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Public Hearing on Home Equity Lending
September 7, 2000

                        BEFORE THE

                    BOARD OF GOVERNORS

                  FEDERAL RESERVE SYSTEM

PUBLIC HEARING                                    |
HOME-EQUITY LENDING MARKET                        |

             Garden Conference Rooms A and B
          Federal Reserve Band of San Francisco
                    101 Market Street
                San Francisco, California

                    September 7, 2000


EDWARD M. GRAMLICH, Member, Board of Governors, Federal
  Reserve System, Chairman, Committee on Consumer and
  Community Affairs.


DOLORES S. SMITH, Director, (Moderator, Afternoon Session)

GLENN E. LONEY, Deputy Director (Moderator, Morning

JAMES A. MICHAELS, ESQ., Managing Counsel

JANE E. AHRENS, ESQ., Senior Counsel

SANDRA BRAUNSTEIN, Assistant Director and Community
  Affairs Officer (Afternoon session)


JOY HOFFMAN MOLLOY, Director, Community Affairs and Public
  Information Federal Reserve Bank, San Francisco


                        I N D E X

Opening Remarks    Glenn Loney, Moderator              5

Opening Remarks    Edward M. Gramlich, Governor        7
                   Federal Reserve System
                   Chairman, Committee on
                   Consumer and Community Affairs

SPEAKER:                                              PAGE


PEGGY L. TWOHIG    Assistant Director                 13
                   Division of Financial Practices
                   Bureau of Consumer Protection
                   Federal Trade Commission

ELENA DELGADO      President,                         17
                   Irwin Home Equity Corporation

ROBERT GNAIZDA     Policy Director & General Counsel  20
                   The Greenlining Institute

ANN CARLTON BOSE   President, Estate Funding, Inc.    24

MARY LEE WIDENER   Chief Executive Officer            27
                   Neighborhood Housing Services
                     of America, Inc.

DAVID H. SANDS     Partner, Troop Steuber Pasich      30
                     Reddick & Tobey, LLP

NORMA P. GARCIA    Senior Attorney, Consumers Union   34

SANDOR E. SAMUELS  Managing Director, Legal           36
                   General Counsel & Secretary
                   Countrywide Home Loans, Inc.

JOHN L. BLEY       Director,                          40
                   Department of Financial Institutions
                   State of Washington

DANIEL J. MULLIGAN Partner, Jenkins & Mulligan        43

MICHAEL A. RANKINS President & CEO                    45
                   Rankins Mortgage Corporation

JOHN A. COURSON    President & CEO                    47
                   Central Pacific Mortgage Company


PANEL DISCUSSION                                      50


Opening Remarks    Dolores S. Smith, Moderator       164


ALAN FISHER        Executive Director                167
                   California Reinvestment Committee

FRANCINE MCKINNEY  President                         170
                   Home Buyer Assistance Center

CHESTER CARL       Chairman, Board of Directors      172
                   National American Indian Housing

CHRIS LAMBERTI     Board of Directors                177
                   American Association of Retired

STEVEN HORNBURG    Executive Director                179
                   Research Institute for Housing

PANEL DISCUSSION                                     183


TERRY MACKEN                                         216

STEPHEN COGSWELL                                     219

BARRETT R. BATES                                     221

GEORGE DUARTE                                        224

LOUIS BRUNO                                          227

MILTON HODGE                                         231

LINNIE COBB                                          233

HOWARD BECKERMAN                                     236

SHANELLE COLEMAN                                     240


                  P R O C E E D I N G S

                                                 9:00 a.m.

          MR. LONEY:  If  we could begin, please.   First,

let  me  introduce myself.  I'm Glenn Loney, and  I'm  the

Deputy Director of the Division of Consumer and  Community

Affairs  at the Federal Reserve Board in Washington.   I'm

going  to  acting  as the  moderator  for  this  morning's


          The  San Francisco hearing is the last  of  four

hearings  that  the  Board  is  holding  this  summer   on

home-equity  lending.  We had very interesting and  useful

meetings  already in Charlotte, Boston and  Chicago.   The

invited  panelists and the members of the public at  those

hearings offered a wide variety of views on possible  ways

to address predatory lending practices in the  home-equity

consumer  market,  and we expect the same here.   We  look

forward  to  hearing about these issues in  San  Francisco


          Like our earlier hearings, we will be discussing

the  potential use of the Board's  rule-writing  authority

under  the  Home Ownership and Equity Protection  Act  and

also   alternatives  to  regulations,  such  as   consumer

outreach and consumer education.

          Before I go too far, can everybody hear me?  Can

you hear me, Margaret?  Good.


          First,  let me introduce the panel, the  Federal

Reserve Panel.  From the Board, to my immediate right,  is

Ned Gramlich, who is a member of the Board of Governors of

the  Federal Reserve System, and chairman of  the  Board's

Committee  on Consumer and Community Affairs.

          From  the  Board's  Division  of  Consumer   and

Community Affairs, we have Jim Michaels, Managing Counsel,

and  Jane Ahrens, who is Senior Counsel, who both work  on

Truth In Lending matters at the Board.

          From the Federal Reserve Bank of San  Francisco,

we  have  Joy  Hoffman  Molloy, who  is  the  director  of

Community Affairs and Public Information.

          Let  me  just make a  few  introductory  remarks

about what we are about here.

          The  Truth In Lending Act requires creditors  to

disclose the cost of credit for consumer transactions.  In

1994,  the Congress enacted the Home Ownership and  Equity

Protection  Act -- or HOEPA, as it's called --  and  HOEPA

added   special  protections  to  Truth  In  Lending   for

consumer's  who  use the home as security for  loans  with

rates or fees above a certain percentage or amount.  HOEPA

was  a response to accounts of abusive  lending  practices

involving  unscrupulous  lenders  who  made   unaffordable

home-secured loans to house-rich but cash-poor  borrowers.

These    cases   often   involved    elderly,    sometimes


unsophisticated  homeowners, who were targeted  for  loans

with  high rates or high closing fees and  with  repayment

terms that were difficult or impossible for the homeowners

to meet.

          In  brief, HOEPA requires creditors  to  provide

additional   disclosures  at  least  three   days   before

consumers  become obligated for such loans.  It  prohibits

lenders  from including certain terms in loan  agreements,

for  example:  balloon payments for short-term loans.   It

prohibits creditors from relying on consumer's home as the

source  of  repayment  without  considering  whether   the

consumer's  income,  debt  and  employment  status   would

support repayment of the debt.  It also requires the Board

to  hold  hearings periodically, to keep  abreast  of  the

home-equity  credit  market targeted by  the  HOEPA.   The

Board  held hearings in 1997, about two years after  HOEPA

became effective, and now it is conducting this series  of


          Governor  Gramlich will start us off with a  few

remarks about the purpose of these hearings.

          Governor Gramlich.

          GOVERNOR GRAMLICH:  Thank you very much, Glenn.

          First  off,  we're  happy  to  be  here  in  San

Francisco, and thank the San Francisco Fed for putting  on

the meeting this morning.


          The  last few years has seen an enormous  growth

in  subprime  lending.  The rate  of  growth  in  subprime

lending  has  been roughly twice that  of  prime  mortgage

lending.  Subprime lending has gotten to be a  significant

share  of overall mortgage loans; and, by and large,  this

is  a  very positive development.  Indeed, the  growth  in

subprime lending has brought credit to millions of  people

who  have earlier been judged to be poor credit risks  and

would  not  have  gotten the loan.  So  this  has  enabled

millions of people to buy homes and start really going  on

their  piece of the American dream.  But with  every  good

thing,  there  may be some bad that come  along  in  their

wake.  One of those may be subprime lending, or  predatory

lending.  We hear stories of abuses that have cropped up.

          The  basic goal of the hearings, and  for  every

agency  that  has  any kind  of  authority  for  predatory

lending,  is to try to, in effect, clean up  the  subprime

market,  to  make  sure that  the  good  subprime  lending

proceeds  and the abuses are stopped.  This mixed  message

symbolized  the difficulty of this issue.  That there  are

many  practices that might be good most of the  time,  but

end in abuse some of the time, so it's difficult simply to

ban practices.  I think everyone agrees that, if consumers

really  understood  the properties of the loans,  much  of

this  problem would go away.  But, first off, there's  the


difficulty  in  getting  information  to  the   community;

secondly, there may be competition problems, just like the

market.   So, as regulators, we're treading a narrow  line

here,  but we do what we can to stop the abuses.   But  we

don't want to stop the good part of subprime lending.

          The  Fed  has some authority in this  area.   As

Glenn  has  mentioned,  or might  have,  under  HOEPA,  in

addition  to  holding these hearings, The  Fed  does  have

authority  to  change  the scope of HOEPA a  bit,  and  to

declare  certain practices fraudulent and deceptive.   The

basic purpose of the hearing is to try to figure out  just

exactly what part of this should be used.  We want to make

sure that anything we do has benefits that outweigh cost.

          One thing that I should say, and probably others

will  say, is that The Fed can't do it all, but there  are

things that they can do and we are considering them.   But

there a broad assault on this issue I think is  necessary.

We  are already meeting with nine federal regulators,  who

have  responsibility in this area.  We're already  meeting

with them back in Washington.  In most states, there are a

number  of state statutes that also have bearing.   So  we

want  to make sure that all of the regulators are  on  the

same  page.  Purchasers of secondary mortgages can play  a

role  by  also doing due diligence on the  mortgages  they

purchase.   There are efforts at community education  that


are  underway.   The afternoon part of  the  hearings  are

going to focus on those.

          So  a  broad gauge approach to  the  problem  is

presumably  necessary.    At the same time, the  focus  of

this  morning's hearing are clearly on what The Fed  ought

to  be  doing.  So we will be structuring the  efforts  to

bring out some of the delicate issues in that hearing.

          These are not the first hearings that have  been

held.   There  were an earlier round of hearings  back  in

1997.   Treasury and HUD has had a number of  hearings  on

predatory  lending this year.  This is now the  fourth  of

the  hearings,  or the last of the hearings, that  we  are

holding under HOEPA.

          At this point, I'm going to quit.  We'll let the

panelist  talk  about the issues.  We're  here  mainly  as

listeners.  But, again, I would like to thank everybody in

San  Francisco for having us out here and hopefully  we'll

have a successful meeting that develops some sensible  and

effective policies.

          Thank you.

