board, and 
          6   I will be the moderator for this hearing. 
          7            This is the second of four hearings that 
          8   the Board is holding this summer on home-equity 
          9   lending.  Our first meeting was in Charlotte last 
         10   week, and we have two more scheduled, one in Chicago 
         11   on the 16th and the fourth one in San Francisco on 
         12   September the 7th. 
         13            We have invited panelists and then we also 
         14   have members of the public who, as in Charlotte, 
         15   will be offering a wide variety of views on the 
         16   possible ways to address predatory lending practices 
         17   in the home-equity consumer credit market.  We look 
         18   forward to hearing about these issues here in 
         19   Boston. 
         20            As in Charlotte, we will be discussing the 
         21   potential use of the Board's rule-making authority 
         22   under the Home Ownership and Equity Protection Act, 
         23   which we refer to as HOEPA.  Also, we will be 
         24   discussing alternatives to regulation, such as 

          1   consumer outreach and consumer education. 
          2            First I want to start by introducing the 
          3   Board Panel.  We have Ned Gramlich to my right, who 
          4   is a member of the Board of Governors of the Federal 
          5   Reserve System.  He also is the chairman of our 
          6   Oversight Committee for Consumer and Community 
          7   Affairs of the Board. 
          8            To my left, we have Adrienne Hurt and Jim 
          9   Michaels.  Adrienne is Assistant Director for our 
         10   regulations program, and Jim is Managing Counsel.  
         11   And the two of them are the people who are primarily 
         12   responsible for Truth in Lending matters at the 
         13   Board. 
         14            And then to my right we have Richard Walker 
         15   from the Reserve Bank, Federal Reserve Bank of 
         16   Boston.  He is a Vice-President. 
         17            I'll start with a few introductory remarks 
         18   for the record about the Truth in Lending Act and 
         19   HOEPA. 
         20            The Truth in Lending Act requires creditors 
         21   to disclose the cost of credit for consumer 
         22   transactions generally, not just for mortgage 
         23   credit.  But in 1994, the Congress enacted HOEPA, as 
         24   it is called, and HOEPA added special protections 

          1   under Truth in Lending for consumers who use their 
          2   home as security for loans when the rates or the 
          3   fees on the loans are above a certain percentage or 
          4   amount. 
          5            HOEPA was a response to accounts of abusive 
          6   lending practices involving unscrupulous lenders who 
          7   made unaffordable home-secured loans to consumers 
          8   who were house rich but cash poor.  These cases 
          9   involved elderly, sometimes unsophisticated 
         10   homeowners who were targeted for loans with high 
         11   rates or high closing fees and with repayment terms 
         12   that were difficult or impossible for the homeowners 
         13   to meet. 
         14            HOEPA requires creditors to provide 
         15   additional disclosures at least three days before 
         16   the consumer becomes obligated for the loan.  It 
         17   prohibits lenders from including certain terms in 
         18   loan agreements; for example, balloon payments for 
         19   short-term loans.  It prohibits creditors from 
         20   relying on a consumer's home as the source of 
         21   repayment of the debt without considering whether 
         22   the consumer's income, debt and employment status 
         23   would support repayment. 
         24            For the Board, it also requires that the 

          1   Board hold hearings periodically to keep abreast of 
          2   the home-equity credit market targeted by HOEPA.  
          3   And we did hold hearings initially in 1997, about 
          4   two years after HOEPA became effective. 
          5            And for now we'll start with Governor 
          6   Gramlich, who is going to talk to us a little bit 
          7   about the purpose of these hearings. 
          8            GOVERNOR GRAMLICH:  Thank you very much, 
          9   Dolores.  We're all happy to be here in Boston, and 
         10   we had a successful hearing in Charlotte last week, 
         11   and we look forward to another one today. 
         12            Let me just say a few overall words about 
         13   the issue here.  The last few years have seen a very 
         14   large growth in subprime lending.  It's roughly 
         15   twice the rate of growth of other mortgage lending. 
         16            Most of us think that by and large this 
         17   growth was a good thing, that it generally brought 
         18   credit to low and moderate income families that 
         19   previously had been denied credit and opened up 
         20   credit markets and went along with a number of 
         21   things that we would put in the general category of 
         22   equalizing opportunities for groups of all income 
         23   levels. 
         24            But by all anecdotes there seem to have 

          1   been some abuses that have come along at the same 
          2   time.  There have been a series of anecdotes that 
          3   I'm sure you've all heard, maybe are the source of 
          4   many of them, and we're trying to track this down 
          5   now with quantitative data.  But there does seem to 
          6   be some rise in foreclosures that would otherwise be 
          7   hard to explain. 
          8            It's this kind of puzzle that leads to the 
          9   quandaries up here.  We would like to encourage the 
         10   continued growth of subprime lending, the continued 
         11   opening up of credit markets, but we also want to do 
         12   what we can within our authority to curb the abuses 
         13   that are cropping up. 
         14            The Fed has some authority in this area, as 
         15   Dolores mentioned.  We have some authority under 
         16   HOEPA.  We also have some authority under the Home 
         17   Mortgage Disclosure Act.  And these hearings are 
         18   fundamentally about aspects within our authority; 
         19   that is, what the Fed can do.  We are trying to keep 
         20   our focus analytical and to keep our eye on the 
         21   ball, if you will, and try to find measures that we 
         22   can take that have more benefits than costs, 
         23   recognizing that nothing will be perfect. 
         24            One thing I should mention and that you'll 

          1   hear today is that our authority in the overall 
          2   scheme of things is a bit limited.  We certainly 
          3   can't do it all.  To make a broad-based assault on 
          4   predatory lending, it's going to take the combined 
          5   efforts of all financial regulators, of which there 
          6   turn out to be nine in Washington.  It's going to 
          7   take a number of private sector efforts.  It's going 
          8   to take a big push on consumer education, and that's 
          9   why the session this afternoon focuses on that 
         10   topic. 
         11            So a multifaceted approach will be 
         12   necessary.  At the same time, the Fed can probably 
         13   do some good, and that's the kind of thing that we 
         14   are going to be focusing on. 
         15            These hearings build on others that we've 
         16   had in the past that Dolores mentioned.  There have 
         17   also been some Treasury/HUD hearings earlier in the 
         18   year, and that led to a report that Treasury and HUD 
         19   made that had a number of suggestions for Federal 
         20   Reserve action. 
         21            So this is the more, if you will, the more 
         22   precise part of that.  We're now getting down to 
         23   business on these recommendations and trying to look 
         24   at them one by one and see exactly what we should 

          1   and shouldn't do. 
          2            So with that I will stop and turn it back 
          3   over to Dolores so we can continue with the agenda.  
          4   But, again, thank you for coming, and thank you for 
          5   helping us with this difficult problem. 
          6            MODERATOR SMITH:  Thank you, Ned.  I wanted 
          7   to talk a little bit about how our agenda is 
          8   structured.  We're going to spend the morning 
          9   considering ways in which the Board might use its 
         10   rule-writing authority under Truth in Lending and 
         11   HOEPA to curb the predatory lending practices, as I 
         12   mentioned, while preserving access to credit for 
         13   homeowners who have less than perfect credit 
         14   records.  And then this afternoon we'll turn our 
         15   attention to alternatives to regulation, such as 
         16   consumer outreach and consumer education, that also 
         17   might help address predatory practices. 
         18            At both sessions we hope to hear about 
         19   studies or research on subprime or equity lending 
         20   that would inform the Board in its deliberations. 
         21   And then we also this afternoon have set aside time 
         22   for members of the public. 
         23            For the morning session and the afternoon 
         24   panel, we have invited panelists.  And then we will 

          1   have, starting at about three o'clock, what we are 
          2   calling an open mike session, so that members of the 
          3   public who are interested in presenting their views 
          4   may sign up at the registration desk outside and be 
          5   prepared to give us, in about three minutes, their 
          6   views on the topics we are discussing today. 
          7            For this morning's session we have some 
          8   rules of procedure.  We will start with opening 
          9   statements by the invited panelists.  Each person 
         10   will have three minutes.  We have a timekeeper in 
         11   the audience, if you will raise your hand.  We have 
         12   two of them, and they will give you, I believe, a 
         13   one-minute warning, and then they will tell you when 
         14   your time is up by saying, "Please finish."  So that 
         15   if you're in the middle of a sentence, perhaps you 
         16   can get to the end. 
         17            But it's important to try to keep an eye on 
         18   the timekeeper.  I know that the inclination will be 
         19   to look toward the Panel, but if you will just kind 
         20   of be mindful.  I will also say that because 
         21   sometimes the attention is focused over here, what I 
         22   plan to do, when I see the signal, is do this 
         23   (demonstrating).  This is not time out; this is time 
         24   up. 

          1            There will be an opportunity for you to 
          2   sort of extend your remarks in several ways, both in 
          3   the dialogue in the general discussion that will 
          4   follow our opening statements.  Also, some of you, I 
          5   know, have prepared written statements.  We will 
          6   include those in the record if you will give them to 
          7   us, please. 
          8            So with that, I think we are ready to 
          9   start, and we are going to -- oh, let me just 
         10   mention as far as the schedule generally, we expect 
         11   to take a ten-minute break sometime around 10:30, 
         12   and then we will reconvene.  We will break for lunch 
         13   at one o'clock. 
         14            So with that we will start with Jennifer 
         15   Davis Carey, and if you will each just start with 
         16   your name and continue with your organization and 
         17   identify yourself.  I can't see all the names from 
         18   here, so you just do your own thing.  We're going to 
         19   go clockwise, so we'll just keep going. 
         20            MS. CAREY:  Good morning, everyone.  My 
         21   name is Jennifer Davis Carey, and I'm Director of 
         22   Consumer Affairs and Business Regulation for the 
         23   Commonwealth of Massachusetts. 
         24            Thank you for this opportunity to speak 

          1   about predatory mortgage lending and how we can 
          2   further combat its attendant abuses.  Let me begin 
          3   by assuring you that my office and the Division of 
          4   Banks, one of the nine consumer protection agencies 
          5   under my supervision, are deeply committed to 
          6   protecting Massachusetts residents against 
          7   unscrupulous rogue lenders who engage in abusive and 
          8   unconscionable lending practices.  
          9            Predatory lending has no place in this 
         10   Commonwealth.  We pledge to do everything within our 
         11   existing authority to stop this form of white-collar 
         12   mugging that robs people of the equity in their 
         13   homes, places them on a cycle of debt, jeopardizes 
         14   the sustainability of home ownership, destabilizes 
         15   neighborhoods, and thwarts the transfer of the hard- 
         16   earned wealth of working people to succeeding 
         17   generations. 
         18            This unconscionable practice preys on the 
         19   elderly and virtually assures that financially 
         20   unsophisticated working people and the poor, whom 
         21   these lenders target, consign themselves to long- 
         22   term, if not permanent, financial distress. 
         23            I commend the Federal Reserve for 
         24   maintaining continued focus on the issue of 

          1   predatory lending.  As you consider this issue, I 
          2   urge you to consider its definitional, legal and 
          3   regulatory complexity.  I also urge you to weigh 
          4   carefully how predatory lending, which is illegal 
          5   and clearly immoral, differs from other legitimate 
          6   forms of lending. 
          7            For example, flexible loan mortgage 
          8   programs under the Massachusetts and Federal 
          9   Community Reinvestment Acts and responsible forms of 
         10   subprime lending have resulted in the extension of 
         11   credit to countless numbers of creditworthy people 
         12   who in the past did not fit easily into conventional 
         13   loan underwriting standards. 
         14            Let me articulate what we believe to be 
         15   important governing positions.  There must be clear 
         16   and meaningful disclosure.  The extension of high- 
         17   cost credit should be only made to borrowers based 
         18   on the ability to repay and not on collateral 
         19   values.  Financing of points or single-premium 
         20   payment insurance should be prohibited.  Points that 
         21   deviate from industry-wide standards should be 
         22   prohibited.  Loan modification and deferral fees 
         23   should be prohibited.  And there are a number of 
         24   others, but in the interests of time, I will keep it 

          1   short. 
          2            One of the things that we are doing is I 
          3   have asked our Commissioner of Banks to look at our 
          4   regulation, and we are also creating an advisory 
          5   committee in our Division of Consumer Affairs to 
          6   work with the industry and with the advisory and 
          7   watchdog groups on this matter.  Thank you. 
          8            MODERATOR SMITH:  Thank you very much. 
          9            Mr. Curry.  
         10            MR. CURRY:  Good morning.  For the record, 
         11   my name is Thomas J. Curry, and I am the 
         12   Massachusetts Commissioner of Banks.  I do have a 
         13   written statement, which I believe has been 
         14   submitted for the record, but I would like to make 
         15   some brief oral remarks. 
         16            The Federal Reserve's reexamination of 
         17   Truth in Lending's HOEPA provisions is truly timely 
         18   and appropriate after six years.  During this 
         19   period, we have observed the development and 
         20   marketing of new nonconventional mortgage products, 
         21   increased levels of consumer debt, and significant 
         22   appreciation of residential property values here in 
         23   Massachusetts, particularly in the Boston area. 
         24            From a regulatory perspective, my office 

          1   has also gained significant additional practical 
          2   experience with these new mortgage products and this 
          3   segment of the mortgage lending industry. 
          4            As you may know, the Commonwealth also has 
          5   a State Truth in Lending law, which is enforced by 
          6   my office.  We too have looked at whether the 
          7   Commonwealth's HOEPA or Section 32 requirements are 
          8   adequate.  Many of these same questions that were 
          9   raised by the July Federal Register notice have been 
         10   considered at the state level here and in other 
         11   states such as North Carolina and New York. 
         12            Given our licensing and examination 
         13   experience with nonbank mortgage lenders and 
         14   brokers, we believe that many of the specific 
         15   questions referenced in the public hearing notice 
         16   should be actively considered and pursued by the 
         17   Federal Reserve. 
         18            For our part, we have recently proposed 
         19   comparable changes and amendments to our state 
         20   regulations governing high-cost mortgage lending. 
         21   After collaborating with Director Carey's office, we 
         22   are proposing, one, to expand the coverage of the 
         23   Commonwealth's HOEPA regulations; two, to strengthen 
         24   its existing disclosure, limitations and prohibited 

          1   act provisions; three, to add a new provision 
          2   listing a series of high-cost loan unfair practices; 
          3   and four, to strengthen the penalties for high-rate 
          4   loan violations under the Commonwealth's mortgage 
          5   lending licensing and consumer protection rules. 
          6            The text of these proposed changes, 
          7   including an official summary, are found in our 
          8   proposed regulations which are attached to our 
          9   testimony.  However, I would like to briefly 
         10   highlight some of the specific proposed changes. 
         11            We think existing HOEPA thresholds are too 
         12   low and underinclusive.  We are proposing to reduce 
         13   the interest rate trigger from 10 to 8 percent, 9 
         14   percent for junior mortgages, and to reduce the fees 
         15   or points trigger from 8 to 5 percent, excluding 
         16   bona fide discount points. 
         17            The proposed regulations also govern junior 
         18   mortgage loans as well as first mortgages and 
         19   clarify the treatment of adjustable rate mortgage 
         20   products. 
         21            We also believe that our proposed new 
         22   section on unfair practices is significant.  This 
         23   section addresses abusive high-cost mortgage loan 
         24   practices, such as the financing of excessive 

          1   points, fees and third-party fees; loan flipping; 
          2   loan packing; improper encouragement of default; 
          3   deceptive advertising; unconscionable rates, fees 
          4   and third-party charges; oppressive arbitration 
          5   provisions; selective credit history reporting; and 
          6   a prohibition on single-premium credit insurance 
          7   sales, as well as arbitrary loan call provisions; 
          8   and credit counseling. 
          9            We hope that our proposed state regulations 
         10   will be a resource to the Federal Reserve as it 
         11   considers any future changes to its own Truth in 
         12   Lending regulations.  Thank you. 
         13            MODERATOR SMITH:  Mr. Nadon. 
         14            MR. NADON:  My name is Steve Nadon.  I'm 
         15   the Chief Operating Officer of Option One Mortgage 
         16   Corporation.  Option One has been in the subprime 
         17   business since late 1992.  Our core business was 
         18   then and remains today the underwriting, funding and 
         19   servicing of subprime loans.  As one of the largest 
         20   subprime wholesale originators in the nation, we 
         21   appreciate the opportunity to be heard on this issue 
         22   of what action, if any, the Federal Reserve Board 
         23   should take on HOEPA reform. 
         24            We are submitting written comments to the 

          1   Board which go into much more detail than I am going 
          2   to today, but for the purposes of this morning's 
          3   discussion, there are three important points we 
          4   would like to make. 
          5            The first is that subprime lending is not 
          6   the same thing as predatory lending.  Second, we 
          7   need to take great care not to write new rules that 
          8   cause legitimate lenders to stop lending to 
          9   consumers in large parts of the subprime market.  
         10   Third, the best way to reduce predatory lending is 
         11   to create a better informed consumer. 
         12            First, again, subprime lending is not the 
         13   same thing as predatory lending.  Option One is just 
         14   one of many responsible subprime lenders in the 
         15   industry today.  We do not make high-cost loans.  We 
         16   do not write credit insurance products onto our 
         17   loans.  We do not solicit our servicing portfolio to 
         18   flip our customers into new refinances. 
         19            Our prepayment penalties are optional and 
         20   always come with reductions in rates and/or fees to 
         21   the borrower.  We report loan performance to the 
         22   three major credit bureaus.  We do not offer loan 
         23   products with short-term balloon payments.  Our 
         24   loans have no negative amortization, nor do they 

          1   include any arbitrary lender call provisions. 
          2            Second, we believe it is important to keep 
          3   our eyes on the big picture.  While we certainly 
          4   agree that the business practices of a few in our 
          5   industry are intolerable, we should all be very 
          6   careful to avoid writing rules that limit how any 
          7   lender can make loans in the hope of protecting 
          8   borrowers from the true predators.  A likely result 
          9   of such rules is that the nonpredators in the 
         10   subprime market today may decide to stop making 
         11   loans, subject to the new restrictions. 
         12            As an example, Option One made a decision 
         13   in 1994 that we would not make loans that exceeded 
         14   the HOEPA triggers and voluntarily extended that 
         15   prohibition to all loan submissions, not just those 
         16   covered by the letter of the law.  We were not alone 
         17   in that decision, and it has resulted in a segment 
         18   of the market that companies like Option One will 
         19   not serve. 
         20            If the Board decides to lower the triggers, 
         21   it will cause those of us who have been trying to do 
         22   the right thing to make a very tough decision:  Do 
         23   we stay with our current policy or give in and make 
         24   a statement to the market that we've changed our 

          1   mind and being a high-cost lender is okay?  
          2            Going back to the big picture I spoke of,  
          3   if good, well-intentioned companies like Option One 
          4   further limit the loans that they will make, who 
          5   fills the void?  These borrowers will still have 
          6   credit needs, but the only lenders that would be 
          7   left to help them may be the exact lenders that you 
          8   find to be the most aggressive and likely to engage 
          9   in predatory practices. 
         10            My sense is that the original intention of 
         11   HOEPA was not to drive more people into the hands of 
         12   predatory lenders, but rather to make an effort to 
         13   ensure that borrowers were provided good information 
         14   upon which to base a decision to borrow. 
         15            The third and final point I would like to 
         16   make again of the big picture.  Why are we all in 
         17   these discussions about predatory lending in the 
         18   first place?  It is not the result of whether we 
         19   classify borrowers as prime or subprime or whether 
         20   the loan is under or over the HOEPA triggers.  I 
         21   have not heard any claim or seen any evidence that 
         22   indicates that predatory lending only takes place on 
         23   loans that fall below the HOEPA trigger. 
         24            If I am accurate on this, it begs the 

          1   question, why would we believe that lowering HOEPA 
          2   triggers, thereby expanding the number of 
          3   transaction covered by HOEPA, would reduce predatory 
          4   lending?
          5            MODERATOR SMITH:  Thank you.
          6            GOVERNOR GRAMLICH:  Could I ask Mr. Nadon a 
          7   question.  You indicated that you had taken a number 
          8   of what I'll call policing measures on your own, but 
          9   you more or less seemed to be cautioning us against 
         10   policing the whole market. 
         11            Are you concerned that you would lose 
         12   competitive advantage if you corrected some things 
         13   on your own and these practices weren't corrected in 
         14   the whole market?  
         15            MR. NADON:  Well, we certainly did give 
         16   some business up when we elected, back six years ago 
         17   now, to not do anything that went over what were 
         18   going to be the established HOEPA triggers, which 
         19   was okay.  The question becomes, at what point does 
         20   that competitive advantage begin to cost the company 
         21   too much?  And it's a tough question. 
         22            As HOEPA triggers come down, we probably 
         23   will continue to take the stand that we are not 
         24   going to be making HOEPA loans, so the more that 

          1   those triggers are reduced, the bigger the 
          2   population that we're just not going to be able to 
          3   serve. 
          4            And probably more than the competitive 
          5   concern that we have is that there are some good 
          6   lenders out there that do not do a lot of the things 
          7   that get talked about as being predatory practices, 
          8   and we do that for a reason, because we don't 
          9   believe in doing those things.  If we are serving 
         10   less of the market, then the people that will serve 
         11   those people are the ones that we don't want to be 
         12   helping those people.  That's probably our bigger 
         13   concern than the competitive piece. 
         14            MR. MARKS:  Since we're asking questions --
         15            MODERATOR SMITH:  I'm sorry, Mr. Marks, 
         16   we're not asking questions.  Governor Gramlich has a 
         17   special status here, so he may ask questions.  The 
         18   discussion will not start until after all the 
         19   opening statements have been completed. 
         20            MR. MARKS:  Just on the record, we would 
         21   like to know what the rates that you charge are. 
         22            MODERATOR SMITH:  We will discuss that 
         23   later, Mr. Marks. 
         24            Ms. Renuart. 

          1            MS. RENUART:  Thank you.  I'm Elizabeth 
          2   Renuart.  I'm with the National Consumer Law Center 
          3   here in Boston.  We are an advocacy organization 
          4   that has a national perspective on the problems of 
          5   low-income consumers in this country. 
          6            The impact of predatory lending on the 
          7   human side has been great.  We saw it in the 
          8   mid-1980s.  It led Congress to have a series of 
          9   hearings in the early 1990s that led to the 
         10   enactment of HOEPA, which we're discussing today. 
         11            Since that time, there has been a series of 
         12   additional hearings that have illuminated and 
         13   highlighted this problem.  Hopefully this afternoon 
         14   there will be actual homeowners and others present 
         15   from the community that can talk about the human 
         16   face of what has happened to them as a result of 
         17   predatory lending. 
         18            Senator Grassley held hearings in 1997.  
         19   HUD and Treasury held hearings around country 
         20   earlier this year.  There is ample evidence at this 
         21   point that there is a serious and growing problem 
         22   that, while HOEPA has been helpful to address, it 
         23   has not sufficiently addressed this problem that's 
         24   been growing since 1980. 

          1            The impact on minorities and the poor and 
          2   the elderly has been greatest.  HUD came out with 
          3   studies earlier this year called "Unequal Burden" 
          4   from several cities showing the impact of predatory 
          5   and subprime lending, and the targeting of those 
          6   communities has been quite great in those large 
          7   cities, Atlanta, for example, Baltimore, New York, 
          8   Los Angeles and Chicago. 
          9            The Board is in a unique position at this 
         10   point.  The Board has been delegated, although not 
         11   unlimited, certainly wide authority by Congress to 
         12   deal with this problem on its own and not have to 
         13   seek Congressional authority to go further. 
         14            It can, as we've heard, lower the annual 
         15   percentage rate trigger to at least 8 points.  It 
         16   can add into the points and fees trigger any number 
         17   of points and fees that it chooses to do so, and 
         18   could in fact, under Congressional authority, adopt 
         19   an all-inclusive points and fees trigger, which we 
         20   would support. 
         21            In addition, Congress specifically 
         22   addressed refinancing, and as testimony in other 
         23   arenas have shown, it's the refinancing and the 
         24   inclusion of high points and fees which strips the 

          1   equity out of people's homes.  So later, during the 
          2   panel discussion, I know we will reach the issue of 
          3   refinancing, and I will be happy at that point to 
          4   address some specific proposals. 
          5            The most important problems that we see are 
          6   the refinancing and charging of points and fees that 
          7   suck the equity out of the home.  We are going to 
          8   ask the Board to limit the amount of points and fees 
          9   that a lender can finance to no more than 3 percent, 
         10   and that the interest rate and fees triggered should 
         11   be reduced. 
         12            We have evidence that we will be submitting 
         13   in written testimony that will show that lenders 
         14   like Option One and others can make loans, still way 
         15   below a lower trigger, and cover any losses as a 
         16   result of foreclosure.  And finally, HOEPA must 
         17   apply to open-ended credit.  Thank you. 
         18            MODERATOR SMITH:  Mr. Miselman. 
         19            MR. MISELMAN:  Good morning, everyone.  My 
         20   name is Howard Miselman, and I'm President of 
         21   Continental Funding Corporation, located in 
         22   Stoughton, Massachusetts.  We're a full-service 
         23   mortgage brokerage company serving the community 
         24   since 1989.  We handle all types of financing 

          1   transactions, including conventional, government, 
          2   and the topic of today's discussion, subprime 
          3   lending. 
          4            Currently, I serve as Chairman of the 
          5   Massachusetts Mortgage Association, which is the 
          6   professional trade association representing mortgage 
          7   brokers, lenders and wholesalers throughout the 
          8   Commonwealth of Massachusetts.  As professionals in 
          9   the mortgage industry, I can say confidently that we 
         10   are committed to ending abusive lending practices 
         11   throughout the country. 
         12            First of all, I would like to thank the 
         13   Board of Governors for extending me this invitation 
         14   to participate in the discussion on this very 
         15   important topic.  I hope my comments and thoughts 
         16   help in the discussion. 
         17            The Massachusetts Mortgage Association 
         18   applauds the effort of the Board for convening this 
         19   discussion panel and scheduling similar public 
         20   hearings throughout the country.  I welcome the 
         21   opportunity to discuss different ways to stop 
         22   abusive lending practices which target specific 
         23   consumer groups, including those with less than 
         24   perfect credit ratings.  

          1            As a long-standing member of the mortgage 
          2   community, I have personally seen the chaos in 
          3   people's lives that resulted from predatory lending, 
          4   and I would like see them stopped.  Myself and all 
          5   other reputable firms conducting business in the 
          6   subprime arena are also hurt by the small number of 
          7   firms practicing predatory lending. 
          8            Recent public hearings conducted by the 
          9   Massachusetts Joint Committee on Banks and Banking 
         10   on this subject point clearly to a solution that 
         11   will involve initiating tighter enforcement of 
         12   existing regulations, as well as considering 
         13   amendments to these regulations. 
         14            Such an approach has been advocated and is 
         15   being pursued in the Commonwealth by Commissioner 
         16   Curry of the Massachusetts Division of Banks, and a 
         17   draft of proposed amendments to regulations is 
         18   expected shortly to be available for public comment. 
         19   Effective responses to abuses, using regulation to 
         20   fight predatory lending, are better suited to the 
         21   urgent needs of consumers. 
         22            Like the Commissioner, we are also 
         23   concerned that any legislative or regulatory 
         24   measures clearly acknowledge the difference between 

          1   abusive lending practices and appropriate lending 
          2   practices that serve the legitimate needs of 
          3   borrowers utilizing the services of subprime 
          4   lenders. 
          5            The subprime side of financing has come 
          6   about from a definite need by the public, and 
          7   consequently, any regulatory reform will need to 
          8   tread the line between stemming abusive lending 
          9   practices and keeping legitimate channels of credit 
         10   open to low-income borrowers and those with impaired 
         11   credit histories. 
         12            The most effective weapon against predatory 
         13   lending practices is a well-informed and educated 
         14   consumer.  To that end, we will work with any group 
         15   or government body to establish a predatory-lending- 
         16   free environment so consumers can go out into the 
         17   marketplace and shop with confidence. 
         18            The Massachusetts Mortgage Association 
         19   maintains a proactive role on the issue of ending 
         20   predatory lending practices by engaging in specific 
         21   consumer outreach efforts.  In 1999, for instance, 
         22   the Mass. Mortgage Association participated as a 
         23   contributor and active sponsor of the Massachusetts 
         24   Community Banking Council's "Don't Borrow Trouble" 

          1   campaign. 
          2            This well-thought-out education campaign 
          3   put effective information in front of the homeowner 
          4   who may be looking for a home equity loan.  Just as 
          5   a conforming or prime borrower shops for the best 
          6   possible deal and knows the right questions to ask, 
          7   with the proper information and guidance, a subprime 
          8   borrower can do the same. 
          9            We are united in support of the Board of 
         10   Governors' efforts to address the issue of predatory 
         11   lending and ending abusive lending practices.  Thank 
         12   you very much.
         13            MODERATOR SMITH:  Mr. Gothorpe.
         14            MR. GOTHORPE:  Good morning.  I'm Bill 
         15   Gothorpe, President and CEO of Dedham Institution 
         16   for Savings in Dedham, Mass.  I appreciate the 
         17   opportunity to testify today on behalf of America's 
         18   Community Bankers.  They are preparing a formal 
         19   comment letter in response to your request, so my 
         20   remarks today will just highlight some of the 
         21   points. 
         22            Let me start by giving you some perspective 
         23   about my bank and other ACB members.  We work hard 
         24   to help the average American become and remain 

          1   homeowners.  We're permanent fixtures in our 
          2   communities.  We have been in Dedham since 1831.  I 
          3   would like to think that we will be there another 
          4   couple hundred years.  And we depend on the economic 
          5   health of our borrowers for their success and for 
          6   ours. 
          7            Predatory lending that causes homeowners to 
          8   lose their homes and ruin their credit ratings 
          9   undermines our communities and damages potential 
         10   customers.  So we want to help you and other 
         11   agencies eliminate predatory lending practices, 
         12   without damaging our ability to offer prime and 
         13   subprime loans to our customers. 
         14            Dedham Savings is not only not a predatory 
         15   lender, we don't do any subprime lending.  We do 
         16   everything we can to make prime-rate borrowers out 
         17   of anybody who walks through the front door.  As a 
         18   locally oriented community institution, we have the 
         19   flexibility to do that, but not everyone can operate 
         20   as we do. 
         21            There are many legitimate subprime lenders 
         22   that perform a valuable service by providing credit 
         23   to borrowers who cannot qualify for prime loans.  At 
         24   the same time, we all know that predatory lenders 

          1   are also active in this market.  Unfortunately, it 
          2   has been stated, the information is anecdotal, and a 
          3   good reason for that is that many of the predatory 
          4   lenders don't come under the net of a lot of the 
          5   regulatory agencies. 
          6            I'm here to urge you to take steps to make 
          7   sure that unsupervised nonbank lenders undergo more 
          8   strict supervision.  The Federal Trade Commission 
          9   and the states could play a key role here.  Without 
         10   better supervision, regulations will be imposed only 
         11   on banks, leaving the door wide open to nonbank 
         12   predatory lenders. 
         13            Believe me, a bank like mine wouldn't dream 
         14   of engaging in predatory practices, because it is 
         15   totally contrary to our mission and philosophy.  In 
         16   any case, our federal and state examiners clamp down 
         17   hard on violations of consumer protection laws and 
         18   ask tough questions about the quality of the loans 
         19   on our books.  This is why everyone recognizes that 
         20   banks are not part of the predatory lending problem. 
         21            We know the Federal Reserve understands the 
         22   risk that overregulation can discourage responsible 
         23   lenders from making legitimate subprime loans.  
         24   Drawing the line between subprime and predatory 

          1   lending has become increasingly difficult, 
          2   comparable to the problem faced by the Supreme Court 
          3   in a different context.  Justice Potter Stewart 
          4   declined to define pornography but wrote, "I know it 
          5   when I see it."  I think we all feel the same way 
          6   about predatory lending. 
          7            America's Community Bankers is recommending 
          8   the Federal Reserve lower the high-cost loan trigger 
          9   under HOEPA from the current 10 points over Treasury 
         10   to 8 points.  We believe very few legitimate loans 
         11   would be adversely affected by this change and that 
         12   useful consumer protection will result. 
         13            I can see that my time is up.  The rest of 
         14   the comments will have to be in written form.  Thank 
         15   you. 
         16            MODERATOR SMITH:  Thank you very much. 
         17            Mr. Marks.  
         18            MR. MARKS:  I'll try to do it within three 
         19   minutes.  My name is Bruce Marks, and I'm the CEO of 
         20   the Neighborhood Assistance Corporation of America, 
         21   NACA, and I'm also an ex-employee of Federal Reserve 
         22   Bank of New York.  Let me try to summarize my 
         24            Let's go back in history to understand 

          1   where the Home Equity Protection Act law came from, 
          2   where the legislation came from.  We started in 
          3   Massachusetts with a campaign, a four and a half 
          4   year war against Fleet and its predatory lending 
          5   subsidiary Fleet Finance. 
          6            And when this organization, NACA, had over 
          7   500 people go to Washington and testify in the 
          8   Senate Banking Committee on May 17, 1993, when 
          9   Alphonse D'Amato, Senator from New York State, 
         10   sponsored the legislation, the HOEPA legislation, it 
         11   was opposed by the Federal Reserve Board.  It's been 
         12   opposed by the Fed from day one. 
         13            So let's just listen to a few of the quotes 
         14   that were said by, let's see, Governor Lindsey.  In 
         15   fact in a hearing on the legislation in the Senate 
         16   Committee on Banking, Housing and Urban Affairs on 
         17   May 19, 1993, Federal Reserve Governor Lindsey, 
         18   representing the Fed Board of Governors, criticized 
         19   HOEPA, claiming that it overly restricted credit 
         20   contract terms and "could create a risk that credit 
         21   could be shut off altogether to marginal borrowers 
         22   who happen to need credit due to special 
         23   circumstances."  He went on to state, "I'm sure that 
         24   we want to avoid the unintended consequences of 

          1   making loans more difficult to get, and we believe 
          2   the bill currently runs this risk." 
          3            He then recommended that the Congress raise 
          4   the threshold for each of the criteria for a high- 
          5   cost mortgage that would trigger the bill's 
          6   provisions.  He further cited the widows who would 
          7   be deprived of the chance to do home improvement due 
          8   to HOEPA's income tests.  He went on to claim that 
          9   an 8 percent limit on points or fees is, quote, 
         10   unduly restrictive.  We're talking about a 17 
         11   percent, 18 percent trigger.  That, by definition, 
         12   is predatory. 
         13            At NACA we do prime loans for subprime 
         14   borrowers.  That means that someone who is B and C 
         15   credit can purchase or refinance a house with no 
         16   fees, no points, and an interest rate of 7.5 percent 
         17   fixed.  So it's prime loans for subprime borrowers. 
         18            Brenda Williams, who is in the audience, 
         19   she had an 18 percent GMAC loan.  She lost her home, 
         20   and yet now she was able to get a new home through 
         21   NACA, as did her brother, her three nieces, and many 
         22   of her friends. 
         23            So let's call it what it is.  If any lender 
         24   here is saying that somehow a 17 percent trigger is 

          1   somehow a subprime loan and not a predatory loan, 
          2   that is outrageous on the face of it.  And no one in 
          3   this audience would agree that that makes any kind 
          4   of sense and that's not predatory.  That's not 
          5   subprime.  So we should have it.
          6            (Applause)
          7            MODERATOR SMITH:  Thank you.  Ms. Kogut. 
          8            MS. KOGUT:  I'm Pam Kogut.  I'm an 
          9   Assistant Attorney General in the Attorney General's 
         10   Office in Massachusetts, and I want to thank you for 
         11   inviting our office to be here today.  We've 
         12   historically been interested in protecting consumers 
         13   where they have experienced problem mortgage loans.  
         14   We receive a fair number of consumer complaints 
         15   every year from consumers who are experiencing 
         16   problems with their mortgage loans. 
         17            And I wanted to just highlight one case our 
         18   office has been working on for a bit of time to 
         19   highlight problems that a law enforcement office 
         20   like ours sees in an area where the laws aren't 
         21   necessarily as tight as they could be. 
         22            Our office filed a lawsuit against First 
         23   Alliance Mortgage Company a couple of years ago 
         24   after Commissioner Curry's office referred the 

          1   matter to us.  Their examiners were in the field, 
          2   saw that borrowers were paying more than 20 points 
          3   on a routine or consistent basis, and referred the 
          4   matter to our office. 
          5            Now, when we heard about the facts of this 
          6   case, we thought that it would be -- it was 
          7   obviously an important case to bring, there wasn't 
          8   any question that we were going to file the lawsuit, 
          9   but we also thought that it would be, you know, a 
         10   fairly easy, quick case, that we would get a result 
         11   in short order. 
         12            And that has turned out to be the farthest 
         13   thing from the truth.  We are still in litigation 
         14   with the company now, and they've filed for 
         15   bankruptcy, and the end is not in sight. 
         16            But let me just highlight a couple of the 
         17   things that we learned from the case.  We, in 
         18   discovery, obtained the 300 loan files of every 
         19   single Massachusetts borrower.  Of the 300 loans 
         20   made, in 36 percent of the cases borrowers paid 
         21   points in excess of 20, and in two cases paid more 
         22   than 30 points. 
         23            We believe that the industry-wide standard 
         24   for point charges in Massachusetts is that borrowers 

          1   shouldn't be paying more than 5 points for these 
          2   kinds of loans, and in 96 percent of the loans the 
          3   First Alliance borrowers paid more than 5 percent.  
          4   Of the 300 consumers, 20 percent of them were 
          5   actually rated A or A- and could have gotten 
          6   conventional loans from other lenders, and their 
          7   credit rating didn't define the number of points 
          8   that they paid. 
          9            In every single one of the loan files there 
         10   was a mandatory arbitration agreement, and in every 
         11   single one of the loan files there was a prepayment 
         12   penalty, and borrowers were assessed prepayment 
         13   penalties every time they tried to refinance in 
         14   cases where First Alliance had the documentation to 
         15   support their ability to do so.  So this is a lender 
         16   charging more than 20 points and charging prepayment 
         17   penalty. 
         18            From our point of view -- I'm just going to 
         19   wrap up, because the time people are telling me to 
         20   do that -- we really think that the more definite 
         21   the laws are in the area, the easier our job.  As I 
         22   said, we thought this would be a simple case to wrap 
         23   up, and we are still in litigation with the company. 
         24            We would urge points to be limited.  We 