          MR. LONEY:  We're  going  to spend  the  morning

considering  ways  in  which  the  Board  might  use   its

rule-writing authority under the Truth In Lending Act  and

HOEPA to curb predatory lending practices and  home-equity

lending,  while preserving access to credit for  borrowers


with  less-than-perfect credit.  This afternoon,  we  will

discuss  alternatives  to  regulation,  such  as  consumer

outreach and education, that might help address  predatory

practices.  At both sessions, we particularly hope to hear

about  studies or research on subprime or  equity  lending

that  will inform the Board in its  deliberations.   We're

very  interested  in hard data that anyone  has  on  these


          In addition, we have set aside time to hear from

members of the public.  Anyone who, any of the members  of

the  public who want to can sign up to participate in  the

open-mic  session  later  this afternoon.   The  order  of

appearance  at the open-mic session will be based  on  the

list.   The sign-up will also help us gauge the length  of

time  participants may be asked to observe  in  expressing

their views.  The expectation, based on the experience  at

the earlier three hearings, for people who have signed  up

for the open-mic session can expect about three minutes.

          I  think the sign-up is downstairs at the  lobby

where  we came in, the west entrance.  So, any of you  who

want to sign up for the open-mic sessions, please do so.

          I  need  to  talk briefly  about  the  rules  of

procedure we're going to use at the meeting today.   These

are  the  same rules of procedures that  governed  in  our

preceding three sessions in Charlotte, Boston and Chicago.


          What  we're going to do is:  We're going to  ask

the  panelists  assembled  here and  this  afternoon,  the

second  panel,  to limit their prepared remarks  to  about

three minutes.  We have a timekeeper, sitting right  there

in  the  middle.  Raise your hand, please.   Her  name  is

Georgette Bhathena. She is going to give you a  one-minute

warning, and then a time-is-up warning.  If we are   going

to  get through this in any orderly way, it's going to  be

incumbent upon us all to observe the time constraints.

          I just want to assure the panelists that,  after

that, we're going to have a more open session discussing a

number  of issues that the Board raised in its  notice  of

this hearing.  We will -- there will be time for everybody

to  express  their views on the various  issues  that  the

Board has expressed a particular interest in.

          What  we're  going to do is, is we're  going  to

start  with  my friend and colleague,  Peggy  Twohig,  and

proceed  clockwise.   Each  panelist  will  present  their

opening  statement.   Then, after all the  panelists  have

made  their  opening statements, there will be  a  general

discussion  among  the  panelists and among  us  from  the

Federal Reserve.  Although, I will say that, after  making

your opening statements, the Federal Reserve panelist  may

want to ask questions.

          During our first segment, following the  opening


statements,  we'll  discuss possible  changes  to  HOEPA's

scope  from 9:50 to 10:30.  Then we will break  for  about

ten  minutes at 10:30, and reconvene for the rest  of  the

morning    session   to   discuss   possible    additional

restrictions   or  prohibitions  for  specific   acts   or

practices under HOEPA.

          So,   without  further  ado,  I  will  ask   the

panelists to introduce themselves, where they're from  and

their title, and affiliation.  So, Peggy, if you will.

                       STATEMENT OF





          MS. TWOHIG:  Good  morning.  My  name  is  Peggy

Twohig.    I'm  the  Assistant  Director   for   Financial

Practices, Federal Trade Commission.

          I  appreciate the opportunity to appear at  this

hearing  on  behalf of the Federal  Trade  Commission  and

discuss a serious problem of abusive lending practices  in

the  subprime  market.  The Federal  Trade  Commission  is

looking  at a number of ways to address  these  practiced,

primarily through law enforcement and consumer education.

          The   Commission  has  made  halting   predatory

lending   practices  a  top  enforcement  priority.    The


Commission  has  brought action against  large  and  small

subprime  lenders  for various legal  practices.   In  the

interest  of time, I will mention a few of these  actions.

Other Commission actions are discussed in the full written

statement  that has been submitted to the Board, and  it's

available  both here and is available on the  Commission's

web site.

          A   number  of  these  actions   have   involved

allegations  of  lenders violated the Home  Ownership  and

Equity Protection Act, which we call HOEPA.  Last year, as

part  of Operation Home Inequity, the  Commission  settled

cases with seven subprime mortgage lenders for  violations

of HOEPA, as well as other law violations.

          The HOEPA violations included failure to provide

required  HOEPA disclosures, illegal asset-based  lending,

and  use  of  prohibitive  loan  terms.   The   Commission

obtained substantial remedies, including redress of over a

half-million  dollars.  These involved a total of  several

loans.   In  the  case of one lender, a  ban  against  any

future  involvement  in high-cost  mortgage  loans.   More

recently,  the  Commission  settled a case  of  this  type

against a Washington State lender.  That case included  an

additional allegation that the lender made direct payments

to  home  improvement contractors in violation  of  HOEPA.

That  settlement  required, as part of the  settlement  of


the case, more than  $150,000 in consumer redress.

          In   March,   the   Commission   announced   the

settlement,  along  with the Department  of  Justice,  and

Department  of Housing and Urban Development,  with  Delta

Funding Corporation, a national subprime mortgage  lender.

The  Commission  alleged  that  Delta  violated  HOEPA  by

engaging illegal asset-based lending.

          Other  cases  involved different  violations  of

law,  including deceptive lending practices.  Last  month,

the   Commission  settled  a  case   involving   deceptive

advertising  and marketing practices of  the  now-bankrupt

First  Trust Financial, which involved both claims of  the

amount  of  money you would save  against  the  foundation

loan.   And,  of course, we're still litigating  our  case

against  Capital  City  Mortgage  Corporation.   This  one

involved  allegations  that that company, and  its  owner,

deceived  consumers  in  just about  every  stage  in  the

lending process.

          I  see I'm already running out of time, so  I'll

just  mention  that we also have many  consumer  brochures

that address home-equity lending that are available on our

web  sit.  We distributed about 200,000 copies of them  so


          While some of the predatory lending practices we

have  seen can be addressed through the current  laws  and


regulations, the Commission recommends that the Board make

several  regulatory changes to strengthen the  protections

in  the high-cost market.  The Commission recommends  that

the Board further restrict acts and practices under  HOEPA

and  change the HOEPA triggers.  We believe a  very  small

percentage  of  subprime  mortgage  loans  are   currently

covered   by  HOEPA,  and  the  Commission  has   observed

problem-lending  practices  in subprime  loans  where  the

rates and fees falls far below the current trigger.  As  a

result,  this protection offered by HOEPA will help  those

few  borrowers  unless  HOEPA is expanded  to  cover  more

loans.   More particularly, the Commission recommends  the

Board change the HOEPA triggers by both lowering the HOEPA

APR trigger to 8 percent, and including lump-sum insurance

premiums in the HOEPA fee trigger.

          The  Commission also recommends that  the  Board

address  the  problem of loan packing by  prohibiting  the

financing of lump-sum, single-payment credit insurance and

other  products  sold with HOEPA  loans.   The  Commission

believes  that  a prohibition of this  type  is  necessary

based  on  its  long enforcement history  in  credit  term

packing  and  given  the  nature,  complexity  and  highly

unequal    bargaining   position   involved    in    these

transactions,  disclosures alone would not be adequate  to

protect consumers.


          In addition, the Commission recommends that  the

Board  prohibit  mandatory arbitration  clauses  in  HOEPA

loans.   Mandatory  arbitration agreements  undermine  the

consumer's  ability  to exercise the  statutory  right  to

protection in the credit marketplace.  Consumers, in  this

very    high-cost   market,   particularly   need    those


          The  Commission's full statement  include  other

recommendations.    And, since I've run out of time,  I'll

stop here.  Thank you for the opportunity to appear.

          MR. LONEY:  Thank  you, Peggy.  I'm sure  you'll

get to finish some of your thoughts later.  Sorry.

          Ms. Delgado.

                       STATEMENT OF

                      ELENA DELGADO


          MS. DELGADO:  Good  morning.  My name  is  Elena

Delgado.  Can you hear me?  I'm the president and  founder

of Irwin Home Equity.  I'm pleased to have the opportunity

to participate in this panel.

          Irwin Home Equity -- otherwise known as IE  --is

a  subsidiary of Irwin Financial Corporation,  an  Indiana

state-chartered bank holding company.  IHE originates home

equity  loans and line of credit which are funded  by  its

affiliate, Irwin Union Bank and Trust Company, an  Indiana


state-chartered, Fed member bank.  IE offers its  products

in 28 states and is subject to regulatory oversight in all

of these states.  As you can see, we are subject to a fair

amount of regulatory scrutiny.

          IE   is  a  direct-response   lender   targeting

credit-worthy but underserverd borrowers.  Our home-equity

loans  are generally secured by a second mortgage  on  the

borrower's residence.  We are a debt consolidation  lender

and  our loans enable our borrower's to pay off  high-rate

debt and credit-card debt.

          Our customers generally have A-plus or A  credit

and  are never lower than B plus.  Because  our  borrowers

carry high-credit balances and are looking for a high  LTV

loan,  they  are  precluded  from  obtaining  credit  from

conventional    banking    sources.     Therefore,     our

products/borrower combinations are a higher risk than most

banks  and  we price adjust for this increased  risk.   We

offer  applicants the option of choosing to  reduce  their

rate  by  the inclusion of pre-payment penalty or  by  the

payment  of  discount points and fees.  We feel  that  the

ability  to use these loan terms gives our  borrowers  the

option to choose a product that best fits their needs.

          We  are not in the foreclosure business.   Since

the  inception  of  our business six years  ago,  we  have

originated  over  50,000  loans  and  have  completed  the


foreclosure  process on only 34.  We do make money on  our

foreclosures  and,  in  fact,  our  total  losses  due  to

foreclosures approximates $370,000.

          We are here because today a small number of  our

loans   fall  under  HOEPA  and  we  want  to  share   our

experiences  on  HOEPA with you.  We also  would  like  to

offer   some  suggestions  on  how  to  make  HOEPA   more

effective.   We don't believe HOEPA is  accomplishing  its

primary  objectives.  Our belief is that  the  disclosures

required by HOEPA haven't been either particularly helpful

nor well understood by the borrowers.  We are not aware of

any borrower changing their mind about a loan based on the

information contained in these disclosures.

          We  believe  that  HOEPA is  having  an  adverse

affect on the cost of doing business and has curbed access

to  credit to higher risk market segments because  of  the

increased risk associated with these loans.  In  addition,

the  industry has defaulted to using HOEPA as a proxy  for

predatory lending.  This has created a reputational  risk,

as well.  Because of these risks, we believe that lowering

the HOEPA triggers will further accelerate the flight from

HOEPA  loans which will further limit the availability  of

credit  to  the  needier market  segment.   Already  we've

learned  from  our Wall Street financiers that  there   is

waning interest on the part of investors and  underwriters


in  paper secured by HOEPA loans.  This is because all  of

the  parties involved in the transaction  can't  guarantee

the  adequacy of the process, but are forced to  bear  the

liability.  Also, we are reading news articles daily about

lenders  refusing to make HOEPA loans.  If The Fed  elects

to  reduce  HOEPA triggers, more of our  loans  will  fall

under  HOEPA.  At that point, we also will need to  decide

whether or not it makes business sense for us to  continue

to make HOEPA loans.  We have pulled out of North Carolina

due to passage of their high-cost loan legislation.

          We  are  here  to propose  responsible  ways  to

revamp HOEPA such that it can accomplish it's purpose.  We

look  forward  to your insights to our proposal  and  some

enlightened discussions.

          Thank you.

          MR. LONEY:  Thank you, Ms. Delgado.

          Mr. Gnaizda.

                       STATEMENT OF

                      ROBERT GNAIZDA



          MR. GNAIZDA:  Good  morning.  I'm  Bob  Gnaizda,

the general counsel for the Greenlining Institute.

          Before I begin my prepared remarks, I wanted  to

make   just  some  introductory  observations.    Firstly,


Governor   Gramlich,  all  of  the  community   groups   we

represent  want  to  thank  you  for  your  very   special

commitment  for  this community reinvestment.   We'd  also

like  to thank Joy Hoffman Molloy, of the Federal  Reserve

Bank here, for being an outstanding counselor/adviser  and

so helpful to community groups.

          There  are  three procedural matters I  want  to

discuss before I go into my prepared remarks.  First,  the

key  outside  player is not here and  was  apparently  not

invited;  and that is:  the investment houses  responsible

for  the ten-fold increase in predatory lending  over  the

last five years, through their $300 billion in financing.

          Secondly,  these  hearings are far  too  narrow.

Ninety-five percent of the potential problems are excluded

from the coverage of these hearings.

          Thirdly,  the  Federal Reserve is  in  the  best

position  to  be  the leader in  resolving  this  problem.

These hearings are only a very partial and narrow solution

to that leadership.

          And now my prepared remarks.

          I'd like to make brief substantive observations.

The first is Wall Street.  Wall Street must be brought  to

the  table.   In the last five years, they  have  provided

financing  of $300 billion in the subprime lending,  which

is an increasing amount for predatory lending.  They  have


failed to exercise due diligence, and they must be  forced

to  do so.  The first solution is for the Federal  Reserve

Chairman, Alex Greenspan, to call that to Washington, much

as  he called that to New York, to save the  multi-million

dollar hedge fund.

          Secondly,  we must recognize that up to half  of

all persons securing subprime loans are actually  eligible

for  prime  loans.  Fannie Mae and Freddie Mac  are  in  a

leadership position in doing that conversion.

          Thirdly,  there  is  no  substitute  for  honest

competition.   Predatory  lending will  continue  unabated

unless   there   is   effective   regulated,   scrutinized

competition that cares for the consumer.  And the  Federal

Reserve is in the best position to make that happen.

          Fourthly,  the  Federal Reserve can  begin  that

process  by refusing to permit any mergers where there  is

predatory lending.  That will send a message immediately.

          Five.   The  Federal  Reserve  can  require   or

encourage corporate codes of responsibility, what I  would

call a consumer bill of rights for regulated institutions.

That's the way to encourage them, by providing incentives,

by  giving them additional CRA credit, since there  should

be  a  moratorium  on foreclosures.  HUD  has  begun  that

process in LA, New York, with FHA loans.

          I'm  now  going to move to my  ninth  and  tenth


points  because my time is almost up.  We  cannot  address

this  problem without at least looking back a  few  years.

There  must be restitution for victims.  There is none  in

any form.

          Lastly,   and  probably  the   most   important,

leadership  by the Federal Reserve.  It has  been  absent.

The  Federal Reserve should be the leader  for  protecting

the  consumers  while  encouraging,  as  you  have   said,

Governor  Gramlich, competition in subprime lending.   And

that is why we have given, in our report card, the Federal

Reserve a C minus.

          And,  lastly  on  leadership,  Governor   Davis,

governor  of  the  seventh  largest  economy,  has   three

government agencies that have responsibility in  predatory

lending, banking, corporations and real estate.  They  are

totally  absent,  and  I  note  they  are  not  here.    I

congratulate the state of Washington for sending their key


          I  want to just end with this because  we  don't

have  enough  time.  Greenlining and  the  former  banking

commissioner from California, and Fannie Mae and CRC, will

be holding a press conference at 10:30 in the next room.

          Thank you very much.

          MR. LONEY:  Thank you.

          Ms. Bose.


                       STATEMENT OF

                     ANN CARLTON BOSE


          MS. BOSE:  My name is Ann Bose, and I'm probably

the  only  person sitting at this  table  that  originates

these  types of loans we're talking about:   the  subprime

loans.  I'm a mortgage broker.  I own Estate Funding.

          My  credentials  are, just so you know:   I  was

president  of  the  LA  County  Association  of   Mortgage

Brokers.  I sat on the California Association of  Mortgage

Brokers  for  more  than five years.   I'm  currently  the

director of the National Association of Mortgage  Brokers,

since 1995, and was the treasurer of that group last year.

I have been honored by my peers as Mortgage Broker of  the

Year  in  1994  and  1991.  I also was  a  member  of  the

California Mortgage Bankers Board for two years.

          In  1981 I was a teacher.  I taught high  school

history  and  government.  I got a divorce.   In  1983,  I

founded this business.  I was the mother of four and eight

--  not four children, a four-year old and  an  eight-year

old.  Teaching wasn't going to do anything for me.  I  had

no   alimony   or  child  support.   I   found   tremendous

opportunity  in the mortgage broker industry.  Within  two

years,  I was able to support my family they way  we  were

living before the divorce.


          There is no glass ceiling in this business.  And

it is a business of tremendous opportunity for people that

come to it with a sense of integrity and want to learn  it

and want to work hard.  I think brokers make a  tremendous

difference  in  the  lives of the people  with  whom  they

interact.   I think we help more people realize that  deal

of  home  ownership  than  any  other  segments  of   this

industry.    We  listen  to  our  customers'   long-   and

short-term  financial goals and construct loans that  meet

their  specific needs.  We educate them to their  options.

We have tremendous options.

          As  mortgage  brokers,  we  have  a   tremendous

opportunity to support for 100 percent financing.  We have

five or six different loan options.  We have subprime.  We

have  government.  We have first-time home-buyer  options.

We  have  lines  of credit.  How about  80  percent  to  a

million  dollars?  We have no-income documentation  loans,

and subprime as well.

          Brokers help keep prices down.  There are a  lot

of  us.  We're a highly competitive business.  Because  we

keep  prices  down, we help keep the  competition  honest.

Subprime is becoming almost the same level of commodity as

the  first-risk C business and the conventional  business.

Because subprime has been securitized, it is very close to

becoming the same type of commodity that the  conventional


loans are.  Which means you have standardized underwriting

procedures and much less opportunity to abusive practices.

If  prices are closed, what do we sell?  We sell  service,

education,  integrity  and options.  We are  an  efficient

marketing  channel for a variety of loan products for  the


          Regarding  proposed  regulations,  I'd  like  to

suggest  that  we enforce the regulations we have  on  the

books  before we assume that the legislation that we  have

now  is not working.  I don't believe there is  sufficient

enforcement  to  make that evaluation.  I think  that  the

current  HOEPA regulations have, in effect, eliminated  an

entire class of loans that, from my experience as a broker

and originating loans, I cannot find small second trustees

for subprime borrowers.  I can't find lenders that want to

do  them  due to the fact of the high cost to  lenders  in

terms of regulation, disclosures and risk, and there is no

profit  to  do  all that.  It's a  narrow  profit  for  me

because  I can't make enough money on $10,000  or  $20,000

loans  to  do the loans.  So we've  already  eliminated  a

class of loans.  I can't find comfort in that.

          I   think  industry  self-regulation   is   very

important.  The best business practice is a proposal  that

has  been  put forth by the NBA and NAMB to  register  all

originators,   not  just  brokers.   To  isolate   problem


originators, you need to register all originators.  If you

charter your brokers by themselves, then the bad eggs will

just  go to work for banks, and they have enough bad  eggs

themselves.  So I think industry self-regulation and  more

enforcement and consumer education is where we belong.

          Lastly, I believe, as Senator Graham said in his

hearings that he is not sure what predatory lending is.  I

think  you need to define that before you try  to  control


          MR. LONEY:  Thank   you,  Ms.  Bose.   Sorry   I

mispronounced  your  name.  I'm sure it's  not  the  first

time.  I hesitate to call you Ms. Widener, but go ahead.

                       STATEMENT OF

                     MARY LEE WIDENER



          MS. WIDENER:  My name is Mary Lee Widener, Chief

Executive  Officer  of Neighborhood  Housing  Services  of

America.   We are a special-purpose, nonprofit,  secondary

market  for the community loans bank in  the  Neighborhood


          We  applaud  these  hearings,  both  for   their

content  and  the message.  The Board  is  the  preeminent

point  of guidance with regard to financial  practices  in

America.   So  the  message  of  these  hearing  is   very



          The  Board  asked for comments on  a  number  of

specific  items.   I'd like to submit as my  response  the

model statutes against abusive home loans, as developed by

the  Community  Center  for Self-Help,  in  Durham,  North

Carolina.   We've tried to establish whether or not  these

have been submitted, but I really want to be sure they are

on the record, and they are all the specifics called  for.

With regard to the details, I support all of them.

          In addition, I'd like to comment on and  support

the  report the Greenlining Institute's 10 Point Plan.   I

think  the  expansion of looking at where  the  investment

dollars  come  from, in particular, to  support  predatory

lending.  It's an extremely important point.  You've  just

got tto cut this off, and should be adopted by the Board.

          The  other  objective  that  I  feel  should  be

included  in my primary remarks would be that  there  does

need  to  be  a clear and  more  expansive  definition  of

"predatory   lending,"   so  that  the   whole   industry,

non-profit  and  for-profit,  know what  we're  trying  to

avoid.   And some very good work was done by the  National

Association of Consumer Advocates on this point.  And  I'd

like to provide that to the Board, as well.

          Another  objective  should be to  establish  the

legal  right  of non-profits to  protect  the  hard-fought


gains  in improving the financial condition of  low-wealth

borrowers.   The  best  example are work  of  Habitat  for

Humanity  and  the  Neighbor  Works  Network.   When  these

groups pull together as volunteers and partners around the

country  to  help  families who  otherwise  wouldn't  have

opportunity to see which way runs the risk of making  this

a  way to continue to get the kind of support  that  we're

able  to provide to low-wealth borrowers.  And  we  should

not   have   to  include  those   protections   in   these

restrictions,  because  so much of that work  has  already

been  done  ahead  of  this  predatory  lending  kind   of

experience.  And it would be impossible to check all  that

work  in these restrictions.  So we feel  encouraging  the

general legal right in some form, whether by regulation or

by statute.