          1   would urge the trigger to be lowered.  We would urge 
          2   any laws that would eliminate flipping.  28 of our 
          3   borrowers, also their loans were flipped.  So this 
          4   is a significant problem.  And we would urge any 
          5   regulation to prohibit mandatory arbitration 
          6   agreements.  And I could go on and on, but I won't. 
          7            MODERATOR SMITH:  Mr. Gravino.
          8            MR. GRAVINO:  I'm really going to try to do 
          9   this in three minutes.  Good morning.  My name is 
         10   Dick Gravino.  I'm President of PCFS, which is a 
         11   division of Provident Bank in Cincinnati. 
         12            I appreciate the opportunity to speak, be 
         13   here, and also to demonstrate our opposition to 
         14   predatory lending and loan-sharking.  As part of my 
         15   comments, I want to address a concern of both myself 
         16   and from our colleagues over tinkering with the 
         17   HOEPA laws as currently written until we can answer 
         18   some questions: 
         19            What have been the real results of HOEPA 
         20   legislation?  What are the meaningful by-products of 
         21   the law?  What changes have taken place in the 
         22   consumer marketplace?  Has HOEPA accomplished its 
         23   mission?  Has the at-risk consumer's behavior -- 
         24   what has been the behavior of at-risk consumers 

          1   resulting from this legislation?
          2            Many legitimate lenders will not make or 
          3   purchase loans considered to fall under the HOEPA 
          4   guidelines, PCFS included.  But where have those 
          5   consumers gone that would have been serviced?  Their 
          6   choices certainly have been limited.  They can't 
          7   shop around.  Who has picked up the slack and filled 
          8   up the void?  We all know that, when legitimate 
          9   businesses exit, the need still exists, the void is 
         10   filled. 
         11            Compliance with HOEPA today is difficult.  
         12   As currently written, there is room for a lot of 
         13   subjectivity.  For instance, a $5,000 miscalculation 
         14   and a one cent miscalculation have the same penalty. 
         15            No legitimate subprime lender will endorse 
         16   practices which are predatory.  We believe there are 
         17   many positives that are going to result with the 
         18   recent public awareness of predatory issues, but we 
         19   also believe the correct way to approach the problem 
         20   is through continuing education programs.  We need 
         21   real education, education directed at the consumer 
         22   in advance, so that she can make a choice prior to 
         23   committing to a particular lender. 
         24            We also need enforcement of current 

          1   legislation.  Very few of the predatory practices 
          2   you see in the paper here and on TV are legal.  
          3   We're for new legislation where needed, but only 
          4   after a rational analysis of the problem is 
          5   determined and we clearly understand what is 
          6   predatory, and we act only after a clear, well- 
          7   thought-out, rational solution is obtained, one that 
          8   creates a win-win environment. 
          9            Many legitimate subprime companies are no 
         10   longer in business today, and they're falling by the 
         11   wayside very fast.  New entrants are few.  The risks 
         12   are too great. 
         13            I think Mr. Marks mentioned the law of 
         14   unintended consequences.  You could have unintended 
         15   consequences as a result of tinkering.   You could 
         16   have the virtual elimination of loans under $60,000, 
         17   elimination of second mortgages as a borrower 
         18   choice, and also, believe it or not, having to send 
         19   a customer to two different lenders to get what they 
         20   need. 
         21            We all know that changes in business 
         22   products come after sufficient analysis, research 
         23   and testing and consumer focus groups have taken 
         24   place.  These processes normally are void of emotion 

          1   and political content.  We should treat the change 
          2   to HOEPA in the same way.  Thank you.
          3            MODERATOR SMITH:  Ms. Schwartz.
          4            MS. SCHWARTZ:  Thank you.  Good morning.  
          5   My name is Faith Schwartz, and I'm here representing 
          6   Freddie Mac today.  I'll be very focused on my three 
          7   minutes. 
          8            The focus for us to be here is to update 
          9   the Board of Governors of the Federal Reserve System 
         10   of our efforts to expand the range of low-cost 
         11   financing into the subprime segment of the mortgage 
         12   market and in particular our efforts to combat 
         13   predatory lending. 
         14            From the overview from the secondary 
         15   mortgage market, please note we are not an 
         16   originator in this marketplace, but we do create a 
         17   secondary mortgage market by offering and packaging 
         18   loans in the low-rate environment and having them 
         19   sold into investors through securities. 
         20            The secondary mortgage market rates, of 
         21   course, in the conforming mortgage market have 
         22   improved substantially with our type of involvement 
         23   in the secondary market.  We are looking forward to 
         24   bringing those efficiencies into the subprime 

          1   segment of the mortgage market.  One of the ways to 
          2   do that is by combatting this predatory lending 
          3   issue. 
          4            We have a three-pronged approach.  One is a 
          5   public education initiative.  We have raised the bar 
          6   and increased standards on what we will invest in as 
          7   a corporation.  And finally, we have introduced new 
          8   products to add competition and borrower choice, all 
          9   of which we believe will bring down rates and add 
         10   value to this segment of the mortgage market. 
         11            From a public education initiative, we 
         12   think informed decision-making is one of the most 
         13   important tools for a consumer to use to avoid 
         14   predatory practices.  We are proud to have 
         15   collaborated with Mayor Menino in the City of Boston 
         16   in the "Don't Borrow Trouble" campaign.  That is a 
         17   series of ads that will be run on billboards, Web 
         18   sites, and public service announcements in English 
         19   and Spanish for those consumers to educate them 
         20   about predatory lending.  That's one of the many 
         21   actions we've taken in the public arena. 
         22            The standards we've added are these:  We 
         23   have required full-file credit reporting from any 
         24   institution we do business with on the borrower's 

          1   credit to the three repositories on a monthly basis.  
          2   We have banned HOEPA loans.  We will not purchase or 
          3   add liquidity to the current version of the HOEPA 
          4   loan.  We all know what that is; I won't describe 
          5   it. 
          6            What was our objective?  We wanted to send 
          7   a strong signal that we do not like high rate and 
          8   fee lending.  So we do urge caution when reviewing 
          9   what will go into the HOEPA limits, because it is 
         10   our job to keep liquidity in the secondary mortgage 
         11   markets, so this will be a good analysis. 
         12            Finally, we did ban credit insurance 
         13   front-end premium where it's attached to the 
         14   mortgage loan and financed over the life of the 
         15   loan.  The objective there was strong signaling 
         16   regarding front-end practices.  It is our interest 
         17   that financing should be a wealth-building tool, not 
         18   a wealth-stripping tool.  We have done many other 
         19   things.  I'll finish.  Thanks. 
         20            MODERATOR SMITH:  Mr. Golann.
         21            MR. GOLANN:  I'm Dwight Golann, and in 
         22   addition to teaching consumer law, as the bio notes, 
         23   I've been chief of the Consumer Protection Division.  
         24   I've also, I should say, counseled and represented 

          1   lenders, both regulated and unregulated, some of 
          2   whom were accused of some of the practices involved 
          3   here. 
          4            I have some thoughts, particularly about 
          5   education and better enforcement as alternatives to 
          6   regulation and why I think regulation is required. 
          7            Better education is a response.  Since this 
          8   is Boston, let's remember that the average target of 
          9   predatory lending is inevitably, being credit 
         10   impaired by having built up equity, going to be 
         11   middle-aged or elderly.  That means they went to 
         12   school in Boston before 1970. 
         13            Before 1970, as the Federal Courts have 
         14   found, Boston ran an intentionally segregated school  
         15   system.  Minority students had no decent chance for 
         16   a decent education.  Even the white student didn't 
         17   have much of a chance, because those who have been 
         18   here a long time will remember at least one member, 
         19   maybe more, of the School Committee was indicted for 
         20   larceny, and many of them seemed more interested in 
         21   serving themselves than the school system. 
         22            I think there is something to be said for 
         23   warning people against predatory lending, but anyone 
         24   who really wants to replace what people lost in the 

          1   school system of the '50s and '60s has a major job 
          2   in front of them. 
          3            Better law enforcement.  I read Governor 
          4   Gramlich's testimony, and some of you confirmed that 
          5   predatory lending -- not predatory lending, but 
          6   subprime lending has mushroomed in the past five 
          7   years.  I have seen no mushrooming in the staffs of 
          8   the Federal Trade Commission or the State Attorney 
          9   General's Office or anybody who's going to be doing 
         10   the enforcement in this area, and I am personally 
         11   not terribly optimistic that Congress is going to do 
         12   so in the next couple of years. 
         13            Private litigation, the record is somewhat 
         14   mixed.  I guess I would like to say one thing in 
         15   particular.  I think you can help enforcement 
         16   greatly by having clearer rules.  My personal 
         17   experience counseling lenders, enforcing rules, and 
         18   lawyers for regulated institutions who have come 
         19   into my class and talked to my students have made it 
         20   clear that, if the rules are unclear, a couple of 
         21   things happen.  
         22            The Option Ones, the Dedham Savings may not 
         23   lend at all, and other people push the envelope to 
         24   its limits.  Some of them in fact ask the question, 

          1   "How likely am I to get caught, and what are the 
          2   penalties if I get caught?", rather than where the 
          3   limit is.  It is also, in my experience, much more 
          4   expensive to enforce the law. 
          5            The implication is, it's best to have a 
          6   clear rule, even if it doesn't work perfectly, it 
          7   doesn't fit the situation perfectly.  You have some 
          8   false positives, some uncovered negatives.  I would 
          9   encourage you to establish clear rules for the 
         10   benefit of both sides.  Thank you.  
         11            MR. ALGIERE:  Thank you.  My name is Dennis 
         12   Algiere.  I am Vice-President of Compliance and CRA 
         13   Officer at the Washington Trust Company, a midsize 
         14   community bank located in southern Rhode Island.  
         15   We've been in business since 1800.  I would like to 
         16   thank the Board of Governors for inviting me to 
         17   participate in this very, very important discussion. 
         18            We all understand the importance of 
         19   reasonable, responsible and prudent subprime lending 
         20   and the dangers of unethical, uncaring predatory 
         21   lending.  Subprime lending is a practice which 
         22   largely benefits consumers with less than perfect 
         23   credit history, but the financial damage wrought by 
         24   unscrupulous, fraudulent lenders has raised serious 

          1   concerns. 
          2            I am pleased to see that the attention 
          3   being focused today is on this issue.  These 
          4   hearings have the potential to identify reasoned, 
          5   balanced actions that may greatly benefit consumers, 
          6   bankers, lenders in our communities. 
          7            As a banker, I am troubled that there are 
          8   consumers being victimized by dishonest, fraudulent 
          9   lenders.  This situation begs an important question:  
         10   Why do consumers with less than stellar credit 
         11   histories choose predatory lenders rather than 
         12   legitimate lenders?  This answer is critical in 
         13   finding a solution.  I believe serious research and 
         14   not simple anecdotal-based hunches is required. 
         15            I suspect there are more than one or two 
         16   answers or reasons.  Certainly some assume they will 
         17   not qualify for traditional loans.  Some seem more 
         18   comfortable seeking the services of other lenders, 
         19   despite the fact that there are banks offering loan 
         20   products which could meet their needs.  Is it a 
         21   matter of better educating the public on financial 
         22   issues?  Is it a matter of marketing?  Why are 
         23   consumers overlooking banks and risking their assets 
         24   with lenders who aren't reputable? 

          1            I believe that if the banking industry 
          2   joins with the Federal Government and consumer 
          3   advocates to address this issue, we will find a 
          4   multifaceted workable solution.  New restrictions 
          5   and additional disclosures are being proposed.  
          6   Deceptive lenders will always find new ways to 
          7   victimize vulnerable consumers.  Term-specific laws 
          8   simply cannot anticipate every scheme of the 
          9   imaginative unscrupulous lender. 
         10            I would first suggest that the unregulated 
         11   lenders be required to be licensed and examined as 
         12   depository institutions are.  In many cases 
         13   reported, there are clear violations of existing 
         14   laws.  Licensing and examination will augment 
         15   enforcement of existing laws. 
         16            However, laws, even when aggressively 
         17   enforced, cannot alone prevent predatory behavior.  
         18   Only knowledge and a minimum level of financial 
         19   savvy can truly protect consumers from deceptive, 
         20   unfair lending practices. 
         21            Private industry, community groups and the 
         22   government can serve an important role in education 
         23   and outreach counseling programs.  The industry, 
         24   community representatives and government can help 

          1   consumers learn to protect themselves.  This, I 
          2   believe, will be the most effective weapon.  
          3   However, such efforts will require imagination and 
          4   new ideas to get the message out. 
          5            I look forward to a productive meeting 
          6   today and thank you once again for the opportunity 
          7   to contribute to this discussion. 
          8            MODERATOR SMITH:  Thank you very much.  
          9   With that, we will move on into the discussion 
         10   phase, and we're going to start by examining 
         11   possible changes to HOEPA's scope of coverage. 
         12            First, HOEPA covers mortgage loans that 
         13   meet one of the two high-cost triggers.  A loan is 
         14   covered if the APR exceeds the rate for Treasury 
         15   securities with a comparable maturity by more than 
         16   10 percentage points, or if the points and fees paid 
         17   by the consumer exceed the greater of 8 percent of 
         18   the loan amount or $400 indexed, which now is $451, 
         19   I believe. 
         20            HOEPA authorizes the Board to adjust these 
         21   triggers, to adjust the rate trigger by 2 percentage 
         22   points.  So for the Board, the question is, what 
         23   basis should we use for pegging a change in that 
         24   rate?  Is 8 percent the right number?  Are there any 

          1   data that suggest how many loans are in fact covered 
          2   by HOEPA and how many more would be covered if the 
          3   APR trigger were lowered to, say, 8 percentage 
          4   points? 
          5            On points and fees, the test is, as I 
          6   mentioned, the $400 or 8 percent.  For this purpose, 
          7   the points and fees include all items that are 
          8   included in the finance charge and the annual 
          9   percentage rate, except interest, and all 
         10   compensation paid to mortgage brokers. 
         11            The act specifically excludes reasonable 
         12   closing costs that are paid to unaffiliated third 
         13   parties.  The act also authorizes the Board to add 
         14   such other -- to add other charges to the points and 
         15   fees test as the Board deems appropriate. 
         16            In the notice that the Board published 
         17   about these hearings, we identified three possible 
         18   fees that could be added:  credit life insurance 
         19   premiums, certain prepayment penalties, and points 
         20   on refinanced loans. 
         21            So with that, I would like to have the 
         22   discussion start, and ask either Ms. Carey or Mr. 
         23   Curry to start us off on this discussion, if you 
         24   would, please. 

          1            MR. CURRY:  Thank you.  As you know, we are 
          2   proposing a lowering of the thresholds under our 
          3   State Truth in Lending regulations.  I think what 
          4   we're relying on in terms of the economic impact of 
          5   lowering is really the public hearing and comment 
          6   process.  We would be very interested in hearing 
          7   from the industry themselves.  I think that's the 
          8   best barometer. 
          9            My concern -- this is really from practical 
         10   experience, and Ms. Kogut mentioned this -- on the 
         11   fees, given the existence of an APR system, the true 
         12   cost of credit, it amazes -- I question the economic 
         13   or risk-pricing practices of having excessive number 
         14   of fees, other than to confuse the consumer in the 
         15   marketing of what the real interest rate is. 
         16            My suspicion is that since my examiners 
         17   can't be there when loans are being marketed or 
         18   closed, that there is an overemphasis on contract 
         19   rate costs, rather than APRs.  So I'm most 
         20   interested in seeing a lower fee threshold. 
         21            MODERATOR SMITH:  Thank you.  Any questions 
         22   from the Panel first before I open it to other 
         23   discussion? 
         24            MR. MARKS:  It would be nice to hear from 

          1   the industry about what is so unconscionable about a 
          2   trigger of 17 percent.  I would like to hear the 
          3   argument of why 17 percent is such an unreasonable 
          4   rate and why that shouldn't be lowered. 
          5            MS. RENUART:  Can I add right here, as some 
          6   data that we're submitting in our written report, 
          7   there was a study done by Cathy Lesser-Mansfield, a 
          8   professor at Drake University, being published in  
          9   the South Carolina Law Review, and she examined, 
         10   since there is no collection of data about subprime 
         11   lenders in any uniform way, she examined 
         12   prospectuses and filings with the SEC. 
         13            And her data, over looking at several 
         14   subprime lenders, shows that only about 25 percent 
         15   of the loans made generally by subprime lenders are 
         16   over 15 percent.  And she also collected information 
         17   showing the loss rates, and we've collected some and 
         18   put it into our written testimony as well, showing 
         19   the loss rates of similar subprime lenders.  And 
         20   their loss rate over their portfolio, either on an 
         21   annual basis or projected over the entire life of 
         22   the loan, was about 3 percent. 
         23            So there is no reason why, first of all, 
         24   you can't lower the interest rates and still not -- 

          1   you're not going to affect very many loans that are 
          2   being made, less than 25 percent. 
          3            And we should make the point from the 
          4   consumer's perspective that some loans ought not to 
          5   be made, that it is a good thing to cut off bad 
          6   credit, because it only leads to foreclosure.  
          7   That's not a positive result from the idea of saying 
          8   everyone should get credit all of the time.  That's 
          9   thrown out there as a mantra, but it has resulted in 
         10   devastation in neighborhoods. 
         11            So given that information that is more 
         12   fully spelled out in our written testimony, it shows 
         13   that you can lower the trigger and only affect a 
         14   small portion of the loans, and those loans are 
         15   being made at such high rates anyway, there is no 
         16   justification for the risk level of that borrower.  
         17            MR. NADON:  I'll try to answer, but it's 
         18   probably coming from a little different perspective, 
         19   because we don't have anywhere near that kind of 
         20   percentage of our loans that are in that kind of a 
         21   price range. 
         22            For us, the 8 percent trigger would affect 
         23   about 3 1/2 percent of the business that's booked, 
         24   so it wouldn't affect us, the 8 percent trigger 

          1   wouldn't really affect us. 
          2            My question on lowering the trigger is 
          3   only, is that really going to get to the root cause 
          4   of the problem?  And I'm not convinced that it is, 
          5   because I haven't seen any data other than anecdotal 
          6   stories; I haven't seen any data that says that 
          7   since HOEPA was put into effect that it has had a 
          8   positive effect on reducing predatory lending 
          9   practices, which would then help build an argument 
         10   that further lowering it would have an even greater 
         11   impact on reducing it.  So I'm not sure that's the 
         12   answer. 
         13            Our answer, from an Option One standpoint, 
         14   is that probably the biggest thing that can be done 
         15   is to improve what's done to educate the consumer so 
         16   that they know what kind of a loan they're getting 
         17   into and they know what the right questions are. 
         18            One quick way to get there is to change the 
         19   way we have all of the documentation and all the 
         20   disclosures done, which, as you all know, are a 
         21   rather thick pile of documents.  They're written in 
         22   a certain way that the average person is not going 
         23   to be able to understand exactly what is there, so 
         24   it can be intimidating.  And if you walk into a 

          1   closing and the average person is intimidated by 
          2   what they see, they tend not to ask questions in the 
          3   first place. 
          4            So we would like to try to find a way that 
          5   we can make that process much, much easier for the 
          6   average person to understand, with very easy-to- 
          7   understand documents, fewer documents, so that when 
          8   they walk in there, they can see very clearly what 
          9   kind of a loan am I getting, what are the 
         10   consequences of this loan.  And they can take that 
         11   kind of information and shop around themselves to 
         12   see if they can get something better somewhere else 
         13   in the marketplace. 
         14            MR. MARKS:  We will agree with you that 
         15   absolutely HOEPA has not done what the intent of 
         16   HOEPA was to do; it has not stopped predatory 
         17   lending.  But we should -- so you're right.  But 
         18   we're here to talk about what the Federal Reserve 
         19   can do.  But we shouldn't be talking about just to 
         20   reduce the trigger, not to prevent it, the trigger 
         21   for disclosure from 17 to 15 percent or the trigger 
         22   of at how many fees does a disclosure kick in, not a 
         23   prohibition. 
         24            So we should be looking at what the Federal 

          1   Reserve -- the Federal Reserve is the problem.  They 
          2   have been, as the GEO study says, AWOL, and the 
          3   result has been that tens of thousands of people 
          4   have lost their livelihoods and have not had the 
          5   American dream of home ownership. 
          6            But the Federal Reserve can do a lot of 
          7   things.  With Fleet, let's take Fleet as an example.  
          8   Fleet Finance was the predatory subsidiary of the 
          9   holding company.  The Federal Reserve refused to 
         10   investigate the subsidiary, the predatory lending 
         11   subsidiary of Fleet.  They could have done that.  
         12   They tried to prevent the other regulators from 
         13   doing any kind of investigation.  So even without 
         14   HOEPA, there could be a lot of work that could be 
         15   done. 
         16            But let's get past this issue of saying, 
         17   "Oh, should it be 15 percent?"  I mean, how could 
         18   anybody say that someone should get a loan for 17 
         19   percent?  How could anybody afford that over the 
         20   long run?  How is it that you are buying loans 
         21   from -- you're buying loans from, let's say, real 
         22   estate brokers, right? 
         23            MR. NADON:  From mortgage brokers. 
         24            MR. MARKS:  Right.  You are buying loans 

          1   from mortgage brokers.  Do you pay a yield spread 
          2   premium to those mortgage brokers?  
          3            MR. NADON:  No.
          4            MR. MARKS:  Are you against any lender 
          5   paying a yield spread premium to those mortgage 
          6   brokers?  
          7            MR. NADON:  Not per se, no.  We just have 
          8   not been doing that for years. 
          9            MR. MARKS:  Sir, is that true in your case?  
         10   Are you buying loans -- are you paying yield spread 
         11   premium to mortgage brokers?  
         12            MR. GRAVINO:  There are a couple of things 
         13   on the table at once.  If you don't mind, I would 
         14   like to stick with the original question, and then 
         15   I'll come back to your statement.
         16            MR. MARKS:  But let's talk about not just 
         17   lowering the rate to 15 percent or 8 points. 
         18            MR. WALKER:  Excuse me.  I just want to 
         19   make a comment to set the record straight on a 
         20   comment that Bruce made.  It is not true that the 
         21   Federal Reserve kept any of the federal regulators 
         22   from going into Fleet Finance, and in fact we did 
         23   investigate Fleet Finance. 
         24            MR. MARKS:  Richard, you should talk to the 

          1   OCC about that.
          2            MODERATOR SMITH:  The OCC is not here 
          3   today, so we're not going to get off into that.  
          4   And, Mr. Gravino, did you have a comment?  
          5            MR. GRAVINO:  Yes.  Frankly, as I said in 
          6   my opening comments, and to go along with what Steve 
          7   said and part of what Bruce said here, the problem 
          8   with the HOEPA laws as currently written is it 
          9   captures the law of unintended consequences.  The 
         10   fee and percentages, by using percentages, you 
         11   affect the smaller loan more than the customer -- or 
         12   as much as the customer who actually should be 
         13   impacted by HOEPA. 
         14            When you start getting into loans, like in 
         15   North Carolina, you get into loans under $60,000, 
         16   all of a sudden the economics of the deal start to 
         17   become in question, so you start making decisions on 
         18   the economics rather than the needs of the consumers 
         19   in that state. 
         20            PCFS, yes, we do pay yield spread premiums.  
         21   What do they average?  I don't know, 1 1/2 to 2.  
         22   And do we find them conscionable?  We also find them 
         23   a cost of not having a branch network out that there 
         24   would cost us about the same if we were to originate 

          1   the loans through our branch network. 
          2            MR. MARKS:  Then how can you -- I mean, I 
          3   would like to hear a discussion about, if you pay a 
          4   yield spread premium, you're paying for a higher 
          5   rate or for more points, right?
          6            MR. GRAVINO:  We're paying for the cost of 
          7   originating the loan. 
          8            MR. MARKS:  But you are required to only 
          9   pay for services that are provided? 
         10            MR. GRAVINO:  That's right. 
         11            MR. MARKS:  So that's what you're paying 
         12   for.  So if you've got a $100,000 loan -- and you 
         13   pay a percentage, right?  
         14            MR. GRAVINO:  Right. 
         15            MR. MARKS:  So let's take percentage.  What 
         16   percentage do you think on average you would pay to 
         17   a mortgage broker for a loan?  
         18            MR. GRAVINO:  On a $100,000 loan, probably 
         19   1 percent. 
         20            MR. MARKS:  So you pay 1 percent, so you 
         21   pay them $1,000.  Certainly we know that the 
         22   industry is much higher than that. 
         23            But let's say you pay $1,000.  Now someone 
         24   comes to you with a $200,000 loan; you pay $2,000.  

          1   Are they doing twice as much services for a mortgage 
          2   of $200,000 versus $100,000?  
          3            MR. GRAVINO:  First of all, you would find 
          4   that a $200,000 loan would not get you 1 point.
          5            MODERATOR SMITH:  I would like to take a 
          6   little bit of control over this and recognize Mr. 
          7   Golann. 
          8            MR. GOLANN:  Trying to address the first 
          9   issue that you posed, I have some conceptual 
         10   difficulty understanding the disclosure statute, 
         11   particularly such complex disclosures for people who 
         12   have, by definition, as much difficulty with complex 
         13   financial transaction as the group we're trying to 
         14   serve.  So I find myself wondering what the HOEPA 
         15   disclosures actually do. 
         16            That said, though, on the question of fees 
         17   or interest rates, my tendency would be to focus on 
         18   fees, because that is where I hear more of the abuse 
         19   has been and more of the uncertainty is.  I would 
         20   tend to favor an all-inclusive definition in the 
         21   interests of a clear rule, even if that means that 
         22   the actual level doesn't go down. 
         23            Actually, I would also favor, if it were 
         24   possible, some kind of tolerance, because I have no 

          1   great interest in trapping people who missed the 
          2   limit by 50 cents or a dollar. 
          3            We can argue about what should be included.  
          4   Certainly single-premium credit insurance, if you 
          5   want to get into that, is something that I would 
          6   like to see included, even if it's voluntary. 
          7            I've seen notes in your hearing notice 
          8   about the possibilities for statutory change.  That 
          9   would be wonderful if it occurred.  I don't think 
         10   that the possibility of a statutory change sometime 
         11   in the future is a reason not to take action now. 
         12            MS. CAREY:  I have a question for the 
         13   lenders.  I've heard a number of people mention the 
         14   need for consumer education and the need for full 
         15   and clear disclosure.  I would like to know what the 
         16   lenders are doing now in that area. 
         17            MR. NADON:  Well, in a session like this, 
         18   we're asking that consideration be given to make the 
         19   disclosures a lot simpler than they are today.  So 
         20   that's the first part. 
         21            The second part would be we're trying to 
         22   develop a document which is almost finished.  We do 
         23   not do this today, but we have been working on a 
         24   document, through a lending committee internally, 

          1   that we would give, in addition to all of the other 
          2   advanced disclosures that the borrower gives at the 
          3   time of application, which tells them that credit 
          4   counseling is real smart thing and that they should 
          5   take advantage of it.  It gives them direction on 
          6   where they can go with an 800 number or to a Web 
          7   site so that they can call and get any kind of 
          8   information they want from an independent third 
          9   party. 
         10            The concern that comes out of that is -- we 
         11   believe that's the right thing to do.   The concern 
         12   that we have is that most of the credit counseling 
         13   agencies that we're familiar with are good at giving 
         14   information on purchase money loans.  They are not 
         15   as skilled at giving information on cash-out 
         16   refinance loans.  And cash-out refinance loans are 
         17   primarily what the subprime lending business does.  
         18   We are not really a purchase money market. 
         19            So we are concerned that there is, in 
         20   today's world, there is probably not consistency 
         21   among the credit counseling agencies.  So if a 
         22   borrower were to go to one in Irvine, California, 
         23   where we're based, or went to one in Norwalk, 
         24   California, about 25 minutes away, I'm not sure they 

          1   would get the same answers.  And I'm not sure if 
          2   there is a licensing that needs to be done to make 
          3   sure that all people that are in that practice have 
          4   been trained properly to give the right information. 
          5            But those are two things that we think 
          6   would help a lot to try to give people better 
          7   information before they commit themselves to any 
          8   kind of a loan. 
          9            MR. MARKS:  Look, the idea around  
         10   disclosures and this idea around education, it gets 
         11   away from the crux of the matter.  It's the 
         12   economics.  Let's get down to the economics.  If you 
         13   can push someone from a prime loan into a subprime 
         14   loan, if you could get someone from 8 percent to 12 
         15   percent or higher, you're going to do that. 
         16            Subprime lenders or predatory lenders are 
         17   not interested in education, and if someone is 
         18   targeted and someone is desperate to save their 
         19   home, you know, they're going to be -- they're 
         20   vulnerable. 
         21            So the fact of the matter is that just 
         22   because you have a stack of papers, as you said, 
         23   that is this thick, and I don't know anybody, 
         24   whether they make $1 million a year or they make 

          1   $10,000 a year, who has ever read every document at 
          2   a closing.  It just doesn't happen.  That's what you 
          3   hire lawyers for, and I'm willing to bet lawyers 
          4   have never read every document in that closing. 
          5            So let's get past the fact of disclosure; 
          6   let's get past the fact of consumer education.  
          7   Let's talk about the economics. 
          8            The economics say, if you're a mortgage 
          9   broker, you shop around for a lender, not because 
         10   they are going to give you the best interest rate, 
         11   but because they're going to get you the most fees.  
         12   That's the reality that is out there.  That's what 
         13   you have to focus on. 
         14            So that's what you have to look at:  What 
         15   are the economics?  We've been hearing about all of 
         16   these subprime lenders that have gone out of 
         17   business, right?  Why have they gone out of 
         18   business?  Because the fact of the matter is you 
         19   cannot -- these loans are going to go bad at some 
         20   point. 
         21            Liz is right that some loans shouldn't be 
         22   made.  This idea that if you don't do this stuff, 
         23   somehow someone else is going to come in -- those 
         24   loans are wrong.  A loan at 17 percent should not be 

          1   made, should be illegal.  There should be usury laws 
          2   in this country that say it's not reasonable.  Who 
          3   can afford a 17 percent or 18 percent loan over a 
          4   reasonable period of time, for a long period of 
          5   time?  It just doesn't make any sense. 
          6            So this idea that you're going to take the 
          7   conventional people out of this -- these predatory 
          8   loans shouldn't happen.  
          9            MR. ALGIERE:  I think the discussion -- and 
         10   I agree with you, education alone and lowering 
         11   triggering fees, adding more disclosures, I think 
         12   the solution is multifaceted, and you have to look 
         13   at the economics.  We're not going to come up with 
         14   one answer to a question, and we're not going to 
         15   come up with one solution, but let me ask a 
         16   question.  Making changes that are proposed, is that 
         17   in itself going to solve the problem? 
         18            MR. MARKS:  No.
         19            MR. ALGIERE:  Are you still going to get 
         20   that 17 percent loan being made by a fraud?  Sure. 
         21            MR. MARKS:  But it's a safety and soundness 
         22   issue.  Let's look at it not just from the consumer 
         23   point of view, but it is outrageous and it is 
         24   predatory.  And we can have a discussion about what 

          1   is a subprime and what is a predatory loan, but if 
          2   you define a predatory loan as a loan that someone 
          3   cannot afford over the term of the loan, that is 
          4   straightforward, that is a predatory loan. 
          5            But let's look at the safety and soundness 
          6   issue that's out there.  You have got institutions 
          7   who have these loans.  The key is, when you're a 
          8   lender, and the lenders know very well, the key is 
          9   you want to be the second-to-last entity holding 
         10   that loan.  You don't want to hold that loan, 
         11   because you know that that loan is going bad.  It's 
         12   only a matter of time that that loan goes bad, 
         13   because no one can afford that over the term of the 
         14   loan. 
         15            So it's safety and soundness.  When we say 
         16   about the Federal Reserve, we say -- let's take this 
         17   real cynical argument; let's take the cynical point 
         18   of view that says the Federal Reserve does not care 
         19   about consumers, they care about -- let me just 
         20   finish this point, Dolores -- that what they care 
         21   about is the safety and soundness of the 
         22   institutions that they regulate. 
         23            Even on that point, they have got to take 
         24   action to say these institutions are vulnerable with 

          1   the predatory lending operations or subprime that is 
          2   going on.  
          3            MS. RENUART:  To add to that, what we've 
          4   seen recently is, you know, Wall Street drying up 
          5   its money in terms of securitizations of subprime 
          6   lenders whose loans have been found to be faulty, 
          7   who are going into bankruptcy. 
          8            And to the extent that that is happening, 
          9   there is a recognition of that, that Lehman 
         10   Brothers, who securitized First Alliance's 
         11   mortgages, is being sued in the First Alliance 
         12   bankruptcy itself, that consumers are going to go up 
         13   the food chain to get restitution for what's been 
         14   done to them, that sounds a big bell on Wall Street 
         15   that helps to dry up the money. 
         16            Freddie Mac taking recognition of it so 
         17   they won't purchase loans under the APR and points 
         18   and fees triggers, if we lower these triggers, then 
         19   they will purchase loans that have even lower 
         20   triggers, and that sounds the bell to the industry 
         21   that you've got to shape up. 
         22            We have seen and our testimony provides 
         23   examples of loans where predatory lenders with the 
         24   predatory features that we will talk about later in 

          1   this discussion, balloons, prepayments, et cetera, 
          2   are making them just under the triggers.  So the 
          3   benefit of lowering the triggers is you're going to 
          4   capture these predatory loans that, by all 
          5   definition in this room, are going to be looked at 
          6   as predatory. 
          7            MODERATOR SMITH:  Thank you.  And with that 
          8   I'll recognize Mr. Walker. 
          9            MR. WALKER:  Ms. Kogut, you mentioned the 
         10   litigation that you are involved with against First 
         11   Alliance and made a statement about an 
         12   identification of part of the portfolio of A and A- 
         13   people who were in the loans that were in the 
         14   portfolio.  Was there any -- were you able to do any 
         15   analysis vis-a-vis who those folks were or how they 
         16   ended up with First Alliance versus a Washington or 
         17   a Dedham or any of the other more reputable 
         18   institutions?
         19            MS. KOGUT:  Yes, it's interesting.  These 
         20   consumers were probably not themselves looking to 
         21   borrow money; they were solicited like crazy.  In 
         22   fact, the only consumer complaints that our office 
         23   had on file against First Alliance, at the time when 
         24   the case was referred to us, were from consumers who 

          1   were saying, "Get these telemarketers to stop 
          2   calling me at night.  I don't want to hear from them 
          3   anymore." 
          4            So these consumers, it didn't occur to them 
          5   naturally to even think to borrow money.  They got 
          6   these solicitations pouring into their mailbox, and 
          7   they got telemarketing phone calls at night, and the 
          8   solicitations were deceptive.  They said no 
          9   out-of-pocket expenses, low monthly payments.  They 
         10   had a variety of very deceptive statements in them. 
         11            But consumers after a bit apparently did 
         12   take the bait and made a phone call and arranged to 
         13   meet with First Alliance.  And it didn't mater what 
         14   their credit backgrounds were, it just absolutely 
         15   didn't matter.  The amount of points that they paid 
         16   just had nothing to do with their credit histories 
         17   whatsoever.  
         18            MR. WALKER:  So they were using -- 
         19   consumers then were using these for home improvement 
         20   loans -- 
         21            MS. KOGUT:  Right.
         22            MR. WALKER:  -- primarily?
         23            MS. KOGUT:  Right.  These consumers, these 
         24   were typically older borrowers who had been in their 

          1   homes for a long time -- First Alliance had 
          2   obviously bought a mailing list -- where the 
          3   original mortgage loan had almost been paid off, so 
          4   there was a fair amount of equity left in the home.  
          5   And consumers had perhaps a lot of credit card debt.  
          6   That was a typical profile. 
          7            But otherwise their credit histories 
          8   weren't -- they weren't terrible.  They might have 
          9   had more indebtedness than would have permitted them 
         10   to get a prime loan.  But as I say, there were some 
         11   that were A rated. 
         12            And, I mean, the problem with First 
         13   Alliance is that they had an extremely deceptive 
         14   program from start to finish, so when consumers went 
         15   and met with the loan originator, the loan 
         16   originator would completely deflect from the actual 
         17   costs. 
         18            And, you know, it's interesting, I think 
         19   consumers are pretty savvy about interest rates.  
         20   You know, partly because of the credit card 
         21   solicitations that are pouring out of their mailbox, 
         22   they know what competitive interest rates are.  But 
         23   they don't know what a point is, they don't know 
         24   what an origination fee is, and they don't 

          1   understand, actually, the way the APRs work. 
          2            So in this case, probably two thirds of our 
          3   300 borrowers had variable rate loans as opposed to 
          4   fixed rate loans, and the riser was -- the index was 
          5   a LIBOR plus a very large margin, so that the 
          6   interest rates went up, you know, really quickly, 
          7   really fast, in ways that consumers didn't 
          8   understand. 
          9            So we started hearing from consumers when 
         10   their interest rates were going up.  Actually, the 
         11   Minnesota AG's Office called these exploding ARMs, 
         12   because the increases went up so fast and so 
         13   crazily. 
         14            MODERATOR SMITH:  Mr. Algiere. 
         15            MR. ALGIERE:  Yes, thank you.  A point was 
         16   made earlier by Dwight regarding FTC and enforcement 
         17   efforts.  Here is a good example of existing laws 
         18   that were violated, deceptive advertisements.  You 
         19   know, with the Internet now being used by more and 
         20   more companies and financial institutions, and more 
         21   bait and switch is being used, we have existing laws 
         22   right now that perhaps aren't being enforced. 
         23            And perhaps, you know, FTC's budget needs 
         24   to be beefed up a bit to go after some of these 

          1   deceptive advertising and deceptive techniques being 
          2   used, bait and switch, let's face it. 
          3            So I guess the point I'm trying to make is 
          4   there are existing laws on the books now that 
          5   perhaps need to be looked at more closely, and if 
          6   enforcement efforts need to be beefed up, perhaps 
          7   they should. 
          8            MR. MARKS:  But one of the laws --
          9            MODERATOR SMITH:  Thank you.  I recognize 
         10   Mr. Miselman next. 
         11            MR. MISELMAN:  I concur also with those 
         12   thoughts.  There are a lot of laws on the books 
         13   currently, rules and regulations.  We're very a 
         14   heavily regulated industry, and perhaps enforcement 
         15   -- as was mentioned, there is now a much larger 
         16   volume of subprime loans, where it's exploded.  I 
         17   don't think the staff to handle regulation on that 
         18   has exploded with that. 
         19            But I've been a mortgage broker for the 
         20   last 11 years.  I've seen the mortgage industry 
         21   change where brokers are now doing upwards of 60 
         22   percent of the loans in the country.  And for the 
         23   most part, the Mass. Mortgage Association and the 
         24   people I come in contact with, they do not take the 

          1   opinion that if they can sell an 8 percent loan and 
          2   make a certain percentage or get a 12 percent loan 
          3   and get a certain percentage, that they will 
          4   automatically go to the 12 percent. 
          5            They don't find that in the long run that's 
          6   going to be beneficial, because many of them do 
          7   referral business.  If you give someone a 12 percent 
          8   loan that can get an 8 percent loan and you're a 
          9   reputable company, you know that person is never 
         10   going to come back to you, because they will find 
         11   out about it. 
         12            In the mortgage brokerage industry what we 
         13   do, we've been notified a lot lately from 
         14   wholesalers, and a lot of it is coming from the top 
         15   down, they are now telling us what their definition 
         16   of predatory lending is.  It has been a vague 
         17   concept for a lot of years.  Right now it's starting 
         18   to come down. 
         19            What I do in my shop is we hold meetings 
         20   and we educate the loan officers of what to tell 
         21   people to look for, because we get shopped around to 
         22   various other companies.  And when people call us up 
         23   on the phone and we give them, you know, a real 
         24   interest rate and someone else gives them something 

          1   different, you know, they might think something is 
          2   up.  
          3            So we educate the loan officers on how to 
          4   educate the consumer on a one-on-one basis.  And 
          5   we're not interested in giving someone a 12 percent 
          6   loan who is eligible for an 8 percent loan, because 
          7   there is enough profit doing a prime loan from the 
          8   start. 
          9            MODERATOR SMITH:  I'd like to --
         10            MR. MARKS:  If I could make one point.  
         11   There is a regulation that actually has worked very 
         12   well in Massachusetts, and that is the regulation 
         13   that mortgage brokers cannot -- that home 
         14   improvement companies cannot pass and cannot try to 
         15   be mortgage brokers at the same time. 
         16            If you look back to the second mortgage 
         17   scam and that four years that that was in the paper 
         18   virtually every day, that was one of the biggest 
         19   abuses out there, where you had contractors going 
         20   out there saying, "I will do the work.  And by the 
         21   way, here are the papers, and I'm a mortgage broker, 
         22   and I'll get the financing," and the homeowner never 
         23   saw the money and the work never got done properly. 
         24            That has been in effect in Massachusetts 

          1   and has worked extraordinarily well.  You don't hear 
          2   those abuses here in Massachusetts, and that's a 
          3   model that can be replicated and should be 
          4   replicated around the country on the mortgage 
          5   brokers. 
          6            There are going to be abusive mortgage 
          7   brokers out there.  We're never going to regulate 
          8   all the abusive mortgage brokers out of existence, 
          9   as long as the lenders are willing to pay a fee for 
         10   that deal.  When you talk to lenders, what they will 
         11   say is, "If I want the business, I've got to be 
         12   competitive in what I pay the mortgage brokers."  
         13   And so they are subject to -- because the mortgage 
         14   brokers shop it around, they shop the deal around. 
         15            So the fact of the matter is, you have to 
         16   regulate and prohibit these fees that lenders are 
         17   paying mortgage brokers, because that's an industry 
         18   now.  We're getting more and more -- Howard is 
         19   right, we're getting more and more to the fact that 
         20   mortgage brokers are the way that lenders get their 
         21   loans.  And as long as those mortgage brokers can 
         22   shop around, not for, you know, the best rate, but 
         23   for the best kickbacks, you're always going to have 
         24   this problem out there. 