          And, then, finally, I think it's very  important

that  the Board succeed in sending a solid message to  the

financial industry that, with regard to predatory lending,

it's bad to be a part of the problem, and it's good to  be

a part of the solution.  And I would really encourage  the

most  stringent  use of regulatory  power,  especially  in

mergers and acquisitions to send this message.

          With  regard to concerns about subprime  lending

and  damages in that market, I have to say that I  applaud

your concern there, but our -- my impression is that --


          MR. LONEY:  Your  time  is up, but  finish  your


          MS. WIDENER:  My  impression  is,  to  a   large

degree,  people  who need subprime lending, to  the  point

that  it is unclear whether or not it is moving over  into

predatory,  probably  need to stay out of the  game.   And

there  needs  to  be a great deal  more  pressure  on  the

non-profit sector, the for-profit sector, local government

sector,  and the conventional market to try  and  regulate


          MR. LONEY:  Thank you.  Mr. Sands.

                       STATEMENT OF

              DAVID H. SANDS, ESQ., PARTNER


          MR. SANDS:  Thank you, Mr. Loney.

          My name is David Sands, and I'm a partner in the

law  firm  of Troop Steuber Pasich Reddick  &  Tobey.   My

practice  principally involves representation of  lenders,

servicers and the investment community, like companies  of

some who are here.  And they're big organizations, clients

in corporate matters.

          I'm  honored to be invited to speak here and  to

share  my perspective through my practice over the  years.

I  hope  I  can contribute a little  bit  to  the  Board's

deliberative process on these very important issues.


          I  want to open my remarks by noting that,  much

of  what I read in the other hearings and  transcripts  of

those  hearings,  and  I read in  the  press,  it  clearly

troubles  me.   Because,  as Governor  Gramlich  said,  we

really  need to base our decisions in the process on  what

the  facts  are and what the studies show.   Clearly,  the

anecdotal evidence shows -- and I'm sure the studies  show

--  there are many situations where  unscrupulous  brokers

and  lenders  have  taken  advantage  of  borrowers,   and

misrepresented them, mislead borrowers.

          This predatory lending activity, and I would say

the predatory lending and not subprime lending, is clearly

deplorable.  And, on the other hand, subprime lending  has

been  extremely beneficial.  Nobody can argue --  I  don't

think  anybody  is  arguing that.   As  Governor  Gramlich

correctly  pointed out that subprime lending  has  greatly

increased  the flow of credit into communities that   have

been typically underserved or not served.  In many  cases,

may   be  served  by  payday-advance  companies.    That's

probably the last place they want to go to for a loan.

          So,  hopefully,  if you think  about  all  these

discussions  and, again, as Governor Gramlich has  pointed

out, I hope we always keep in mind the fact that, whatever

we talk about, whatever we do, we try to keep in mind that

we  want  to keep more credit available,  for  the  lowest


cost, for as many people as possible.

          Turning  to  specific  issues  to  be  discussed

today,  which  are principally three:  Whether  the  Board

should  consider lowering the triggers; whether to  change

the  various elements points, indeed to test; and  whether

it should prohibit certain practices.  I think we have  to

ask ourselves, before we think about the isolated  issues,

has  HOEPA  had the effect of reducing  predatory  lending

practices?  Based on anecdotal evidence and discussions, I

don't  know,  but  it sure seems to be  that  these  have,

perhaps,  increased.   I'm not sure why, in the  last  six

years, HOEPA has had the effect that is hoped, that people

hoped it has, and why changing a law that may not prohibit

the practice people are concerned about is the right thing

to do.

          One thing I did want to talk about, at least  in

my  practice, is not so anecdotal, but at least  based  on

actual practice, we have been involved in abusive  lending

cases.   Those are cases really that we are suing  brokers

and lenders for violations of contracts, for violations of

law,   because  they  were  engaged  in  abusive   lending

practices,  making  loans that my clients  didn't  realize

they were buying.  As a result of them buying the funding,

once they did their diligence -- which, in hindsight,  may

they  should  have done earlier -- but once  they've  done


their  diligence,  they turned around and took  the  loans

back to the lenders or brokers and often made  restitution

to   the   borrowers.   Meaning:   There   are   effective

enforcement mechanisms out there.  Things are happening.

          There are three points I'd like to make for  the

Board to think about, which I think everybody agrees  upon

what  we need to do, at least at a minimum, for  the  time

being.   And,  again,  this is based  on  what  I've  been

involved with.

          Education --

          MR. LONEY:  Your time is up.  If you can  finish

that thought --

          MR. SANDS:  This  will  be  quick.   No.  1   is

education and counseling.  An educated consumers typically

is  a consumer we don't see a problem with.   Secondly  is

simpler  notices.   I'm not going to go into  that.   It's

been  talked about a lot at this hearing.  And, three,  is

enforcement.   I'm  very happy to hear  that  the  Federal

Trade  Commission has been active in  enforcement.   There

are  a lot of laws on the books right now, including  Fair

Lending  Laws, elder abuse statutues in California,  which

will  go  very  far to prohibit the  practice  people  are

concerned  with.  I hope we can keep these issues in  mind

as talk today.

          MR. LONEY:  Thank you.  Ms. Garcia.


                       STATEMENT OF


                     CONSUMERS UNION

          MS. GARCIA:  Good  morning.  I'm  Norma  Garcia,

Senior   Attorney,  with  Consumers  Union's  West   Coast

Regional Office in San Francisco.  Consumers Union, as you

know,  is  a  non-profit  publisher  of  Consumer  Reports

Magazine, incorporated in the state of New York in 1936.

          Thank  you very much for this opportunity to  be

here  with you this morning.  I appreciate the  fact  that

the  Board  of Governors has called this hearing  and  has

gathered all of these interesting individuals at the  same

table to discuss these very important issues.

          In  the interest of time, I want to  second  the

comments  offered by Ms. Twohig, by Mr. Gnaizda,  and  Ms.

Widener, and offer a few of my own observations.

          I  heard a comment made earlier that one of  the

things we want to do to preserve subprime lending  because

it  has  provided  a valuable service  to  the  public  by

increasing the number of people who have been able to  buy

homes  with  subprime loans.  I want to narrow  the  focus

here  a  little  bit, because  my  understanding  of  this

problem -- and we have studied this extensively -- is that

the  issue  is not about purchase  money  mortgages.   The

issue   and   area   of   abuse   comes   more   in    the


home-equity-based  mortgage  lending.  So, to  the  extent

that  the  subprime  lending industry  has  assisted  more

people  to become home owners, I applaud the industry  for

that.   But  to  the extent that  the  industry  has  been

involved  in abusive lending that has undermined the  home

ownership dream for many homeowners, on that note, I  want

to say that there is a lot of work to be done.

          I want to emphasize that if self-regulation were

effective, we wouldn't be here today.  There wouldn't have

been  the multitude of hearings that has happened  in  the

last  three years on this issue.  If self-regulation  were

working, we wouldn't have increasing numbers of stories of

homeowners  who  have lost their home, and  all  of  their

American   dreams,  to  fraudulent  and  abusive   lending


          I  think  consumer  education  is  a   necessary

component  to attacking the problem; but, yet,  cannot  be

looked  at  alone as a solution, or as an  alternative  to

more  enforcement  and better regulation.  We need  to  be

very  careful about this.  I don't think it's the  answer.

It   doesn't  stand  alone  as  a  solution,   just   like

self-regulation doesn't stand alone as a solution.

          Very briefly, I want to say that Consumers Union

supports  the  notion of adjusting the HOEPA  trigger,  to

lower  the  trigger  to extend HOEPA's  protections  to  a


broader class of transaction and borrowers.  We also think

that  the points and fees triggers should be  adjusted  so

that more fees are added to the calculation,  particularly

credit insurance, prepayment penalties and points when the

same creditor finances a loan.

          We  have  given further comment in  our  written

testimony  about  the  other points  you've  asked  us  to

address,  so I will pass the mic on now.  Thank  you  very

much.  We look to forward to the discussions with you.

          MR. LONEY:  Thank you, Ms. Garcia.

          Mr. Samuels.

                       STATEMENT OF

                    SANDOR E. SAMUELS



          MR. SAMUELS:  Thank you.

          My  name  is  Sandy Samuels.   I'm  the  general

counsel for Countrywide Home Loans.

          I  would like to begin my remarks by looking  at

what I believe to be the root causes of predatory lending:

Lack   of   choice,  lack  of  knowledge,  and   lack   of


          The  past year has seen a dramatic  increase  in

the  amount  of  attention focused  on  predatory  lending

practices, not unlike 1994, when Congress enacted the Home


Ownership and Equity Protection Act in responce to similar

press  articles on abusive lending in Atlanta and  Boston.

For  that  matter,  it's not  unlike  1968  when  Congress

enacted the Truth In Lending Act to safequard the consumer

in connection with the utilization of credit by  requiring

full  disclosure  of the terms and conditions  of  credit.

Interestingly,  the  problem seems to be  the  same  every

time:    Bad   actors  engaging  in  deceptive,   if   not

fraudulent, behavior that exploits the consumer's lack  of

knowledge  and  lack  of choice.  The  fact  that  we  are

meeting  on  this topic 32 years after enactment  of  TILA

only  serves to highlight that it's something  outside  of

the federal box.

          Disclosures,   in   and   of   themselves,   are

meaningful  tools for many consumers.  But disclosures  do

not stop bad actors from preying on consumers on consumers

who  either don't understand the information conveyed,  or

who  never received disclosure in the first place.   These

bad  actors engage in a variety of  fraudulent  practices.

Examples  of fraud upon consumers have been documented  in

the  various articles and hearings this past  year.   From

home  contractors, who have lied to consumers, to  lenders

who   have  affirmatively  used  Truth  In   Lending   Act

disclosure terms to mislead consumers about the true terms

of  their  loan.  Yet every state the union  has  statutes


that address fraud.  Most, if not all, have statutes  that

address unfair and deceptive practices that fall short  of

common  law  fraud.  What seems readily apparent  is  that

there  are many fraudulent acts being committed  that  are

already  clearly illegal under existing state and  federal

law  -- usually TILA and its HOEPA provisions.   In  other

words,  no  new  law or modification to  existing  law  is

needed to address what is already illegal.