          1            MODERATOR SMITH:  All right.  I would like 
          2   to turn the discussion a little bit to the points 
          3   and fees question.  We had mentioned three types of 
          4   fees that could be included in the fee test, credit 
          5   life insurance premium, certain prepayment 
          6   penalties, and points on refinanced loans.  Do we 
          7   have views from our invited panelists on any of 
          8   these particular items?  
          9            MR. GOLANN:  Credit life insurance has been 
         10   a problem for at least the 30 years that I'm 
         11   available that I know of and probably for 30 before 
         12   that.  I don't think it's going to go away without 
         13   regulation.  I don't think more or different 
         14   disclosures are going to help very much.  They 
         15   haven't helped so far. 
         16            One core of the problem is the payment and 
         17   the financing of lump-sum premiums.  To the extent 
         18   you can forbid lump-sum premiums or you can require 
         19   that credit insurance be sold after the closing, so 
         20   anyone who wants to buy it can buy it, but it isn't 
         21   shoved down their throat in the pile of papers 
         22   that's been referred to, I think that would be 
         23   enormously helpful.  
         24            I understand that no regulation or 

          1   substantive prohibition is perfect and that there 
          2   will be somebody who would have liked to have it who 
          3   can't get it, but there will be many more that are 
          4   helped.  And the Federal Trade Commission in the 
          5   unfairness standards adopted a cost/benefit test, 
          6   recognizing that regulation has costs and that the 
          7   issue is whether the benefits exceed the costs, not 
          8   whether there are no costs, and I think you should 
          9   apply that standard here.  So I would first take aim 
         10   at credit insurance. 
         11            MODERATOR SMITH:  Mr. Michaels. 
         12            MR. MICHAELS:  Let me follow up with a 
         13   question, Dwight.  I've heard the argument that the 
         14   sale of credit insurance with the lump-sum premium 
         15   ought to be banned, I've heard the argument that the 
         16   sale should be delayed, and I've heard the argument 
         17   that you should just prevent the financing of the 
         18   insurance, let them sell it, but just don't let them 
         19   finance it, which some would argue is just 
         20   effectively banning the sale. 
         21            What would be the effect, do you think, of 
         22   adding the cost of the credit insurance premiums 
         23   paid at closing to the points and fees trigger under 
         24   HOEPA?  Would that in fact have the effect of either 

          1   delaying the sale, stopping the sale, or just 
          2   developing a product where the premiums would be 
          3   paid monthly?  
          4            MR. GOLANN:  That's a more complex 
          5   question, and I don't have the empirical data to 
          6   tell you how many loans would become HOEPA loans if 
          7   credit insurance were added.  For example, when I 
          8   last knew about this, there was a very low 
          9   penetration rate in Massachusetts and a much higher 
         10   penetration rate in other states, so I don't think 
         11   you are going to find much of that data here. 
         12            And of course, when you make it a HOEPA 
         13   loan, you might for Freddie Mac, for Option One, be 
         14   banning it, but for others you are simply adding a 
         15   layer of disclosure. 
         16            MR. MICHAELS:  The question I guess I'm 
         17   raising is, by adding the credit insurance fees to 
         18   the HOEPA trigger, in effect you might be making 
         19   more loans covered by HOEPA; but on the other hand, 
         20   you might be encouraging people to move away from 
         21   the product where the premiums are paid at closing 
         22   and would be in the trigger to a product where the 
         23   premiums would be pay as you go.  Is that --
         24            MR. GOLANN: That seems like one of the 

          1   plausible results for a percentage of the market.  
          2            MS. SCHWARTZ:  On the credit life issue, if 
          3   you look at the way the monthly programs work versus 
          4   the front premium financed programs for the 
          5   consumer, there is much lower cost.  You can cancel 
          6   it at any time, and then you are very clear on what 
          7   the cost to the consumer is.  So, in a sense, your 
          8   question is such that you will know your costs more 
          9   definitively for that consumer, and if that effect 
         10   is going monthly, then you've just moved the product 
         11   into a more attractive product, if that's your 
         12   question.
         13            MR. MICHAELS:  Has Freddie seen a lot of 
         14   loans where the premiums are paid monthly? 
         15            MS. SCHWARTZ:  Frankly, that's an old 
         16   standard in the mortgage business, that you can 
         17   solicit credit- and life-related products, any 
         18   insurance product after the loan is closed, through 
         19   the servicing portfolio.  That's a very standard 
         20   product in the prime business, less standard in the 
         21   subprime segment.  And I would just urge you to 
         22   understand both segments of that market before you 
         23   make any decisions. 
         24            We have chosen not to buy any assets or any 

          1   bonds with any front premium credit life, because we 
          2   were uncomfortable with that product. 
          3            MR. MICHAELS:  Do you have a speculation or 
          4   do you know why it might be less standard in the 
          5   prime versus subprime?  
          6            MS. SCHWARTZ:  I don't have a speculation, 
          7   but what I would share with you is, there is some 
          8   front premium credit life in the prime market, so 
          9   don't think it's just a subprime product.  So we did 
         10   affect the base when we announced that.
         11            MODERATOR SMITH:  Mr. Miselman. 
         12            MR. MISELMAN:  That was kind of the point 
         13   that I was going to say, that the market, when you 
         14   are in the prime market, prime borrowers have the 
         15   option, if they have private mortgage insurance, 
         16   which is another insurance product that a borrower 
         17   has to pay when they put less than 20 percent down 
         18   generally, they do have the option of single-premium 
         19   up-front at closing. 
         20            Many of them choose, because they may not 
         21   be in the house or the loan that long, to take a 
         22   monthly premium, but they do have the choice.  And 
         23   how you make sure that people in the subprime have 
         24   all the same educated decision-making process, you 

          1   know, could be disclosure, but, again, the consumer 
          2   has a choice in that case, even in the prime market. 
          3            MODERATOR SMITH:  Any other comments, or 
          4   are we ready for our break?  
          5            MS. RENUART:  One comment.  Our position is 
          6   that you should include all points and fees, as Mr. 
          7   Golann had mentioned earlier, because that is a 
          8   bright line test.  It's easy for compliance; it's 
          9   easy for a creditor to know to add them all up and 
         10   that's it.  And so we would suggest that.  Also, the 
         11   effect of that, of course, is going to bring in more 
         12   loans to HOEPA coverage.  We think that's a good 
         13   thing. 
         14            In terms of the question about what's the 
         15   effect of including the single-premium credit 
         16   insurance into the points and fees trigger, just 
         17   like we've seen many lenders now bumping up against 
         18   the triggers that are just below them in order to 
         19   avoid HOEPA coverage, the same thing will occur.  I 
         20   think that it will have an effect on reducing the 
         21   sale of that product in the subprime market. 
         22            And then finally because of the HUD studies 
         23   on unequal burdens that show that subprime loans are 
         24   made primarily -- the refinances, I should say, are 

          1   made primarily in low and moderate income 
          2   neighborhoods and minority neighborhood, that again 
          3   the sale of credit life insurance, single-premium 
          4   credit life insurance, again is sold mostly to those 
          5   same people.  So there is a disparate impact in 
          6   terms of the sale of that product, which, if it's 
          7   reduced or eliminated, would be a good thing.
          8            MODERATOR SMITH:  One more comment?
          9            MS. SCHWARTZ:  Yes.  Just I would offer 
         10   some thoughtfulness on this issue.  If you add 
         11   prepayment penalties, if you add credit life, I 
         12   mean, in a sense all of this is making some sense, 
         13   but we should know the impact on how many loans 
         14   would become HOEPA loans.  60 percent of the market 
         15   has prepayment penalties that are legal.  That is in 
         16   this market today. 
         17            So if you add all of this in, you will 
         18   create a huge segment of a $100 billion market that 
         19   will become a HOEPA loan market.  I would just 
         20   suggest we certainly will have to reanalyze our 
         21   position, which has been largely saying high rates 
         22   and fees out, but be careful to not mix that with 
         23   any legitimacy that's in the market, because we all 
         24   believe there is some legitimacy to this market. 

          1            So I think it is very important, all points 
          2   and fee, plus credit life, prepayment penalties, we 
          3   should all be very thoughtful about what this means 
          4   to this segment.  Maybe it's okay that 60 percent 
          5   will now become HOEPA loans, or maybe it's not.
          6            MR. NADON:  I certainly echo that comment, 
          7   because in today's environment there really is a 
          8   stigma attached to being a Section 32 lender, and it 
          9   is not a good stigma, which is a positive thing; we 
         10   don't want to be that.  And so depending on what 
         11   adjustments were made, we would probably stay with 
         12   it, but if adjustments are made like that, credit 
         13   insurance doesn't affect us because we don't believe 
         14   in that product anyway, so we don't sell it. 
         15            But on prepayment penalties, which are an 
         16   integral part of the economics of the subprime 
         17   business -- they are not in the conventional world, 
         18   but they are in the subprime world -- we would have 
         19   to then ask ourselves the question, do we now want 
         20   to change our story, do we want to go into the 
         21   marketplace and say being a high-cost lender is 
         22   okay? 
         23            And the risk to that is possibly that once 
         24   people are forced into that decision and they become 

          1   that, there is almost no barrier at that point, 
          2   because if you are going to be a high-cost lender, 
          3   what difference does it make if you're charging 5 
          4   points or 6 points or 8 points?  You are already 
          5   nailed with the stigma of being a bad guy. 
          6            So we're still, going back to the big 
          7   picture here, we're still not convinced that just 
          8   classifying more people as a HOEPA borrower or HOEPA 
          9   loan solves the problem.  In some respects I have a 
         10   lot of agreement with what Mr. Marks is saying, 
         11   because I think he is trying to focus on the broader 
         12   and the bigger picture. 
         13            Well, that bigger picture says that that 
         14   isn't really going to do it, because there isn't any 
         15   evidence still that we've seen that says that the 
         16   HOEPA laws as they are today had any effect on 
         17   predatory lending practices.  Simply to be 
         18   classifying more people to be that is not 
         19   necessarily going to get you the answer that you 
         20   want. 
         21            MR. MARKS:  But the point that you said 
         22   which I think is very important is the economics.  
         23   You said, if you deal with the prepayment penalties, 
         24   you're dealing with the economics of the industry.  

          1   That's absolutely correct, because if a lender is 
          2   paying a mortgage broker a fee, they don't want that 
          3   loan refinanced until they can recoup that fee that 
          4   they paid. 
          5            So if that's an outrageous fee -- so if 
          6   you're paying a mortgage broker, if a lender is 
          7   paying a mortgage broker 5 percent on a $100,000 
          8   loan, that $5,000, if that person was to refinance 
          9   in six months, you are losing money.  So you want to 
         10   make it as difficult for that person to refinance as 
         11   possible. 
         12            So absolutely, that is exactly why, if you 
         13   eliminated the prepayment penalties, if you put much 
         14   more restrictions on the credit issues -- because 
         15   you're right, that kind of insurance, it's 
         16   outrageous.  I mean, people can go out and get the 
         17   standard credit life insurance; it's much more 
         18   affordable. 
         19            But getting back to the economics, the 
         20   prepayment, you prevent that, that allows people to 
         21   say, "Geez, I've got a high-rate loan now, but if I 
         22   make my mortgage payments on time for three, six, 
         23   twelve months, I would have the option to go out." 
         24            Let me just make this one point.  Let's 

          1   just put this in perspective.  The subprime and 
          2   predatory lending area came out of loan-sharking.  
          3   And the loan sharks, that issue was, if I had a 
          4   financial difficulty, I'd go to the loan shark on 
          5   the corner, and I would say, "I need a high-rate 
          6   loan."  And you get it for a short period of time, 
          7   you bust your butt to make that payment, because the 
          8   consequences were pretty severe, but you can get out 
          9   from under it. 
         10            This whole subprime and predatory lending 
         11   issue has been corrupted that says, yes, sometimes 
         12   you have to get a higher rate loan to get past a 
         13   personal or severe financial difficulty, but you 
         14   should have the option, when making those payments 
         15   on time, to get out from under. 
         16            Prepayment penalties, balloon payments, all 
         17   those issues prevent you from getting out from 
         18   under.  Once you get that loan, you're on the road 
         19   to losing your home.  It's only a matter of time. 
         20            You're right.  Let's deal with the 
         21   economics of it. 
         22            (Applause)
         23            MODERATOR SMITH:  With that, we're going 
         24   to take a ten-minute break, and I won't say from 

          1   when.  Just look at your watches, because I'm sure 
          2   we all have a different time. 
          3            (Recess)
          4            MODERATOR SMITH:  We're ready to start with 
          5   the next segment, which will go from 30 to 40 
          6   minutes.  We're turning our attention to examining 
          7   possible additional restrictions or prohibitions for 
          8   specific acts and practices. 
          9            Under HOEPA, the Board is authorized to 
         10   prohibit acts and practices, 1, in connection with 
         11   mortgage loans, if the Board finds the practice to 
         12   be unfair, deceptive, or designed to evade HOEPA; 
         13   and, 2, in connection with refinancing of mortgage 
         14   loans, if the Board finds that the practice is 
         15   associated with abusive lending practices or 
         16   otherwise not in the interests of the borrower. 
         17            The Board's notice raises several topics 
         18   for discussion.  Because of the limited time, we 
         19   would like to focus on four of them:  1, loan 
         20   flipping; 2, unaffordable lending; 3, regulating 
         21   credit insurance, which we've talked a bit about 
         22   already; and 4, improving disclosures. 
         23            Now, flipping, as we are using the term 
         24   here, refers to the frequent refinancing of home- 

          1   secured loans, where the consumer derives little 
          2   economic benefit and the lender receives significant 
          3   income through fees.  The fees are typically added 
          4   to the loan amount, thus reducing the homeowner's 
          5   equity in the property. 
          6            Among the questions that we might address 
          7   is what regulatory approach would effectively curb 
          8   refinancings that do not benefit borrowers, without 
          9   impairing transactions that help borrowers.
         10            The recent report submitted to the Congress 
         11   by the Department of the Treasury and HUD suggested 
         12   that the Board should prohibit refinancings, such as 
         13   within a specified time period, unless there is a 
         14   tangible net benefit. 
         15            So among the questions that that particular 
         16   recommendation raises is, what would give the Board 
         17   the basis for deciding a particular period of time 
         18   in which to ban refinancings, 12 months, 18 months?  
         19   And then there is the question of how to measure 
         20   benefit to the consumer.  For example, lowering the 
         21   payment amounts and extending the number of 
         22   payments, is that a benefit?  Yes, some times?  No, 
         23   other times?
         24            Balloon payments in the context of 

          1   flipping.  We understand that to avoid HOEPA, to 
          2   avoid HOEPA's restriction on balloon payments, some 
          3   lenders may include payable-on-demand clauses in 
          4   HOEPA loans.  So we're interested in learning from 
          5   you, if we can, whether this practice is prevalent 
          6   where flipping occurs. 
          7            Should the Board consider restricting 
          8   payable-on-demand clauses in HOEPA loans to the same 
          9   extent that balloon payments are restricted, which 
         10   is to say that balloon payments generally are not 
         11   permissible unless the loan term is five years or 
         12   longer?  
         13            We'll have about 40 minutes for this 
         14   discussion, but before we start, I would like to 
         15   just remind the audience that if there are some 
         16   among you who have not registered for the open mike 
         17   session, and you are interested in presenting your 
         18   views, be sure and sign up at the first opportunity. 
         19            So, with that, do we have people ready to 
         20   comment?   Ms. Renuart?
         21            MS. RENUART:  I'm always ready to talk, so 
         22   just give me an opportunity, and I'll be glad to.  
         23   Thank you. 
         24            Let me address the flipping issue first.  

          1   The problem is that the way loans are structured 
          2   with high points and fees, not only in the flipping 
          3   context, but just making a loan in that way in the 
          4   first place with high points and fees, it takes a 
          5   borrower a very long time to pay down those points 
          6   and fees before they ever start paying off their 
          7   principal. 
          8            So in our written testimony we have an 
          9   example showing the difference between a loan with 
         10   about $8,000 in points and fees and a loan with only 
         11   3 percent of the loan amount in points and fees, and 
         12   how much faster it is for that borrower to pay down 
         13   their principal. 
         14            So one of our recommendations to the Board 
         15   is to prohibit the financing, the outright 
         16   financing, as an unfair and deceptive trade practice 
         17   if more than 3 percent of the points and fees are 
         18   financed as part of the transaction.  So that also 
         19   affects the flipping side, because the effect of 
         20   points and fees being charged on a regular and 
         21   constant basis just aggravates the problem 
         22   dramatically, and it sucks the equity out of the 
         23   home even faster. 
         24            So that's one way to eliminate the 

          1   incentive to flip and gouge the borrower by charging 
          2   high points and fees on a regular basis. 
          3            In addition, on the points, you know, what 
          4   points and fees ought to be included in the points 
          5   and fees trigger, another way to look at the 
          6   flipping issue is to say if, upon refinancing, there 
          7   is no rebate of the unearned portion of the points 
          8   and fees that were charged on the earlier loan, then 
          9   that portion that could have been rebated under the 
         10   actuarial method ought to be included as a point and 
         11   fee towards the HOEPA trigger in the first place.  
         12   That's another way of looking at the flipping issue. 
         13            On credit insurance, we've already talked 
         14   about that, so I won't address that again, and 
         15   that's also addressed at length in our written 
         16   testimony. 
         17            On the repayment issue, the ability to 
         18   repay, what we have proposed is that the Board adopt 
         19   some guidelines or create a safe harbor for lenders 
         20   who use the VA, the Veterans Administration, 
         21   guidelines for determining ability to repay. 
         22            VA has very clear rules.  They're set out 
         23   in regulatory form.  The VA and the FHA together 
         24   have been for years making loans to what now 

          1   everyone calls subprime borrowers, but those folks 
          2   haven't been called subprime borrowers in the past. 
          3            But because those two administrations reach 
          4   out to folks who, you know, haven't been homeowners 
          5   and are trying to create more home ownership for 
          6   people in this country, they have been dealing with 
          7   people who have had credit problems for a long 
          8   number of years. 
          9            So the VA has established a very reasonable 
         10   way of looking at that, where the debt-to-income 
         11   ratio is 41 percent, but they apply, against the 
         12   monthly income, certain deductions in addition to 
         13   what the proposed mortgage amount is.  And whatever 
         14   the remainder is left over, they call that the 
         15   residual income that that family would have to live 
         16   on for their other expenses. 
         17            And they just have a chart, and every year 
         18   they update what the residual amount is.  So if a 
         19   proposed loan would end up generating a residual 
         20   income below the chart amount that the VA has 
         21   established, that loan would not be made, because 
         22   there wouldn't be enough income to support the 
         23   family for their other expenses during that month. 
         24            So that's a very easy, clear, already- 

          1   established standard that the Board could adopt and 
          2   deal with this problem with the inability to repay, 
          3   because otherwise it's a fairly amorphous problem.  
          4   And creditors, I'm sure, have difficulty figuring 
          5   out what is the right debt-to-income ratio, is this 
          6   particular homeowner going to be able to make it, am 
          7   I going to run afoul of the inability to repay 
          8   standards of HOEPA if it is a HOEPA loan. 
          9            In addition, the Board -- this is not 
         10   something the Board has direct authority for, but 
         11   the Board could seek Congressional authority to 
         12   eliminate the pattern and practice requirements, 
         13   because that has made it very difficult for 
         14   consumers and expensive for consumers and 
         15   enforcement agencies.  For example, in New York, 
         16   where the Attorney General sued Delta Funding, it 
         17   ultimately resulted in a settlement, but it would 
         18   have been very expensive for the Attorney General's 
         19   Office to have properly prosecuted that issue. 
         20            And certainly for an individual consumer to 
         21   prosecute that issue in an individual HOEPA case is 
         22   just way beyond the expense ability and certainly 
         23   oftentimes the attorney's ability to be looking at 
         24   numerous and thousands of loan files in order to 

          1   establish that. 
          2            MODERATOR SMITH:  Thank you. 
          3            MR. GRAVINO:  I can't respond to all those 
          4   things; my memory isn't all that good.  I do want to 
          5   talk to a couple of issues, though.  The marketplace 
          6   being a fairly wonderful thing, a lot of things 
          7   happen when the business grows as fast as it's 
          8   grown, and those things are called becoming an 
          9   efficient marketplace. 
         10            And while we're probably not there, those 
         11   of you -- I've been in this business since 1963 -- 
         12   in 1974, the standard for this loan was 18 percent, 
         13   10 points.  I think you'd find in today's 
         14   marketplace, you're probably around 10 1/2 and 2 on 
         15   an average loan.  That would be the B- type loans.  
         16   I'm sure you can find examples that go all over the 
         17   place, but when I look at my portfolio, that's what 
         18   I see. 
         19            Flipping, in terms of flipping, we as a 
         20   lender, of course, are benefited when loans do not 
         21   flip, and as a retail lender, it's very easy to 
         22   self-police that if you take a mind to or establish 
         23   a law that says you can't. 
         24            But we don't allow flipping within our own 

          1   bank within the first 18 months, and even after 
          2   that, then no new points and fees are allowed on any 
          3   new money extended.  Whether that's the most perfect 
          4   way to do it or not, I don't know.  But it works for 
          5   us, and it really meets our objective of trying to 
          6   keep the customer on the books for three years. 
          7            Insurance, we don't sell insurance.  
          8   Frankly, I won't even comment on it.  I'll have to 
          9   let people who do sell insurance comment on that. 
         10            Prepayments, here again, you know, we 
         11   made -- Bruce, you made some comments about a lot of 
         12   companies that went out of business.  We've done a 
         13   lot of research on these companies also, and what we 
         14   saw, as much as it was delinquency, it was more so 
         15   prepayment speeds, the inability of those companies 
         16   to hold onto their customers. 
         17            Here again, it's an efficient marketplace.  
         18   You have loans that were made in 1996 at 12 1/2 to 
         19   13 percent rates, rates drop, new products come in, 
         20   something called the two-year and the three-year 
         21   loan.  These products all of a sudden start to make 
         22   the marketplace more efficient.  The rates do get 
         23   reduced. 
         24            I mean, I've got a lot of friends in these 

          1   organizations, and I guarantee you that it wasn't 
          2   delinquency.  You can plan for delinquency.  You 
          3   cannot plan for a marketplace becoming that 
          4   efficient that quickly. 
          5            In looking at how do you judge a loan, 
          6   we've kind of borrowed a little bit from the VA.  We 
          7   do something called the net disposable income 
          8   analysis, and it has to meet that test before we'll 
          9   buy it or make it. 
         10            But, you know, it's an imperfect 
         11   marketplace out there, but I think there's a lot of 
         12   good things that are happening, and I would like to 
         13   see more attention paid to those things that are 
         14   outside of the scope. 
         15            I'm going to go back to continuing 
         16   education.  The smarter a borrower is, the better 
         17   off that borrower is going to be, the better deal 
         18   they get for themselves.  The regulations that are 
         19   suspect, the things that are not managed right now, 
         20   they need to be managed.  And if that means we have 
         21   to create new laws to do that, we're all for that. 
         22            But, you know, when you get down to the 
         23   economics of the loan, whether you originate that 
         24   loan or whether you buy that loan, the costs aren't 

          1   that much different. 
          2            If I didn't buy the loan from a broker -- 
          3   and I don't allow brokers to shop.  They either have 
          4   a direct relationship with me or I don't buy 
          5   business from them.  But if I had that broker's 
          6   office out there, it would cost me almost the same 
          7   whether I originate it or whether I buy from him, 
          8   and that has to be built into the economics of the 
          9   deal. 
         10            MR. MARKS:  Let me, if I may, make two 
         11   points.  I understand, Governor Gramlich, that you 
         12   are into the free market.  Your focus is to make 
         13   sure that the market works well. 
         14            Well, if the market is going to work well, 
         15   if a lender is making a loan and they think it's the 
         16   best rate that that person should get, and that's a 
         17   reasonable rate and they're doing the right thing by 
         18   the consumer, we shouldn't put any roadblocks into 
         19   the way that that consumer, if they make their 
         20   payments on time, should be able to find any other 
         21   loan, and that market should be able to dictate what 
         22   they can get. 
         23            And that's why you've got to prohibit these 
         24   prepayment and some of the balloon payments, some of 

          1   the way that the late fees are added onto the loan, 
          2   so that you can allow the free market to work. 
          3            Let's talk about the other point of 
          4   flipping, and let's look at it from your point of 
          5   view that says safety and soundness issue.  Well, if 
          6   you look at a number of lenders out there, they will 
          7   refinance their own loans that they make. 
          8            Why would they do that?  Why would a lender 
          9   out there say, "I'm going to give you -- I'm going 
         10   to make you a 14 percent interest rate loan at, 
         11   let's say, 5 points," and then in six months, "I'm 
         12   going to refinance that same loan at a lower rate."  
         13   Why do they do that? 
         14            The reason is they're booking the previous 
         15   fees as net income, they're actually defrauding 
         16   their investors, and that's not what the free market 
         17   is about.  That's an incentive for them to go out 
         18   there and defraud their investors and frankly 
         19   defraud -- put that institution at risk.  And that's 
         20   what it is. 
         21            So if the concern is, well, we're not 
         22   really concerned about the consumer, but we're 
         23   concerned about the safety and the soundness of the 
         24   institutions, you should be very concerned.  You 

          1   should be concerned about -- take the model of what 
          2   happened to Fleet Finance and why they were put out 
          3   of business.  You should be concerned about the 
          4   finance companies, the subsidiaries that are putting 
          5   the bank holding companies at risk.  And that is 
          6   against the free market. 
          7            MR. MICHAELS:  When you say prohibit 
          8   balloons, are you talking about just high-cost 
          9   balloons, or would you recommend prohibiting balloon 
         10   notes for all types of margins?
         11            MR. MARKS:  No, I think you have to look at 
         12   the high-cost balloons.  I think it's outrageous 
         13   that someone can pay the high rates, the high fees 
         14   for an extended period of time, and on the face of 
         15   it, 15 years down the road, they have been paying 
         16   those on time, they owe more, they owe more at the 
         17   end of 15 years than they did on day one, and there 
         18   has got to be a clear benefit of the refinancing of 
         19   what that term is. 
         20            You know, let's get back, again, let's put 
         21   this in perspective of saying, what is -- subprime 
         22   lending was always meant to be a short-term stopgap 
         23   measure for someone who's got severe financial 
         24   difficulties.  It was never intended to be, once you 

          1   get in, you never get out. 
          2            So if you take away the economics, again, 
          3   we can show thousands of people out there, and we've 
          4   got thousands of files that we have shown to the FTC 
          5   and other regulators about the abusive practices.  
          6   But let's take the cynical approach that says all 
          7   we're concerned about is safety and soundness of the 
          8   people out there and the concept.  The fact of the 
          9   matter is that you've got to let people bust their 
         10   tail to make the payments, and then they should have 
         11   the option to get a better rate, better term, once 
         12   they can prove that. 
         13            And the difference -- we're talking about, 
         14   if the market is 8 percent, how could we be talking 
         15   about 9, you know, more than 10 percent, 200 basis 
         16   points?  And how is it that Freddie Mac, who is the 
         17   government, who is subsidized by the taxpayer -- 
         18   well, they shouldn't even be allowed to get into the 
         19   subprime lending market, because the fact of the 
         20   matter is, we should be focusing on expanding what 
         21   the conventional market is, because of the NACA 
         22   track record, with thousands of homeowners who have 
         23   gone through it, of prime loans for subprime 
         24   borrowers.  It's a proven track record. 

          1            Freddie Mac and Fannie Mae should not be 
          2   allowed to constrict the conventional market to make 
          3   tremendous profits on the subprime lending market. 
          4            MR. MICHAELS:  Would anybody on the 
          5   industry side like to expand on or elaborate on the 
          6   role of balloon notes and what kind of rules the Fed 
          7   might consider in terms of where balloons are useful 
          8   and help consumers and where balloons don't have a 
          9   legitimate role?  
         10            MR. GRAVINO:  I'm not sure what -- I'm 
         11   sorry, go ahead. 
         12            MR. MISELMAN:  Generally, we don't 
         13   generally even do balloon notes, because they don't 
         14   usually benefit the consumer.  But if a consumer is 
         15   going to be leaving the property within or before 
         16   the period that the balloon will come due, then it's 
         17   a guaranteed benefit, because they will get 
         18   generally a lower rate on a five-year or a seven- 
         19   year, and they have ten-year balloons.  You get a 
         20   lower interest rate versus if you took a straight 
         21   30-year fixed rate. 
         22            If you end up moving or selling the 
         23   property or refinancing within those five, seven or 
         24   ten years, by definition you will get a better deal, 

          1   because you will have saved every month that you had 
          2   the loan outstanding. 
          3            But, again, you have to be aware that that 
          4   balloon note is coming due.  The disclosures that 
          5   they give you are in bold print, big capital 
          6   letters, that this is something that's coming due at 
          7   a certain point in time, and it's very, very clear. 
          8            Generally, what people see that disclosure, 
          9   at least in our shop -- I've been doing this for a 
         10   lot of years -- it's not worth the relatively small 
         11   benefit that they'll see month to month in payments 
         12   with a lower interest rate. 
         13            MR. GRAVINO:  We don't do balloon loans, 
         14   with the exception of what we call a 15, 15 and 30, 
         15   and generally it is 1/8 to 1/2 of a point.  And 
         16   frankly, I have no objection to anybody regulating 
         17   that you can't do that.  The loans really do no 
         18   benefit for us.  It's a marketplace-driven product. 
         19            I don't know that it benefits anybody over 
         20   the long term.  You know, it's a 15-year payback -- 
         21   the loan comes due in 15 years.  The average 
         22   subprime lasts about 28 months.  So I'm not sure 
         23   that anything happens or the customer gets a break 
         24   on the interest rate. 

          1            MR. NADON:  If I could just echo that and 
          2   what Howard is saying, the one benefit, to answer 
          3   your question, that we see -- and we only do a 30 
          4   and 15, we don't do anything shorter than that --  
          5   that one product really is geared towards the people 
          6   that really do know that in their circumstances 
          7   they're going to be in the house -- usually they're 
          8   out within two to five years, because the loan life 
          9   on the loan is really not that long. 
         10            But they know that they're going to be 
         11   relocating or something, and because of the break 
         12   they get in the rate and the fact that they will 
         13   have moved or refinanced years before that balloon 
         14   comes due, they're just saving money.  So that's the 
         15   benefit to the consumer, and it's the only kind of a 
         16   balloon product that we offer, and it's specifically 
         17   designed for that kind of a customer. 
         18            MS. SCHWARTZ:  I thought I would mention 
         19   for the record that Freddie Mac is delighted to be 
         20   in this segment of the mortgage market, and we will 
         21   in fact, pursuant to our statutory requirement and 
         22   our mission, set standards, and we will better this 
         23   market, which now is very inefficient, nonstandard, 
         24   and has caused a lot of controversy. 

          1            I guarantee you, we will add the values 
          2   that we added to the conforming market to this 
          3   segment of the mortgage market, and you will stop 
          4   talking about the risk of prime versus subprime, but 
          5   will have a continuum of mortgage lending and credit 
          6   availability that is correctly applied to this 
          7   segment. 
          8            MR. MARKS:  By your own records, your own 
          9   records, your own study says that at least 30 
         10   percent of the people that get -- 30 to 40 percent 
         11   of the people that get a subprime loan really should 
         12   get a prime loan.  So your economics, you have a 
         13   responsibility to your stockholders to maximum your 
         14   profits.  So since 40 percent of the people who get 
         15   your subprime loans could have gotten a prime loan, 
         16   you're really saying, "Geez, we made 200 basis 
         17   points," a lot of money for you guys, to really push 
         18   people into the subprime market. 
         19            That is, you're creating the market.  
         20   You're creating this market.  I mean, we're never 
         21   going to be able to outlaw every predatory lender 
         22   out there.  So you've got to deal with the market 
         23   issue.  Well, if the GSCs are creating the market 
         24   because they're going to profit from it, that's 

          1   where the fight is, that's the focus.  You are the 
          2   worst problem out there.  You are the biggest 
          3   problem, the GSCs. 
          4            These predatory lenders, they're small 
          5   potatoes compared to what you do, but they will be 
          6   really upset when you pull that switch and you say, 
          7   "By the way, now we're going to originate 
          8   mortgages."  And all of a sudden all these lenders 
          9   out there will join with the community and say, 
         10   "Geez, you know, we don't want Fannie and Freddie  
         11   to be out there originating mortgages." 
         12            MS. SCHWARTZ:  Thank you. 
         13            MR. MARKS:  You must have a response.  I 
         14   mean, you just can't sit there.  Come on, join in.
         15            MS. SCHWARTZ:  I stand on the record. 
         16            MODERATOR SMITH:  Mr. Golann.
         17            MR. GOLANN:  I don't want to interrupt the 
         18   exchange.
         19            MS. SCHWARTZ:  Thank you, Mr. Marks. 
         20            MR. MARKS:  Okay.
         21            MR. GOLANN:  I just, since you had 
         22   mentioned payable-on-demand clauses as an aspect of 
         23   balloons, I had thought that they had been banned.  
         24   I must say, they certainly have been banned in the 

          1   jurisdictions I have been involved in, other than in 
          2   commercial loans, of course. 
          3            I was trying to figure out what the 
          4   economic justification could be that could possibly 
          5   outweigh the consumer harm, and I can't think of 
          6   any.  I've been waiting here for someone to 
          7   articulate the case for these things.  I don't hear 
          8   it articulated. 
          9            MODERATOR SMITH:  Thank you. 
         10            MS. RENUART:  Just to add for the record 
         11   that even though some of the lenders here are saying 
         12   that their balloons are very innocuous because 
         13   people have agreed to them and it's in exchange for 
         14   something else, and there is huge disclosures and 
         15   everybody is warned and everybody is knowledgeable, 
         16   that certainly is not true of the clients that I 
         17   have represented or the clients that other attorneys 
         18   have contacted me about who they represented who 
         19   were very surprised about the balloon payment that 
         20   was there and very shocked by it. 
         21            It was used by many of the subprime lenders 
         22   and predatory lenders that were involved in these 
         23   cases as a way to call them up and say, "Hey, now 
         24   you have a balloon.  Why don't you come back in, and 

          1   we'll refinance you.  Even though we made you the 
          2   balloon, come back in, and we'll refinance you for a 
          3   better loan without a balloon," the same lender 
          4   saying that. 
          5            People come in, and they pay a whole huge 
          6   round of closing costs, points and fees again, and 
          7   then the flipping starts.  So it's used as a tactic 
          8   to get the customers to come back in and to scare 
          9   them into refinancing. 
         10            MR. NADON:  Just to get some balance to 
         11   that, there are some people that actually don't do 
         12   that, and because we never solicit any of our own 
         13   portfolio, we never do.  We actually have pooling 
         14   and servicing agreements with the people that we are 
         15   selling loans to that strictly prohibit us from 
         16   doing that. 
         17            So we have never in the last eight years 
         18   done that, and we will not be doing it in the 
         19   future.  So we do not use it as a practice to try to 
         20   do that. 
         21            If I am a consumer, and I know that in five 
         22   years I am going to be moving or retiring or doing 
         23   whatever and I'm going to leave this house, and I 
         24   can get an interest rate of 8 percent by taking this 

          1   15-year balloon loan, or I can get a loan of 8 3/4 
          2   and get a 30-year fixed loan, my answer is going to 
          3   be I'm taking the 8 percent loan, because that's 
          4   going to save me 50 basis points for the first five 
          5   years that I'm in this deal, and then I'm selling 
          6   the house anyway. 
          7            The balloon has never had to be 
          8   experienced, and no one from Option One has called 
          9   me and asked me, "Would you please now refinance the 
         10   balloon that's coming due."  Not everyone does that 
         11   practice. 
         12            It kind of goes back to one of the 
         13   statements I made in the opening comments.  Not all 
         14   subprime lenders are predators.  Some do some things 
         15   that have to be corrected.  But that is not the case 
         16   for every one of us. 
         17            MR. MARKS:  But then, would you define a 17 
         18   percent loan as a subprime or predatory loan? 
         19            MR. NADON:  Yes, I would.  That's why we 
         20   don't make them.
         21            MR. MARKS:  So you would consider that 
         22   every HOEPA loan is a predatory loan, then? 
         23            MR. NADON:  A HOEPA loan?  
         24            MR. MARKS:  Yes.