          When a neighborhood reports an increased  number

of  burglaries, the first response is not simply  to  pass

tougher  burglary laws.  The response is to  increase  the

police patrolling the beat.  And we believe that that must

be the fist step taken now.  Congress and the states  must

increase  financial support of the agencies  charged  with

enforcing   these  laws  so  that  lenders,  brokers   and

contractors that engage in this sort of activity will know

that there is real risk of detection and punishment.

          Funding must also be increased to agencies, such

as legal aid services and counseling organization, to give

those most often preyed upon accessible resources to  call

upon before one of these tragedies occurs.

          The Board has asked us to address whether  there

are  regulatory  and/or statutory changes  to  HOEPA  that

would  more  effectively curb predatory lending.   Let  me

make  clear that we do not believe lowering the HOEPA  APR


trigger  is  an  effective way to  enforce  the  law.   We

believe  that  enforcing the HOEPA provisions,  and  other

applicable  law -- I'm sorry.  We believe  that  enforcing

existing HOEPA provisions, and other applicable law, is an

effective way to stop predatory lending.

          Most  of  the  recent  testimony  has   reported

striking  increase  in the amount of subprime  lending  in

recent  years.   One of the most  important  and  positive

developments in subprime lending has been the emerging  of

some  of  the largest national lendings  in  this  market,

lenders  in this market.  This has clearly  increased  the

availability of credit to many Americans and has, in turn,

lowered  the cost of subprime credit because of  increased


          I've got much more to say, and I see my time  is

up.   Let  me  just say that  we  believe  that  increased

competition is the key.  We think that the lowering of the

HOEPA  triggers  will have the opposite effect.   It  will

reduce  competition, it will reduce choice, and I'll  have

more to say during the discussion.

          MR. LONEY:  Thank you.  Mr. Bley.






                       STATEMENT OF

                   JOHN BLEY, DIRECTOR


                   STATE OF WASHINGTON

          MR. BLEY:  My  name  is  John  Bley.   I'm   the

director  of the Department of Financial  Institutions  in

the state of Washington.

          We   think  the  way  to   effectively   address

predatory   lending   is,  first,   simplify   disclosure,

establish prohibitive practices, and enforce the two.

          I  want you to think about Ms. Bose's  comments.

Among other things, she said that she sells trust.  In our

view,  based  upon our years of experience  in  regulating

mortgage lending for a non-bank, predatory lending is  the

use  of  deceptive or fraudulent sales  practices  in  the

origination of the loan secured by real estate.

          The federal disclosures are too complex for many

borrowers  and borrowers turn to loan officers to  explain

the  terms of their loan.  Thus, predatory lending  is  an

abuse  of  misplaced  trust.   Predatory  lending  becomes

possible  when  a  borrower trusts  the  loan  officer  to

explain the terms of the loan and the loan officer commits

deception  by  abusing  this  trust.   The  deception  may

include hiding the high fees or points; variable rate loan

instead  of  a  fixed-rate loan;  unneeded  insurance,  or


prepayment  penalty,  and may take the form of  selling  a

consumer a subprime mortgage loan when they could  qualify

for a lower-cost loan.

          I  have attached as Exhibit A of my  comments  a

memorandum  authored  by the Department's  chief  mortgage

investigator,  Chuck Cross, which describes the  deceptive

practices  we  have observed in the state  of  Washington.

Mr. Cross has spent the last five years on the front lines

fighting predatory lending practices.  We believe that his

memorandum  provides  a comprehensive  discussion  of  the

practices that are causing the problem.

          I know you have asked us to address a series  of

questions regarding the Federal Reserve System's authority

to  make certain amendments to the  regulations  enforcing

HOEPA, enforcing the Home Ownership and Equity  Protection

Act  amendments to the Truth In Lending Act.  I am  afraid

that  our  experience  in Washington  is  that  the  HOEPA

amendments  have  had  very  little  impact  on  predatory

practices in mortgage lending, and that any amendments the

Board  of  Governors might make to those  regulations  are

also unlikely to have a significant impact on the problem.

          Over  the last three years, the  Department  has

brought,  among the hundred other  administrative  action,

administrative   cases  against  Nationscapital   Mortgage

Corporation and First Alliance Mortgage Company.  In  both


of those cases, many consumers told us that they  received

high-rate,  high-fee,  variable-interest rate  loans  when

they  thought they were getting fixed-rate loans  and  did

not know about the high fees.  In most if not all of these

cases, it appears that consumers "received" their Truth In

Lending Act disclosures to no substantive effect.

          Our  view in Washington is that the  problem  of

predatory lending should be dealt with surgically,

          I  see  my  time is up.  I'll  --  we  recommend

simplification of the disclosure. Attached as Exbibit B is

an example of how we think TILA should be simplified.   We

think  that  prohibited practices should  be  established.

And,  in terms of enforcement, this Department  encourages

harsh  penalties  for  acts  of  predatory  lending.  Such

penalties  should  include  should  include   restitution,

monetary  fines, permanent injunctions from  lending,  and

criminal convictions for individuals.  In cases  egregious

enough to convince a prosecutor to accept them,  violators

should  be  constitutionally deprived  of  their  personal


          Thank you.

          MR. LONEY:  Thank you.

          Mr. Mulligan.




                       STATEMENT OF


                    JENKINS & MULLIGAN

          MR. MULLIGAN:  Thank you.  Can you hear me?

          Since we've been given a limited time, I'd  like

to   first   endorse  two  of  the   statements,   written

statements,  made  to  the Board.  The first  was  by  the

American Association of Retired Persons.  The second, that

presented   by  the  National  Association   of   Consumer

Advocates.   We,  as  litigators, support  both  of  those

comments and the statutes.

          I'd like to state that my experience here and my

comments  are  based on what Mr. Sands  called  "anecdotal

evidence,"  that  is  ten years, or  more,  of  experience

litigating against lenders, foreclosure companies on  both

an  individual  and  class  basis.   I've  also  had   the

opportunity to lecture and meet with litigators around the

country and gathering more anecdotal evidence.

          I'm  going  to have a comment on what  would  in

another  arena,  the medical arena, be  called,  I  guess,

clinical evidence, and there's a tendency to ignore these.

Because  we know that there were cases, but we really  end

up representing those patients that have died in the hands

of  these  lenders.  So we have some method  by  comparing

around the country, now at least, to see what is going on,


on a general basis.

          Given that, I'd like to focus on four areas that

we see.  I'd like to first agree with Mr. Samuels --  this

may  be a first for me and Countrywide.  But I would  like

to  say  that disclosures, all of  these  disclosures,  at

least  by  themselves, are completely ineffective  in  our

experience.   It's  constantly amazing to us that  we  can

have two people running for the presidency and campaigning

primarily  on  education reform.   And, yet, when  you  go

into  object or litigate or any of these issues,  everyone

ignores  the  fact that a good percentage  of  the  people

simply can't read a simple form, let alone complex  forms,

that are given.  I have some examples, but, since I  don't

have much time here, I'll go on.

          Secondly,  as far as the point is  concerned  of

what  we  would like to see, among other  things,  is  the

correction of data.  We really don't know what is going on

in the marketplace.  For example:  We do not know what the

differential is, really, in a foreclosure between subprime

and prime lending.  We have no idea on a nationwide basis.

The  result  of this is:  We cannot even know,  the  Board

cannot  know, if, in fact, these increased rates and  cost

charges  to the so-called subprime group has any  economic

justification.  The default rates are not higher.  If  the

default rates are not higher, why are the costs higher?


          Third,  I've  been urged to say this.   I'm  not

directly  banning anything.  But I have to say,  from  our

experience, we'd love to see you place an absolute ban  on

repayment penalties, which are the curse of God among  the

elderly  and  the  minorities that we see.   There  is  no

economic justification for it.

          Lastly, I'd like to endorse the FTC's  comments,

that   the  biggest  single  impetus  to  enforcement   is

arbitration  agreements.  We also ask not to  observe  the


          Thank you.

          MR. LONEY:  Mr. Rankins.

                       STATEMENT OF

                    MICHAEL A. RANKINS

                   PRESIDENT AND CEO,


          MR. RANKINS:  First of all, I would like to  say

that it's a privilege and an honor to be here before  you,

Governor Gramlich. The Federal Reserve is to be  commended

for  its  national  efforts  to  ultimately  enhance   all

consumers.   Additionally, I'd like to thank Jane  Ahrens,

who is requested all this data from our office.  Lastly, I

would  like to thank Rod Howard, of the  Mortgage  Bankers

Association  -- he's doing a great job --  which  includes

all  mortgage  bankers  like -- I don't  think  I  can  go


through them in three minutes.

          MR. LONEY:  That'll be nice.

          MR. RANKINS:  Secondly, I'd like to endorse  Ms.

Delgado,  for all her experiences.  We've experienced  the

same thing.

          Rankins  Mortgage is located in  Oklahoma  City.

We're  four-years  old,  the only  African-American  prime

mortgage banker/lender in the state of Oklahoma.  A lot of

brokers are minority, African-American brokers, but  we're

the  only  pure lender.  We're located in  Oklahoma  City,

Tulsa,  Fort Sill, Lawton.  All these offices, all  three,

are   located  in  the  heart  of   the   African-American

community.   Rankins Mortgage customer base is 90  percent

African-American.   For  four years, we  have  loaned  and

brokered   over  $18  million  to  individuals  in   these

communities.   Seven out of ten of our clients  have  been

turned  down  by national or state banks, or  federal  and

state chartered credit unions prior to coming to us.   The

other three, out of ten, are just intimidated by banks and

credit  unions.  In other words, these people  feel  their

credit  is so poor, so derogatory, that they will  not  go

into the banks.  Rankins Mortgage is a high-cost  mortgage

lender.  We are high cost.  We are high cost.

          Rankins  Mortgage would encourage the  Board  to

approach the new regulations very carefully.  Lowering the


trigger  and/or  new  regulations  could  result  in  less

participants in the subprime market.  Last year, when Bank

of America bought a bank who had been one of our  original

investors, they changed the rules and decided they  didn't

want to be what they call a high-cost investing arm.  That

investor  had very, very good rates.  Seventy  percent  of

those customers that we were brokering, or in the case  of

corresponding loans, we lost that investor.  We don't  use

that investor anymore.

          I   think,  if  the  Board  does  consider   new

regulations  and lowers the trigger, it's going to  result

in  --  we dominate in our market right now; but  we  will

become  a  monopoly.  We don't think that's  in  the  best

interest  of  the  citizens  of  Oklahoma,  or  any  other

citizens.  We don't want to be a monopoly.  We want to  be

a good competitive mortgage banker.  But it will  dominate

the  market  and  brokers will get out  of  the  business,

investors will get out of the business.

          MR. LONEY:  Thank you, Mr. Rankins.

          Mr. Courson.

                       STATEMENT OF

                     JOHN A. COURSON



          MR. COURSON:  Good  morning.   My name  is  John


Courson,  and  I  am the  president  and  chief  executive

officer  of  Central Pacific Mortgage Company.  We  are  a

mortgage  company that has 93 retail originating  branches

in 24 states.  I also serve as the vice president elect of

the Mortgage Bankers Association.  What was advertised  as

a  one-year  job has turned into a  three-year  career  of

chairing their mortgage reform task force.

          I must say that I certainly applaud the  hearing

we're  having today, and, in particular, working with  the

Federal Reserve, as we did with the Department of  Housing

and  Urban  Development  in the  effort  of  comprehensive

mortgage reform that we dealt with as part of the mortgage

reform working group over the last two years.

          Obviously,  it's been said before, and  I  would

echo the thought that HOEPA, as it exists today, begs  the

issue that, if it's effective, why are we here today?  And

it  has  not  been effective.  It is  not  the  tool  that

clearly  has  solved  the practices  that  we're  here  to

discuss,  the predatory lending, in the  different  venues

throughout the country.

          As  we  all  know, there  are  many  legislative

proposals, both federal and state, that have been actively

pursued, both currently on the federal level and in  state

legislatures  throughout  the  year;  and,  in   addition,

regulatory  efforts,  now even at the  city  level,  being


pursued to combat the predatory lending.  However, in  all

these  efforts,  the same approach is to  tinker,  if  you

will, with the terms and conditions of HOEPA loans.  And I

would  submit  to you that tinkering will  not  solve  the

practice.   Predators will be predators.  If, in fact,  we

tinker   with  terms  and  conditions  that  are   already

confusing  to  consumers, if in fact we continue  to  have

unintended  consequences  by having  the  tinkering,  what

we're going to find is that all we've really done is  make

the  process much more confusing for consumers today  who,

albeit, do not understand the process.

          I  would submit to you that the answer lies  not

just  nibbling  around  the  edges of  one  piece  of  the

predatory piece, but it lies in comprehensively looking at

the  entire  mortgage loan process.  How  can  you  combat

predatory  lending by legislating or regulating terms  and

conditions  without,  in fact, looking  at  reforming  the

entire  process,  the  disclosures  that  they  get.    An

opportunity for consumers to shop for the right  mortgage.

Being told in simple terms, albeit, the annual  percentage

rate is one of the great mysteries of life for  consumers.

One  of  the great mysteries of life for  lenders.   Let's

make it simple.

          MBA  has put forth a comprehensive  reform  plan

that we're working on diligently now.  It has seven points


--  and I'm sure we'll have the opportunity to discuss  it

later -- to look at the entire picture as opposed to  just

one piece of a much larger problem.

          Thank you.

          MR. LONEY:  Thank you, Mr. Courson.

          There  were  a number of issues that  the  Board

specifically  asked for the participants to address.   One

of  those had to do with the issue of changing  the  HOEPA

trigger.    Jane  Ahrens  will  lead  the  discussion   on

examining possible changes to these triggers.


          MS. AHRENS:  HOEPA has two independent triggers.

One is based on the annual percentage rate, and the  other

is based on cost paid by the consumers.  Let's discuss the

rate trigger first.

          A loan is covered by HOEPA if the APR is paid by

more  than  10 percentage points, the  rate  for  Treasury

securities,  with  the  comparable  maturity.   And  HOEPA

authorizes  the Board to adjust that 10  percentage  point

differential  up  to 2 percentage points.  Do any  of  you

have any data on the number of loans that are covered  now

by  HOEPA and would be covered, for example, if the  Board

lowered the trigger to 8 percent?

          When asked this question at other hearings,  one

large creditor said that its portfolio is about 10 percent


HOEPA  covered  now,  and would go to  20  percent  if  we

lowered the rate to 8 percent.  And we've also heard that,

really, the rate trigger changes is kind of much ado about

nothing  because the points, the fees that  capture  loans

under  HOEPA,  not  the rates.  So moving  from  10  to  8

wouldn't make much difference.

          Do  any  of you have any -- have  you  done  any


          Ms. Delgado, had your company?

          MS. DELGADO:  Well,  we do have analysis.  I  am

just somewhat concerned because the issues are  sensitive,

in particular because we pay our financing to Wall Street.

          MR. LONEY:  Would you get near a mic?

          MS. DELGADO:  The  issue is very sensitive  one.

We  do know what percentage of our loans fall under  HOEPA

right  now.   It's  a small  number.   That  number  would

increase  significantly if the triggers were lowered.  I'm

just reluctant to disclose information publicly.  I  would

make it available confidentially.

          MS. AHRENS:  Anybody else?

          MR. GNAIZDA:  Two   observations:    One,    the

National   Committee,   the  Investment   Coalition,   has

estimated that, by lowering your trigger, you would  cover

change  from  one percent, with a subprime loan  to  five.

And  they  base  that  on  the  Treasury-HUD  Report.   My


question  is this:  Why has the Federal Reserve failed  to

gather that information?

          There's  no way for community groups  to  gather

that  information.   Every mortgage broker  contends  it's

confidential.   The  Federal  Reserve  should  gather   it

confidentially  for  each company,  but  not  confidential

overall.   Then  we  could understand  the  scope  of  the

problem.   On  it's face, it sounds like a good  idea,  to

lower  the trigger.  I'm not sure that is is, and I'm  not

sure  that,  if  we  do  that,  it  will  make  that  much


          Greenlining   would  tend  to  side   with   the

regulators  in  Washington in terms of  their  suggestions

about how to address the problem.  It may be, by  focusing

on  this  trigger,  the narrowness of that,  that  we  are

losing sight of the larger problem.

          MS. TWOHIG:  Let me a disclaimer out of the  way

before we proceed here.  The statement that was  submitted

to  the  Board  by  the  Commission  is  the  Commission's

statement.  And the remarks I gave earlier where a summary

of  that  statement.   Anything  I  say  in  response   to

questions are my own views and do not necessarily  reflect

the   views   of  the  Commission,   or   any   individual

Commissioner.  With that said --

          MR. LONEY:  That's  okay, Peggy.  We  like  your



          MS. TWOHIG:  I  can't  tell  you  that  in   our

enforcement  experience, we don't believe that there  that

many  loans  that are covered by HOEPA now.  It's  a  very

small  percentage.  We don't have specific data.  We  have

limited  resources, and, so, we do what we can do  in  the

enforcement area.  But based on what we have seen to date,

it's a very limited percentage.

          I  will say that, because of the  other  reasons

I've mentiond, we do think that the APR trigger should  be

lowered as much as the Federal Reserve has reported to do,

combining  with that more substantive prohibitions.   It's

also the case, though, that most of the times we do  HOEPA

loans,  it is because of the trigger.  So that is  a  very

important  part  of the task.  We also, as I  said  in  my

comments, think that more fees should be included in  that

trigger,  particularly  if  there  is  a  lump-sum  credit

insurance premium.

          MR. SAMUELS:  I  agree with Mr. Gnaizda and  Mr.

Bley,  in that lowering the triggers we believe  will  not

have any benefit.  But, in addition, we also believe  that

it  will have a significant detriment. Because one of  the

things, as I said, that we are looking to is the increased

competition.  And we have very specific examples of  banks

who  are worried about two things:  reputational risk  and


compliance  risk.   And because of the  severe  penalties,

even an inadvertent HOEPA violation.

          There  are  a number of companies who  are  just

saying:   I'm not going to do it.  We're going to get  out

of  the  business.  And we heard from  Mr.  Rankins  about

that,  and that is not just anecdotal.  That's  documented

all  across the country.  So, what we're trying to do  is,

we  want  to  increase competition, we  want  to  increase

choices for the consumers.  This is not the way to do it.

          MR. MICHAELS:  Can I follow up with a question?

          Because you've heard from a number of companies,

let   me   put  this  directly  to  you.   In   terms   of

Countrywide's own experience, do you make HOEPA loans?

          MR. SAMUELS:  Yes.

          MR. MICHAELS:  So   what  percentage   of   your

funding is HOEPA covered?

          MR. SAMUELS:  It's small, very small.

          MR. MICHAELS:  What percentage would it be?

          MR. SAMUELS:  We  are actually looking  at  that

issue.   It's hard to come up those, those numbers, for  a

lot of reasons.  No. 1, it is not clear, you know.  A  lot

depends on what happens with these, whether they're  going

to covered by the fee issue.  I would agree with you  that

the  fee  issue is probably more important than  the  rate

issue.  But both of them are important, again, in terms of


covering the loans under HOEPA.

          However it's extended, what you're going to find

is  that  different lenders are going  to  make  different

decisions.   Some  are going to say:  Okay,  we  have  the

systems.   We  have  the  technology,  and  we  have   the

willingness  to bear this risk.  It may be that  after  we

have  some experience in their bearing this risk,  we  may

decide  it's not worth it and we're going to get out.   We

don't  know  at this point.  So far, you know,  we've  had

little problem with HOEPA.

          We're  concerned that, as it expands,  we  could

have  significantly  more problems with HOEPA.  But,  more

importantly,   we're  concerned  that  there   are   other

institutions  who  are just going to say  that,  expanding

HOEPA, we're going to get out of that business as well.

          MR. MICHAELS:  Let   me  follow  up   with   two

questions.  One, without trying to pin you down to precise

figures,  which  I understand your reluctance to  do,  but

orders  of  magnitude,  were you  talking  double  digits,

single digits?

          MR. SAMUELS:  I  would  hate to give  you  that.

It's not huge because that's just not our business.   But,

obviously,  we  are mostly a prime lender.  We do  have  a

subprime  unit  that we deal with both in our  retail  and

wholesale  division.   But HOEPA is not a  large  part  of


that.   Certainly, depending on how low it goes, then  one

of the issues that we also have in terms of these we  will

get  to.   If you open the door for it, we  are  concerned

about our having to include affiliate fees.  When we  have

an  appraisal  company, a credit  reporting  company,  and

title  company,  we have to include those  fees.   So  our

triggers  are a lot lower than, say, another  company  who

uses  third-party fees even though, when we combine  those

fees,  we can give a better deal to the customer, both  in

terms of cost and in terms of efficiency.  But it operates

to our detriment.

          GOVERNOR GRAMLICH:  I wonder if I could jump  in

on this?  The numbers that we have seen, as were mentioned

by the Federal Trade Commission, indicate that HOEPA loans

are  actually  a  pretty small share  of  subprime  loans,

whether  single  or double digits, whatever.  And  if  you

just  look at the kinds of disclosures  and  prohibitions,

and  so  forth,  under HOEPA, they  don't  seem  all  that

onerous.   And, so, one wonders what is the  problem?   Is

the  problem  really in the stigma of HOEPA?  I  mean,  is

that why everybody is shying away from the trigger?   What

is the problem with HOEPA?