          1            MR. NADON:  And these are all high-cost 
          2   loans?  That's very aptly named, it's a high-cost 
          3   loan.  We do not make high-cost loans. 
          4            MR. MARKS:  So then how would you define a 
          5   predatory loan?  How would you make a distinction 
          6   between a subprime and predatory loan? 
          7            MR. NADON:  That's such a -- that's sort of 
          8   a general and vague question that there is so many 
          9   factors that go into someone doing something that's 
         10   predatory, I couldn't give you a real brief answer 
         11   to that.  All I can tell you is that if we're 
         12   generally going to say that if you make loans under 
         13   the current HOEPA guidelines, that that is high-cost 
         14   loan, we agree that is a high-cost loan, and we 
         15   don't make them. 
         16            MR. MARKS:  But anybody who wants to get a 
         17   subprime loan, let's take your definition of 
         18   subprime loan, that means that they cannot get, in 
         19   theory, they believe they cannot get a conventional 
         20   loan.  Therefore, if you want to look at the 
         21   marketplace, they're in weakened position, because 
         22   somehow something is going on that is preventing 
         23   them from getting an 8 percent conventional loan.
         24            MODERATOR SMITH:  I think we will --

          1            MR. MARKS:  So the fact of the matter is 
          2   this issue around disclosures and the issue around 
          3   education is just a false issue, because you're 
          4   talking about people who are vulnerable, who are 
          5   desperate, who are in a weakened position.  So if we 
          6   focus on disclosures and on education, that's just 
          7   crazy.  That's not dealing with the issue. 
          8            Your job is to maximize your profits.  You 
          9   are targeting those people because they are 
         10   vulnerable because they cannot get a conventional 
         11   loan.
         12            (Applause)
         13            MODERATOR SMITH:  We will nonetheless be 
         14   getting into some of those issues this afternoon as 
         15   far as education and how to better protect the 
         16   vulnerable consumer.  So we will have some 
         17   discussion of that this afternoon.
         18            MR. MARKS:  That's what the regulators 
         19   should be doing now. 
         20            MODERATOR SMITH:  Then, Dwight, did you 
         21   have a comment?  
         22            MR. GOLANN:  On one of other issues you 
         23   raised, Elizabeth had mentioned the option of 
         24   counting unamortized points and fees toward the 

          1   points and fees tests on the, quote, flipped or 
          2   refinanced HOEPA loan.  That sounds quite reasonable 
          3   to me, and I would be interested in whether the 
          4   creditors see a problem. 
          5            On the 18-month limit on refinancing that 
          6   Richard Gravino mentioned as just a practice that 
          7   they follow, I note that that's the same 
          8   recommendation that HUD and the Treasury make. 
          9            Given the number of points and fees on a 
         10   HOEPA loan by definition, it's hard to see how they 
         11   could be -- how it could make sense to refinance 
         12   within 18 months, given that interest rates simply 
         13   don't drop that fast.  One would have to have a 
         14   truly precipitous drop in interest rates, it seems 
         15   to me, for it to make sense to refinance. 
         16            Points and fees only on new money extended 
         17   sounds like an excellent idea.  You might want to 
         18   restrict it to related lenders, because that seems 
         19   to be where the flipping goes on, as opposed to 
         20   unrelated lenders.
         21            CHAIRMAN SMITH:  Yes, Mr. Miselman.
         22            MR. MISELMAN:  I think maybe a case of if 
         23   you have a lender who does both subprime and prime, 
         24   if somebody does reestablish credit within, let's 

          1   say, 12 months, and they're in their subprime 
          2   portfolio, and you prohibit them from monitoring 
          3   their portfolio because they could put them into a 
          4   prime loan then, it's the same company, and it might 
          5   be a disservice to the consumer. 
          6            MR. NADON:  Something else just to think 
          7   about with that.  We don't solicit our accounts.  It 
          8   really doesn't affect me very much to put 12 months 
          9   or 18 months; that's not a practice that we do at 
         10   Option One. 
         11            Where I would just ask you to give some 
         12   consideration is, here is a circumstance that the 
         13   lender or a broker or somebody is not initiating the 
         14   contact, but I refinanced my house because of 
         15   interest rates, let's say, 12 months ago.  Somewhere 
         16   after that, I found out that my wife is going to 
         17   have a baby, and we wanted to add a room, and I 
         18   didn't want to sell my house, I just wanted to add a 
         19   room, so I want a cash-out refinance because we want 
         20   to do an addition so we could have a bedroom for the 
         21   baby. 
         22            I call up the lender under this rule of 18 
         23   months, and I have had a good relationship with the 
         24   lender that I'm dealing with today, and I say, 

          1   "Would you please refinance my loan, because I want 
          2   $10,000 or $15,000 to put in an add-on," and your 
          3   answer is "No," regardless of how I've paid you, 
          4   regardless of the circumstance. 
          5            So as long as there is some room built in, 
          6   because there are some legitimate reasons why 
          7   people, other than interest rate, might want to do 
          8   some sort of a refinance. 
          9            MR. GOLANN:  That seems a fair comment, and 
         10   one would have to make sure it didn't become a 
         11   reason to reimpose all the points and fees from the 
         12   first loan.  But subject to that, I understand your 
         13   point. 
         14            MODERATOR SMITH:  Yes, Mr. Curry. 
         15            MR. CURRY:  The approach that we've taken 
         16   in our proposed regulations is really to try to 
         17   address some of those legitimate concerns.  It must 
         18   be a high-rate loan being refinanced by a high-rate 
         19   loan, and there is also an exception for additional 
         20   proceeds that I think would deal with your issue.  
         21   With Howard's issue of being conventional, it 
         22   wouldn't meet the test, because both transactions 
         23   have to be high-rate transactions.  
         24            MS. RENUART:  The problem with that, 

          1   though, is that there are many loans that were prime 
          2   that are being refinanced into subprime and at much 
          3   higher interest rates, and so that rule would not 
          4   cover it.
          5            MR. CURRY:  But if you are dealing with the 
          6   issue of flipping, then I don't think you have a 
          7   flip there, you really have a change in 
          8   circumstance.  They are really entering into the 
          9   high-rate loan context with that second transaction. 
         10            MS. RENUART:  But these are often people, 
         11   from our experience as consumer representatives, 
         12   folks who had a good loan sometime way earlier in 
         13   their life to purchase money, and now they're being 
         14   treated as a subprime borrower in the sense that 
         15   they either perceive themselves as unable to get 
         16   better credit or they're being treated that way by 
         17   someone who is soliciting them for their business.  
         18   And because the new lender wants to be in the first 
         19   position, they will only refinance, they won't make 
         20   them a second on their house. 
         21            So they refinance not only decent prime 
         22   mortgages but also rehabilitation loans made through 
         23   various cities in this country that are either zero 
         24   interest rate or low interest rate or not even 

          1   payable until the property is sold.  Those are being 
          2   flipped into high-rate mortgages. 
          3            So there's a bigger problem than, I 
          4   think -- I don't mean to criticize your proposal, 
          5   but there is sort of a larger picture to look at 
          6   that would be not covered and not regulated by what 
          7   you're suggesting.  
          8            MR. GRAVINO:  I think you have, continuing 
          9   on with what you say, you have a larger, a very 
         10   difficult problem when you start limiting points and 
         11   fees by using percentages. 
         12            Going back to Bruce's remarks, the 
         13   economics of the deal, I mean, this is just an 
         14   example.  You do have unscrupulous lenders out 
         15   there.  They're going to take advantage of the 
         16   situation. 
         17            I'm not sure how you end this up, but, I 
         18   mean, you have a customer who wants to take $20,000 
         19   to put an add-on on their home.  They have an 8 1/2 
         20   or 9 percent first mortgage.  The cost of doing that 
         21   $20,000 add-on is about $3,000.  That's what it 
         22   costs to make the loan; whether you're first, 
         23   second, 200,000th, it doesn't matter, it's very 
         24   close to that number. 

          1            So, if you limit 5 points on the $20,000 
          2   loan, all of a sudden you're at a $1500 fee, which 
          3   doesn't cover the cost of making the loan.  So what 
          4   do you do?  Do you now take that loan, add it onto 
          5   your $80,000 first that you have, refinance that 
          6   whole thing, and charge them 3 points? 
          7            The customer, you know, if you charge them 
          8   10 points on the $20,000, he would have paid $2,000; 
          9   if you charge him 3 points on the $100,000, now he 
         10   is paying $3,000, and he is still paying $3,000 to 
         11   get $20,000 as opposed to $2,000 to get $20,000.  
         12   One comes under the HOEPA regulation, one does not. 
         13            The one that he pays more, and you've done 
         14   a disservice to him, is the one that doesn't come 
         15   under the HOEPA regulation.  That's a difficult -- 
         16   you know, you start to push people into those types 
         17   of arenas. 
         18            MR. MARKS:  But so what if it comes under 
         19   the HOEPA regulation?  I mean, it's not -- it should 
         20   be a prohibition to do things, but it's not a 
         21   prohibition, it's a disclosure.  I mean, this whole 
         22   thing that somehow people are scared to death to be 
         23   subject to disclosure says, if they do something 
         24   that they should be scared to death, they certainly 

          1   should be disclosed. 
          2            MR. GRAVINO:  I don't think disclosure is 
          3   the issue; it's the penalty for making a mistake 
          4   under HOEPA that's the real scary issue for most.  
          5            MR. MARKS:  There should be a penalty, 
          6   shouldn't there, that says --
          7            MR. GRAVINO:  Not if they make an honest 
          8   mistake. 
          9            MR. MARKS:  But you can't have the 
         10   exception make the rule.  If the rule is that you 
         11   should be penalized if you're making a loan that 
         12   shows on the face of it that the borrower cannot 
         13   afford it, that's not an honest mistake, that's just 
         14   making a predatory loan. 
         15            MR. GRAVINO:  Different issue.  I was not 
         16   talking about that.
         17            MR. WALKER:  Dolores, I would like to ask a 
         18   question.
         19            MODERATOR SMITH:  Mr. Walker, please. 
         20            MR. WALKER:  To what extent do appraisals 
         21   and rising real estate values add to the issue and 
         22   problem of flipping, I'm curious, to panelists. 
         23            MR. MISELMAN:  I think it certainly adds to 
         24   it.  As property values go up, you know, a subprime 

          1   borrower now has the availability, with his equity 
          2   in his property, to get cash.  It is perhaps more 
          3   likely to be targeted.  And if the property values 
          4   had stayed about the same or only increased 
          5   typically maybe 4 or 5 percent a year, they may not 
          6   be ready to get any cash out for several years.  So 
          7   now when folks have a lot of equity in their 
          8   property, they could become a target. 
          9            So I think the fact that appraisals have 
         10   gone up certainly in Massachusetts, there is equity 
         11   there.  You know, you have seen the advertisements 
         12   where you are sitting on cash in your home, and 
         13   whether that's appropriate or not for people to see 
         14   might come under HOEPA or not as far as advertising.  
         15   But when there's equity there, that's money that 
         16   could be tapped into, and people will try to talk 
         17   them into it. 
         18            MODERATOR SMITH:  Ms. Carey.
         19            MS. CAREY:  I think that that's accurate, 
         20   and I think that goes to the question of ability to 
         21   repay as opposed to collateral values, and looking 
         22   at people's asset worth rather than their ability to 
         23   repay, as you mentioned.  So I do think, yes, that 
         24   does tie in. 

          1            MS. RENUART:  I just wanted to add briefly 
          2   historically the rise in predatory lending only has 
          3   occurred since the mid-1980s when property values 
          4   have risen dramatically.  And so as they continue to 
          5   rise, the problem is still going to be there, 
          6   because this asset can be targeted by the lenders. 
          7            MODERATOR SMITH:  Anyone else on that 
          8   point? 
          9            MS. HURT:  I just wanted to ask -- I've 
         10   just briefly looked at the Massachusetts regulation, 
         11   but could you tell us or share with us some of your 
         12   deliberations on choosing two years in prohibiting 
         13   refinancing, as opposed to 18 months, or why you 
         14   chose to prohibit refinancings for a certain period 
         15   of time at all. 
         16            MR. CURRY:  To some extent the prohibition 
         17   is arbitrary.  It is part of the process of the 
         18   public hearing process.  This is two years, put it 
         19   on the table, hear from the industry why it works or 
         20   it doesn't work from an economic standpoint. 
         21            We also looked to the North Carolina and 
         22   New York provisions in terms of establishing an 
         23   initial threshold subject to public comment.  I was 
         24   interested in the comments in terms of 18 months 

          1   here as part of that process. 
          2            MS. HURT:  So the choice of the time period 
          3   is fairly arbitrary.
          4            MR. CURRY:  To the same extent that, you 
          5   know, I think there is definitely a need to lower 
          6   some of the triggers, let's come out with something 
          7   to start the debate.  That's really the approach 
          8   that we've taken. 
          9            MS. HURT:  But you've also seemingly taken 
         10   the position that -- I don't want to put words in 
         11   your mouth, but one effective way to deal with loan 
         12   flipping is to impose some sort of time period in 
         13   which you couldn't refinance.  
         14            MR. CURRY:  Yes, that the longer the period 
         15   that you have, the more likely that there is a 
         16   legitimate reason for refinancing.  The shorter the 
         17   period, the more likely that it's an oppressive 
         18   tactic of loan flipping. 
         19            So we looked also to, you know, tie into 
         20   when you are financing a high-rate loan with another 
         21   high-rate loan and whether or not additional 
         22   proceeds were being advanced.  We're trying to 
         23   distinguish between what might be a legitimate 
         24   transaction versus an oppressive tactic. 

          1            MS. HURT:  Did you discuss or could you 
          2   share with us some of the other approaches to 
          3   addressing loan flipping that you decided against 
          4   adopting. 
          5            MR. CURRY:  I think initially, you know, 
          6   when you start this process, with this ban of 
          7   refinancing outright, then you have to take into 
          8   account the economic and market issues, and this is 
          9   really what the process is:  Yes, there are probably 
         10   legitimate reasons for this type of -- or why 
         11   refinancing might occur within a short period of 
         12   time; how can you try to differentiate and have some 
         13   flexibility with what otherwise would be a hard and 
         14   fast rule?  
         15            MR. MARKS:  I would like to know from the 
         16   lenders, what is your position on the North Carolina 
         17   law where, on the flipping, there needs to be a net 
         18   tangible benefit for any loan that is flipped?  
         19            MR. GRAVINO:  I think it's any loan that's 
         20   made, not necessarily just flipped.
         21            MR. NADON:  It's any loan that's 
         22   originated. 
         23            MR. GRAVINO:  Any loan that's originated.  
         24   We frankly require that on all loans, whether 

          1   they're in North Carolina or not. 
          2            MR. NADON:  When you are making a loan, 
          3   there should be a benefit to the borrower; 
          4   otherwise, you really have to ask yourself, why are 
          5   you doing this?  We struggle with the wording of it 
          6   only to the extent that it says "a reasonable 
          7   tangible net benefit," and there is no definition 
          8   given, there is no guidance given as to what does 
          9   that mean. 
         10            So I don't know if it's as simple as we 
         11   reduced the borrower's payments by $300 a month, or 
         12   we reduced the interest rate on his underlying first 
         13   mortgage from, you know, 12 percent to 10 percent.  
         14   I don't know what those rules are. 
         15            And so as we are underwriting loans in 
         16   North Carolina, it gets to be a challenge for the 
         17   underwriters to know, what calculation am I supposed 
         18   to do, what am I supposed to take into 
         19   consideration?  Over what term does that net benefit 
         20   need to take place?  Is it over the potential 30- 
         21   year term of the loan?  Is it over the average life 
         22   of three years? 
         23            It's very problematic for us.  We're right 
         24   now asking people to try to help us get a 

          1   definition, frankly, of what that means. 
          2            MR. MARKS:  But would you in general 
          3   support that? 
          4            MR. NADON:  Absolutely.  I think every 
          5   loan, as I said -- every loan that is made should be 
          6   providing a benefit to the consumer. 
          7            I will add, though, that this is a two-part 
          8   transaction.  We are lending money; they are 
          9   borrowing.  They are asking for money.  So they also 
         10   have to have some hand in helping us define what do 
         11   they want and do they need it.  I can't read their 
         12   mind.  I don't know what's exactly in their head.  
         13   So we can only do our best efforts. 
         14            That's what we're trying to do in North 
         15   Carolina as we do in all the other states.  Frankly, 
         16   we've tried to provide a benefit to the consumer on 
         17   every loan since we started our company. 
         18            MR. MARKS:  Then I would like to ask Mr. 
         19   Curry, what would be the position of the State 
         20   Banking Commissioner on a similar kind of -- similar 
         21   piece of regulation that would say that, on any loan 
         22   that is made, there would need to be a net tangible 
         23   benefit to the consumer?  
         24            MR. CURRY:  I think that's what we're 

          1   trying to say in the flipping provision that we're 
          2   looking at, that as an initial matter, that flipping 
          3   is questionable.  We've carved out these areas of 
          4   advanced funds, additional funds are being advanced 
          5   for whatever the borrower's purposes are.  That's 
          6   the carve-out that we've come up with. 
          7            I mean, we're open to it.  We looked at the 
          8   North Carolina law as too vague, so we're trying to 
          9   provide some definition.  And again, you know, we're 
         10   in the rule-making and public hearing process and 
         11   comments.  We want to know what's a better way to do 
         12   it or a refinement of it.  It really goes to the 
         13   same issue, I agree with you. 
         14            What I think is important too is the 
         15   borrower's ability to repay in terms of suitability 
         16   of these products.  That's really the issue, is that 
         17   at some point in time it's unsuitable.  That's where 
         18   I think there's a clear need to refine the existing 
         19   regulation, aside from the statutory issues.  We've 
         20   seen in some cases where the forms, the files are 
         21   beautiful, but you know that that is not verified 
         22   income, and we want to tighten up that requirement. 
         23            MR. GRAVINO:  As a lender in North 
         24   Carolina, it is the vagueness of the law that people 

          1   are struggling with.  We elected to remain in the 
          2   state.  Most of our counterparts have not done that. 
          3            But simply because of the way we had to 
          4   interpret the law -- we had to give it wide berth -- 
          5   we're seeing, within one month, we have seen almost 
          6   a three-quarters drop in the number of applications 
          7   being submitted in that state.  And that isn't 
          8   anything other than we're just not sure how to 
          9   interpret the law and how to make it reasonable and 
         10   make it work. 
         11            So we've taken a very conservative position 
         12   on it, and we've seen -- as I said in my opening 
         13   statements, there's a void that's going to be 
         14   filled.  Somebody is going to fill it, and I just 
         15   hope they're reputable lenders. 
         16            MR. MARKS:  But we keep hearing that, that 
         17   if you guys don't do it, and you guys consider 
         18   yourself legitimate and trustworthy and all those 
         19   nice things, but --
         20            MR. GRAVINO:  I feel very good about 
         21   myself. 
         22            MR. MARKS:  -- but why shouldn't the issue 
         23   be that at some point no one should get those loans, 
         24   that because we have -- we have regulations in this 

          1   country that say, you know, if you go out and buy a 
          2   refrigerator and you make a mistake, well, you know, 
          3   the penalties on that are that you are going to lose 
          4   your money.  But if you go out and you put your 
          5   house at risk, we're going to put protections in 
          6   this country to say, well, we're going to prevent 
          7   certain things from being done even despite 
          8   yourself, because the consequences are very severe. 
          9            Why isn't the position saying a 17 percent 
         10   loan that puts your house at risk shouldn't be made, 
         11   shouldn't be made, and saying that should be the 
         12   issue, not that somebody else who you consider more 
         13   devious and more underhanded should go out there and 
         14   do that?  
         15            MR. GRAVINO:  Actually, the way the law is 
         16   written in North Carolina, you wouldn't get anywhere 
         17   near 17 percent, and we never were to begin with.  
         18   The issue, Bruce, I guess what you are saying is 
         19   going to happen, people are going to be restricted 
         20   from credit.  We'll see what happens.
         21            MODERATOR SMITH:  I would also say at this 
         22   point that we can have this discussion about making 
         23   or not making loans or permitting them about 17 
         24   percent.  To the extent that the focus of today's 

          1   hearing is on measures that can be taken within the 
          2   Federal Reserve Board's authority, that is not one 
          3   of them.  So maybe we could just go on to other 
          4   items.
          5            MR. MARKS:  In that respect, we disagree, 
          6   that the Federal Reserve certainly has the 
          7   jurisdiction over its entities that it does regulate 
          8   to say that this is a deceptive or this is a 
          9   predatory practice to do that.  This hearing 
         10   shouldn't be defined on some marginal issue of 
         11   whether HOEPA regs are going to kick in at 17 
         12   percent or 15 percent.  You certainly do have that 
         13   authority.
         14            MODERATOR SMITH:  We will be discussing in 
         15   the next section some other items, and I think that 
         16   maybe we just ought to move along.  Mr. Golann. 
         17            MR. GOLANN:  I can't resist making one 
         18   comment, which is I heard an echo in Richard 
         19   Gravino's comments of something I said at the 
         20   beginning, which is if the standard is very vague, 
         21   it's not like not knowing where the cliff is.  Good 
         22   lenders don't want to fall off; we'll stay well away 
         23   from the cliff.  Other people might walk closer 
         24   because they're not so concerned about falling off. 

          1            We have an interest in defining where the 
          2   edge of the cliff is, and I think the Fed could be 
          3   very helpful, quite apart from whether you agree at 
          4   this specific limit. 
          5            MODERATOR SMITH:  Jim.
          6            MR. MICHAELS:  This segment, our focus has 
          7   been on how could the Fed use its authority under 
          8   HOEPA to define specific acts or practices that are 
          9   unfair and deceptive, and flipping is the obvious 
         10   one that comes up. 
         11            We've heard people say, you know, it's hard 
         12   to define predatory lending, but you need to have 
         13   some specific rules that define certain practices 
         14   that are deceptive that's going to help.  And there 
         15   are certain practices that are already clearly 
         16   unlawful or illegal, whether it is deceptive 
         17   advertising, misleading people about credit 
         18   insurance, falsifying loan documentation, falsifying 
         19   the applicant's income on a loan application; these 
         20   are all practices that are already unlawful. 
         21            The question I have is, if the Fed were to 
         22   use its HOEPA authority to define these kinds of 
         23   practices which are unlawful under other laws as 
         24   being unlawful under HOEPA, does that add anything 

          1   to the kinds of remedies that are available?  Is 
          2   that a useful endeavor?  
          3            MS. RENUART:  The answer in my mind is yes, 
          4   because the other laws you're referring to are a 
          5   patchwork of unfair and deceptive trade practices 
          6   acts that exist in the states, and in a significant 
          7   percentage of those state laws, they do not apply to 
          8   either credit transactions, mortgage lending, or the 
          9   particular type of lender might be excluded from 
         10   coverage. 
         11            So it's very unclear throughout the rest of 
         12   the nation whether the laws will actually pick up on 
         13   this type of behavior.  If you're talking about 
         14   outright fraud, yes, every state has the common law 
         15   tort of fraud.  But fraud is a very difficult thing 
         16   to prove, not only because of all the various 
         17   elements involved in reliance and damage and all 
         18   that, but you have to prove it by clear and 
         19   convincing evidence, so it is a much harder standard 
         20   than if all of the states' unfair and deceptive 
         21   trade practices acts would apply. 
         22            Now, Massachusetts happens to have a very 
         23   broad statute, but that's not true for other states.  
         24   Virginia, for example, excludes all credit 

          1   transactions outright, so you can't get to that type 
          2   of behavior, but for, in my opinion, the Board 
          3   adding a list of what it considers to be unfair and 
          4   deceptive trade practices to HOEPA, which, again, is 
          5   a small segment of the lending population.  It's the 
          6   high-cost loans as defined under the act.  We're not 
          7   talking about it applying to everybody; we're 
          8   talking about it applying to a smaller group of 
          9   loans. 
         10            MR. ALGIERE:  Any definition must be clear 
         11   and concise; otherwise we could open up a floodgate 
         12   of litigation against banks or what have you.  And, 
         13   again, I preface my remarks with fraud and deceptive 
         14   lending practices are unconscionable, it must be 
         15   stopped, but definitions have to be clear and 
         16   concise; otherwise we get into litigation.  It could 
         17   potentially open up floodgates of litigation. 
         18            MR. MARKS:  But every piece of legislation 
         19   is always broad --
         20            MR. ALGIERE:  Absolutely. 
         21            MR. MARKS:  -- by way of definition.  So 
         22   always the regulators are going to do that.  So, you 
         23   know, this discussion of saying it has to be -- yes, 
         24   it's a truism. 

          1            MR. ALGIERE:  Let's make an effort to make 
          2   it clear and concise. 
          3            MR. MARKS:  Absolutely.
          4            MR. ALGIERE:  Since we're here discussing 
          5   if indeed something needs to be defined, my 
          6   statement is just let's try our hardest to make sure 
          7   it's clear and concise. 
          8            MR. MARKS:  So the argument against the 
          9   North Carolina law can't be because it is vague, 
         10   because every piece of legislation is that way, so 
         11   therefore, it's always up to the regulators and the 
         12   enforcement entities -- 
         13            MR. ALGIERE:  I just want to make myself 
         14   clear.  I did not make that statement, because I 
         15   haven't read the North Carolina law. 
         16            MR. MARKS:  I'm saying, the comment from 
         17   the other lenders, that that can't be the argument. 
         18   That doesn't fly on its face.
         19            MODERATOR SMITH:  Jim.
         20            MR. MICHAELS:  I want to cover as many 
         21   topics as possible, and I want to change the focus a 
         22   little bit to this concept of unaffordable lending.  
         23   Under HOEPA, creditors may not engage in a pattern 
         24   or practice of extending credit without regard to 

          1   the repayment ability of the consumer.  In that 
          2   specific prohibition, creditors are directed to give 
          3   consideration to the consumer's current and expected 
          4   income, their current obligations, and their 
          5   employment status. 
          6            For purposes of this hearing, there are 
          7   some questions that we may not be able to resolve or 
          8   that we could debate for the rest of the day, and 
          9   one of them is the merits of the pattern or practice 
         10   requirement which Congress has inserted into HOEPA 
         11   and whether Congress ought to lift the pattern or 
         12   practice requirement. 
         13            The other issue that it seems that we could 
         14   debate for the rest of the day would be what 
         15   constitutes a pattern or practice, how do you know 
         16   when there is a pattern or practice. 
         17            So, for the next 20 or 30 minutes or so, I 
         18   would kind of like to put those questions aside and 
         19   focus on perhaps some more specific issues. 
         20            Currently, there is no specific requirement 
         21   for documenting the consumer's repayment ability in 
         22   order to avoid violating this requirement.  For 
         23   example, you could have a rule that says you are 
         24   engaged in a pattern or practice of making loans 

          1   without regard to the consumer's ability to repay if 
          2   you don't have a practice of doing the following, 
          3   and that list could include verifying the consumer's 
          4   income, verifying employment status, verifying 
          5   debts, using credit reports. 
          6            There are similar requirements which are 
          7   part of HOEPA in connection with the ability to use 
          8   prepayment penalties, and the question we would like 
          9   to focus on now for a little while is whether or not 
         10   it would make sense to use similar verification 
         11   requirements for purposes of this unaffordable 
         12   lending issue. 
         13            MR. ALGIERE:  I would just like to make a 
         14   comment.  I would hope that during -- this is 
         15   something under the Division of Supervision -- that 
         16   under a safety and soundness examination during the 
         17   review of loans, that if indeed an examiner or 
         18   examiners do come across some type of pattern such 
         19   as that, that some action would be taken.  Am I 
         20   correct in that assumption? 
         21            MR. MICHAELS:  We hope so. 
         22            MR. ALGIERE:  I would hope so.  If they see 
         23   a significant number or a number of files where 
         24   there is no income verification, credit reports are 

          1   poor --
          2            MR. MICHAELS:  Let me tell you the 
          3   distinction, which is that is true, but then you are 
          4   dealing with a safety and soundness issue, which is 
          5   different from dealing with a HOEPA violation, and 
          6   the ramifications and remedies come under HOEPA. 
          7            MR. MARKS:  But that's what the Federal 
          8   Reserve, in my previous life -- yes, I mean, you 
          9   look at the CAMEL ratios, you look at all the 
         10   information, yes, you need to.  That is part of what 
         11   the Federal Reserve does, it does the safety and 
         12   soundness, and that gets to the heart of HOEPA in 
         13   some ways.  We're saying this is bad on all ends:  
         14   It's bad for the consumer; it's bad for the 
         15   investors and the lenders. 
         16            But let me start to address the issue of 
         17   what's affordable.  When we do our lending through 
         18   NACA, we don't go by the ratios.  We take the 
         19   person's rent, what the verified rent is, and we say 
         20   that's how much you're qualified for the mortgage 
         21   payments.  And then we look at their regular pattern 
         22   of savings, and we say we'll increase it by your 
         23   regular pattern of savings. 
         24            We think that's a more accurate way to look 

          1   at it, not by the ratios, but look at whether 
          2   someone can afford the mortgage, even what people 
          3   consider subprime borrowers, and the results of the 
          4   performance of the loans has really been 
          5   extraordinary. 
          6            But to get to what is affordable, even if 
          7   you don't do that way of looking at what's 
          8   affordable, certainly if you're talking about ratios 
          9   that go above 40 or 43 percent, there should be a 
         10   test that says, document that this thing -- that the 
         11   borrower can make those payments.  There should be a 
         12   threshold that says, at a certain debt-to-income 
         13   ratio, you've got to document that the person can 
         14   afford it. 
         15            And, you know, I guess we do it on a 
         16   personalized basis, we discuss it; that's what we do 
         17   as a nonprofit to make sure that it works.  We're 
         18   not saying that should be what every lender does, 
         19   but let's have a justification, some debt-to-income 
         20   ratio that says, okay, that shows they can pay for 
         21   it. 
         22            And let's make it clear that you can't do 
         23   it on equity in-house, you can't do asset lending, 
         24   because I agree that a lot of lenders do not want to 

          1   foreclose on loans.  Some do; some have that as a 
          2   practice.  I assume that's not your business -- 
          3            MR. GRAVINO:  Can't afford it. 
          4            MR. MARKS:  -- to want to foreclose, or 
          5   what Steve is out there doing.  But there are some 
          6   that do that.  We will agree that the majority don't 
          7   want to do that.  Some might get as much money out 
          8   of the borrower and then not have to take the action 
          9   to foreclose.  So asset lending doesn't make a lot 
         10   of economic sense.  
         11            MR. NADON:  If I could just say, I 
         12   absolutely agree with you.  It makes no sense in our 
         13   business to do asset-based lending, none.  Frankly, 
         14   of all the people that I know in this industry with 
         15   the bigger companies, none of us do that. 
         16            Absent fraud, we are finding out what they 
         17   make, we're verifying the employment, we're running  
         18   merged credit reports to make sure we have all of 
         19   the credit information.  You are looking at before 
         20   and after debt ratios, so you can see what can they 
         21   afford before and what are we doing to them after 
         22   the loan is done, so you can see what kind of an 
         23   impact you're having.  
         24            You're doing all of those things for just 

          1   that reason, because the loss severity, if you take 
          2   something to foreclosure, is in the 35, 36 percent 
          3   range of the principal balance.  It's an absolute 
          4   lose-lose proposition:  We lose a lot of money, and 
          5   the borrower loses their home.  We do not want to do 
          6   that.  So I don't know of someone that's a major 
          7   lender that is doing any asset-based type lending. 
          8            MS. RENUART:  Is that the same as no-doc 
          9   lending in your mind?
         10            MR. NADON:  When you say "no-doc," I'm not 
         11   exactly sure what you mean.  We're verifying the 
         12   income, we're verifying the employment, we're 
         13   verifying the credit, we're verifying the debt 
         14   ratios before and after.  We're doing all that work 
         15   on every single loan that we do. 
         16            MS. RENUART:  So when Bank One Financial 
         17   Services has a program of making light-documentation 
         18   or no-documentation loans, and New Century in their 
         19   latest prospectus shows that they make 30 percent of 
         20   their variable rate loans in the first quarter of 
         21   this year as no-document or stated-income loans, 
         22   would you find that acceptable to you in your 
         23   business? 
         24            MR. NADON:  Stated-income loans can be very 

          1   acceptable as long as the income that you are 
          2   looking at is a reasonable figure for what the 
          3   person does for a living and you are verifying that 
          4   they're actually there doing the work.  It is not 
          5   inherently a bad loan if someone doesn't hand you a 
          6   W-2. 
          7            MS. RENUART:  Then how do you verify it?
          8            MR. NADON:  I'll give you an example.  
          9   Someone says that they are working at McDonald's and 
         10   they are making whatever they would make at 
         11   McDonald's, $5 or $6 an hour, and that's what they 
         12   put on the 1003.  You do the math on your 
         13   calculator, and you say, "What they're telling me 
         14   they make is what they would make there." 
         15            I call McDonald's and find out if they'll 
         16   verify they're working there, are they in fact the 
         17   counterperson or whatever they would have as the job 
         18   title, and how long have they been there.  And they 
         19   tell me that's how long they've been there and 
         20   that's what they do. 
         21            I take a look to see, on their past 
         22   servicing of debts, is the income that they needed 
         23   to have to service the debts that the credit report 
         24   and the borrower have indicated that they have, is 

          1   the servicing of the debt indicating that that 
          2   income has in fact been coming through the 
          3   household?  
          4            And if I look at my loan and I say, am I 
          5   doing anything that appreciably increases or 
          6   negatively then impacts his ability to continue to 
          7   service the after-loan debts, and if I'm not doing 
          8   anything, his outgo before in total was $800 a month 
          9   and his outgo after it is $800 a month, and he has 
         10   got a good performance record before, I have every 
         11   reason to believe, if I verify his employment just 
         12   as I talked about, that he is going to continue to 
         13   pay me the way he was paying other people before. 
         14            MS. RENUART:  Based on what you said, you 
         15   absolutely verify something; you make no loans in 
         16   which there is no attempt at all to verify. 
         17            MR. NADON:  That's correct. 
         18            MS. RENUART:  So if other subprime lenders 
         19   were making, by their definition, no-documentation 
         20   and stated-income loans, which meant to them no 
         21   verification, you would think that would be 
         22   inappropriate? 
         23            MR. NADON:  If they didn't do anything?  I 
         24   think that's -- "inappropriate" might be -- I 

          1   wouldn't use the word "inappropriate" --
          2            MR. MARKS:  Come on, Steve, say it.
          3            MS. RENUART:  So it should be something the 
          4   Board should regulate, then, or prohibit?  
          5            MR. NADON:  I think maybe they should just 
          6   rethink their business practices. 
          7            MODERATOR SMITH:  Mr. Curry. 
          8            MR. CURRY:  I would just say, from our 
          9   standpoint at the State, we are dealing with a 
         10   specific class of loans.  Once you reach whatever 
         11   the final trigger is, basically a high-rate loan is 
         12   a predatory loan, and I think it is only appropriate 
         13   to tighten up the repayment ability requirements to 
         14   require verification.  That's the approach we have 
         15   given. 
         16            I would also like to say, strictly from an 
         17   examination standpoint, trying for licensed lenders, 
         18   to the extent that we would want to have an 
         19   administrative enforcement action, let alone 
         20   litigation, pattern and practice is very difficult 
         21   to deal with.  We have opted to eliminate it from 
         22   our regulations only because our enabling statute 
         23   allows us to do more than the Fed does.  So that's 
         24   our approach. 