          MR. RANKINS:  Governor  Gramlich, let me try  to

expand  and  respond  to some questions,  several  of  the

questions that Ms. Ahrens asked.


          Ninety  percent  of the loans that we  make  are

under HOEPA.  We act merely as a broker in our  community.

And  it's based upon who we broker, the investor  that  we

sell  the loans to.  For the most part, to try to  respond

to  that question, we are overly disclose to  the  client.

The client, why am I signing all these papers?  Well, it's

because of the documentation, disclosures, the points, the

fees.  We overly, overly, overly disclose.

          GOVERNOR GRAMLICH:  You  don't think the  points

and fees, things like that, should be disclosed?

          MR. RANKINS:  Yes.  We overly  disclose.  That's

not  an  issue with us.  Our issue is if  the  trigger  is

lowered,  we're going to have investors that are --  right

now, we have good, competitive rates.  Those investors are

probably  going  to get out of the business  and  subprime

lenders --

          GOVERNOR GRAMLICH:  That's   what  I'm   asking:

Why?  If all that is going on is that they can't give  the

balloon  payments  for the first five years,  and  reverse

amortization  mortgages,  and they have  to  disclose  the

points and fees, what is the problem?

          MR. RANKINS:  The stigma of high cost.

          GOVERNOR GRAMLICH:  So it is the stigma?

          MR. RANKINS:  It is the stigma.

          MS. AHRENS:  Ms. Bose, then Mr. Bley.


          MS. BOSE:  As an originator, we have done  three

loans in the last two years.  And the reason that we don't

do  them is that (a) the lender discourages us from  doing

it.  They don't like the regulatory burden and they  don't

like  the risk.  It has nothing to do with the  fact  that

it's  a high-cost loan.  It's simple for us, but for  them

it's  not possible.  We can't make enough money  to  cover

our costs.  And I know profits are a word you don't  hear.

But I need to pay my mortgage, too.  So if I can't make  a

profitable  loan,  and the investor has to spend  so  much

time  and  effort  with  disclosures  and  the  regulatory

burden, and the potential that they may rescind this thing

in  three  years because they made a ten  dollar  mistake,

they're not going to do the loans, period.

          So  it's not just one thing.  The point is  that

what you are doing is eliminating the whole class of loans

for credit-challenged people who need them.  And we  can't

do it for a variety of reasons.  But the point is we'll be

eliminating  a source of financing for people in  an  area

that can't go anywhere else.

          MR. BLEY:  We asked this question several times,

and I think we made an interesting observation.  First  of

all, when the test is created, it has to be applied to all

refinancing and second-mortgage transactions to  determine

the  section  has  been triggered.  We  don't  think  that


lowering  the trigger point, it does not create a  greater

cost.  And making the test on the margin, you already have

tests.   You  have  to  test  each  of  the  loans.    The

calculation is the same with the changed variable.

          There  is another interesting  observation  that

our field examiners have made, which is that many subprime

lenders appear to automatically make HOEPA disclosures  --

just  talking about the disclosure now -- on all of  their

loans.   They  do see that it is cheaper  and  safer,  and

we're  talking  about regulatory risk, that  to  make  the

disclosure  rather  than  taking the  time  to  check  and

risking  the  possibility  of having erred  on  the  test.

Giving  that it is cheaper to comply on all loans,  rather

than  test all loans, lowering the trigger should have  no

greater cost or less availability.

          MR. COURSON:  I'd  like to respond  to  Governor

Gramlich's question.  We're talking about a small slice of

the  market.   And  I don't think there's  any  data  that

really determines at what rate level abusive and predatory

lending  practices  take place.  There seems  to  be  this

assumption that predatory lending is somehow ties to HOEPA

loans.   I  would  submit  to you  that  moving  the  rate

trigger, if you will, or any of the terms or conditions in

HOEPA, is not going to.  If it's that small a piece of the

market,  the predators out there, the  abusive  practices,


are much more widespread than just that slice of the loan.

          And the issue there, therefore, as the gentleman

from  Washington  said, is to really look  at  prohibitive

practices and try to zero in on those, as opposed to terms

and conditions.

          GOVERNOR GRAMLICH:  But  that is  essentially  a

part of the point.  Because there are some practices  that

are   prohibitive  by  HOEPA,  and  not   prohibited   for

non-HOEPA.   So,  if  you change the  trigger,  then  some

practices  become prohibited.  I mean, that's exactly  the

point of all of this.

          MR. COURSON:  I   understand   that,   but   the

prohibition,  I mean, those are prohibited today.  Yet  we

still  have -- we're here talking about predatory  lending

practices, and those have been prohibited since HOEPA  has

been around, and it hasn't solved the problem.  So I don't

think it's a prohibition.

          GOVERNOR GRAMLICH:  That's  actually what  we're

asking.   Within  the HOEPA sector, I mean,  everybody  is

worried  about  the changing of the trigger  because  more

loans will come under it.  What we're trying to figure out

is  that, within the HOEPA segment where some  things  are

prohibited, are those prohibitions effective?

          MS. TWOHIG:  I would just encourage the Board to

be  very  careful about overreacting to the  notion  that,


well,  we can't lower the trigger because that means  more

people  would  leave the market.  I think that  there  are

practices  -- our enforcement experience shows that  there

are practices going on out there that are very  troubling.

We  have found HOEPA violations.  In our  law  enforcement

actions,  we have found lenders that had  loan  provisions

that had increased, an illegal increase, after default and

clear  asset-based  lending, had short-term  balloons  and

direct payments to home contractors.  We have seen just  a

about  everyone of those conditions violated, but  it's  a

very  small  slice of the market.  We  believe  that  more

coverage  of  HOEPA is appropriate to get at  a  few  more

loans.   We don't think that increased coverage,  so  that

those  very  important protections and  prohibitions  that

really  are  just inappropriate for this  segment  of  the

market, with these variable consumers, are or would --  we

think it would do much more benefit than harm.

          And I'll just stop there.

          MR. SAMUELS:  I'm  glad  reasonable  minds   can

differ on this issue because there are a couple of things.

As  a  national lender, we have to look at, we  have  been

looking  at,  federal, state and even  local  attempts  to

regulate  this area.  One of the things that we have  seen

when  we take a look at the triggers is, okay, we see  the

triggers, what's the impact of that?  And I'll give you  a


couple  of  examples.  And I do need to disagree  with  my

colleague regarding repayment penalties, because that's  a

big issue for us.

          We  think it's a very, very good thing  to  give

the  consumer a choice because it allows us to think  that

they are going to stay in the house for five years.   They

get  a  fair rate and we think that's a very  good  thing.

Now,  are  there  abuses with  prepayment  penalties?   Of

course.   I'm not going to say that there aren't.  But  we

have,  in  our experience, a lot of people  who  are  very

happy  with  prepayment penalty because they get  a  lower

rate, and that's what we are about.  We are about lowering

costs  and  giving  consumers choices.   If  the  consumer

thinks he's only going to be in the house for three years,

we don't them to take a prepayment penalty for five  years

because,  then, they are going to have to pay it.  But  it

gives  the  borrower a lower rate, and it also  gives  the

investor some degree of certainty that that loan is  going

to be around.

          So,  if  you're  going to  talk  about  lowering

triggers,  the lowering of triggers, in and of itself,  we

have to look at them to see what comes along with it.   If

you're  going  to  prevent us from  being  able  to  offer

prepayment  penalties  and  we're  not  ---  we  are  very

careful.   We want the industry to be very  careful  about


providing a choice along the lines of Fannie Mae come  out

with last April.  We think that that's a good thing, not a

bad thing.  We think that that's fine.

          We are not in favor of asset-based lending.   We

are  not  in  favor of the predatory  practices  that  has

somebody  pay $500 a month for their mortgages,  and  have

them have a monthly paycheck come in for $500.  That is  a

predatory  practices and those people should be strung  up

by their thumbs.  We have no issue with that. What we  are

trying  to  prevent is we do see  legitimate  choices  for

consumers and keeping the good guys in the business to  be

able to make these kinds of loans available.

          GOVERNOR GRAMLICH:  Could I just -- so, I  think

you're  saying  that you don't have any problem  with  the

current  prohibitions under HOEPA.  But you don't want  us

to expand those.

          MR. SAMUELS:  Frankly,  we  prefer not  to  have

some of those prohibitions, again, on prepayment  penalty.

Many  of  the prohibitions we have no issue with  at  all,

absolutely.   But extending them, again, the  reputational

risk -- and it's there, because we've heard it -- and also

the compliance risks, it's there.  We are concerned  about

increasing   costs  that  result  from  a  lot  of   these

compliance    concerns.    Resulting   from    inadvertent

violations of HOEPA.


          MS. AHRENS:  Let's have --

          MR. MULLIGAN:  Two  quick  points.   One  as  to

competition.  It seems to us that the largest generator of

HOEPA  in the last four years, First Alliance, who is  now

in  bankruptcy, absolutely no problem in  getting  funding

out  of  Wall Street for its loans, for years,  until  the

moment they filed.  Lehman Brothers was buying their stuff

day in and day out.

          Second point is, in fact -- on the triggers  now

-- if, in fact, lenders are willing, as everyone seems  to

be, fees up front, discounts for interest rates, and  that

prepayment  penalty is the cost of that loan.  There's  no

way  around it. Even if you could justify  the  prepayment

loans, on some economic grounds, you have to include it in

the cost of the loan.

          MS. AHRENS:  Prepayment penalties.  Just let  me

say that we can go back to it.

          MS. DELGADO:  Can  I  make  a  point  about  the

triggers?  Part of the problem that we see is that, again,

in the disclosures.  We don't believe the disclosures  are

well  understood by our borrowers.  We don't seem to  pass

the connection.  That's one thing.  Lowering the  triggers

is  only  going  to  subject more  borrowers  to  a  lower

threshold.  We're just lowering the threshold.

          I  wanted  to  speak to  the  compliance  issue,


because  it  can't  be taken lightly.   Some  of  us,  the

financial institutions that rely on secondary markets  for

financing, the secondary markets don't want to assume  the

pass-through  liability  because  they  have  no  way   of

controlling  whether  those disclosures are  sent  out  on

time;  and,  yet, they bear the full liability.   So  it's

really  difficult  for  us  to go  out  there  and  obtain

financing from these sources if they're just reluctant  to

proceed with us.

          MR. GNAIZDA:  Could I just add something on  the

trigger?  I don't think we're dealing with the real world.