          1            Mr. Michaels' idea that the more clarity, 
          2   if you cannot eliminate it by statute, the more 
          3   clarity, a clear test you have to establish 
          4   predatory practice is great.  We just have it a 
          5   little bit easier, fortunately.  
          6            MR. GRAVINO:  I'm going to step in here a 
          7   little bit on the stated income, because we do 
          8   stated-income loans.  But I believe we have always 
          9   limited the stated-income loan to a professional 
         10   borrower.  We don't do -- 
         11            MS. RENUART:  To what, I'm sorry?
         12            MR. GRAVINO:  To a professional.
         13            MS. RENUART:  A professional person? 
         14            MR. GRAVINO:  Yes.  We don't do them to 
         15   McDonald's workers. 
         16            There is a market out there for that type 
         17   of loan.  There are professionals who just really 
         18   don't mind paying an additional fee to not have to 
         19   disclose all the incomes or give you W-2 forms.  
         20   That market has been here for some time. 
         21            But I find, in terms of our own market 
         22   performance, that that is a very high-performing 
         23   marketplace.  The loans that we make on stated 
         24   income to professionals, our delinquency is very, 

          1   very low.
          2            MS. RENUART:  But are these HOEPA loans? 
          3            MR. GRAVINO:  No, they're not HOEPA loans.  
          4   I didn't think we were addressing just HOEPA. 
          5            MR. MARKS:  Is there a certain -- what is 
          6   your threshold debt-to-income ratio that you use?  
          7   What is your threshold for total debt-to-income 
          8   ratio?  
          9            MR. CURRY:  We're using basically 50 
         10   percent of gross monthly income against the 
         11   payments, monthly payments. 
         12            MR. MARKS:  50 percent.  And are the 
         13   lenders that you're using?
         14            MR. GRAVINO:  (Inaudible) 
         15            MR. MARKS:  And that's what you're doing at 
         16   Option One as well, 50 percent?
         17            MR. NADON:  We have programs, depending on 
         18   the loan to value, that can handle as high as 60 
         19   percent.  Our average borrower is at 39. 
         20            MS. RENUART:  Of gross?  
         21            MR. NADON:  39 percent of gross income is 
         22   our average.
         23            MODERATOR SMITH:  Yes, Mr. Miselman.
         24            MR. MISELMAN:  You know, what I've seen, 

          1   being in the mortgage brokerage industry, is 
          2   wholesalers will provide us the capital to provide 
          3   to the consumer.  They don't just look at ratios 
          4   anymore.  It's actually trickled down to even prime 
          5   borrowers, where you can run someone through an 
          6   automated underwriting system. 
          7            Automation is here, and many, many, many 
          8   brokers, if not all of them, should be on it if 
          9   they're not already.  And it's almost like a black 
         10   box.  The data goes in.  You put it in accurately, 
         11   based on what the consumer tells you. 
         12            When it comes out of that black box, if 
         13   it's an approval, you don't know necessarily what 
         14   the criteria is, whether it was -- could it go with 
         15   a 65 percent ratio if they happen to have $100,000 
         16   in the bank and they're only borrowing $80,000?  The 
         17   next day they could pay that loan off, should they 
         18   ever get into trouble. 
         19            So it looks at so many different scenarios 
         20   that to only focus on income as a criteria, we've 
         21   kind of gone in the other direction, and we're 
         22   looking at the whole package.  And sometimes it's 
         23   tough to figure out, but it usually makes common 
         24   sense.  The people with the higher ratios have very, 

          1   very strong compensating factors, either 
          2   particularly good credit or particularly high assets 
          3   or some combination. 
          4            MR. MICHAELS:  Would there be any problem 
          5   with incorporating into this documentation that 
          6   assets could be considered as long as they were 
          7   liquid assets and were other than the home? 
          8            MR. MISELMAN:  Sure.  We have programs that 
          9   have requirements of six months worth of reserves 
         10   where, you know, that would carry them if they had, 
         11   say, some real tragedy happen, and they have to sell 
         12   the house and they can't work, the next day they're 
         13   out of work. 
         14            If they have six months' reserves, it gives 
         15   them six months worth of payments to handle while 
         16   they're not working.  They could cover the mortgage 
         17   payment.  You know, the ultimate worst case is put 
         18   the house on the market if it's a true tragedy.  So 
         19   reserves are a big, big factor in prime and subprime 
         20   lending. 
         21            I would imagine that New Century at some 
         22   point, if they're doing a no-doc loan and it's to 
         23   someone who -- it's HOEPA loan or not, if they have 
         24   a high default ratio, as was said over here by 

          1   Steve, they lose money when they have to try to take 
          2   a house back, they will stop the program.  So they 
          3   look at their data, and all wholesalers do, and they 
          4   respond to what the market wants. 
          5            MR. MICHAELS:  Moving on to the next topic, 
          6   we have spent a lot of our time this morning talking 
          7   about the Board's regulatory authority dealing with 
          8   what sometimes is referred to as substantive rules 
          9   or substantive limitations. 
         10            We would like to talk now about disclosure 
         11   issues, and we could certainly have some debate 
         12   about the value of additional disclosures generally.  
         13   But we are asking for comment on a federal 
         14   regulation that has to be published, and we would 
         15   like to have some discussion this morning about some 
         16   specific disclosures as well.  And I will list five 
         17   that are on our mind and then open up the 
         18   discussion, and we can take these in any order. 
         19            The first is additional disclosures about 
         20   credit insurance and similar products, such as debt 
         21   cancellation agreements.  The second would be 
         22   disclosure about the availability of consumer credit 
         23   counseling services.  The third would be additional 
         24   disclosures about balloon payments.  The fourth is 

          1   whether the HOEPA disclosures that are given to 
          2   consumers at least three days before the loan 
          3   closing could themselves be improved.  And the fifth 
          4   is additional disclosure regarding foreclosure 
          5   notices. 
          6            We're particularly interested in the 
          7   foreclosure notices and whether or not -- and this 
          8   is a somewhat different approach than is 
          9   traditionally taken, because foreclosure has 
         10   traditionally been a state or local area of 
         11   regulation. 
         12            What we're thinking about in terms of 
         13   foreclosure is whether or not there ought to be, as 
         14   part of HOEPA's rules, minimum federal standards for 
         15   the types of actual notice to consumers that they 
         16   will get in a default situation where foreclosure is 
         17   the next step, and what type of information would 
         18   need to be in that notice to prevent the possibility 
         19   that consumers who have been the subject of a 
         20   predatory loan or abusive practices will not have 
         21   ample opportunity to assert as a defense to the 
         22   foreclosure those predatory practices.  So with 
         23   that, I would like to open it up for discussion. 
         24            Let me rephrase the foreclosure question.  

          1   Is there any reason why the Fed should not establish 
          2   minimum federal standards for giving actual notice 
          3   to consumers in foreclosure cases and for the 
          4   minimum amount of information that needs to be in 
          5   those foreclosure notices?  Is there any reason why 
          6   that shouldn't occur?  
          7            MR. NADON:  If I could ask just a general 
          8   question which is nonresponsive, so forgive me, is 
          9   there a reason to believe that all of the state 
         10   requirements that we currently have are inadequate?  
         11            MR. MICHAELS:  Well, we have received 
         12   comment on this issue from time to time, and this 
         13   started back in 1998 when we were looking at the 
         14   issue of mortgage reform generally under Truth in 
         15   Lending and RESPA.  We issued a report to the 
         16   Congress that went through the litany of the 
         17   problems related to predatory lending. 
         18            What we heard at that time was that there 
         19   were some states that, first of all, still did not 
         20   require actual notice to a consumer, that 
         21   publication of an impending foreclosure was 
         22   sufficient.  And what we've heard from some Legal 
         23   Aid attorneys is that when they go to see -- when a 
         24   client comes to see them and says, well, "I haven't 

          1   been able to pay my mortgage.  Am I in 
          2   foreclosure?", the Legal Aid attorney has to say, "I 
          3   really can't tell you for sure." 
          4            So we do have reason to believe that it is 
          5   a live issue.  And the subissue is, even in states 
          6   where the consumer does get actual notice, the 
          7   question is what is the quality of that notice and 
          8   what kind of information are they receiving; are 
          9   they getting the right kind of information about 
         10   their legal options at that point. 
         11            MR. GRAVINO:  Isn't the intent to 
         12   foreclose -- is that a state requirement?  I thought 
         13   that was a state requirement.
         14            MR. MARKS:  Absolutely.  That is where you 
         15   can look at Massachusetts where you have -- it takes 
         16   a long time, Soldiers and Sailors.  You have Georgia 
         17   where it is a nontraditional foreclosure; you just 
         18   have to notify the first Tuesday every month, it's 
         19   on the State House steps, and it's two weeks' 
         20   notice.  So it really is -- it is very particular to 
         21   every state, and the disclosure would be particular 
         22   to every state that is required. 
         23            MR. GRAVINO:  Our practice, when we send 
         24   out intention to foreclose at whatever level we send 

          1   out, 10 percent of all customers, we frankly think 
          2   that that's the right way to do it:  This is 
          3   regardless of where you're at, what state you're in,  
          4   et cetera, we send it out at the 45-day or 
          5   two-payment-down delinquent notice.  It goes out at 
          6   that stage.  I'm in favor --
          7            MR. MARKS:  That's a demand letter that you 
          8   send out at that point.
          9            MR. GRAVINO:  Yes.
         10            MR. MARKS:  Which is a --
         11            MR. GRAVINO: -- 60-day thing.
         12            MR. MARKS:  Right.
         13            THE STENOGRAPHER:  Could you speak into the 
         14   microphones, please.
         15            GOVERNOR GRAMLICH:  Let me ask a question 
         16   about this.  Some of you were saying earlier that 
         17   already disclosures were so voluminous that the 
         18   added use was very slight.  And if you look at any 
         19   one of these things that Jim has mentioned, they 
         20   seem to be logical on their face. 
         21            Is there a problem in just getting so many 
         22   disclosures that nobody pays attention to any of 
         23   them?  Or is there some way we could -- some way to 
         24   deal with that issue?  

          1            MR. GRAVINO:  I think that certainly is an 
          2   issue.  I mentioned that we kind of poll our 
          3   customers quite often on what they like and what 
          4   they don't like, and one of the issues that they 
          5   consistently come up with is they did not understand 
          6   what they were signing at closing. 
          7            I don't know whether additional forms are 
          8   going to do you any good.  I mean, Illinois is 
          9   having a terrible problem with predatory lending, 
         10   and I think in Illinois there is almost 12 state 
         11   requirements, 12 forms that are additional to the 
         12   federal requirements that you have to sign in that 
         13   state, which just gets to be mind-boggling. 
         14            We're all for one form, get it as simple as 
         15   possible, and I think the consumer would be a lot 
         16   better off if we could do that.  I mean, I'm in this 
         17   business, and I go to closings and I'm confused.  I 
         18   can imagine, you know, what happens out there. 
         19            MR. GOLANN:  I would draw a basic 
         20   distinction between the first four items mentioned 
         21   and the last one, which is foreclosure.  The first 
         22   four, I gather, would be along with the rest of the 
         23   pile at closing.  Foreclosure is fundamentally 
         24   different.  There is not the danger that it will be 

          1   confused with something else. 
          2            I know that the Fed has heard about this in 
          3   the Consumer Advisory Council, so I'm interested to 
          4   hear that one major lender actually does manage to 
          5   get out these foreclosure notices on a national 
          6   basis.  It sounds like it's doable. 
          7            Then the question becomes how to make them 
          8   clear and simple enough that they -- without trying 
          9   to advise, "Now, these are your rights under Georgia 
         10   law.  If you happen to live in states that begin 
         11   with the letter I, you have these rights," and so 
         12   forth. 
         13            MR. GRAVINO:  You have to do that. 
         14            MR. GOLANN:  Well, one could simply warn 
         15   about a foreclosure and say that you may have rights 
         16   or you should consult someone. 
         17            MR. MARKS:  What he is saying is what every 
         18   lender really does, and that is at 60 days, if 
         19   someone is two months behind, they will send a 
         20   demand notice that says that you've got 30 days to 
         21   come up with full arrears.  That's what every 
         22   servicer does out there.  What you are saying, you 
         23   are taking the demand notice as a foreclosure 
         24   certification. 

          1            MR. GRAVINO:  It's not the demand yet; it's 
          2   the intent. 
          3            MR. MARKS:  The intent that you're going to 
          4   refer it to the foreclosure process if you don't 
          5   bring the full arrears up.  That's a standard that 
          6   every lender does. 
          7            MR. GOLANN:  Maybe we're holding this part 
          8   of this hearing in the wrong place, because I'll 
          9   just note that there are Legal Services attorneys 
         10   from places like Mississippi who at least have told 
         11   the Fed that it doesn't happen for their clients.
         12            MR. NADON:  What most of us do, that's 
         13   called a notice of intent to foreclose.  And then in 
         14   addition to that, at least on our side in our 
         15   servicing group, we sort of pair up a loss 
         16   mitigation person with the people that are doing the 
         17   foreclosures.  So at the same day that action 
         18   starts, the loss mitigation person is working 
         19   directly with the consumer, because we don't want it 
         20   to go down that process. 
         21            So they're trying to help them find 
         22   solutions, help them find longer-term ways that they 
         23   can either get themselves righted financially, 
         24   because oftentimes just the reason they came to a 

          1   subprime lender in the first place is some life 
          2   event happened to them, and that may happen again 
          3   after we made the loan to them.  So we try to work 
          4   with those and find other ways, other solutions to 
          5   their problems, so we don't have to get to the bad 
          6   part. 
          7            MR. MARKS:  There should be a way, to make  
          8   the distinction, there should be, at the actual 
          9   foreclosure, there certainly should be something 
         10   that's sent out that you can go to see these 
         11   counseling agencies for assistance. 
         12            I think it's clear that -- I mean, we do 
         13   hundreds of closings every month, and as much as we 
         14   want to spend the hours, two or three hours at the 
         15   closing to go through every document, the reality is 
         16   that, as clear as the disclosure might be or the 
         17   document might be, the person is excited about 
         18   buying the house, and they are going to take all 
         19   those documents, they're going to put them hopefully 
         20   in a safe place.  And if any issue comes up, it is 
         21   probably a few years down the road, and no one, no 
         22   matter how well schooled you are or whatever, is 
         23   going to remember those documents. 
         24            Certainly to notify people when there is an 

          1   issue out there at the time the issue comes up of 
          2   I'm at risk of losing my house, there should be some 
          3   kind of way -- "Here's a foreclosure notice, but you 
          4   can go to see these agencies who can help you," and 
          5   then the Federal Reserve giving incentives to the 
          6   lenders to do workouts. 
          7            So it says that, you know, there is an 
          8   encouragement to say how do we prevent this person 
          9   from getting too far into it, because by the time 
         10   that -- the day you send it to the foreclosure 
         11   attorney, you've incurred over $1,000 of the 
         12   attorney's fees just on the face of that, to do 
         13   that. 
         14            So you want to prevent that, if the Federal 
         15   Reserve had stuff in there that would say, "Here is 
         16   an incentive and encouragement to work with people 
         17   to prevent it to be referred to foreclosure." 
         18            MS. RENUART:  If I could sort of perhaps 
         19   help clarify the discussion about what's the 
         20   difference -- what do the states do with the notice 
         21   of intent to foreclose, and what does the industry 
         22   do, et cetera, and how the state laws might differ 
         23   on foreclosure, our organization writes several 
         24   legal treatises, and one of them compiles a list of 

          1   all the state foreclosure and right to redeem 
          2   statutes. 
          3            So based on my knowledge of that, and my 
          4   knowledge of having been a consumer legal services 
          5   lawyer myself for many years, I think the difference 
          6   is, in standardized mortgage documents, such as 
          7   Freddie Mac's, Fannie Mae's, the FHA and the VA, 
          8   there is a standard clause that requires a notice to 
          9   be sent out of an intent to accelerate, and it tells 
         10   you how many days you have to pay up your arrearage 
         11   so that acceleration and further action doesn't 
         12   happen. 
         13            Quite separate from that, though, many 
         14   states don't have any additional legal requirements.  
         15   That's just by virtue of the mortgage, what I just 
         16   described.  But legally many states don't require 
         17   any notice of intent to foreclose, don't require any 
         18   actual notice of a sale date, they simply require 
         19   publication in a newspaper. 
         20            More than 50 percent of all the states in 
         21   this country allow nonjudicial foreclosure, which is 
         22   a very quick and easy process, and I'm sure many 
         23   lenders appreciate that.  But on the other hand, the 
         24   consumers find it more beneficial to have judicial 

          1   foreclosure, because then they have an opportunity 
          2   to raise their claims and defenses. 
          3            So what we are recommending in our written 
          4   testimony is that the Board state that it would be 
          5   an unfair and deceptive trade practice in a high- 
          6   cost loan to proceed nonjudicially to foreclose, and 
          7   that because every state does have a judicial 
          8   foreclosure procedure, that that's the only way to 
          9   allow a consumer to have the real ability, a true 
         10   real ability to raise defenses, because otherwise, 
         11   in a nontraditional foreclosure state, the only way 
         12   you can raise anything to stop a foreclosure is to 
         13   find an attorney who is willing to do the extreme 
         14   amount of work it takes to get into court, get an 
         15   injunction, file all the papers to do that. 
         16            Most people do not have access to lawyers 
         17   on that basis.  Even if there are Legal Services 
         18   lawyers in their area, many of them don't handle 
         19   mortgage foreclosure transactions.  So there is very 
         20   limited and spotty representation. 
         21            MR. MICHAELS:  We touched on counseling for 
         22   a second, and notice of available counseling at the 
         23   operative time when there is a foreclosure 
         24   impending.  I mean, we'll talk this afternoon a 

          1   little bit about who pays for the counseling and how 
          2   to ensure that counselors are qualified.  Is there 
          3   also a need for better information about the 
          4   availability of credit counseling at an earlier time 
          5   when the high-cost loan is first made? 
          6            MR. MARKS:  Yes.  I mean, certainly 
          7   counseling is important, but, you know, we've talked 
          8   about this subprime, focusing on the subprime and 
          9   the predatory lending practices.  The vast majority 
         10   of those loans are made by mortgage brokers out 
         11   there, independent mortgage brokers that the lenders 
         12   are buying from. 
         13            They're not in the business -- and that 
         14   means that these mortgage brokers, they deal with 
         15   real estate agents at the purchase and sale.  The 
         16   deal is already done.  The deal is already done.  
         17   There is no counseling that's done out there for 99 
         18   percent of all the mortgages that are done, all the 
         19   subprime mortgages that are done in this country. 
         20            So we've got to get past this issue of, you 
         21   know, we're looking at the very small percentage of 
         22   loans that could involve counseling, because again 
         23   you get back to the economics. 
         24            The economics are, someone goes out there.  

          1   They find a real estate broker who gets them a 
          2   house.  The real estate broker does a quick 
          3   qualification and says, "Yes, I think there is a 
          4   mortgage broker out there that I can do a deal 
          5   with."  There is a purchase and sale on the house. 
          6            There is no counseling that goes on there.  
          7   They will refer people to the mortgage broker.  The 
          8   mortgage broker will find the lender out there who 
          9   will table fund the mortgage, and the deal is done. 
         10            There is not -- if we focus on counseling, 
         11   come on, that's not the reality of the industry.  
         12   We're looking at that 1 percent that could be 
         13   affected versus getting to the economics.  The real 
         14   estate agent wants to get the deal done, the 
         15   mortgage broker wants to get as much fees as the 
         16   mortgage broker can get, and the lender wants to get 
         17   the highest rate.  That's the bottom line. 
         18            MODERATOR SMITH:  Ms. Schwartz.
         19            MS. SCHWARTZ:  Speaking about counseling, 
         20   something kind of interesting that we introduced to 
         21   the market this year and are excited about is a new 
         22   product called Credit Works. 
         23            We're funding an initiative in 19 cities 
         24   where those borrowers who appear to be B and C 

          1   borrowers on paper, as would be defined by the 
          2   subprime lenders, we're having them go through an 
          3   18-month intensive counseling process, restructuring 
          4   of debt, and we're working with counseling, as well 
          5   as a couple large lenders are providing market rate 
          6   loans as market prices that are similar to prime 
          7   rate mortgages.  But on paper those people would 
          8   definitely go to a subprime lender at much, much 
          9   higher rates and points, as is indicated in the 
         10   subprime segment. 
         11            It's new to our company because we're 
         12   betting on the counseling, because for every other 
         13   reason, if they came through our models with those 
         14   credit parameters and characteristics, they would be 
         15   qualified much more in the subprime segment than the 
         16   typical loans we buy. 
         17            This is kind of a new effort for us to 
         18   continue to expand the prime effort to bring more 
         19   people into better rate mortgages, and that's 
         20   something that we've introduced this year, as well 
         21   as the counseling.
         22            MR. MARKS:  There is no question that 
         23   counseling works.  I mean, just --
         24            MS. SCHWARTZ:  We hope so.  We're looking 

          1   forward to the results.
          2            MR. MARKS:  -- just the NACA program shows 
          3   that it works.  I mean, you know, yes, we do -- we 
          4   will counsel people on whether they are NACA 
          5   qualified, meaning that they're credit qualified, 
          6   asset qualified, income qualified.  And then once 
          7   they are qualified, then you determine how much they 
          8   can afford. 
          9            There is no question that it works, but we 
         10   just can't get the focus away from the economics of 
         11   the vast majority of the industry and that there is 
         12   no economic interest to educate the consumer, 
         13   because if Option One was to educate the consumer or 
         14   Provident was to educate the consumer, what you are 
         15   educating the consumer is what your options are out 
         16   there, and the options might be a lower cost loan, 
         17   and it might be another lender out there.  So, you 
         18   know, that's the truth --
         19            MS. SCHWARTZ:  These loans were in our 
         20   pipeline.  We couldn't buy them.  What I'm trying to 
         21   make a statement here on, these loans would 
         22   definitely go to subprime lenders, but because of 
         23   the counseling program for 18 months that they have 
         24   to finish, in conjunction with our lenders and the 

          1   credit counseling agencies, we're making a market we 
          2   otherwise would be uncomfortable making because of 
          3   the credit characteristics.  I'm just trying to 
          4   clarify that. 
          5            MR. MARKS:  Well, let me ask you, do the 
          6   lenders in Freddie Mac look at the credit scores?  
          7   Do you do a lot of your lending based on the credit 
          8   scores?  
          9            MS. SCHWARTZ:  There are numerous variables 
         10   that we base our lending criteria on.  Credit scores 
         11   are one of them.
         12            MODERATOR SMITH:  How are you identifying 
         13   people for participation in your program?  
         14            MS. SCHWARTZ:  We're working with the 19 
         15   cities in our Expanding Markets area in conjunction 
         16   with some of the largest lenders in the country that 
         17   are in those cities that will buy through at current 
         18   rates.  So I should know, but I'm not in charge of 
         19   that program. 
         20            MODERATOR SMITH:  And are they people who 
         21   consider themselves ready to go out and buy houses?  
         22   Are they willing to -- do you have any problem 
         23   keeping them in the program for 18 months?  
         24            MS. SCHWARTZ:  There are 200,000 people in 

          1   that pipeline who are undergoing significant 
          2   foreclosure -- they've been either foreclosed, in 
          3   bankruptcy, and/or already are possibly in the 
          4   subprime segment or maybe are just looking to buy a 
          5   house.   There is already a pipeline we can tap to 
          6   bring people into a market rate, prime-oriented 
          7   rate, that otherwise we wouldn't make if they 
          8   weren't in this program, because they didn't come 
          9   through our normal programs.
         10            MR. MARKS:  And out of that 200,000, how 
         11   many have closed?  
         12            MS. SCHWARTZ:  This is brand-new.  But 
         13   there is a pipeline, and we're pretty excited about 
         14   this.  We will track it.  We'll let the world know 
         15   as soon as we know. 
         16            GOVERNOR GRAMLICH:  I had a question about 
         17   it too.  So how do you get people to wait 18 months 
         18   before they get their house? 
         19            MS. SCHWARTZ:  Well, the ones that can't 
         20   wait -- since there is already a pipeline in there, 
         21   obviously the people who want cash today, what is 
         22   their other option?  We have another product that is 
         23   a merit-rate step-down product that will compete 
         24   with the prepayment penalty mortgages in, let's say, 

          1   the A- segment of the mortgage market. 
          2            We'll offer that at a higher rate, slightly 
          3   higher than our prime-oriented rates.  But we'll 
          4   offer, after 24 months of current pay history, a 
          5   lower rate to that borrower, without having to get 
          6   flipped, refinanced, incur fees.  That's through 
          7   market competition, that's what we're about. 
          8            GOVERNOR GRAMLICH:  I see.  So they get the 
          9   loan and they're in the counseling. 
         10            MS. SCHWARTZ:  They don't have to be in 
         11   counseling to get that loan.  If they need something 
         12   immediately, we have a product that we have at a 
         13   much lower rate environment than the typical 
         14   subprime segment that we offer to compete for 
         15   someone who needs cash today.  That's out in the 
         16   market that we offer today.  But if they go through 
         17   intensive counseling, they can get a lower rate. 
         18            MR. MARKS:  What the difference between an 
         19   A and an A- loan? 
         20            MS. SCHWARTZ:  Do you know the difference?  
         21   I don't know all the differences. 
         22            MR. MARKS:  No, but I'm curious.
         23            MS. SCHWARTZ:  It is a nonstandard market 
         24   out there. 

          1            MR. MARKS:  Okay.  But what's the 
          2   difference between an A and an A-, other than it's a 
          3   much higher interest rate?  
          4            MS. SCHWARTZ:  There is a range of credit 
          5   out there in the segment of risk across the spectrum 
          6   from A- to D, but I can assure you that most lenders 
          7   out there don't have the same programs that say A- 
          8   is equal to a B or a C; they all differ.  That's why 
          9   we're being pretty cautious about how we buy all of 
         10   these loans.
         11            MR. MARKS:  It would be interesting to know 
         12   the difference between -- because you are charging 
         13   200 basis points more for an A versus an A-, and 
         14   there is no discernible difference between the two.  
         15   So I would love to know what the answer to that is. 
         16            MR. GRAVINO:  There are discernible 
         17   differences.  It's a lot of issues.  You have to 
         18   look at -- you have to kind of look at the risk of 
         19   the deal.  The difference between an A, which you 
         20   are talking about as a prime --
         21            MR. MARKS:  Yes.
         22            MR. GRAVINO:  -- and a subprime --
         23            MR. MARKS:  Something that Freddie or 
         24   Fannie would buy and then provide them the 

          1   conventional rating. 
          2            MR. GRAVINO:  You're normally looking at 
          3   someone who has been late on their mortgage in the 
          4   last 12 to 24 months probably twice.
          5            MR. MARKS:  Two 30s. 
          6            MR. GRAVINO:  Two 30s.  You're probably 
          7   looking at consumer debt that is past due, probably 
          8   looking at a bankruptcy in the past 24 months.
          9            MR. MARKS:  For an A-?  Come on, that's not 
         10   right. 
         11            MR. GRAVINO:  I'm sorry, but --
         12            MODERATOR SMITH:  You asked -- 
         13            MR. MARKS:  I want you to be truthful. 
         14            MR. MICHAELS:  I'd like to shift this a 
         15   little bit, because we started out talking about 
         16   disclosures generally. 
         17            MR. MARKS:  A- is not bankruptcy. 
         18            MR. MICHAELS:  We started talking about 
         19   disclosures generally, and one of the assumptions 
         20   was that consumers get an awful lot of information 
         21   at closing, perhaps more information at closing than 
         22   they can absorb, but there are a couple of these 
         23   disclosure options here that would not necessarily 
         24   be at closing.  Obviously foreclosure is one of 

          1   them. 
          2            The other two that I would like to focus on 
          3   that might not be at closing would be a disclosure 
          4   dealing with credit insurance, which could come 
          5   after closing in connection with the consumer's 
          6   right to rethink the decision to buy credit 
          7   insurance and perhaps cancel and get a rebate.  And 
          8   the other disclosure that might not come at closing 
          9   would be one pertaining to balloon notes, which 
         10   could come as early as application. 
         11            So let's focus on credit insurance, for 
         12   example.  Would it make sense to give consumers 
         13   information about the purchase of credit insurance 
         14   that they may not have absorbed at closing?  It may 
         15   have been there, but they may not have had an 
         16   opportunity to focus on it. 
         17            Would there be some consumer protection in 
         18   giving them a post-closing notice that says, "You 
         19   may not have focused on it.  You just bought credit 
         20   insurance.  This is how much insurance you just 
         21   bought.  And in your state you may have a right to 
         22   cancel this and get this money refunded to you"?  
         23   Does that make sense?  
         24            MS. HURT:  Can I just add to that, do you 

          1   think something along those lines would help the 
          2   packing issue, that is, consumers not knowing that 
          3   they signed up for credit insurance?  Or is the 
          4   problem that, whether they knew or not, they felt 
          5   that they were coerced into taking it, that they 
          6   wouldn't get the credit?  
          7            Maybe I'm not being clear on that, but, 
          8   essentially, do you think that that would help the 
          9   packing at all, where consumers don't know they have 
         10   the insurance, so as Jim was saying, if they get a 
         11   post-closing notice, then they might, you know, 
         12   reconsider?
         13            MODERATOR SMITH:  Elizabeth, who should 
         14   have been recognized a little bit go. 
         15            MS. RENUART:  That's okay.  I've been 
         16   talking a lot.  In response to your specific 
         17   question, I think it can have a positive impact on 
         18   the packing, but only if not only what is rebated is 
         19   the unearned insurance premium using the actuarial 
         20   method rather than the Rule of 78s, because that 
         21   unfairly benefits the insurer or creditor, whoever 
         22   is retaining the premium, but also the interest that 
         23   would be earned over the life of the loan on the 
         24   increase in the principal amount because that 

          1   insurance premium is being financed. 
          2            So, if you just simply rebate the insurance 
          3   premium itself, the amount that it originally cost 
          4   is still part of the principal amount and is still 
          5   going to generate interest at, since we're talking 
          6   about high-rate loans, very expensive interest 
          7   rates, which could be several thousands of dollars 
          8   over the life of the loan. 
          9            One example we've included in our written 
         10   testimony shows a credit insurance premium of 
         11   $11,000, and so over 30 years at 17, 18 percent, 
         12   whatever the rate is going to be, it's quite a bit 
         13   of money.  So the packing, I think there is some 
         14   disincentive by the rebate and the notice that might 
         15   encourage some people. 
         16            MR. MICHAELS:  I don't want to sound like 
         17   an economist here, because I'm clearly not, but the 
         18   other side of the argument is if they get the 
         19   $11,000 rebate, then they would reinvest the $11,000 
         20   or pay down the loan $11,000.  
         21            MS. RENUART:  Well, some creditors might 
         22   say, "We're going to apply it against the 
         23   principal," and that might -- and that could 
         24   alleviate the problem of the interest accumulating.  

          1   But many people are just going to, say, quite 
          2   clearly not really understand what the amount of the 
          3   check was, whether it's the right amount or really 
          4   know what it's about, and cash the check. 
          5            So it doesn't prohibit the packing in the 
          6   first instance, which not only generates the higher 
          7   principal, but generates higher points on that 
          8   higher principal, higher points and amounts, I mean, 
          9   and also the higher interest that will be collected 
         10   over the life of the loan.  So I think it will have 
         11   some impact, but not significant. 
         12            MR. MICHAELS:  You might want to treat the 
         13   points issue different than the interest on the 
         14   financing issue. 
         15            MS. RENUART:  I'm sorry?
         16            MR. MICHAELS:  You might be able to treat 
         17   the points issue differently than the issue of 
         18   paying interest on what you finance.  
         19            MS. RENUART:  Well, I just think our 
         20   earlier discussion about credit insurance will have 
         21   the effect that you are asking about much stronger 
         22   than this notice about the potential rebate, and 
         23   that is just simply include it in the points and 
         24   fees or abolish it altogether in high-rate loans. 

          1            MODERATOR SMITH:  Mr. Nadon, Mr. Miselman, 
          2   and then Mr. Golann. 
          3            MR. NADON:  Just a comment, because we 
          4   don't sell the insurance, so I'm giving you just a 
          5   little bit of experience.  I started out in the 
          6   finance company business about 20-some years ago, 
          7   and I remember firing somebody for doing this, 
          8   because finance companies, I think, still to this 
          9   day sell a lot of this kind of insurance stuff. 
         10            I found someone that was intentionally 
         11   putting insurance products into the loan, so that 
         12   immediately after funding, the borrower could 
         13   cancel, so that he could give additional cash to the 
         14   borrower.  Our loan limits said he could only borrow 
         15   $25,000.  By adding insurance on top, he got the 
         16   borrower $30,000, and the borrower wouldn't take the 
         17   deal unless he got $30,000. 
         18            So he said, "Let me just put the insurance 
         19   on the deal, and then immediately send me a letter, 
         20   and I will send you a check back for the other 5 
         21   grand, so now you have 30." 
         22            So I would encourage you, and that was -- 
         23   you don't like to terminate people, but that was a 
         24   good termination, because I didn't like that 

          1   practice. 
          2            So I would encourage you, if you're going 
          3   to do something on this kind of insurance, if a 
          4   rebate is going to be done, I think it should only 
          5   go onto the principal balance, not back into the 
          6   borrower's hands, because they could also figure 
          7   that out, and that's just a way to kind of get 
          8   around the system. 
          9            That would alleviate certainly the 
         10   additional interest that gets charged on those kinds 
         11   of insurance premiums, because some of the premiums 
         12   I've heard are high, real high.  So I would just 
         13   encourage you to do that; otherwise, you could have 
         14   all kinds of operational problems within the lenders 
         15   themselves.
         16            MR. MISELMAN:  It seems to me that as 
         17   brokers we don't generally sell, it is usually a 
         18   lender thing, so I don't really cross it day to day.  
         19   But it seems, from everything I've heard, the best 
         20   way to do it would be to do it prior to the closing, 
         21   involve the issues of perhaps paying down. 
         22            If somebody did have a $5,000 premium and 
         23   financed it, and then they wanted to cancel it, if 
         24   you put it towards the principal, their mortgage 

          1   payment isn't going to change, unless they happen to 
          2   have a short-term adjustable loan, so they're still 
          3   going to be stuck with the payments month to month. 
          4            I think the real way to do it is to make 
          5   sure they understand what they're getting into up 
          6   front, and whatever kind of disclosure is done, 
          7   people are doing it without the borrower's 
          8   knowledge, and that's obviously a problem. 
          9            I'm certain a signature on a form should 
         10   certainly be encouraged.  The ability that they can 
         11   shop for this particular insurance with outside 
         12   folks probably would be a good thing.  And then in 
         13   the case of a refinance or a second mortgage have a 
         14   recision period, where if they want to take any and 
         15   all of that paperwork back to their own personal 
         16   attorney, their significant other or a relative, 
         17   they have a chance to cancel the whole shooting 
         18   match and start all over again. 
         19            So prior to is, in my opinion, the absolute 
         20   best way to alleviate any problems. 
         21            MR. GOLANN:  Another aspect of what I do, 
         22   I'm a director of an insurance company that does not 
         23   lend to consumers.  In fact, I'm the Vice-Chairman 
         24   of the board, and I've just sat through two days of 

          1   annual meetings talking about things like loss 
          2   ratios.  And I have to tell you that if I had a 
          3   product that had the kind of loss ratios that this 
          4   does, 25 percent, maybe, 20 percent, I would drool 
          5   all over it, and I suspect my marketing people would 
          6   too. 
          7            I suspect that there would be a significant 
          8   temptation, if I had to give a notice, to try to 
          9   give a notice in a way that produced the fewest 
         10   cancellations possible.  You are relying more than 
         11   usual on the efficacy of disclosure and on the good 
         12   faith of the people that will implement this 
         13   disclosure.  I think it's quite a temptation. 
         14            MR. MARKS:  Just by the fact that the 
         15   commissions that are paid to the attorneys when they 
         16   get people to buy credit life insurance or any other 
         17   credit insurance are so astronomical, the profit 
         18   margins in that are just tremendous. 
         19            So, you know, without hearing all of, you 
         20   know, just the loss ratios and all of that, they are 
         21   very, very low, it's really that you've got the 
         22   closing attorneys and the other people in there just 
         23   really encouraging people and pressuring them to 
         24   take this, because it's extraordinarily profitable.  

          1   We're seeing closing attorneys getting 60 to 70 
          2   percent of the premiums on it, just because it's 
          3   such a great deal for the companies that do it. 
          4            So it's something that should not be 
          5   allowed to be financed, because it's not in the best 
          6   interests, in virtually every circumstance, of the 
          7   borrowers.  And just these two lenders here, they 
          8   said that they don't do it, and they're in the 
          9   subprime lending market, and that's being kind.  
         10   That's your term.  We call it predatory. 
         11            MODERATOR SMITH:  Jim, did you have other 
         12   topics?
         13            MR. MICHAELS:  Yes.  We're coming close to 
         14   the time that we need to break for lunch.  I wanted 
         15   to get a couple questions in about disclosures, and 
         16   particularly the unique disclosures that come under 
         17   HOEPA. 
         18            Under HOEPA you get a disclosure three days 
         19   before closing, which is a fairly abbreviated 
         20   disclosure compared to what consumers are going to 
         21   see in closing.  So one danger is, if you add 
         22   additional disclosures, that it will no longer be 
         23   abbreviated and simple. 
         24            But the question is, can that disclosure be 

          1   improved?  Is the consumer getting the right kind of 
          2   information three days before closing?  And I give 
          3   you one of the examples:  A consumer will get on 
          4   that disclosure the APR and will also get the 
          5   monthly payment amount. 
          6            What we've heard people say is they can 
          7   sell a loan with that monthly payment amount because 
          8   that's a monthly payment amount that's lower than 
          9   what the consumer is currently paying on their 
         10   mortgage.  What they don't know is that it could 
         11   still be lower yet, because they don't realize that 
         12   the monthly payment on that disclosure is one that 
         13   relates to a total loan amount that is larger than 
         14   their loan request.  It includes a lot of financed 
         15   fees. 
         16            So it might help to have the consumer look 
         17   at that monthly payment in relationship to the 
         18   amount of the total loan, but that's not a 
         19   disclosure they get now. 
         20            The other thing that might go on that early 
         21   disclosure is the monthly income that the creditor 
         22   has used in underwriting that loan and determining 
         23   that that's an appropriate monthly payment that the 
         24   consumer can afford.  There is an opportunity for a 

          1   consumer who has given their monthly income to a 
          2   broker, for example, to have the broker pad that 
          3   income so that the creditor can underwrite the loan.  
          4   Having that disclosure show the income used by the 
          5   creditor would hopefully deter some of that. 
          6            So with those two examples, can the HOEPA 
          7   disclosure three days before closing be improved?  
          8   That's the question.
          9            MS. RENUART:  Well, into a vacuum I will 
         10   march, a vacuum of silence, that is, not a vacuum of 
         11   will.  I think that without destroying the brevity 
         12   and simplicity of the current notice, you could add, 
         13   I think, the things you're alluding to quite 
         14   quickly. 
         15            And that would be, what I think would be 
         16   important is the total amount of charges, prepaid 
         17   finance charges you are paying on the loan, so that 
         18   will list out the prepaids; the total amount of 
         19   other closing costs that are being charged, that 
         20   will list those out; and the total loan amount. 
         21            This gets to what the allegations in the 
         22   First Alliance Mortgage case are about, in the 
         23   Minnesota complaint filed by the Attorney General, 
         24   which is that First Alliance sells people on the 

          1   amount financed, they focus on that in their whole 
          2   sales pitch to the customer, that this is the amount 
          3   you're borrowing, which is the amount financed, 
          4   rather than the total loan amount. 
          5            So people then don't have a way, from what 
          6   they hear, leading up to the signing of the papers, 
          7   they don't have a way to see that what they think 
          8   they're borrowing is really much smaller than what 
          9   they actually are borrowing because of all the 
         10   points, fees and closing costs that are stacked on 
         11   top. 
         12            So just the addition of, I think, those 
         13   three numbers.  I think there was some suggestion of 
         14   adding the interest rate.  I don't think you should 
         15   ever add the interest rate in conjunction with the 
         16   APR, because it is too confusing, because then 
         17   lenders will say, "Look at the interest rate.  The 
         18   government just confuses you by giving you the APR.  
         19   Ignore the APR, ignore the man behind the curtain, 
         20   just look at the interest rate."  And of course we 
         21   know the interest rate is not the true cost of the 
         22   credit. 
         23            MS. KOGUT:  It is true, in the First 
         24   Alliance Mortgage Company case, one of the things we 

          1   hear from consumers is that they had no idea how 
          2   much money they had borrowed.  I mean, imagine that, 
          3   walking away from the closing and not knowing 
          4   actually how much money you borrowed. 
          5            But I'm reluctant to endorse any changes 
          6   that would just amount to more disclosures.  These 
          7   consumers were treated to such an intense oral 
          8   deceptive sales technique that I think they are 
          9   really in a position to disregard anything they get 
         10   in writing. 
         11            I mean, I think it certainly would be 
         12   helpful if they got a piece of paper a few days 
         13   before the closing saying, "This is how much money 
         14   you're going to borrow," but it is still -- I think 
         15   still for many of these consumers, they might not 
         16   have even woken up to that or even read it, they 
         17   were so in tune with what the loan originator was 
         18   saying to them, which was so much along the lines 
         19   of, you know, "No need to read these pieces of paper 
         20   here.  These are just kind of things the lawyers 
         21   make us give you." 
         22            MR. MICHAELS:  What about the consumer's 
         23   monthly income; would that help? 
         24            MS. RENUART:  Stating what --

          1            MR. MICHAELS:  Stating the monthly income 
          2   that was used by the creditor in processing. 
          3            MS. RENUART:  I don't think that helps 
          4   significantly, because many of the brokers, in 
          5   particular, who are working with -- again, that's 60 
          6   percent of the market, and probably a higher 
          7   percentage of predatory loans that are being made by 
          8   brokers -- they say to our clients, you know, "What 
          9   I put down here, you know, don't worry about it.  
         10   I'm just putting down what you need to have on the 
         11   application." 
         12            And if the consumer ever questions, "Well, 
         13   that's not really my true income, that's too high," 
         14   they say, "Oh, we have to put that down.  It doesn't 
         15   mean anything," again, ignore the man behind the 
         16   curtain kind of discussion. 
         17            So, again, the more that happens, and we 
         18   have heard this from many clients, the less likely 
         19   it will be that, when they see that wrong figure on 
         20   the HOEPA notice, they will be alarmed. 
         21            MR. MISELMAN:  When it comes time for 
         22   closing, a lot of lenders now actually have an 
         23   application, a typed application based on what the 
         24   mortgage broker submitted to them, so that if there 

          1   is a discrepancy, the borrower can catch it at the 
          2   closing. 
          3            So if they originally said $3,000 a month 
          4   income, when they actually get to the closing, one 
          5   of the forms is the actual application that was 
          6   transferred from the broker to the lender, to the 
          7   wholesaler.  And at that point, you know, they can 
          8   review the application to see if the facts that they 
          9   originally gave to the broker are what ultimately 
         10   made it to the lender.  So that's kind of being done 
         11   a lot in the marketplace right now. 
         12            There are a lot of other loans as well now 
         13   that have come up.  There is the no-income loan, 
         14   which is what we've kind of -- no income 
         15   verification, where people can state an income.  
         16   They have come out with no-ratio loans, which is the 
         17   fact that you just state your job, you state your 
         18   job title, and as Steve was saying, an underwriter 
         19   will underwrite just to the reasonableness -- you 
         20   know, if someone works at McDonald's and they 
         21   state -- and they don't state, but they're going for 
         22   a $250,000 loan, you wonder how you could qualify 
         23   that unless they happen to own the franchise. 
         24            So they're starting to address all these 

          1   issues, where you can't fraudulently put down 
          2   different -- you know, incorrect income, and that's 
          3   what it really would come down to. 
          4            MS. HURT:  May I ask, in the Massachusetts 
          5   proposal, you've added some enhancement, you've done 
          6   some enhancement about HOEPA disclosures by, for 
          7   example, requiring a disclosure that the consumer be 
          8   told that there may be a less costly alternative and 
          9   some other things.  Could you share with us your 
         10   thinking on adding that disclosure versus some other 
         11   disclosure.  
         12            MR. CURRY:  I think it's the same thought 
         13   process when you're probably getting any regulation 
         14   with a disclosure.  Here, because of the nature of 
         15   it, you're already in the high-rate loan provisions.  
         16   You want to use the disclosures as last chances to 
         17   tell people to get out of the deal or to raise the 
         18   issue that it's financially questionable or has 
         19   serious implications.  That's what we are trying to 
         20   do. 
         21            It's the same thing with the credit 
         22   products.  We have a disclosure for that, basically 
         23   requiring acknowledgment that they know -- to sort 
         24   of reinforce the message that "You don't have to buy 

          1   this, and it's not necessarily in your best 
          2   interest.  Let us know if this was presented to 
          3   you."   That's really the rationale. 
          4            In my career as a bank regulator, I do fear 
          5   the accreted weight of all these disclosures, but 
          6   you have to make a decision, on a particular subject 
          7   matter, is it worth throwing an extra piece of paper 
          8   on it.  In this type of transaction, I think the 
          9   balance favors disclosure.  It's clear, so you can 
         10   see the financial and other implications of the 
         11   transaction ahead of time. 
         12            MR. GOLANN:  Many of the disclosures that 
         13   appear in the Massachusetts real estate transaction 
         14   are proposed by the Legislature through somebody's 
         15   perhaps misguided hope to solve some particular 
         16   problem, and they're not the responsibility of the 
         17   Banking Commissioner. 
         18            I will just say that the most useful thing 
         19   that the Fed can do, and I'm not suggesting that 
         20   it's on your plate, would be to restrict the number 
         21   of state disclosures, so that at least there would 
         22   be a limited number and they would be accurate.  
         23   I'll say the other thing -- 
         24            MR. CURRY:  That's heresy as a former 

          1   regulator. 
          2            MR. GOLANN:  I know that.  I remember from 
          3   my state enforcement that the worst cases to 
          4   litigate were the ones that had wonderful paper 
          5   disclosures that they could point to that you knew 
          6   that the consumers had never really read or been 
          7   given a chance to digest. 
          8            MS. KOGUT:  All of these problem mortgage 
          9   lenders have the cleanest files.  The ones with the 
         10   highest costs and the biggest areas of deception, 
         11   the files could not be cleaner.  That's always a 
         12   problem. 
         13            MODERATOR SMITH:  Mr. Gravino.
         14            MR. GRAVINO:  We have a practice that has 
         15   been very effective for us in terms of income 
         16   disclosure, and that is we have a fraud unit.  And 
         17   as part of our closing process, we give a customer a 
         18   notice that says, "We have a fraud unit.  We are a 
         19   federally insured institution.  Any information on 
         20   your application had better be accurate," or words 
         21   to that effect.  And that has surfaced quite a bit 
         22   of the problem, and we're -- well, the form is 
         23   working for us, but it has real meat behind it.
         24            MODERATOR SMITH:  Thank you.  Any other 

          1   issues?  Any other issues that we -- yes. 
          2            MS. RENUART:  I'm sorry, I just wanted to 
          3   add about the notice issue that we think the three- 
          4   day advanced notice, because it's so unusual in 
          5   mortgage transactions -- you don't get that many 
          6   things three days in advance; the big stack is when 
          7   you get the closing -- so this is your big warning, 
          8   your advanced warning system is really what the 
          9   HOEPA notice is about. 
         10            And I think if the Board tied or sort of 
         11   thought of that mandatory counseling preconsummation 
         12   in conjunction with the three-day notice, it could 
         13   work very well, because if the homeowner then took 
         14   the three-day notice to their mandatory counseling 
         15   session prior to entering into it, the counselor, 
         16   properly trained, properly funded, whatever, and 
         17   those are all big ifs, if that system was in place, 
         18   that would be an additional person who would look at 
         19   this early warning system notice and say, "Oh, wait 
         20   a minute.  What are you getting yourself into?  
         21   Let's just figure this out and see whether this 
         22   really makes sense." 
         23            So the two together, I think, should work 
         24   very well.  But the National Consumer Law Center 

          1   really supports this three-day advanced notice as a 
          2   warning system. 
          3            MR. GOLANN:  I would second that. 
          4            MODERATOR SMITH:  Any other issues that you 
          5   would like to bring up before we adjourn? 
          6            MS. RENUART:  I'm sorry to keep going.  I 
          7   wanted to address one thing that was mentioned by 
          8   Dennis at the end, who is not here right now, when 
          9   he made his opening remarks, and that is that 
         10   perhaps we should have more enforcement of existing 
         11   laws. 
         12            And that ties to another area which the 
         13   Board did not specifically ask comment about, but 
         14   what has been mentioned by Ms. Kogut in the FAMCO 
         15   loan file, and that is mandatory arbitration 
         16   clauses. 
         17            So that no matter how much money we can 
         18   throw at the FTC or at the state attorney generals' 
         19   offices or at the private attorneys or the Legal 
         20   Services offices around the country to enforce these 
         21   actions through private attorney general 
         22   enforcements -- which is what the statute Section 
         23   1640 in Truth in Lending is all about, and Congress 
         24   envisioned private attorney general enforcement as 

          1   the main way to effectuate the public policies 
          2   behind the Truth in Lending Act and HOEPA -- if 
          3   everything is shunted off into mandatory 
          4   arbitration, where as we know there are no national 
          5   set rules, it depends on what arbitration company 
          6   handles it, and there are the big three, and then 
          7   there are many others out there, there is no 
          8   consistent way of knowing whether a consumer's 
          9   rights can actually be vindicated in that process. 
         10            There are high filing costs, there are high 
         11   arbitration costs, there is no rule of law 
         12   necessarily applied.  The arbitrators don't have to 
         13   be attorneys, necessarily.  It's sort of the Wild 
         14   West, once you're thrown into mandatory arbitration. 
         15            That's something that the Board, I think, 
         16   should give serious consideration to, because all of 
         17   what else we might say or all of what else you might 
         18   do might not amount to a hill of beans if everything 
         19   is thrown into this Wild West way of enforcing Truth 
         20   in Lending and HOEPA, through mandatory arbitration 
         21   clauses. 
         22            And those are appearing everywhere and 
         23   creeping ever more greatly into mortgage lending.  
         24   They're very widely used in credit card 

          1   transactions, automobile financing transactions, 
          2   certainly mobile home purchases and others, and they 
          3   are seen widely now in the mortgage lending side. 
          4            Finally, we haven't talked about open-ended 
          5   credit, and in our written comments, we talk -- we 
          6   specifically ask the Board to consider asking 
          7   Congress to include open-ended. 
          8            We have examples in our written testimony 
          9   of loan-splitting transactions where two very 
         10   major -- the biggest finance companies will make a 
         11   closed-end mortgage transaction on one day and, on 
         12   the same day or a few days after, make a much 
         13   smaller open-ended transaction, sometimes to fund 
         14   the points on the closed-end transaction.  And 
         15   surprise, surprise, the open-ended transaction is 22 
         16   percent or higher APR, which would be a HOEPA loan 
         17   but for the fact that it's open-ended.  Thank you. 
         18            MS. HURT:  I'm sorry, I just want to follow 
         19   up on that.  In the original HOEPA hearings we had, 
         20   and also in the legislative history, there was the 
         21   issue of whether HOEPA should apply to open-ended 
         22   credit.  And periodically, and maybe you will have a 
         23   few examples, I would think, or just from my 
         24   experience, we've heard a lot of anecdotal evidence 

          1   about predatory or stories of predatory lending.  It 
          2   doesn't often involve open-ended credit. 
          3            MS. RENUART:  Well, I can only tell you 
          4   that Beneficial Finance and Household Finance are 
          5   doing this, and they are extremely large finance 
          6   companies.  So if they are making open-ended loans 
          7   that may actually be spurious open-ended loans, 
          8   there may be a legal claim about that.  But that 
          9   aside, I don't know how else to --
         10            MS. HURT:  I guess I would say that if you 
         11   have or you know others that have examples of 
         12   that --
         13            MS. RENUART:  Yes.
         14            MS. HURT:  -- because to my understanding, 
         15   based on the anecdotal evidence that we've heard, 
         16   and we've heard through the HUD and Treasury 
         17   hearings and in other instances, it very rarely, if 
         18   ever, involved open-ended credit.  So I think if you 
         19   are suggesting that it should cover open-ended 
         20   credit, then anecdotal evidence of that, if you have 
         21   it, or if you know others that have it, it would be 
         22   beneficial to us.
         23            MS. RENUART:  Thank you. 
         24            MODERATOR SMITH:  Thank you very much.  We 

          1   thank the panel for being here this morning and 
          2   sharing your views with us.  We hope that, if your 
          3   schedule permits, you're able to stay for the 
          4   remainder of the hearing.  And a reminder about your 
          5   written statements, if you would give them to one of 
          6   us or to Kyung who is in the audience. 
          7            So with that, we are adjourned until 1:30.  
          8   We will reconvene promptly.  A reminder, if you 
          9   wanted to appear this afternoon, to sign up at the 
         10   desk.  So thank you very much.
         11            (Luncheon recess)

          1                     AFTERNOON SESSION
          2            MODERATOR SMITH:  I believe we're ready to 
          3   start, and so I will.  I'm Dolores Smith.  I'm the 
          4   Division Director for Consumer and Community Affairs 
          5   at the Federal Reserve Board, and I'll be moderating 
          6   for the hearing this afternoon. 
          7            For those of you who have just joined us, 
          8   we welcome you, especially the panelists, although I 
          9   was glad to see some of you here this morning.  We 
         10   did hear some interesting things this morning.  I 
         11   think they will be useful to us in our 
         12   deliberations, and we look forward to receiving your 
         13   views this afternoon. 
         14            Let me start by introducing the Board 
         15   Panel, and I will -- this morning Ned Gramlich, who 
         16   is a member of the Board and the Chairman of our 
         17   Oversight Committee for Consumer and Community 
         18   Affairs, was able to join us on the Panel.  He has 
         19   left us for the afternoon, but I just wanted to let 
         20   you know that we did have him in attendance here. 
         21            And so on the panel this afternoon, I will 
         22   start at my extreme right with Richard Walker, who 
         23   is Vice-President here at the Federal Reserve Bank 
         24   of Boston.  Then Sandy Braunstein from the Board, 

          1   who is Assistant Director in charge of Community 
          2   Affairs.  Then we have Jim Michaels, Managing 
          3   Counsel for Regulations, and Adrienne Hurt, 
          4   Assistant Director for the Regulations Program. 
          5            Adrienne and Jim are the ones who are most 
          6   closely associated with dealing with matters having 
          7   to do with the Home Ownership Equity Protection Act 
          8   and in developing whatever regulations will come out 
          9   of these hearings.  So that's kind of who we are. 
         10            We have some rules of procedure for this 
         11   afternoon, as we did this morning.  First of all, 
         12   our invited panelists who have joined us here will 
         13   have three minutes each to give opening statements 
         14   before we get into the more general discussion of 
         15   the issue for the afternoon, which has to do with 
         16   consumer outreach and consumer education. 
         17            And we have, in the first row in the 
         18   audience, timekeepers.  They will be lifting up a 
         19   card that says "One Minute Remaining," and then 
         20   "Please finish" when you are approaching the three- 
         21   minute mark.  There is also, I think, a little 
         22   musical beep that goes off when the three minutes 
         23   are up, which you may or may not hear.  You may 
         24   confuse it with some of the cell phones that keep 

          1   going off. 
          2            But aside from that, I said this morning, 
          3   although I didn't get around to using it, that if 
          4   perchance you are looking in this direction instead 
          5   of toward the timekeepers, that I would sort of give 
          6   you the time's up signal.  But I think we'll do just 
          7   fine. 
          8            Then, at the conclusion of the opening 
          9   statements, then we will get into a more general 
         10   discussion where we are hopeful that, as in the case 
         11   this morning, it will be more of a round-table 
         12   discussion than just witnesses appearing before this 
         13   Panel.  So that ought to be interesting. 
         14            So for the afternoon session, then, we will 
         15   start with the opening statements, and then we'll 
         16   go. 
         17            MS. MOSELEY:  I want to thank the Board for 
         18   having us here.
         19            MODERATOR SMITH:  Would you state your 
         20   name.
         21            MS. MOSELEY:  Norma Moseley from the 
         22   Ecumenical Social Action Committee in Boston.  I've 
         23   been working as a housing advocate for about 34 
         24   years, so I'm not the new kid on the block.  And I 

          1   have been watching the cycles of predatory lending 
          2   in the '80s and early '90s and now starting all over 
          3   again. 
          4            I'd like to make one comment that, based on 
          5   this morning's testimony, I heard from the lenders 
          6   in that group that there are very small percentage 
          7   of predatory lenders out there and the rest of the 
          8   subprime lenders are good guys. 
          9            Well, for a small number, they're having an 
         10   enormous impact.  I think part of this is because of 
         11   the massive advertising that they are able to do 
         12   over television, mail solicitation, door-to-door 
         13   solicitation and phone solicitation.  So, for a 
         14   small group, they're spending a lot of money, so 
         15   there must be some money in it.  So when you say 
         16   there are only a small group of predatory lenders, 
         17   don't let that deceive you into thinking that there 
         18   isn't a whole lot of predatory lending going on out 
         19   there. 
         20            The other thing I want to say right at the 
         21   beginning is that this is the third panel I've been 
         22   on in three months dealing with predatory lending:  
         23   The FDIC, the National Consumer Law Center and the 
         24   Federal Reserve.  And it seems to me that after this 

          1   meeting the fact-finding should be complete, and 
          2   it's about time to get down to action.  And action 
          3   isn't more disclosures, I can tell you that.  Our 
          4   families don't even get through the disclosures that 
          5   they're given at the closing. 
          6            I'd like to talk with people about forming 
          7   some subcommittees or task forces and dealing with 
          8   it on parallel lines and levels as to how we can 
          9   come about getting some resolution to this problem, 
         10   not all regulation, not all disclosures, but what 
         11   can we do.  There are a lot of people out there who 
         12   have a lot of good ideas, and I think that that 
         13   should be the next step.  And I hope, at the 
         14   conclusion of this meeting, that there will be some 
         15   ongoing dialogue to really develop strategies and 
         16   not just talk about them any more.
         17            MODERATOR SMITH:  Thank you.
         18            MS. COHEN:  Hi.  I'm Nadine Cohen from the 
         19   Lawyers Committee for Civil Rights Under Law of the 
         20   Boston Bar Association, and I hope I get Norma's 
         21   extra seconds there.  So make sure. 
         22            Subprime loans grew in the greater Boston 
         23   area by 435 percent between 1994 and 1998, and 
         24   subprime lending in high minority areas in that same 

          1   period grew by over 1000 percent.  Subprime lending 
          2   in minority areas is three times greater than in the 
          3   general metropolitan area, and it's also greatest in 
          4   refinancing. 
          5            Now, while not all subprime loans are 
          6   predatory, it's clear we have a dual lending market 
          7   where low-income minority borrowers, who are most 
          8   vulnerable, are targeted by the unscrupulous 
          9   lenders, and they're targeted for high-interest, 
         10   high-fee loans that result in stripping homeowners 
         11   of color and communities of color of their wealth. 
         12            The word "sub "means below or beneath, and 
         13   we are accepting a dual market where people of color 
         14   are routinely given less favorable terms in loans 
         15   than whites, and often regardless of their ability 
         16   to pay back the loans or their credit history, and 
         17   they are thus relegated to a lower status. 
         18            Instead of helping people who have limited 
         19   incomes or past credit problems, by allowing the 
         20   predatory lenders, we are charging people of color 
         21   more than we charge wealthier white borrowers and 
         22   subjecting them to more onerous terms.  The goal 
         23   should be to get all borrowers in the prime market 
         24   and get them loans at reasonable rates with 

          1   reasonable terms. 
          2            While consumer education is extremely 
          3   important, the Federal Reserve Board must use its 
          4   regulatory and enforcement powers to stop the 
          5   unscrupulous lenders from taking advantage of 
          6   people.  The Lawyers Committee would support 
          7   lowering the interest rate, prohibiting the 
          8   prepayment penalties, all the things that were 
          9   probably talked about this morning. 
         10            We also want to see expanded HMDA data 
         11   collection, and most importantly, I think in terms 
         12   of this panel, there has to be support for financing 
         13   of consumer counseling programs and consumer 
         14   education and enforcement programs by private fair 
         15   housing groups and by legal groups.  One suggestion 
         16   for ensuring borrowers are protected is support 
         17   funding of attorneys or lay advocates who can 
         18   represent borrowers at the closings and review the 
         19   loan documents.  We need to put low-income borrowers 
         20   in an equal position. 
         21            MODERATOR SMITH:  Thank you very much. 
         22            MR. RAYMOND:  Hi.  I'm very pleased to be 
         23   here today.  I thank very much the Board for 
         24   inviting me.  I am Len Raymond.  I'm the founder and 

          1   director of Homeowner Options for Massachusetts 
          2   Elders.  We are a 17-year-old statewide nonprofit 
          3   that works with older homeowners in terms of 
          4   sustaining their independence in their homes. 
          5            I would also like to, before I get into my 
          6   short substantive statements here, to congratulate, 
          7   because I think I have to do this, the Bank 
          8   Commissioner of Massachusetts and the Secretary of 
          9   Consumer Affairs, because I was very proud that they 
         10   were, quote-unquote, lowering the bar this morning 
         11   in terms of the announcement of their regulation, 
         12   which I think is much needed, especially in the area 
         13   of elder homeowners who are victims. 
         14            There is no question in my mind, and we can 
         15   certainly hopefully discuss this later on in more 
         16   detail, but those regulations will have a direct 
         17   impact in alleviating some of those problems or 
         18   difficulties. 
         19            I'm going to also quickly run through some 
         20   issues here which I would like to have us hopefully 
         21   elaborate and hopefully the audience will  
         22   participate in and the panelists later on as well. 
         23            But certainly, as has been noted already, 
         24   the availability of counseling I think is going to 

          1   be a really critical issue in being able to make 
          2   things work for the clients that we're talking 
          3   about, the homeowners seeking the refinancing.  
          4   There are obviously questions of quality of that 
          5   counseling, its availability, the fiscal resources 
          6   to support it, and some sort of set of standards at 
          7   the same time. 
          8            I'm trying to reiterate Norma's point about 
          9   public awareness.  Most people, I believe, by this 
         10   time have heard about the "Don't Borrow Trouble" 
         11   campaign, which was really started here in Boston, 
         12   and Norma had a lot to do with getting it off the 
         13   ground with MCBC and other folks.  Now its 
         14   statewide.  But that's an incredibly important 
         15   initiative there.  Again, it shows the need for very 
         16   expensive, punchy, frequent and correctly timed 
         17   advertising on the other side of the issue here. 
         18            Education and outreach for the target 
         19   populations -- we're talking about on a long-term 
         20   basis -- is extremely important.  Our program, the 
         21   HOME program, has been providing for some time now 
         22   and is continuing to refine it, but a program 
         23   designed specifically for senior homeowners that 
         24   deals with not only immediate financial questions, 

          1   but also such important life issues as remainder 
          2   life planning and successful aging in place. 
          3            The last thing I would like to comment 
          4   about is that we really need to get out of the box, 
          5   I think.  This is my fourth session, which  
          6   unfortunately I think -- America has this penchant 
          7   for 30-second attention spans.  No offense to the 
          8   Board, but I think we really need to seize upon, as 
          9   I read here from the Board, the desire to have not 
         10   just the regulatory remedies discussed but to have 
         11   very much a broad spectrum of possibilities 
         12   discussed, and I hope we do that today. 
         13            MODERATOR SMITH:  Thank you very much.  Mr. 
         14   Callahan. 
         15            MR. CALLAHAN:  Thank you.  I thank you for 
         16   inviting us today.  My name is Tom Callahan, 
         17   representing two organizations today:  the 
         18   Massachusetts Affordable Housing Alliance, which I'm 
         19   Director of, and I'm the Co-Chair of the Mortgage 
         20   Committee of the organization called the 
         21   Massachusetts Community Banking Council, which is a 
         22   cofounder with the City of Boston of the "Don't 
         23   Borrow Trouble" campaign. 
         24            Consumer education is a very important 

          1   piece, I think, in the predatory lending issue.  
          2   That's why the Massachusetts Community Banking 
          3   Council, which is a consortium of nine banks and 
          4   nine community organizations, was formed ten years 
          5   ago to try to identify and continue to work on 
          6   issues of concern to both community groups and banks 
          7   specifically in low and moderate income communities. 
          8            A couple of years ago it identified this 
          9   issue of high-cost lending, predatory lending, and 
         10   tried to attack it in a way -- in a couple of 
         11   different ways.  One, we produced a foreclosure 
         12   counseling guide that told people where they could 
         13   get assistance, basically from which types of 
         14   nonprofit agencies. 
         15            Two, we tried to encourage and we're still 
         16   trying to encourage banks to offer alternative 
         17   credit products so that people have an alternative 
         18   to the high-cost subprime and predatory lenders out 
         19   there. 
         20            And three, we tried to develop a very 
         21   broad-based consumer education campaign that would 
         22   at least in some small way attempt to match the 
         23   marketing muscle of the subprime lenders, which has 
         24   been impressive, to say the least, in terms of their 

          1   reach into specifically low and moderate income and 
          2   minority communities through the mail, through door 
          3   to door, through TV, through almost any medium you 
          4   can think of. 
          5            "Don't Borrow Trouble" is a campaign, like 
          6   I said, in partnership with the City of Boston and 
          7   now in partnership with the State Office of Consumer 
          8   Affairs and the Division of Banks that has developed 
          9   posters that will go in main streets, businesses, 
         10   mailings to homeowners, PSA, commercials for TV and 
         11   radio, ads on subway, the MBTA system and regional 
         12   transit systems throughout the state. 
         13            We think it's too new to judge its 
         14   effectiveness, but we think it will be a good 
         15   counter to, like I said, the marketing power of the 
         16   predatory and subprime lenders. 
         17            However, and I'll just finish with this -- 
         18   we can talk more about this -- education, as I think 
         19   Nadine said, should not be a substitute for tougher 
         20   regulations.  And I think Congressman Leach called 
         21   the Fed AWOL on this issue of regulation of subprime 
         22   lenders.  And while I don't pretend to take a 
         23   position on that, whether or not the Fed is AWOL, I 
         24   think that the Division of Banks here has provided a 

          1   model for the Fed to follow into what can be done 
          2   within existing regulations to toughen up the 
          3   regulations on predatory lenders.  Thank you.
          4            MODERATOR SMITH:  Thank you.  Mr. White. 
          5            MR. WHITE:  I would also like to thank the 
          6   Board for giving us this opportunity to participate 
          7   in your deliberations.  My name is Allen White.  
          8   I've been a Legal Services attorney in Philadelphia 
          9   for about 17 years now and have been interested, 
         10   along with a few other people who are seeing the 
         11   anecdotal stories about predatory lending, in trying 
         12   to gather some data and some research to try and 
         13   look at some of the big questions about subprime and 
         14   predatory lending on a more empirical basis. 
         15            And recently Professor Mansfield and I 
         16   gathered some statistics through a fairly tedious 
         17   process of going through SEC filings on both the 
         18   interest rates charged by subprime lenders and on 
         19   foreclosures. 
         20            One of the definitions that's been offered 
         21   of predatory lending is a loan that's made that has 
         22   a substantial likelihood of being foreclosed on.  
         23   And I think frequently these type of hearings in the 
         24   last year have begun with some untested hypotheses, 

          1   including the premise that a substantial portion of 
          2   the subprime mortgage lending that's being done is 
          3   somehow beneficial or providing useful -- or meeting 
          4   social needs, and there are a small group of 
          5   outliers who are harming consumers and homeowners. 
          6            And I think some of the data, the very 
          7   little data that are out there, suggests that there 
          8   is a serious problem.  I think we handed out a 
          9   couple of slides that I brought with me, graphics, 
         10   that have the results of the tabulations that we 
         11   made about foreclosures and serious delinquencies, 
         12   and this was for about 15 or 20 lenders who reported 
         13   their data publicly. 
         14            Perhaps not surprisingly, subprime 
         15   foreclosures and serious delinquencies are 
         16   substantially greater than foreclosures and serious 
         17   delinquencies for conventional lenders.  For 
         18   conventional lenders, it's a little over 1 percent, 
         19   and for the subprime industry, over 4 1/2.  In fact, 
         20   the Mortgage Information Corporation is now 
         21   reporting for 1999 that those rates are approaching 
         22   5 percent. 
         23            But the other two slides that I brought 
         24   with me basically are intended to show that even 

          1   that 4.6 or 5 percent rate of serious delinquencies 
          2   seriously understates the problem.  First of all, 
          3   every subprime lender whose data we've looked at has 
          4   delinquencies and foreclosures increasing year after 
          5   year, partly because their volume is growing, partly 
          6   because the loans are seasoning. 
          7            So we have the example here of Equicredit, 
          8   probably the number one -- it is in fact the number 
          9   one originator of subprime loans, and you can see 
         10   three years in a row having mounting delinquencies.  
         11   And this is the pattern you will see with all 
         12   subprime lenders. 
         13            Finally what the third slide is intended to 
         14   illustrate, instead of looking at the foreclosures 
         15   for a single lender -- for a single point in time, I 
         16   should say, if you look at loans that are made and 
         17   originated in a period of time and follow them 
         18   longitudinally as a cohort of loans, a pool of 
         19   loans, the numbers are much more dramatic. 
         20            In this particular pool of loans, of the 
         21   6,000 loans we saw, over 1300 of those people who 
         22   got those loans are now in foreclosure.  And this is 
         23   two years after the loans are originated.  So it 
         24   raises an interesting question, whether you should 

          1   disclose to people who are taking these loans out, 
          2   "You have a one-in-four chance of losing your home 
          3   if you take this loan out." 
          4            MODERATOR SMITH:  Thank you.  Mr. Anderson. 
          5            MR. ANDERSON:  Thank you.  While the 
          6   participants of this meeting will discuss the 
          7   minutia of subprime lending, maybe we can also 
          8   answer the question of how many angles can dance on 
          9   the head of a pin. 
         10            And if you will pardon me for being 
         11   cynical, but after being in the real estate business 
         12   for 22 years, a great deal of what is called 
         13   predatory lending is little more than good 
         14   old-fashioned fraud. 
         15            I only have three minutes, which I will go 
         16   over -- my apologies to you up front -- so I will 
         17   spare you the statistical analysis, which the Fed 
         18   ignores anyway.  Instead I'll give you a few 
         19   examples to show how widespread mortgage fraud is. 
         20            Very few mortgages go bad in the first few 
         21   months.  Knowing that, Yawu Miller, a reporter for 
         22   the Bay State Banner, asked me for a list of recent 
         23   mortgages that are already in default.  We found 
         24   Aryan Wiley, an 80-something-year-old black woman  

          1   in foreclosure on a loan from Advanced Financial 
          2   Services.  The loan was originated after she had 
          3   previously defaulted on a loan to United Companies 
          4   Lending. 
          5            The story that Ms. Wiley told us, who was 
          6   clearly suffering from some sort of dementia, and 
          7   her grandnieces, who reeked of alcohol at ten 
          8   o'clock in the morning, told us something was very 
          9   wrong. She was referred to Ms. Moseley, who 
         10   uncovered more unseemly family finances.  A few 
         11   months later she lost her home to foreclosure, and 
         12   no regulators did anything. 
         13            Surely the Fed can't be responsible for 
         14   every real estate transaction, so let's go back to 
         15   1990.  As the New England real estate market was 
         16   collapsing, a condo developer develops several 
         17   new -- finishes several new developments.  His first 
         18   eight sales go through Northeastern Mortgage 
         19   Corporation, a leading mortgage originator at the 
         20   time and a leader in originations that end in 
         21   foreclosure.  Of those eight, all eight are 
         22   foreclosed. 
         23            When Northeastern Mortgage goes bankrupt, 
         24   Cawley has to come up with a new scam.  He records 

          1   phony deeds and phony mortgages and creates a paper 
          2   trail needed to get a refinance mortgage.  Of the 30 
          3   units he sold this way, all but three have been 
          4   foreclosed.  One of those that was not foreclosed 
          5   supplied us with the RESPA form clearly marked 
          6   "Refinance."  All this fraud and foreclosure, and 
          7   the Fed does nothing. 
          8            Back to developer Richard Cawley.  With all 
          9   the foreclosures, there are bargains to be purchased 
         10   and flipped.  This time he has a major bank willing 
         11   to finance his business, because they need loans in 
         12   minority areas for CRA compliance requirements. 
         13            A Boston Globe article that was July 2 of 
         14   '95 showed seven properties that Cawley had built, 
         15   arranged financing on, sold, then bought back at 
         16   foreclosure, then flipped through Fleet Bank.  Fleet 
         17   and the Boston Fed have told us that all these loans 
         18   have been taken care of.  So why, of the seven, have 
         19   four been foreclosed? 
         20            And the one who wasn't foreclosed told us a 
         21   very different story.  The owner of Unit 9 bought 
         22   her unit for $90,000 in 1993.  Cawley bought it for 
         23   $25,000 a month earlier.  But the new buyer told us 
         24   that she didn't have a down payment.  So Cawley gave 

          1   her a check at the day of closing to cover the 
          2   difference.  Oh, those home buyer classes to make 
          3   sure inexperienced buyers don't get into trouble?  
          4   The Fleet originator told her it wasn't necessary 
          5   and checked it off on the form. 
          6            Did Fleet approach her to make sure there 
          7   were no problems with the mortgage, as they told the 
          8   Boston Globe and the Boston Fed they were going to 
          9   do?  No.  The owner said the only time she heard 
         10   from Fleet was when they came after her because she 
         11   stopped paying her condo fees because the common 
         12   electricity in the development was disconnected, and 
         13   there was a huge water and sewer bill.  It seems 
         14   Cawley had omitted to tell her that the water and 
         15   sewer and the electric bills hadn't been paid in a 
         16   while. 
         17            With all this a matter of record testified 
         18   on this stage, did the Fed do anything?  No. 
         19            But we were talking about subprime lending 
         20   and predatory lending.  The owner of Unit 9, after 
         21   getting over the financial difficulties thanks to an 
         22   extra part-time job, was a bit short of money.  
         23   Since she overpaid for her condo six years earlier 
         24   and Fleet did nothing about her loan, she had no 

          1   equity to borrow against and had to go to a subprime 
          2   lender. 
          3            So her $81,000 Fleet loan and her $15,000 
          4   subprime loan means a principal of $96,000.  But 
          5   since Fleet stopped doing business with Richard 
          6   Cawley, the most expensive condo to sell in her 
          7   development was Unit 8, right next door.  It sold 
          8   for $78,000 last year.   After six years, in a red- 
          9   hot real estate market, her unit is still not worth 
         10   what she paid for it. 
         11            This is all a matter of public record, and 
         12   the Fed knows this.  At previous hearings I gave the 
         13   Fed data on about 80 Fleet-financed Cawley and other 
         14   speculator loans, and what has the Fed done?  
         15   Nothing. 
         16            If past is prelude, then these hearings are 
         17   a sham.  What difference does a few points on an APR 
         18   trigger mean when the Fed ignores solid evidence of 
         19   good old-fashioned fraud?  Instead of these 
         20   hearings, the individuals in the Fed should be 
         21   telling us why they haven't done anything in five 
         22   years.
         23            MODERATOR SMITH:  Thank you very much. 
         24            We will now go on to the discussion phase 

          1   of this session, and I'll say that -- there are a 
          2   couple of general questions that we would like to 
          3   focus on.  One of them has to do with your views on 
          4   what techniques have been or might be most effective 
          5   in performing outreach to the targeted populations, 
          6   the vulnerable individuals that might fall prey to 
          7   predatory lenders.  And another has to do with what 
          8   role can the Federal Reserve play in community 
          9   outreach and consumer education.  Are there 
         10   sufficient materials available?  Are there delivery 
         11   system issues. 
         12            And then, Sandy, do you have anything 
         13   specific to get us started on? 
         14            MS. BRAUNSTEIN:  Well, actually, I would 
         15   kind of like to hear a little more about the "Don't 
         16   Borrow Trouble" campaign, since that's a big thing 
         17   up here, from either Tom or Norma, more about how 
         18   did you decide what techniques to use, do you have 
         19   any information at this point on how effective it's 
         20   been in the communities.
         21            MS. MOSELEY:  I'll start, Tom, and then you 
         22   can pick it up.  It's a fairly recent campaign, and 
         23   I don't believe, unless it's on Boston cable TV, I 
         24   haven't seen the TV spots aired yet.  Am I correct? 

          1            MR. CALLAHAN:  Correct. 
          2            MS. MOSELEY:  But let me just say one thing 
          3   before we get into that specific thing.  We're 
          4   talking about outreach to potential victims of 
          5   predatory lending, and yet the predatory lenders 
          6   call it "marketing."  And there's a big difference. 
          7            Outreach is all squishy, fuzzy, see you at 
          8   a social gathering.  Marketing is business driven 
          9   and profit driven.  And until the same amount of 
         10   money can be put into marketing our solutions as 
         11   they can selling their product or marketing their 
         12   product, you're going to get nowhere. 
         13            These people are not easy to reach.  I 
         14   mean, you can have billboards, you can have 
         15   newspaper articles like Yawu does.  But when you 
         16   watch cable TV on any weekend or any evening, you 
         17   see ad after ad after ad, and they're talking about, 
         18   you know, "When the banks say no, we say yes," and 
         19   "The loans are out there," and "You can pay off 
         20   those high-interest credit card debts," and "You're 
         21   going to save $300 a month."  And it's just one big 
         22   jolly thing.  "We can do it over the phone."  "We 
         23   close at your house."  You bet they do.  Boom, and 
         24   they're right there. 

          1            I'm just saying, until there is that same 
          2   dedication to wanting to prevent predatory lending 
          3   as there is to making the loans, all the hearings 
          4   and all the regs aren't going to happen.  Education 
          5   is a really slow process.  It isn't the solution.  
          6   You've got to market your solutions with the same 
          7   vigor and the same dollars that are put into the 
          8   lending process. 
          9            That didn't answer your question at all. 
         10            MS. BRAUNSTEIN:  No, actually it did -- 
         11   well, part of it.  I want to follow up on that a 
         12   second.  Where are the dollars coming from for the 
         13   "Don't Borrow Trouble" campaign?
         14            MR. CALLAHAN:  It's a collection of -- City 
         15   of Boston is putting in the most money, I believe.  
         16   The initial first-year contribution was $50,000 the 
         17   City of Boston is putting in.  MCBC itself put in 
         18   $10,000.  And then another $50,000 or so was raised 
         19   from Fannie Mae, Freddie Mac, the Mass. Bankers 
         20   Association, the Mass. Mortgage Bankers Association, 
         21   and I'm probably forgetting a couple.  But it was a 
         22   team effort.  The City of Boston went out and 
         23   recruited some of those folks, and MCBC helped in 
         24   that regard as well. 

          1            I think that is one issue.  We've been able 
          2   to do that for the launching of this campaign, but 
          3   to sustain this campaign, will that same type of -- 
          4   those same type of resources be there?  I think the 
          5   City of Boston and the State have now committed to 
          6   this in terms of staffing hot lines in an ongoing 
          7   way for consumers to call. 
          8            I mean, I think that was one key element of 
          9   the "Don't Borrow Trouble" campaign.  We wanted to 
         10   make sure there was a place where people just didn't 
         11   see a poster or get a brochure in the mail without 
         12   having a place to call that they could pursue the 
         13   issue and get questions answered and get help and 
         14   get referred to a counseling agency like Norma's, 
         15   which is part of the City of Boston's and will be 
         16   part of the State of Massachusetts's campaign. 
         17            But I'm worried about the ability to 
         18   sustain that type of funding over the long term, 
         19   because it needs to be a lot more than a one-shot 
         20   deal to compete with predatory lenders. 
         21            The other answer, just picking up a little 
         22   bit on what Norma said, I think the best outreach 
         23   method -- I think the best thing we can do from an 
         24   outreach perspective to low-income consumers is to 

          1   put the predatory lenders out of business. 
          2            I think defining predatory loans and doing 
          3   things like lowering the APR trigger to 5 percent 
          4   above Treasury, prohibiting balloon payments, 
          5   prohibiting prepayment penalties, those types of 
          6   things that I'm sure were talked about this morning, 
          7   I think are going to be the things that really help 
          8   us in our outreach, because it will give us a 
          9   starting point where at least people are not getting 
         10   the most outrageous conditions and terms that you 
         11   can imagine. 
         12            There are other programs, I think, that 
         13   exist out there.  We have a program called the Home 
         14   Safe Program, which is a homeowner resource center.  
         15   It really evolved out of our success in helping 
         16   people get into homes through home buyer counseling. 
         17            This is a program that's really designed to 
         18   reach people in the first year or two of home 
         19   ownership, before they have a crisis, before they 
         20   need an equity loan, before they have problems with 
         21   their home that they can't deal with, with 
         22   information and resources that are available to 
         23   homeowners.  But it's really trying to reach folks 
         24   in this non-crisis situation. 

          1            I think those types of things are key, 
          2   where you could talk to folks.  Education up front 
          3   in the prepurchase about predatory lenders in the 
          4   prepurchase classes are important, but we find, 
          5   since the bulk of this problem is in equity-type 
          6   lending to homeowners, you don't really realize the 
          7   problems and the issues you're going to deal with as 
          8   a homeowner until you're actually in the door and 
          9   experiencing life as a homeowner. 
         10            So that's why the postpurchase classes, I 
         11   think, are so key.  There is not a lot of support 
         12   for postpurchase classes out there.  The banks fund 
         13   prepurchase classes because it's in their self- 
         14   interest.  But postpurchase, not a lot of folks.  
         15   We've been able to scrap together some money to fund 
         16   that program, but there are only three programs that 
         17   I know of in the state, really, that do extensive 
         18   postpurchase counseling, largely because of a lack 
         19   of funding. 
         20            MODERATOR SMITH:  Would you remind me when 
         21   the "Don't Borrow Trouble" was launched.
         22            MR. CALLAHAN:  Just in the last few -- 
         23   earlier this year, basically the last few months of 
         24   spring.   And it's being rolled out in different 

          1   phases.  Many homeowners have already received the 
          2   initial mailing from the Mayor, but as Norma said, 
          3   the TV and radio spots are in production right now 
          4   and haven't aired yet.  Posters are going up now in 
          5   community centers and in main street businesses 
          6   around the city.  So it's just starting to produce 
          7   calls, and it's too early to track data from it.
          8            MS. BRAUNSTEIN:  Will you have any way of 
          9   being able to tell whether it's been successful?  
         10            MR. CALLAHAN:  The call centers I think 
         11   will be our best way to track, both the State call 
         12   center that's going to be set up later this summer 
         13   and the City call center that's already fielding 
         14   calls. 
         15            I think we'll be able to tell, one, how 
         16   many people are calling, and, two, you know, what 
         17   level of assistance is needed for those folks.  
         18   There's going to be -- those folks answering the 
         19   phones will be trained to provide a certain level of 
         20   advice and assistance, but then for people that are 
         21   really in need of counseling and further assistance, 
         22   they will be referred to an agency like Norma's. 
         23            So I think there will be the ability to 
         24   tell what level of advice and assistance is needed, 

          1   and then once we find out how many people need the 
          2   real in-depth counseling and foreclosure-prevention 
          3   type assistance, we'll be able to track that as well 
          4   and see how successful --
          5            MS. MOSELEY:  It's already on the Banking 
          6   Commissioner's line.  I think it's punch 4 or 
          7   something if you want the "Don't Borrow Trouble" hot 
          8   line.  I know because I was trying to reach the 
          9   Commissioner's Office yesterday. 
         10            So it's already there.  It's part of a 
         11   menu.  It doesn't rise up and hit you in the face, 
         12   but it's part of a menu. 
         13            MS. BRAUNSTEIN:  Can I just -- I'm sorry, 
         14   one more question on this.  You mentioned, Tom, 
         15   letters going out.  Who is getting -- is it just in 
         16   certain communities or every homeowner in the city?
         17            MR. CALLAHAN:  Mayor Menino in the City of 
         18   Boston is sending a letter to every homeowner in the  
         19   city.  This is actually the second mailing.  He did 
         20   last year send a general, just, letter, and then 
         21   this is a letter with the brochure which was 
         22   specifically designed for the "Don't Borrow Trouble" 
         23   campaign, which, I think, is more -- hopefully will 
         24   attract even more attention. 

          1            MS. MOSELEY:  It goes out with the tax 
          2   bills.
          3            MODERATOR SMITH:  Ms. Cohen. 
          4            MS. COHEN:  I just wanted to add something 
          5   to that.  I think any communication, and I don't 
          6   know if the Mayor's letter is being translated into 
          7   other languages, but I think that's a critical 
          8   piece, because many homeowners and borrowers are 
          9   immigrants, people for whom English is not the first 
         10   language.  And I think that we have to ensure that 
         11   any outreach materials get translated. 
         12            I always worry about all the HOEPA 
         13   disclosures and the Truth in Lending disclosures.  I 
         14   don't think they even say anything that our 
         15   utilities bill say, that "This is an important 
         16   document.  You should bring it to someone to be 
         17   translated." 
         18            And I have had cases where I've had a 
         19   family who spoke no English, were Hmongs, and they 
         20   didn't understand what they were signing.  The 
         21   lenders just took them through the whole thing, and 
         22   there was no one to explain anything to them.  
         23   That's always the danger in disclosures. 
         24            I also wanted to emphasize, when you talked 

          1   about what techniques work, I think Tom really 
          2   identified it.  I mean, we have to get rid of all 
          3   the balloon payments, the prepayment penalties, all 
          4   the indicators of predatory loans, and I think that 
          5   really helps.  But short of that, I think you really 
          6   need people to be represented at these closings, 
          7   either by lay advocates like Norma and Len or from 
          8   Tom's group or by trained attorneys. 
          9            The Lawyers Committee is now working with 
         10   the National Consumer Law Center on a program to 
         11   train attorneys and later community people on how to 
         12   recognize predatory loans and what legal avenues 
         13   people have when they get involved in predatory 
         14   loans. 
         15            And I think that's critical.  We're sending 
         16   people into these closings in a totally unequal 
         17   situation.  It's hard enough -- I always tell the 
         18   story that I always thought it was easier to have a 
         19   nine-month pregnancy and have a baby than to buy a 
         20   house.  I think I started the process around the 
         21   same time.  And I as an attorney was overwhelmed by 
         22   the paperwork, by the numbers, by the whole process. 
         23            And we're sending in unsophisticated 
         24   borrowers, elderly people, people who don't always 

          1   speak English, who are most vulnerable, and they're 
          2   not represented.  I don't think there are many other 
          3   situations in life where you are risking so much 
          4   without any real protections. 
          5            So I would push that as part of an 
          6   education and a funding campaign. 
          7            MR. CALLAHAN:  Actually, if I could ask 
          8   Norma to tell that story about the time you did show 
          9   up at the closing.  I think that's instructive to 
         10   Nadine's point, if I may be so bold. 
         11            MS. MOSELEY:  Well, I go to all my clients' 
         12   closings, by the way.  But this was an elderly 
         13   couple in South Boston who had gotten into a 
         14   refinance -- I think this was going to be their 
         15   second refinance in about 18 months.  And 
         16   interestingly enough, on the documents it indicated 
         17   that "If you are elderly, call the Elderly 
         18   Commission.  You may want to have someone with you." 
         19            So, they did, and I did, and I was there.  
         20   And I had prepped these people.  I had seen the 
         21   documents.  It was clearly a ridiculous loan.  They 
         22   were elderly, and the gentleman was also 
         23   handicapped. 
         24            The closing was at their home.  So the 

          1   lawyer came up, and just bit by bit he was asking 
          2   them to sign this, sign this, sign this.  I said, 
          3   "Wait, wait, wait.  Let's go over this."  They had 
          4   been prepped.  We had been over it.  But they played 
          5   the part. 
          6            And so we did, and they would ask -- stop 
          7   and ask a question, "But I applied for a 30-year 
          8   fixed rate mortgage.  Now you've got this as a 15- 
          9   year variable."  "Oh, well, that must have been a 
         10   mix-up in the documents.  But go ahead and sign it." 
         11   "No, we're not going to sign it." 
         12            And then, "So what does the rate go up to?"  
         13   And then they see all this LIBOR plus.  "What does 
         14   that mean?"  "It just means they base it on some 
         15   kind of prime rate in the market somewhere over in 
         16   London."  I don't know what the hell it means 
         17   either. 
         18            But at each document, they HUD settlement 
         19   statement, "Where is the broker?  What's this 
         20   broker's fee?  We didn't pay a broker."  "Oh, yes 
         21   you did.  That gentleman who came to your house 
         22   wasn't from the bank.  He was a broker."  "Well, I 
         23   didn't know that.  I thought I was applying to the 
         24   bank." 

          1            Anyway, to make a long story short, they 
          2   didn't sign anything.  So the lawyer said, "Could I 
          3   use your phone?"  He got on the phone, and he 
          4   evidently called the broker and said, "This family 
          5   isn't going through with this loan."  And the broker 
          6   said, "Give me a minute." 
          7            And he came back from the phone and said, 
          8   "Well, look, we can make this a 30-year fixed.  We 
          9   can drop the interest from 14 down to 10.  We can 
         10   knock off these broker's fees and put you in a 
         11   really good loan." 
         12            And I said to them, "Do you want to go with 
         13   a mortgage company that just like that can change 
         14   the terms?  Because if you were eligible for them 
         15   now, you were eligible for them before."  And they 
         16   said, "No."  So we went out and got a prime loan 
         17   with somebody else. 
         18            But I was so delighted.  They called back 
         19   for three weeks in a row, sweetening the pie every 
         20   time, saying, "You can't get it.  You have lousy 
         21   credit."  They already had been approved for their 
         22   loan somewhere else. 
         23            So, I mean, it does make a difference.  It 
         24   does make a difference if you are there.  You don't 

          1   have to be a lawyer that can -- all you have to do 
          2   is ask the right questions, because the lawyer for 
          3   the lenders, they don't like to be asked the right 
          4   questions.  And by the way, if you really want to 
          5   get a batch of scoundrels, get those lawyers who 
          6   close these loans.  I don't know how they sleep 
          7   nights.  They're sleazy. 
          8            MS. BRAUNSTEIN:  To play devil's advocate 
          9   for a second, one of the things obviously we hear 
         10   everywhere is that one of the ways that the 
         11   predators operate most effectively is by gaining the 
         12   trust of their clients through all that personal 
         13   contact and even taking them to lunch, whatever. 
         14            Okay.  So if there was a requirement that 
         15   people had to be represented at their closings, how 
         16   do we know that the trusted lender wouldn't say, 
         17   "Oh, don't worry about that.  I'll get you 
         18   somebody"?  
         19            MS. MOSELEY:  They do already, even though 
         20   their documents all say, "The attorney is 
         21   representing the lender.  You have a right to an 
         22   attorney on your own," and it's there.  You know, 
         23   disclosures aren't the issue.  Everything is 
         24   disclosed.  It's right out there.  So what? 

          1            MS. BRAUNSTEIN:  I'm just saying, how would 
          2   you make that happen to make sure that everybody has 
          3   good representation at closing?
          4            MS. MOSELEY:  I think it has got to be 
          5   almost -- I don't know how you -- whether legally 
          6   you can require it, a third party, you know, an 
          7   independent third party there.  But if there were a 
          8   way to do it legally, you would save a lot of people 
          9   from getting into bad loans. 
         10            MS. BRAUNSTEIN:  Well, another thing that 
         11   we've heard is that possibly people who are getting 
         12   HOEPA loans should be required to go to housing 
         13   counseling first.  That's another kind of take on 
         14   what you're talking about. 
         15            We have had some conversations, and I would 
         16   like some reaction from the whole panel on this, 
         17   we've had some conversations with some housing 
         18   counselors who have told us that even when they can 
         19   get to a client before they enter into a deal, and 
         20   they go over it with them and show them how this is 
         21   not a good deal for them, that oftentimes the 
         22   client, because they're in need of the money to pay 
         23   a doctor bill or something like that, will enter 
         24   into the deal anyway, that there has been a great 

          1   deal of frustration with that. 
          2            And I don't know -- I was wondering if 
          3   that's been anybody here -- like Norma, I guess you 
          4   do more of it than anybody, or Leonard, your 
          5   experience, has that been the case?
          6            MR. RAYMOND:  Certainly that often is the 
          7   case.  As I think, as Norma and I were sitting this 
          8   morning listening to the testimony, again, we 
          9   reiterate the issue that irrespective of the 
         10   substance and the length of the disclosures, that 
         11   oftentimes the people who are in these circumstances 
         12   are desperate, absolutely desperate.  So they may 
         13   very well go through, although I would say our 
         14   experience, most of the time we see people post this 
         15   situation, not often previous. 
         16            If it's a situation where, indeed, we're 
         17   talking about, okay, three days before, pursuant to 
         18   the HOEPA regulations, we're going to get people 
         19   connected with a counselor, there might be some 
         20   possibility during some circumstances of making a 
         21   difference.  I think a good number of people we 
         22   could perhaps make some difference.  But there will 
         23   always be a minority of folks who, no matter what, 
         24   are going to go forward. 

          1            MS. MOSELEY:  What happens is people get 
          2   into a situation where they're delinquent on a loan.  
          3   Let's say it's even a decent loan.  They're just 
          4   delinquent and foreclosure is imminent.  And 
          5   because, you know, when you're in foreclosure, that 
          6   doesn't give you a very good credit score, so you 
          7   probably already decide on your own, you can't go to 
          8   a regular lender and refinance out of this. 
          9            Subprime lenders are right there, filling 
         10   the gap.  And even though, you know, you can point 
         11   out, as Len said, all of these things, they say, "I 
         12   have to do it, because I'm going to lose my home 
         13   otherwise, and I've got to close." 
         14            We do explore with them the options, if it 
         15   sounds like it can work, a Chapter 13.  And their 
         16   response is, "Oh, but that's going to ruin my 
         17   credit."  Here they are in foreclosure.  And I say, 
         18   you know, "At this point, your credit is the least 
         19   thing to worry about.  Let's look at saving your 
         20   home and starting to rebuild your credit." 
         21            But you see the reasoning isn't, you know, 
         22   the way you might reason it or you might reason it, 
         23   but this is what is going on.  This is what they 
         24   see.  Chapter 13 ruins your credit.  A foreclosure, 

          1   being in foreclosure and then doing a subprime loan 
          2   somehow is going to keep your credit neat and clean 
          3   and dandy.  I'm looking at the real world, the way 
          4   they see it.  
          5            MS. BRAUNSTEIN:  Tom, you mentioned in your 
          6   opening statement working to try with lenders to 
          7   develop alternative products to subprime loans.  I 
          8   was wondering how successful you have been at doing 
          9   that.
         10            MR. CALLAHAN:  I'll turn that back to 
         11   Norma, because she's actually been the agency 
         12   that's -- MCBC has tried to facilitate a little bit 
         13   of that, but Norma's agency has had the most 
         14   success.  But it's been actually disappointing in 
         15   the overall response.  We hosted a breakfast, MCBC 
         16   did, for some 30 lenders or so, and maybe one or so 
         17   has followed up with Norma to try to add -- Norma 
         18   has a list of four lenders that provide some 
         19   alternative financing in these, and I'll let her 
         20   describe that. 
         21            In response to your previous question, 
         22   though, I wanted to say, I think the later you see 
         23   people in the process, the more likely it is they're 
         24   going to go forward with that, maybe against their 

          1   own interests, but with that subprime loan or 
          2   predatory loan. 
          3            That's why I think this maintaining -- 
          4   trying to maintain a relationship from prepurchase 
          5   to non-crisis postpurchase counseling to early 
          6   delinquency and foreclosure-prevention counseling, 
          7   we have had successful cases in our office of people 
          8   who have taken our non-crisis postpurchase workshops 
          9   and then have been marketed to by these, and just at 
         10   the very early stages of thinking about it call our 
         11   counselor, because they have a relationship with him 
         12   or her, and say, "This sounds attractive in one way, 
         13   but I have some questions," or "I'm a little leery 
         14   about it.  Can you help me go through it."  And they 
         15   come in, and our counselor sits down and we go 
         16   through it. 
         17            And more often than not, those folks who 
         18   are sort of at the beginning stages of thinking 
         19   about maybe they need some equity credit or for a 
         20   variety of reasons, those folks we can usually make 
         21   sure they don't fall into that trap and get them a 
         22   better deal, if they really do need that, or in some 
         23   cases work with them on budgeting issues.  And one 
         24   of the goals of "Don't Borrow Trouble" is actually 

          1   convincing people at times they don't need to borrow 
          2   more money.  That's the worst thing they can do in 
          3   certain circumstances. 
          4            So it's really, you know, budgeting and 
          5   money management as much as trying to find a loan 
          6   for them. 
          7            I'll let Norma talk about --
          8            MR. RAYMOND:  Actually, I wanted to 
          9   interject.  I think it's very important for us to 
         10   get back, because that's a really critical question, 
         11   to those alternative products.  But we've 
         12   participated in the "Don't Borrow Trouble" program 
         13   as well statewide, but I think that's a slice.  
         14   That's one slice. 
         15            I think there is another slice here that's 
         16   very important, that's more of a long-term kind of 
         17   prevention approach.  Since we work exclusively with 
         18   people 50 and over, mainly elders, we are 
         19   continuously getting exasperated by the fact of 
         20   people coming to us late in the process, often in 
         21   foreclosure itself, and we're just mystified as to 
         22   why people made the choices that they did, et 
         23   cetera, how did they get trapped in these 
         24   situations. 

          1            We became convinced that we had to spend 
          2   some time, some considerable time putting together 
          3   what we called an elder economic literacy product, 
          4   which goes out to the community.  We have done this 
          5   in 30 communities across the state.  We work with 
          6   Councils on Aging.  We developed a set of manuals 
          7   that deal with not just refinancing issues, but 
          8   important life skills. 
          9            Remember, we're dealing with a population 
         10   that has particular needs.  For us, most of our 
         11   clients who are elderly are widows.  In an average 
         12   year, 85 to 86 percent of our clients will be single 
         13   women, average age of 80, average income of $10,000 
         14   to $12,000, all homeowners, nonetheless, and 
         15   experiencing all kinds of difficulties. 
         16            So it was very important for us to go into 
         17   the community, with the Councils on Aging, bringing 
         18   in other professionals from Legal Services, from 
         19   various housing and other kinds of elder services.  
         20   And we present this as a part of what we call 
         21   Remainder Life Planning. 
         22            It's a set of skills in terms of surviving 
         23   in your house long term, preserving as much equity, 
         24   getting your options, finding out ways to off-load 

          1   your needs into various programs and services which 
          2   are low cost, no cost, preferably government 
          3   programs, et cetera.  And we have been very 
          4   successful in that. 
          5            But that's, again, one slice of the pie.  
          6   It's one piece here, and I think we need --
          7            MS. BRAUNSTEIN:  How are you reaching your 
          8   audience?  Are you using existing --
          9            MR. RAYMOND:  We go out to the Councils on 
         10   Aging.  We have the Bank Commissioner's Office 
         11   working with us.  They have been participating in 
         12   the program, the various AAAs, area agencies on 
         13   aging, housing advocates, as well as the Legal 
         14   Service folks who are working particularly with 
         15   senior citizens and their problems.  It's scheduled 
         16   way ahead of time, so a lot of advertising.  
         17            One of the other techniques we have found 
         18   is we have what we call circuit rider counseling.  
         19   We actually have people who then show up post those 
         20   sessions at the designated times we'll announce.  So 
         21   we have those wonderful situations where an elderly 
         22   gentleman will come in and say, "Well, I decided to 
         23   go by the COA today to pick up some information, and 
         24   by the way, I have this friend who has this 

          1   problem," those situations. 
          2            It's a piece of the pie.  It's a small one, 
          3   but nonetheless a very significant one.  And we've 
          4   reached several thousand elders this way and want to 
          5   continue on doing that, again, giving people some 
          6   tools, tools in terms of really important written 
          7   materials, manuals on various issues, refinancing, 
          8   the dangers of certain kinds of financial 
          9   situations, what kind of scams are directed 
         10   particularly at elders, what kinds of options and 
         11   resources are available to them, et cetera. 
         12            One of the biggest issues we deal with is 
         13   the problems of credit cards, which has absolutely 
         14   exploded.  One of the biggest reasons why people are 
         15   moving at this stage of life into looking at 
         16   refinancing is because they've run up credit cards.  
         17   15 years ago, when I got started in this business, 
         18   it didn't exist.  Now we're talking an average of 
         19   $7,000 or $8,000 per elder.  The recent record in 
         20   the office is $146,000, one senior, of credit card 
         21   debts. 
         22            There is no question that there is an 
         23   informal network out there where essentially when a 
         24   widow reaches $10,000 or $12,000 of credit card debt 

          1   which she cannot maintain, and she gets harassed by 
          2   the collection agencies, interestingly enough the 
          3   question arises in those conversations with the 
          4   harassing collector, "Gee, do you have a home?  Oh, 
          5   you don't have a mortgage?  Oh, a small mortgage?  
          6   We can refer you out." 
          7            So, again, these are the kinds of things 
          8   we're trying to get people some basic skills, tools, 
          9   also very important for them to know that there are 
         10   places to go, numbers to call, et cetera. 
         11            Again, it's one basic piece, but it's a 
         12   significant one nonetheless. 
         13            MS. BRAUNSTEIN:  Do you know if that kind 
         14   of thing is going on in other cities?  Is AARP aware 
         15   of what you're doing?  Do you work with them at all?  
         16            MR. RAYMOND:  Well, certainly I think 
         17   they're aware of us and we're aware of them.  But 
         18   this is a project -- we've essentially had a very 
         19   small grant from the Crossroads Foundation and a 
         20   small grant from the late, great Bank of Boston to 
         21   get this off the ground, but essentially we are 
         22   literally -- this is held together by baling wax, 
         23   strings and bubble gum, because we have to rely on 
         24   our community lenders to help defray some of the 

          1   cost who participate in the program. 
          2            MS. HURT:  May I ask, do you have any 
          3   thoughts on reverse mortgages as an alternative 
          4   to -- that you would like --
          5            MR. RAYMOND:  Our organization basically 
          6   created reverse mortgages for this part of the 
          7   country some 17 years ago, and we have, last count, 
          8   I think, 68 community lenders, credit unions, mutual 
          9   savings banks, cooperatives, et cetera, who work 
         10   with us as.  And we have created actually a whole 
         11   array of financial options for seniors, some of 
         12   which are equity conversions, some are not. 
         13            Our real strong feeling is that the real 
         14   success of aging in place successfully is preserving 
         15   as much equity as possible.  Reverse mortgages can 
         16   be extremely good under some circumstances.  They 
         17   can be the wrong thing for a heck of a lot of other 
         18   elders. 
         19            So we really take the maximum of equity 
         20   conservation, equity preservation, off-load it, and 
         21   only using loans as a last resort.  That means any 
         22   kind of loan, but especially reverse mortgages, 
         23   because they are, pardon the expression, damnably 
         24   expensive, and they deplete equity.  They can be 

          1   good tools under some circumstances. 
          2            Because of that we created a product called 
          3   SELOC, which is a senior equity line of credit 
          4   product, which is designed specifically for elders.  
          5   Again, it's more of a prevention tool.  It was 
          6   designed for elders who have little or no debt, but 
          7   again, that large group of elders who are just 
          8   basically surviving by their wits, month to month, 
          9   and all it takes is one major problem to bump them 
         10   off.  And these are the folks that are, pardon the 
         11   expression, the raw meat for predatory lenders. 
         12            You know, when the ten-year-old car dies, 
         13   when the roof goes and there is no public program to 
         14   pay for it, when there is an in-home care problem or 
         15   an expense with the hospital that is not covered by 
         16   insurance, that's often when people are driven.  
         17   They go to the local bank.  The bank will make the 
         18   correct decision that your income is too small, 
         19   especially given your credit card debt. 
         20            So what happens next is they pick up the 
         21   newspaper with the wonderful block ad, "No credit/  
         22   bad credit?"  Or they submit to that wonderful 
         23   advertisement which Norma alluded to.  We won't name 
         24   them.  Athletes should be selling underwear, not 

          1   loans.  But essentially that's when they get hooked 
          2   into this stuff. 
          3            So this was a tool which we provided for 
          4   them, because it's a loan design that doesn't depend 
          5   on credit criteria.  It's purely the fact that they 
          6   own this house.  But it's a qualified loan, which 
          7   means disbursements are made after a consultation 
          8   with the program, because we try to find other kind 
          9   of solutions and ways. 
         10            But in addition to that, which is very 
         11   important, we have been able to really intervene in 
         12   terms of home repair issues, so they don't hopefully 
         13   get hooked into the whole home repair scam 
         14   situation.  And they have options of either 
         15   amortizing the loan, paying the interest only, or 
         16   they can defer payment altogether.  But it's a way 
         17   for us to stretch things out. 
         18            MR. WALKER:  I wanted to ask a question 
         19   with regard to credit, and actually maybe Jim or 
         20   Adrienne can answer this question.  I have an 
         21   elderly mother who continues to get almost daily 
         22   solicitations from credit card companies with the 
         23   checks in them.  Does that continue to be legal for 
         24   them to do that?  

          1            MR. MICHAELS:  Yes. 
          2            MR. CALLAHAN:  Can the Fed do something 
          3   about that?  
          4            MS. COHEN:  There is something the Fed can 
          5   do, perhaps.  And it's not only elderly people.  I 
          6   mean, I know I'm old, but I'm not that elderly yet, 
          7   and I get lots of those checks, and they're 
          8   tempting. 
          9            MR. WALKER:  But for the elderly, 
         10   because -- well, for example, for my mother, I mean, 
         11   she has dementia, so to her it looks just like one 
         12   of her regular checks, and she has written herself 
         13   some credit loans as a result of that. 
         14            MS. MOSELEY:  I wanted to talk about the 
         15   alternatives, going back to Tom's thing.  We did 
         16   have a really neat program going with BayBank back 
         17   in the good old days when there was a BayBank. 
         18            We could bring troubled homeowners to 
         19   BayBank with a hardship letter explaining how they 
         20   got into their circumstances where they've got some 
         21   credit issues, you know, if there were extreme 
         22   catastrophic or unforeseen circumstances, so that 
         23   credit wasn't going to be the issue. 
         24            But we looked at LTVs of 80 percent, LTVs, 

          1   and debt-to-income, with everything paid off, about 
          2   max 38 percent.  That is a damn conservative loan, 
          3   and the bank liked it.  It was a money maker.  And 
          4   Fannie Mae was buying them, because they didn't see 
          5   anything other than the LTV and the debt-to-income.  
          6   They didn't investigate the credit.  The bank took 
          7   that. 
          8            We did, oh, probably 80, 85 of those loans 
          9   because it was statewide lending, and BankBoston 
         10   continued it on a scaled-down basis when they took 
         11   over BayBank, and Fleet isn't doing it at all. 
         12            So I'm back sort of behind the eight ball 
         13   trying to reach out now to the smaller community 
         14   banks and sell this program literally on a 
         15   community-by-community basis statewide, because 
         16   you're never going to get a whole bunch of them.  
         17   They may get two or three a year.  That is not going 
         18   to break the portfolio.  And they're performing 
         19   loans.  So I'm out there trying. 
         20            MS. COHEN:  I just want to say that also in 
         21   some of the settlements we did early on in the late 
         22   '80s with some of the banks around some 
         23   discriminatory practices, we did get programs also 
         24   that were similar to what Norma said, which shows 

          1   that the banks can do them.  The mainstream prime 
          2   lenders can make loans to lower-income borrowers 
          3   that are successful loans. 
          4            I think when the Fed looks at -- does CRA 
          5   reviews and looks at banks' performances, you have 
          6   to look at how innovative are they in developing 
          7   products that can meet the credit needs of the 
          8   consumers.  And I think too often we forget that. 
          9            I just want to add a few other things, 
         10   because unfortunately I have to leave at three 
         11   o'clock, but I think the mandatory reporting of 
         12   credit payments for borrowers who have high-interest 
         13   loans is critical, because for borrowers who do make 
         14   their payments on time, it's important that they 
         15   start establishing a good credit history.  And if we 
         16   let lenders get away with not reporting them, I 
         17   think it's really a travesty. 
         18            I think in CRA and compliance review the 
         19   Fed really needs to look at the banks' subsidiaries 
         20   and affiliates and not just the banks, because 
         21   that's where a lot of the problems are.  And, again, 
         22   in the regulatory field, when you do the CRA 
         23   reviews, to really not give CRA credit to lenders 
         24   who have all the balloon payments and the prepayment 

          1   penalties and all the indicators of those predatory 
          2   loans. 
          3            And lastly, I think this is something we 
          4   probably all would support, is expanding HMDA data 
          5   collection to include types of loans and loan 
          6   characteristics, like fees, prepayment penalties, as 
          7   well as borrower characteristics around credits 
          8   scores. 
          9            So I think that it really is such a 
         10   multi-pronged approach from the regulatory end, the 
         11   CRA review end, the HMDA data collection end, and 
         12   the education and outreach end.  But I think we need 
         13   financial support in the outreach and education end, 
         14   and that's critical.  You know, the "Don't Borrow 
         15   Trouble" campaign can be great, but it could be 
         16   short-lived unless it's continuing and unless there 
         17   is funding for lawyers and lay advocates to be, one, 
         18   trained in how you recognize predatory loans and how 
         19   you work with consumers and actually to provide 
         20   attorneys. 
         21            I am pretty sure -- the Lawyers Committee 
         22   works with many of the big law firms in town.  Now, 
         23   some of them I think I could get involved in a 
         24   program to provide some kind of pro bono 

          1   representation, but I need some money to provide the 
          2   administration of a program, the training, the 
          3   resources, and that's not easy to find.
          4            MS. BRAUNSTEIN:  That kind of brings me 
          5   back to the question Dolores asked at the top that 
          6   we never really addressed, that taking aside the 
          7   regulatory answers to this, okay, just looking at 
          8   the outreach education piece of predatory lending, 
          9   what is it that we, the Fed, could do to help, in 
         10   the sense of we've heard various things from people, 
         11   you know, we see a lot of stuff going on around the 
         12   country, a lot of materials being developed. 
         13            I mean, is there really a need for more 
         14   materials, or is it more that there's a need for 
         15   better delivery mechanisms for the materials that 
         16   are out there?  What is it that we could do to 
         17   facilitate this process?
         18            MR. WHITE:  Well, at the risk of diverting 
         19   the discussion a little, I would like to echo what 
         20   Professor Golann said this morning, which is -- and 
         21   I certainly don't want to take anything away from 
         22   community education and outreach efforts; a lot of 
         23   what is going on in Boston is wonderful -- but there 
         24   is a basic problem that you have with the complexity 

          1   of these transactions on the one hand and adult 
          2   literacy on the other hand. 
          3            You have an American population about 40 
          4   percent of whom can't really realistically compute 
          5   with decimals and fractions.  That's what the 
          6   national adult literacy survey tells.  Probably 90 
          7   percent of people can't understand the trade-offs 
          8   between points and interest over the life of a loan. 
          9            So you're just not going to -- Professor 
         10   Golann talked about the Boston school system as 
         11   being the culprit.  I'm not sure where the blame 
         12   lies exactly.  I think part of it is just that these 
         13   transactions are so inherently complex, we can't 
         14   expect 100 percent of the population to be fully 
         15   equipped to deal with the difference between an 
         16   advantageous and a predatory loan. 
         17            So I get back to the most valuable thing 
         18   the Fed can do right now at this moment in history 
         19   is exercise its power to substantively regulate 
         20   these credit transactions.  And let me just suggest 
         21   what I view as the two most important, although 
         22   there are certainly a lot of things you can do. 
         23            First is to really seriously look at this 
         24   question of no-benefit refinancing.  And it's very 

          1   difficult, it seems to me, for this industry to 
          2   defend a transaction in which you take somebody who 
          3   has a conventional 9 percent, 8 percent mortgage and 
          4   refinance it at 12 percent, and they get a minimal 
          5   amount of cash out, less than 10 percent of the 
          6   loan.  They're paying an effective rate for that new 
          7   advance in the hundreds of percent. 
          8            Those are indefensible transactions, and 
          9   they should be outlawed.  And there is a very 
         10   specific authority in Reg Z -- the Act, rather, for 
         11   the Board to do that. 
         12            The second substantive area I think the 
         13   Board really ought to look at is repayment ability, 
         14   which I think ties very directly to the foreclosure 
         15   numbers we've look at. 
         16            You know, you have this vast experiment 
         17   that's going on right now.  It used to be, you know, 
         18   if a mortgage was going to be more than 41 percent 
         19   of your income, you weren't going to get that loan.  
         20   Now the standard in the subprime industry has crept 
         21   up from 50 percent to 59 or 60 percent 
         22   debt-to-income ratios, with very little regard to 
         23   residual incomes and serious problems with 
         24   verification of income. 

          1            Those are all areas that it seems to me 
          2   there is very clear authority for the Fed to 
          3   regulate.  And I think at least the Fed ought to set 
          4   some guidelines and say, "Those of you lenders who 
          5   are going to venture into the great beyond in taking 
          6   risks with people's ability to repay are going to be 
          7   subject to the possibility of being found in 
          8   violation of these HOEPA standards." 
          9            Remember, the idea of a subprime borrower 
         10   is somebody who has credit problems; in other words, 
         11   payment history problems.  There is nothing inherent 
         12   about taking somebody, you know, who has problems in 
         13   the past with paying their bills, saying, well, you 
         14   should also give them a loan amount such that they 
         15   are over conventional debt-to-income standards. 
         16            For some reason that has just happened and 
         17   become kind of a norm, and one of the things the Fed 
         18   can and ought to do is bring those payment ability 
         19   norms back in line with the conventional market. 
         20            One other point about the counseling 
         21   information to borrowers, I do think the North 
         22   Carolina model where you take somebody who's about 
         23   to enter into a subprime loan and you divert them 
         24   and say, "You cannot sign up for that loan; that 

          1   loan will not be valid or enforceable unless you 
          2   first go see a counselor," is probably one effective 
          3   technique of catching people, although obviously it 
          4   would be fairly late in the process at that point. 
          5            MS. MOSELEY:  Is that legal?  Does that 
          6   withstand the test of somebody exercising their own 
          7   independent rights to be -- I'm just playing devil's 
          8   advocate too. 
          9            MS. COHEN:  It's in the North Carolina 
         10   legislation.  So, unless it's challenged, it is 
         11   legal.  I guess people could always waive it.  My 
         12   concern is more of what John said, is the banks or 
         13   the lenders just go, "Oh, you know, you don't need 
         14   that," and you check it off. 
         15            MR. ANDERSON:  That was exactly what I 
         16   was -- I think I'm a fish out of water with all of 
         17   these people discussing what we can do, because I 
         18   spoke with the people from whom the "Don't Borrow 
         19   Trouble" program comes from at the City, or at least 
         20   a person who was somewhat responsible for it, and at 
         21   the end of our conversation he said, "Well, how much 
         22   fraud do you think is in the market?"
         23            And I said, "Well, I only know 
         24   intrinsically where I've been for the last 22 years, 

          1   which is the Dorchester-Roxbury-Mattapan market, and 
          2   I peg it at about 25 percent."  And he looked at me, 
          3   "25 percent of the market is fraudulent?" 
          4            And I started second-guessing myself, and I 
          5   went and spoke with Ada Focer, who I've done work 
          6   with in the past and whose opinion I trust 
          7   implicitly, and I told her, "I said 25 percent," and 
          8   she said, "It's probably more than 30 percent," from 
          9   work that she had done with a couple of MIT grad 
         10   students in the early '90s. 
         11            For example, when we're talking about debt 
         12   ratios and income ratios, if a person wants to 
         13   borrow X amount of money and they don't have the 
         14   money to qualify for that loan, when you get out in 
         15   the real world, the mortgage originator is going to 
         16   be under great pressure, because it's their income, 
         17   to say, "You make $35,000.  You don't make $30,000.  
         18   Why is your income so low this year?  Well, we'll 
         19   write a letter to explain." 
         20            I had a lawyer tell me one time that he got 
         21   out of the traditional mortgage lending business in 
         22   the -- or representing mortgage lenders in the '80s 
         23   because he was having nightmares about all the 
         24   letters that were written to the lenders about why 

          1   there were problems.  You just make them up as you 
          2   go along. 
          3            And the fact that, as I mentioned earlier, 
          4   there is so damn much fraud out there, which is so 
          5   obvious, which is recorded at the Registry of Deeds, 
          6   and you only have to go down and take a look at it, 
          7   and nobody does anything about it. 
          8            So of course this perfectly forthright 
          9   mortgage originator, who is a nice guy and has a 
         10   family with two kids and a dog and would never hurt 
         11   anybody, is all of a sudden under pressure to say, 
         12   "Well, Bill got away with it.  Nothing happened to 
         13   Sue.  Sure, I can puff those numbers a little bit."  
         14   And then you get the person who might be looking for 
         15   a perfectly legitimate loan who has now borrowed too 
         16   much, who is now in trouble. 
         17            How do you get rid of the fraud?  You hang 
         18   a few lawyers.  You put a mortgage company out of 
         19   business.  You put a developer in jail. 
         20            When the developer that I made mention to, 
         21   when I was telling the Fed about all the nasty stuff 
         22   that he was doing, the Fed made such a small noise 
         23   about it that he was in court, in Federal Court plea 
         24   bargaining a mortgage fraud felony charge, and they 

          1   knew nothing about it.  His lawyer was saying, "He's 
          2   the nicest guy on the face of the earth.  That was 
          3   years ago,"  while we were in this room talking 
          4   about the fraud that was going on. 
          5            So, I mean, argue about the minutia, but if 
          6   25 percent of the market is fraudulent, unless 
          7   you're going to do something about that, then my 25 
          8   percent of the market is not going to be affected by 
          9   any of this.  And in fact if your regulations get 
         10   too strict, you'll push more people into the 
         11   fraudulent range.
         12            MS. MOSELEY:  John, wouldn't you say, just 
         13   by going down Banker and Tradesman --
         14            MR. ANDERSON:  Oh, I don't use -- I use my 
         15   own data.  It's better than Banker and Tradesman.
         16            MS. MOSELEY:  I read the Banker and 
         17   Tradesman each week, and under mortgages, I can put 
         18   a little X against those that are going to go bad 
         19   within five years or three years by name.
         20            MR. ANDERSON:  My kids can do it.
         21            MS. MOSELEY:  You don't even have to look 
         22   up anything.  This is a bad one, this is a bad one, 
         23   and this is a bad one. 
         24            Then one of the techniques in trying to get 

          1   around how much you can lend on a first mortgage, 
          2   there's one very prominent finance company that 
          3   will -- someone will apply for a loan, and they will 
          4   break it into two loans.  One is a first mortgage 
          5   with reasonably good rates, 30-year first, no 
          6   prepayments, all of this. 
          7            Then the second mortgage is an equity line 
          8   of credit which has the prepayment penalties, which 
          9   is negative amortizing, and they're going to pay off 
         10   more when they pay this off, if they ever pay it 
         11   off, than they will have borrowed.  But because it's 
         12   an equity line of credit, it isn't the same.  So the 
         13   secured loan is only, you know, within the ratios 
         14   that they allow. 
         15            So they have all of these little 
         16   techniques, and the interest rate on the equity line 
         17   is 18 1/2 percent.  Actually, she is going to pay it 
         18   off and pay the penalty, and then we're going to 
         19   refinance her at a 12 percent one. 
         20            MR. WALKER:  I just want to ask John a 
         21   question.  John, in your opening statement you went 
         22   back to 1990.  We're in 2000 now.  What are you 
         23   seeing right now?  Are you seeing the same kind of 
         24   flips that you --

          1            MR. ANDERSON:  The same guys are in 
          2   business.  Nothing happened to them.  Not only are 
          3   the same guys in business, but they're still doing 
          4   business with the same banks.  Of course there are 
          5   new people, because they can do arithmetic.  You 
          6   don't have to be a brain surgeon.  You just have to 
          7   know real estate and do arithmetic. 
          8            The same guys are in business.  Richard 
          9   Cawley has a new condo development in Dorchester, 
         10   closed a deed the other day where somebody paid him 
         11   $176,000 in cash.  It's possible.  I don't think so.  
         12   I don't know what the story is there. 
         13            One of the guys that I mentioned in my 
         14   previous Fed testimony was Jeff Roche.  He sold a 
         15   property on Westville Street recently in which, if 
         16   you looked at Banker and Tradesman, because Banker 
         17   and Tradesman doesn't do loans or sales under $100, 
         18   it looks like a sale from Jeff Roche to a buyer 
         19   using an FHA loan.  But since I don't use Banker and 
         20   Tradesman's data, if you looked an hour later, there 
         21   was a $10 deed from that person to another person. 
         22            I don't know what the situation is.  I 
         23   don't have the time to track down every one.  But 
         24   it's no longer -- the property is no longer in the 

          1   hands of the person who said that they were going to 
          2   live there for at least six months under the FHA. 
          3            Who is doing anything about it?  Nothing.  
          4   Nobody.  That's out there.  It's as broad as day. 
          5            When I testified last year -- last time, 
          6   four years ago, I told you there was a property that 
          7   was owned for five minutes that was bought for 
          8   $35,000 and sold for $79,000 in five minutes, and I 
          9   submitted it to the Fed.  The time stamps were on 
         10   it. 
         11            There was a property that sold recently, 
         12   bought for -- oh, geez, I can't remember the 
         13   address.  It was bought for 79 and sold for 185 in 
         14   eight minutes.  There was no renovation done.  It 
         15   was just a pure flip, and it was done with a loan 
         16   with a small down payment loan from a major bank. 
         17            Since these guys didn't get hurt -- for 
         18   example, Jeff Roche went and originated a bunch of 
         19   loans through ACORN, several of which have gone bad.  
         20   Richard Cawley went to Capital Mortgage, which does 
         21   FHA funding, and several of those have gone bad.  
         22   There was an auction last week on Brunswick Street 
         23   in Dorchester. 
         24            I just spoke with Bruce Marks, who was on 

          1   your panel this morning, and he said he hadn't seen 
          2   me in a while.  I said, "I get tired tracking down 
          3   all the investors, the non-owner/occupant investors 
          4   who are using your loan programs." 
          5            With the help of Yawu Miller from the Bay 
          6   State Banner we found three.  We weren't even 
          7   looking for them.  We were just looking at mortgages 
          8   that went bad really fast.  We found investors 
          9   buying properties through NACA and Fleet.  You get 
         10   tired of seeing it all the time.  It's not even 
         11   surprising.  
         12            MR. MICHAELS:  This is for Mr. White.  You 
         13   referenced before the research that you and 
         14   Professor Mansfield at Drake Law School had done 
         15   regarding -- I guess you said you used securities 
         16   filings to analyze pools of subprime loans and 
         17   categorize them by rate so you can see where the 
         18   distribution was.  
         19            Since you were here this morning, you 
         20   probably heard our discussion about the Board's 
         21   authority under HOEPA to adjust the APR triggers and 
         22   the rates and fees triggers.  I guess I would 
         23   appreciate it if you could sort of elaborate on how 
         24   you think the Board could use your data, 

          1   specifically what you think your data tells us about 
          2   how the Board should go about using its authority. 
          3            MR. WHITE:  Well, one thing I think is very 
          4   helpful, in Professor Mansfield's article in the 
          5   South Carolina Law Review is a table with 
          6   distributions of interest rates from 1995 to 1999 
          7   charged by subprime lenders, the ones that are 
          8   publicly disclosed.  And you can see the median rate 
          9   for mixed pools of loans is about 11 percent.  Those 
         10   are the note rates, not the APRs. 
         11            And, you know, you can also see the 
         12   percentage, if you draw a line at any cutoff, of how 
         13   many loans in the market in those years you would 
         14   have excluded or included at any variety of 
         15   different triggers.  I think all the proposals under 
         16   consideration for APR triggers would still only 
         17   affect a very small percentage of the loans. 
         18            But perhaps more significantly, if you 
         19   start with the idea that conventional rates have 
         20   been in the 7, 8 and 9 range, and the subprime 
         21   rates, the median rates, have been 10, 11 and 12 
         22   percent, and you look at the fact that these are 
         23   secured loans, so even if you have large numbers of 
         24   foreclosures -- some lenders may be 10 percent or 

          1   more -- if they're recovering 80 percent of their 
          2   money in the foreclosure, the actual losses on these 
          3   loan pools will be very small, 2 or 3 percent per 
          4   year.  And that would be very high.  Typically it 
          5   would be more like 1 percent a year. 
          6            So even a very risky pool of subprime 
          7   loans, the pricing should not be much higher, 
          8   however far up the risk scale you want to go, unless 
          9   you are really making loans that are guaranteed to 
         10   go into foreclosure. 
         11            So it seems to me you can take from those 
         12   ranges of interest rates and from, you know, the 
         13   real credit -- the cost of credit losses, that when 
         14   you get beyond 13 or 14 percent in today's interest 
         15   rate environment, you're really talking about 
         16   pricing that's not risk based; it's just price 
         17   gouging, price discrimination.  You're charging 
         18   people more than the credit risk warrants and the 
         19   current cost of funds warrants. 
         20            So there shouldn't be any reservation about 
         21   discouraging or making impossible to do lending at 
         22   those kinds of rates above 13, 14 percent.  And, you 
         23   know, nobody in the industry has tried to make that 
         24   case. 

          1            People in the industry have said, "Gee, you 
          2   know, we're worried you might start entrenching on 
          3   legitimate lending if you lower the triggers."  But 
          4   I haven't heard a single member of the lending 
          5   industry come forward and say, "Let me show you a 
          6   loan product at 14 percent with 10 points or 7 
          7   points which is a beneficial, useful, appropriately 
          8   priced loan product," because they can't make that. 
          9            MR. MICHAELS:  How do you think we can use 
         10   the data in your study to determine the percentage 
         11   of subprime loans covered by HOEPA now and the 
         12   percentage that might be covered if the triggers 
         13   were adjusted?  Do you think we can use the data for 
         14   that purpose?
         15            MR. WHITE:  Certainly.  I mean, it's not 
         16   comprehensive, because it's only the subprime 
         17   lenders who securitize, which is probably less -- a 
         18   little less than half of all the subprime loans that 
         19   are made.  But as I say, there are tables in the 
         20   back of the South Caroline Law Review article that 
         21   will tell you the exact number out of the million or 
         22   so loans that were surveyed that were at 14-15, 
         23   15-16, 16-17.  You can draw the cutoff anywhere you 
         24   like, and you can tell from those tables how many 

          1   ought to be affected. 
          2            But I do also think, when you look at the 
          3   loss rates, that you can also draw the conclusion 
          4   that pricing above a certain point is really just 
          5   not risk-based pricing anymore; it is just price 
          6   gouging. 
          7            MR. MICHAELS:  Did you draw a conclusion 
          8   about the percentage of subprime loans that were 
          9   covered by HOEPA in your study?
         10            MR. WHITE:  Well, it would be fairly easy 
         11   to figure out, I guess, with a 10 percent APR 
         12   trigger -- well, let me say this:  The information 
         13   that's in the article, which I didn't participate in 
         14   putting together, is just about the rates.  There is 
         15   no public information about points. 
         16            A lot of us who see these loans anecdotally 
         17   feel like there's a lot more price gouging and 
         18   exploitation happening on the points than on the APR 
         19   end and that anything that can be done to drive down 
         20   the cap on those points is probably a good thing. 
         21            As far as the interest rates, as I say, it 
         22   is probably fewer than 10 percent of the loans that 
         23   are above the existing APR trigger.  And in fact 
         24   most HOEPA loans that are HOEPA loans now are HOEPA 

          1   loans because of the points, not because of the 
          2   rates.  If you lower the rate trigger from 10 above 
          3   Treasury to 8 above Treasury, you're still only 
          4   going to be capturing less than 20 percent, I 
          5   imagine, of the market, maybe less now. 
          6            MR. MICHAELS:  When you say that most of 
          7   the loans covered by HOEPA now are covered by the 
          8   points and fees trigger as opposed to the rate 
          9   trigger, can you give me some idea of how you came 
         10   to that conclusion.
         11            MR. WHITE:  Well, I can't say I have a 
         12   statistical basis for that.  I represent -- I've 
         13   litigated a number of cases under HOEPA, and I 
         14   represent a lot of clients who have HOEPA-covered 
         15   mortgages, and it's just been my experience, up 
         16   until about 1999, that charging 10 points was sort 
         17   of a standard in a given segment of the industry.  
         18   Lenders like UC Lending and FAMCO and a number of 
         19   others, sort of 10 points was the default number of 
         20   points they charged. 
         21            Now that HOEPA loans have become less 
         22   popular, it seems to be like 7 1/2 points seems to 
         23   be the standard that's being charged, you know, in 
         24   the high-risk end of the market, particularly for 

          1   loans of less than $50,000. 
          2            MR. MICHAELS:  Thank you. 
          3            MODERATOR SMITH:  With that, I will adjourn 
          4   this portion -- did you have anything else?
          5            MR. RAYMOND:  Excuse me.  I apologize.  It 
          6   seems that you were begging the question earlier, 
          7   and that is that we would -- in terms of having the 
          8   Board work with community advocates, we feel very 
          9   strongly that we would like to issue a challenge.
         10            The challenge would be, can we leave here 
         11   with hopefully a commitment to sitting down with 
         12   some lenders and attempting to -- Norma was talking 
         13   about it earlier.  She is having difficulty in terms 
         14   of providing these alternative financial 
         15   instruments.  We tried the same thing ourselves and 
         16   have had some success. 
         17            But the issue that we feel very strongly is 
         18   that, okay, it appeared to me, from reading 
         19   materials and preparing for this meeting, that you 
         20   weren't only talking about regulatory issues in 
         21   terms of addressing this problem, which is obviously 
         22   very diverse and has a lot of different aspects to 
         23   it. 
         24            But unequivocally to us there is certainly 

          1   a large number of folks who are going to be victims 
          2   otherwise who, if we had a real program to provide 
          3   them with prime lending, despite the fact that they 
          4   may have some hardships or some extenuating 
          5   circumstance or, as was mentioned earlier today, 
          6   there was this whole issue of how many -- this large 
          7   number of folks, what is it, 40 percent of the folks 
          8   who, quote-unquote, are actually higher credit risks 
          9   than what they are ranked; they end up in the subpar 
         10   ranks, and in reality they are A credit. 
         11            These are the kinds of folks we think we 
         12   could provide for if we had a real alternative 
         13   program working with lenders, and we would like to 
         14   solicit the Fed to actually work with an actual 
         15   committee that's set up to deal with this.
         16            MS. MOSELEY:  How many banks do you hear, 
         17   mainstream banks, advertising on the radio for their 
         18   alternative mortgage products?  No.  They're talking 
         19   about their on-link -- I don't know.  But, you know, 
         20   it's all that kind of technology stuff that they can 
         21   offer. 
         22            I'm suggesting that the predatory lenders 
         23   are out there selling their products.  The banks are 
         24   out there selling technology.  Why not have some of 

          1   the banks, particularly with this "Don't Borrow 
          2   Trouble" campaign, but "Come see your friend at X 
          3   bank"? 
          4            It can't just be "Don't do something"; it's 
          5   "We can offer you something better."  That's the 
          6   missing part, that "We can offer you something 
          7   better.  We can offer you a hot line number.  We can 
          8   send you to a Len Raymond or a Norma Moseley."
          9            MR. RAYMOND:  A counseling agency. 
         10            MS. MOSELEY:  And after 50 come in in one 
         11   week, you say, "Shut them off, I can't handle them 
         12   all.  I don't have anywhere to take them." 
         13            MR. WALKER:  Well, we'll certainly be 
         14   willing to sit down and talk with you in any way we 
         15   can be helpful. 
         16            MS. MOSELEY:  That would be really good. 
         17            MR. RAYMOND:  Certainly we think a credible 
         18   partner could be set up.
         19            MODERATOR SMITH:  Thank you very much for 
         20   being here this afternoon and offering your views.  
         21   And we are ready to -- we're going to take about a 
         22   five- or ten-minute break, maybe five minutes, and 
         23   then go into the open mike session.  
         24            (Recess)

          1            MODERATOR SMITH:  Okay.  We are ready, and 
          2   I think the mikes are live. 
          3            What I'm going to do is to read the list of 
          4   the people who have signed up for this session, and 
          5   we will be going in this order.  What I would like 
          6   to do is for you to alternate mikes.  You will each 
          7   have three minutes apiece.  We have two timers, so 
          8   that depending on which mike you are using, you will 
          9   be looking at our person here at each end of the 
         10   table. 
         11            The names that I have, if I can read them 
         12   all correctly, Mr. Davis.  Is it Tim or Jim?
         13            MR. DAVIS:  Tim. 
         14            MODERATOR SMITH:  Okay, Tim Davis, City of 
         15   Boston.  Daniel Ram --
         16            MR. RAMGEET:  Ramgeet.
         17            MODERATOR SMITH:  Ramgeet.  All right.  I 
         18   will ask you all, when you do come to the mike, both 
         19   to say your name and to spell it for our -- for the 
         20   record. 
         21            Willy Knight.  Ed France.  Lucille May or 
         22   Willy May?  
         23            FROM THE AUDIENCE:  Willy May unfortunately 
         24   left.  

          1            MODERATOR SMITH:  Okay.  Ruth Dillingham.  
          2   Leonard C. Akins?  
          3            MR. ALKINS:  Alkins.   
          4            MODERATOR SMITH:  Alkins.  Okay.  Jim 
          5   Campen.  Andrea Luquette?
          6            MS. LUQUETTA:  Luquetta.  
          7            MODERATOR SMITH:  Okay.  And Bruce 
          8   Fitzsimmons. 
          9            So that's the order.  We'll start with Mr. 
         10   Davis.  And then if the next person can kind of be 
         11   ready to go on the other side.  Sit close.
         12            MR. DAVIS:  Hi.  My name is Tim Davis.  
         13   That's T-i-m D-a-v-i-s.  I am a senior program 
         14   manager with the City of Boston Department of 
         15   Neighborhood Development, and I oversee the "Don't 
         16   Borrow Trouble" program for the City of Boston.  
         17   Just to talk very briefly about that program and 
         18   also on the issue of what we are seeing with 
         19   subordination requests in our department as well. 
         20            First of all, we are pleased that through 
         21   the many years of effort we've put into our first- 
         22   time home buyer program, we're beginning to see 
         23   that, probably more so in Boston than in many 
         24   cities, that first-time home buyers now see 

          1   education as an integral part to the home-buying 
          2   process.  And we're hoping that that will translate 
          3   with the "Don't Borrow Trouble" program to 
          4   homeowners as well. 
          5            And to give you some of the preliminary 
          6   results from the first couple of months of the 
          7   "Don't Borrow Trouble" program, from the calls and 
          8   inquiries we've received, 33 percent of our 
          9   inquiries have been general inquiries, people who 
         10   just want to know more about the program.  Those are 
         11   the types of people that we hope that, when they are 
         12   looking to refinance, will call us later. 
         13            42 percent had specific questions about 
         14   loan terms.  So hopefully those are people that we 
         15   are helping before they actually take the predatory 
         16   loan. 
         17            8 percent were behind in their mortgage, 
         18   but it was resolved by our staff without need for 
         19   further referral.  9 percent were referred to 
         20   foreclosure prevention services, specifically Norma 
         21   Moseley, who has been with you today.  And 8 percent 
         22   were referred to our own City of Boston home repair 
         23   program, with an additional 1 percent with other 
         24   questions. 

          1            What we are seeing with that is that there 
          2   are a lot of people who are beginning to call us 
          3   based on the notion of "Don't Borrow Trouble" and 
          4   "Call us before you sign." 
          5            The program is still in its youth.  We have 
          6   done mostly print advertisements and things like 
          7   that.  We're just starting the TV PSA.  We'll know 
          8   that really in a little while.
          9            To finish up, I would like to say something 
         10   quickly about subordination requests, which we get 
         11   for grants that we have done.  We have mortgages on 
         12   the properties.  We are seeing a lot of people 
         13   coming who want subordination requests who do want 
         14   to refi despite what we tell them, despite the 
         15   problems they might see with the loan, because they 
         16   want to consolidate debts.
         17            MODERATOR SMITH:  Thank you very much.  I'm 
         18   not going to mangle your name again.  I'll just say 
         19   Daniel. 
         20            MR. RAMGEET:  Hi.  My name is Daniel 
         21   Ramgeet.  I'm a community organizer for ACORN, and I 
         22   am here to give testimony on behalf of my mother, 
         23   Sandra Ramgeet, R-a-m-g-e-e-t.  She's the president 
         24   of Massachusetts ACORN. 

          1            ACORN members applaud the Federal Reserve 
          2   for holding hearings and starting to move forward 
          3   against predatory loans that are destroying our 
          4   neighborhoods.  ACORN thinks that the Federal 
          5   Reserve has the power to put an end to predatory 
          6   lending and should have done so long ago.  Too many 
          7   families have already been robbed of their dreams of 
          8   home ownership and have become hopeless of ever 
          9   owning a home. 
         10            ACORN thinks that the Federal Reserve 
         11   should use its regulatory authority against 
         12   predatory lendings.  These loans which are targeted 
         13   to low income and minority communities cheat the 
         14   American people out of tens of thousands of dollars 
         15   and in the worst cases force families out of their 
         16   homes.  Our community needs the Federal Reserve to 
         17   live up to its responsibilities and to help protect 
         18   families against these wealth-stripping loans. 
         19            ACORN's recommendation are that you, the 
         20   Federal Reserve, will support the prohibition of 
         21   lending without consideration of repayment ability 
         22   and prohibit the common practice of providing 
         23   teasers, which the American families can't afford, 
         24   then the interest rate goes up and so does the 

          1   monthly payments. 
          2            The practice of financing credit insurance 
          3   as part of loans is a deceptive practice.  Predatory 
          4   lenders often finance high-cost credit insurance 
          5   into the loans, which also increase monthly 
          6   payments, even though the borrowers could get the 
          7   equivalent insurance from another carrier at a lower 
          8   rate without the additional interest. 
          9            The issue of loan flipping definitely needs 
         10   addressing.  Loan flipping is where the lenders 
         11   refinance loans basically solely to generate extra 
         12   fees and to provide no benefits for the borrowers.  
         13   This often forces borrowers to either lose their 
         14   homes after years of paying their mortgage, and then 
         15   some borrowers refinance.
         16            Predatory lenders are making a fortune from 
         17   our misery.  ACORN president quotes, "There is 
         18   something very wrong when it is considered a 
         19   legitimate business practice to provide loans that 
         20   rob us from our life savings that we put in our 
         21   homes and leave us homeless." 
         22            I'd like to submit this on behalf of ACORN 
         23   members that have been victims of these predatory 
         24   lenders, and unfortunately they can't be here today 

          1   because they have to work.
          2            MODERATOR SMITH:  Thank you very much.  Why 
          3   don't you hand it to him, and he will give them to 
          4   us. 
          5            MR. RAMGEET:  One other thing.  Remember, 
          6   the people united will never be defeated.  Thank you 
          7   very much. 
          8            MODERATOR SMITH:  Thank you.  Thank you for 
          9   coming.  Mr. Knight. 
         10            FROM THE AUDIENCE:  He left as well. 
         11            MODERATOR SMITH:  Okay.  Mr. France. 
         12            MR. FRANCE:  My name is Ed France.  I'm a 
         13   Brockton ACORN member.  I am also a victim of the 
         14   predatory lenders, as was stated when we came back 
         15   there. 
         16            I have a mortgage through Equicredit.  I 
         17   had a mortgage through RMC, and then they sold it to 
         18   IMC.  The loan was for -- it was 13 percent.  I went 
         19   with Equicredit because I got 2 points lower on 
         20   that.  And with Equicredit I'm paying a $69,000 
         21   mortgage.  I have a ten-year mortgage.  I'm expected 
         22   to pay, at the end of the ten years, a $64,000 
         23   balloon payment.  At that time I will have already 
         24   paid off my loan.  And I try to pay as much as I can 

          1   over and above my 654 that I owe. 
          2            Equicredit is constantly sending me letters 
          3   for insurance.  They're telling me that I'm 
          4   eligible.  They don't tell you how much it's going 
          5   to cost you.  It's a constant, ongoing thing.  I 
          6   just disregard them.  I'm constantly getting letters 
          7   in the mail, you know, for other loan officers.  
          8   They keep getting information on me somehow. 
          9            With my loan through Equicredit I pay all 
         10   the insurance.  I pay all my property taxes.  And I 
         11   ask my -- the guy that did my mortgage, I says, 
         12   "Arthur, did you know about the $64,000 balloon 
         13   payment?"  He says, yes, he did.  He said that 
         14   Equicredit expects me to pay -- to refinance with 
         15   them within a three-year period, which is telling me 
         16   that I'm going to have to pay more brokerage fees 
         17   again, plus closing costs and everything else, to go 
         18   back with the mortgage with them. 
         19            This is very unfair and very unjust.  I 
         20   wish we could put an end to this. 
         21            If I refinance in three years, I have a 
         22   prepayment penalty.  And I wish you guys could do 
         23   something about, you know, putting an end to this.  
         24   We pray to a higher God up above, a spiritual God.  

          1   These people that are doing these loans, they're 
          2   praying to a higher money called the color green. 
          3            I thank you for your time here.  I really 
          4   hope you can help us out. 
          5            MODERATOR SMITH:  Thank you very much. 
          6            Ruth Dillingham.
          7            MS. DILLINGHAM:  I'm going to cede my time 
          8   to Mr. Fitzsimmons.  We're on the same topic. 
          9            MODERATOR SMITH:  Mr. Alkins. 
         10            MR. ALKINS:  Good afternoon.  My name is 
         11   Leonard Alkins.  That's A-l-k-i-n-s.  I'm the 
         12   president of the NAACP Boston branch. 
         13            I thank you for having these hearings, but 
         14   at the same time I'm insulted that the NAACP was not 
         15   notified that these hearings were coming about, nor 
         16   were we invited to participate in a process that we 
         17   have been involved in since the mortgage scam here 
         18   in Massachusetts. 
         19            I don't know if you have involved the NAACP 
         20   in other cities that you have been in, but this 
         21   impacts people of color, and for us to be excluded 
         22   from the process leads me to wonder, is there going 
         23   to be any change in what has not been happening in 
         24   our community?

          1            The mortgage scams, the flipping of 
          2   mortgages have been a problem for a long time.  They 
          3   never went away.  The message that's being sent by 
          4   State Government, Federal Government and local 
          5   communities, meaning the City of Boston, sends the 
          6   message that it's business as usual. 
          7            We have elderly people in our community who 
          8   are being ripped off by irresponsible contractors 
          9   who work with the City of Boston to repair elderly 
         10   people's homes.  There is no accountability.  There 
         11   is no monitoring of these programs. 
         12            You have legalized loan-sharking going on 
         13   by banks charging outrageous points for mortgages, 
         14   outrageous fees, when you talk about credit cards.  
         15   And what is the Federal Reserve Bank doing?  Does 
         16   anybody care about poor people and elderly people in 
         17   this country?  People who have power and don't use 
         18   it are just as bad off as the people who don't have 
         19   power. 
         20            We ask the Federal Government, the Federal 
         21   Reserve Bank, to enforce the regulations that are on 
         22   the books today, deal with those individuals who are 
         23   violating the subprime market laws.  Get rid of them 
         24   once and for all, prosecute them and prohibit them 

          1   from getting back into the business.  It's a 
          2   revolving door.  And we must act. 
          3            These laws and regulations have been on the 
          4   books for a long time.  Why has it taken us so long 
          5   to take a look at it again?  And why are you only 
          6   giving the community three minutes to discuss the 
          7   frustrations that we have been putting up with for a 
          8   long time?  You need to come into the community and 
          9   see firsthand what is going on, what is not being 
         10   done.  Enough is enough. 
         11            MODERATOR SMITH:  Thank you.  Mr. Campen. 
         12            MR. CAMPEN:  My name is Jim Campen, 
         13   C-a-m-p-e-n.  I'm Associate Professor of Economics 
         14   at the University of Massachusetts in Boston.  I'm a 
         15   former member of the Boston Fed's Community 
         16   Development Advisory Council. 
         17            I've done a number of studies on mortgage 
         18   lending in Boston and surrounding cities, and I'm 
         19   now under contract with the Massachusetts Community 
         20   Banking Council to do a study using 1999 HMDA data, 
         21   which should be available, and HUD's list of 
         22   subprime lenders to do a study of subprime lending 
         23   in the Boston area. 
         24            Preliminary analysis using 1998 data shows 

          1   the same sort of thing in Boston that other people 
          2   have reported, I'm sure, this morning, when I wasn't 
          3   here, has been found in other cities.  For example, 
          4   subprime lenders accounted for 9.4 percent of all 
          5   loans in the City of Boston -- that's refinance 
          6   loans in 1998; 24 percent of loans to blacks, but 
          7   only 5 percent of loans to whites; 32 percent of 
          8   loans in low and moderate income census tracts that 
          9   are more than 75 percent black and Hispanic, but 
         10   only 7 percent of loans in low and moderate income 
         11   tracks that are more than 75 percent white.  So the 
         12   racial divide is a primary thing here rather than 
         13   the income issue, according to that data. 
         14            My comments have to be very brief, so I 
         15   want to make one point, which is that those of us 
         16   who do studies and people who look at the results of 
         17   studies and depend on the results of those studies 
         18   are hurting because of the lack of good data on 
         19   subprime lending.  The situation now is that HMDA 
         20   data does not provide any information which allows 
         21   anybody to identify any particular loan as a 
         22   subprime loan.  And of course they can't identify 
         23   any loan as a predatory loan. 
         24            The way that most studies are done is that 

          1   HUD produces a list each year of subprime lenders; 
          2   that is, lenders that they have determined make -- 
          3   the majority of their loans consist of subprime 
          4   loans.  But those lenders make other loans which are 
          5   not subprime loans, and there are many lenders who 
          6   make predominantly prime loans but also make 
          7   subprime loans. 
          8            So what we need, what I urge the Board to 
          9   do, using its existing authority under the existing 
         10   legislation and to push for additional legislation, 
         11   is to expand the Home Mortgage Disclosure Act to 
         12   include three different kinds of data:  data about 
         13   loans, including interest rates, points, the 
         14   existence of prepayment penalties, balloon 
         15   penalties, balloon payments and so on; secondly, to 
         16   include information about borrowers to allow there 
         17   to be good data collected on the extent to which 
         18   subprime loans are going to prime borrowers who are 
         19   qualified for non-subprime loans; and third, since 
         20   there is a lot of evidence, a lot of anecdotal 
         21   evidence that there is a very large racial dimension 
         22   to the provision of subprime loans, it's important 
         23   to amend HMDA so that information on the race of 
         24   borrowers can be collected for all borrowers. 

          1            As it is now, loans taken over the phone or 
          2   through the mail or over the Internet, borrowers do 
          3   not even have to request -- lenders do not have to 
          4   request the information about the race of the 
          5   borrower.  In Boston, for example, in 1998, for 30.2 
          6   percent of the subprime loans that were made, there 
          7   was no information on race or ethnicity of the 
          8   borrower, compared to 10 percent of the prime loans. 
          9            So I urge the Federal Reserve Board to use 
         10   its authority to expand the HMDA data that is 
         11   collected and made available to the public. 
         12            MODERATOR SMITH:  Thank you very much.
         13            MR. WALKER:  Excuse me, Dolores.  Jim, do 
         14   you have that in written -- in terms of the 
         15   categories of information that you are suggesting?  
         16            MR. CAMPEN:  I was planning to submit 
         17   written --
         18            MR. WALKER:  Okay.  Thanks. 
         19            MODERATOR SMITH:  Andrea. 
         20            MS. LUQUETTA:  Good afternoon.  My name is 
         21   Andrea Luquetta.  That's L-u-q-u-e-t-t-a.  I'm the 
         22   Director of Housing and Community Reinvestment for 
         23   the Massachusetts Association of CDCs.  Our members 
         24   are nonprofit community-based organizations that 

          1   engage in a variety of community development 
          2   activities, often in partnerships with banks, often 
          3   under the CRA. 
          4            Over the past several years, MACDC and 
          5   allied organizations have successfully negotiated 
          6   with area banks commitments to increase CRA lending 
          7   by several billion dollars.  We are motivated to 
          8   pursue such commitments in part because financial 
          9   institutions have not met the credit and capital 
         10   needs of LMI and minority communities. 
         11            However, we've also been motivated by 
         12   troubling instances where a bank or another lender 
         13   has created negative consequences as a result of 
         14   trying to originate CRA-qualified loans or to fill a 
         15   market niche through what has become known as 
         16   subprime lending. 
         17            Therefore, in addition to pursuing 
         18   commitments by the banks to lend at certain volumes 
         19   in LMI areas, we have also pursued mechanisms to 
         20   make sure that the loans are responsibly 
         21   underwritten and do not negatively impact the 
         22   borrower or community. 
         23            For example, several years ago one of our 
         24   members in Chelsea documented that a particular 

          1   institution's bank and mortgage lending affiliates 
          2   had originated home-secured loans to LMI and 
          3   minority borrowers in that area at much higher 
          4   amounts than all other lenders in that area. 
          5            For example, a mortgage -- I'm sorry, a 
          6   loan to a low-income borrower from the mortgage 
          7   lending affiliate was more than $8,000 more than the 
          8   typical loan originated by all other lenders in the 
          9   same population.  On average, an African-American 
         10   applicant to the bank received a loan worth 30 
         11   percent more than all the loans offered by all the 
         12   other lenders.  And the average Asian applicant to 
         13   the mortgage lending affiliate received a loan worth 
         14   more than 65 percent more than all other loans 
         15   offered by all other lenders. 
         16            This is 1996 HMDA data.  It is old, but the 
         17   case was still made. 
         18            In at least one case, this had a negative 
         19   effect on the ability of the borrower to maintain 
         20   their home.  A Cambodian family that had borrowed 
         21   from this lender faced not being able to make 
         22   necessary repairs to their home, including repairing 
         23   major code violations, because this lender had lent 
         24   them 145 percent more than the property was actually 

          1   worth, and this was confirmed by several appraisers. 
          2            In addition to the Chelsea examples, we 
          3   have also heard of similar activity, such as you 
          4   heard today from John Anderson, in the 
          5   Dorchester-Roxbury-Mattapan area.  Thus some 
          6   lenders, in the name of helping to meet credit needs 
          7   of lower and moderate income and minority borrowers 
          8   and mortgage lending affiliates trying to fill a 
          9   market niche, have actually had negative 
         10   consequences and destabilized our communities. 
         11            For our part, we have negotiated with these 
         12   lenders mechanisms to ensure that folks do not get 
         13   in over their heads, that they use responsible 
         14   appraisers, and that they contract with community 
         15   organizations like Norma Moseley's -- I'm sorry, I 
         16   am going to go a little bit over -- like Norma 
         17   Moseley's to go through foreclosure counseling, 
         18   foreclosure prevention and postpurchase counseling. 
         19            However, the ability of community 
         20   organizations to document and address the activities 
         21   of lenders that destabilize our communities is 
         22   limited.  The regulators, and specifically the 
         23   Federal Reserve Board, have many more resources and, 
         24   most importantly, the authority to regulate 

          1   practices that are currently on the legal side of 
          2   HOEPA thresholds but are nonetheless harming our 
          3   communities. 
          4            And I just want to emphasize this point.  I 
          5   understand that you spent the afternoon discussing 
          6   community outreach efforts, and I did come in the 
          7   morning where you were discussing changing the 
          8   triggers and doing regulatory activities.  And I 
          9   think that the community outreach part is very 
         10   important and necessary, but that's not the area 
         11   that the Federal Reserve really stands to make an 
         12   important change. 
         13            It's really in your authority as a 
         14   regulator, rather than as a funder of community 
         15   outreach or even a supporter or cheerleader of 
         16   community outreach, where you have the power and the 
         17   ability to make dramatic, dramatic changes that will 
         18   help all of the community outreach to have a smaller 
         19   market to deal with. 
         20            So I'm going to just summarize the rest of 
         21   my testimony and just echo some of my colleagues in 
         22   encouraging you to use your authority to lower the 
         23   HOEPA triggers; make them more inclusive; to revise 
         24   the definition of points and fees to include all the 

          1   costs a borrower is required to pay in order to get 
          2   the loan; to prohibit prepayment penalties, balloon 
          3   payments, frequent refinancing or flipping of loans 
          4   and lending without regard to the borrower's ability 
          5   to repay on all high-cost HOEPA loans, as well as 
          6   making changes, as Jim Campen said earlier, to the 
          7   HMDA data.
          8            Finally, I would also urge that under CRA 
          9   examination procedures, that a lot of these issues 
         10   also be covered, including through the foreclosures, 
         11   because it's not enough that lenders are making and 
         12   originating these loans and therefore inflating 
         13   their origination numbers; it also has to be 
         14   reviewed what happens after the origination takes 
         15   place and what happens to the families and the 
         16   communities in order for the bank or the lender to 
         17   get CRA credit.  Thank you. 
         18            MODERATOR SMITH:  Mr. Fitzsimmons. 
         19            MR. FITZSIMMONS:  Good afternoon.  My name 
         20   is Bruce Fitzsimmons, F-i-t-z-s-i-m-m-o-n-s.  I'm an 
         21   attorney practicing law in Boston.  I'm also on the 
         22   Board of Directors of the Massachusetts Conveyancers 
         23   Association, a 3,000-member statewide real estate 
         24   bar. 

          1            In the Commonwealth of Massachusetts, real 
          2   estate closings are conducted by attorneys.  In most 
          3   cases, the closing attorney represents the lender 
          4   and also acts as the title insurance agent. 
          5            The MCA appreciates the concerns that have 
          6   led to the introduction of HR 4250 and 2415 and 
          7   related legislation.  The concerns of the 
          8   Massachusetts Conveyancers Association relates to 
          9   technical issues with the proposed legislation. 
         10            First, the concerns raised about predatory 
         11   lending practices have related to refinances and 
         12   second mortgage transactions.  There is no reason to 
         13   extend the Home Ownership and Equity Protection Act 
         14   to residential mortgage transactions in which the 
         15   loan is being used to acquire or construct the 
         16   dwelling. 
         17            Secondly, the MCA believes that the 
         18   provisions of HOEPA which exclude fees or premium 
         19   for title examination, title insurance, or similar 
         20   purposes, as long as the charges are reasonable, the 
         21   lender receives no direct or indirect compensation, 
         22   and the charges paid to a third party unaffiliated 
         23   with the lender, should be retained.  In 
         24   Massachusetts in particular, affiliated business 

          1   arrangements with lenders are exceptions rather than 
          2   the rule.  The lender does not benefit from those 
          3   types of charges. 
          4            Thirdly, the MCA is concerned with the new 
          5   Provision 129K of the Truth in Lending Act which 
          6   states that "No creditor or other person may require 
          7   or allow the collection of a premium for credit 
          8   insurance or a debt cancellation contract on a 
          9   single-premium basis through an up-front charge paid 
         10   by the borrower at the initiation of the loan." 
         11            The objection here is with the words "No 
         12   creditor or other person may require or allow."  
         13   Members of the MCA are involved in the closing of 
         14   mortgage loans, and we believe it is an impractical 
         15   burden placed on the closing attorney, who might be 
         16   viewed as the "other person" who "allows" the lender 
         17   to obtain the single premium in connection with the 
         18   transaction, the role of policing the lender. 
         19            We're not aware of any other section of the 
         20   Truth in Lending Act or other consumer protection 
         21   statute that imposes such an obligation on third 
         22   parties. 
         23            Lastly, we note that HR 3901 contains a 
         24   provision that "A conforming home loan document in 

          1   which blanks are left to be filled in after the 
          2   contract is signed shall not be enforceable under 
          3   federal or state law." 
          4            We believe that room should be left here 
          5   for correction of scrivener's errors in a mortgage 
          6   or for the filling in of recording information on an 
          7   instrument which will be recorded simultaneously 
          8   with the mortgage which requires the instrument 
          9   number from the mortgage. 
         10            Thank you very much for the opportunity to 
         11   present these comments. 
         12            MODERATOR SMITH:  Thank you very much, Mr. 
         13   Fitzsimmons.  And I thank everyone who signed up for 
         14   the open mike session. 
         15            Is there anyone else who did not sign up 
         16   but who would like to offer their views at this 
         17   time?  (No response) 
         18            Well, if not, with that, we will adjourn 
         19   this hearing.  But, again, I thank you in the 
         20   audience both who participated and who came here to 
         21   hear the presentations made by the invited panelists 
         22   and by the open mike presenters. 
         23            We have, I think, gained some important 
         24   perspectives offered here today and will be taking 

          1   advantage of them in our analysis as we work to 
          2   develop proposals and recommendations to the Board 
          3   on measures that might be taken within the Board's 
          4   authority to amend the HOEPA provisions of the Truth 
          5   in Lending Act and to take other measures that might 
          6   be helpful in helping to eliminate predatory lending 
          7   practices. 
          8            So, with that, unless we have other 
          9   comments from the Panel, then we are adjourned, and 
         10   I thank you again.
         11                 (Whereupon the proceedings were
         12                 concluded at 4:00 p.m.)

          1                   C E R T I F I C A T E
          2            I, Carol H. Kusinitz, Registered 
          3   Professional Reporter, do hereby certify that the 
          4   foregoing transcript, Volume I, is a true and 
          5   accurate transcription of my stenographic notes 
          6   taken on August 4, 2000.
          9                  _____________________________
         10                         Carol H. Kusinitz
         11                  Registered Professional Reporter
         14                        -  -  -  -

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