The  attorney  general  in  California  submitted  to  the

California Public Utilities Commission, in the case  we're

involved   in,  the  following  statements.    Twenty   to

twenty-five  percent of all Californians are  functionally

illiterate.   Now, if that's even close to the case,  that

means,  for  predatory lending, you're  talking  about  50

percent  or more.  That's why we have to go back  to  what

John  Bley has talked about, which is effective,  powerful


          That's why we also commend Dan Mulligan and  his

law  firm  for  what they're doing  with  Lehman.   Lehman

Brothers,  they shouldn't have to do it.  It  should  have

been done by the regulators, including the SEC.

          MS. AHRENS:  Turning  now  to the point  of  fee


triggers.  A loan is covered by HOEPA if the point of fees

paid  by the consumer exceed the greater of 8  percent  of

the loan and the dollar figure, which is adjusted annually

at  $451.  For this purpose, points and fees  include  all

items  that  are  included  in  the  finance  charge,  all

compensation paid to mortgage brokers, and it specifically

excludes  reasonable  closing costs paid  to  unaffiliated

third  parties.   HOEPA also authorizes the Board  to  add

such other charges that we may deem appropriate.

          The Board's notice of this hearing talks about a

couple  of  fees:  prepayment  penalties  paid  on   loans

refinanced by the same creditor, and single premium credit

insurance  for  couples.   Let's  start  with   prepayment

penalties  on  loans refinanced by the same  creditor  and

affiliates.   We've  heard, in prior hearings,  that  some

people  never impose prepayment penalties.  Yet,  we  hear

from consumer advocates that it happens all the time.

          Would someone like to address the  effectiveness

if  the Board proposed keeping the financing by  the  same

creditor affiliate so that -- is it a common occurrence or

does HOEPA's restrictions really make it a minimal --

          MR. MULLIGAN:  My experience is twofold:  One is

the state law is now becoming ineffective, and any lenders

are  hiding  behind that.  We have commented  to  the  OTS

about that.  California has the experience.  For  example,


Texas  moved  in prepayment penalties.   There's  an  open

question  as  to  whether  or  not  those  have  all  been

preempted by the OTS regulations.

          Second  point  is:  Many lenders  do  waive,  in

fact,  prepayment  penalties on their own loans.   I  know

that   Household, Beneficial, Associates often  does,  not

always.   I've  never seen Countrywide.  So  that  doesn't

occur.  Where it occurs is in the attempt to refinance out

of  loans  for people, and there is  something  that  they

really  didn't  remember, didn't know about in  the  first


          And   interesting   practices   come   up.    We

understand the term in the industry called "biking."  That

is  biking, where a lender does not even send  out  demand

statements  on loans in the refinancing because they  know

that  the old lender will come in and offer a better  deal

and  want  a new loan, and, surprisingly,  they'll  close.

All of this time they thought they were paying off  taxes,

credit  cards and suddenly they can't be  covered  because

they  forgot to add in the prepayment  penalties.   That's

becoming more common, as well.

          MS. AHRENS:  David.

          MR. SANDS:  On  prepayment penalties, and  we're

really talking about the prepayment penalties for loans by

the same lender.  It would include prepayment penalties in


that  situation and the points and fees.  I guess  what  I

don't  quite understand this, because we're talking  about

situations  where,  as Mr. Mulligan  said,  where  there's

biking.   Where  a  new  lender  comes  in  and  basically

refinances  the  borrower  out  with  the  penalty  you're

suggesting,  which  includes  the  prepayment   penalties,

points  and fees in that situation.  The new  lender,  the

existing lender, comes in, as Mr. Mulligan said, and wants

to  make  a better deal, but knowing they  can't,  because

they  have to put the prepayment penalties in  there,  but

the  new lender doesn't.  So the borrower gets  these  two

statements, one says that the new lender, you're going  to

charge  me X, and the old lender is charging me X  plus  Y

because   old  lender  has  to  include   the   prepayment

penalties.    So  the  borrower  says:   I  don't   really

understand  these disclosures, but one looks a heck  of  a

lot more expensive than the other.  I didn't realize  that

one  gets  to  include the prepayment  penalties  and  one

doesn't.  So I'm going to take the new lender's loan, even

though it's vague and more expensive.

          So,  I don't know why including  the  prepayment

penalty, which creates an uneven playing field and unequal

disclosures would make a lot of sense on the surface.

          MS. AHRENS:  We're running out of time for  this

portion,  but  I  do  want  to  touch  on  premium  credit


insurance and similar products.  Why should these fees  be

added to the point fees?  Anyone have any comment on that?

          MR. RANKINS:  I  just want to make one point  on

penalties.  For Rankins Mortgage, that's a dichotomy.   We

want the benefit of this, as Mr. Samuels said; but, on the

other  hand, we bring our borrowers to our  credit.   They

have to live with the 12 percent interest rate.  Then,  in

two  years,  we bring them back to 9 percent.  That's  the

dichotomy.   We experience -- we don't know.  We're  right

in  the middle.

          On  credit  insurance, we would  say  that  that

should probably be added into the fees. We don't sell  it.

We  think  it's  a  terrible  product.  We  think  it's  a

disservice to our consumers.

          MR. BLEY:  If I can make a comment?

          First of all, I think you know our theme is that

predatory lending occurs when as a result of the manner in

which  loans  are  originated, that there's  a  breach  of

trust,  and  that  the  consumers  don't  understand   the

disclosures because they're too willing, too complex,  and

they  turn  to the loan officer and say:  What  does  this


          In  that  context, I think we need  to  make  an

observation about what we hear in consumer complaints.  We

hear  about  prepayment  penalties.   Far  and  away   the


greatest  consumer  complaint  we  hear  about  prepayment

penalties is that they were unknown.  Not that they exist,

but that they were unknown and there was no opportunity to

include   that  in  the  consumer's  decision.    So   the

bargaining  part  goes  away, along  with  the  prepayment


          So  the key here I think is clear disclosure  of

the   prepayment  penalties  but  in  a  simple   one-page

disclosure which, again, we have attached to our comments.

I hope you get a chance to read Mr. Cross' memo.  I  can't

emphasize  that  enough.   Again,  it  has   significantly

influenced me on this issue and has really turned my  mind

around,   not  focusing  on  terms,  which  I  think   are

inherently  neutral  if they are understood,  but  to  the

manner in which these loans are made.

          MS. AHRENS:  Dan, and then Norma.

          MR. MULLIGAN:  Prepayment  penalties and  credit

insurance  is  probably the worst products that  was  ever

involved, at least in the way it is sold.  And rather than

including them in the trigger, we would recommend that  it

simply  not be allowed to be sold at the time the loan  is

originated.   I  know the Board, or anyone else,  says  we

can't  sell credit insurance.  But if you make the  lender

come back after the fact, and in that way let the borrower

exactly see what they're buying or  paying for, some of it


is  unbelievably bad.  At least that throws it all in  the

pot at the same time and hiding those costs.

          MS. WIDENER:  I  would absolutely agree that  it

should  not  be  allowed.  I think there  should  be  some

special   effort  to  clarify  between  private   mortgage

insurance  and  credit insurance.  Because  I  think  some

consumers  are being confused about that.  We really  want

to  say  credit  life  insurance,  and  all  those  credit

products, absolutely should not be allowed.  I'm aware  of

--  sorry,  we  don't have studies  --  totally  aware  of

borrowers being forced to take the credit product as  part

of doing the loan.  It's just ripping off their equity.

          I'd like to also say that, in general, on all of

these  issues,  I  did not say it  in  the  testimony,  as

represented  in  the model statute, I  think  the  trigger

should  be lowered, the prepayment should not be  allowed.

All  of  these  types of things, anything you  can  do  to

communicate  the message that this behavior has  to  stop.

It needs to happen, it just needs to happen.

          If  the Board is going to err, it should err  on

the  side of protecting this very vulnerable client  group

that's  really suffering from predatory  lending.   People

who  absolutely can't read, don't understand what's  going


          I  have to agree that the disclosures have  very


little effect, even though you have to have them.  What we

have  to  is  get at solving  the  problem  of  low-wealth

borrowers having their equity totally gone.

          MS. GARCIA:  Two  quick comment, if I may,  very


          One  of the things I want to highlight  here  is

that  the  assumption is that, in  good  loan,  prepayment

penalties will lower the cost of borrowers by giving  them

better  interest  rate  and lower fees.   But  what  we're

seeing  with high-cost loans is that the borrowers  aren't

getting  lower  interest rates and they're  certainly  not

getting  lower fees.  In fact, the prepayment  penalty  is

one  of  several  things in a package that  makes  a  loan

extremely  unfavorable for the borrower.  So I first  want

to get to that initial assumption.

          The  second  is  that one  of  the  reasons  why

Consumers Union believes that prepayment penalties  should

be included in the cost factor is because there is a  cost

associated  with that restriction on the loan.  There's  a

cost  to  the borrower and it's, and it has to be  in  the

cost  factor because all of the prime lenders  will  allow

the  borrower to buy down or trade out of  the  prepayment

penalties  by paying a higher fee, paying higher  interest

rates.   And  the  point is  to  discourage  lenders  from

loading  up unfavorable terms onto borrowers in  order  to


create  an  impossible situation for the  borrower,  which

will cause the borrower to refinance; and, therefore,  get

deeper into their equity to pay another set of fees.  And,

perhaps,  even  a higher interest rate  to  refinance  the


          With  respect  to  credit  insurance,  Consumers

Union  believes that it is a total rip off for  consumers.

We  issued a report in 1999 that chronicles  our  findings

where  we believe the consumers group were ripped  off  to

the  rate  of $2 billion a year for credit  insurance.   I

support the comments of my other colleagues who said  that

credit  insurance  had  no  place  in  the  lending  role,

particularly at the point of sale of the loan.

          MS. AHRENS:  Thank you.

          MS. DELGADO:  As  long as we are  on  prepayment

penalties remains alive, I want to talk a little bit about

it   and  take  a  little  different   position,   because

prepayment  penalties do have a practical application  for

the  consumer.  It will cost the consumer anywhere from  3

to  4 thousand dollars to originate a loan.  No one  seems

to talk about that very much.  And the prepayment  penalty

is a way to buy down that loan.  Because just to -- for  a

lender, to make money on a loan, or recoup his acquisition

costs,  is going to take from 3 to 4 years on average.  So

the  prepayment penalty is a way to ask the borrower  were


they planning to keep the loan on their books for 3 years,

or  so, and actually buy down rates significantly  by  one

percentage  point  a year, or more than  that.   Actually,

it's a really good feature.

          It  seems  that  we should be  focusing  on  bad

practices.   Features,  by themselves,  are  good  things.

They're  very,  very good negotiating tools for  both  the

borrower and the lender.

          MR. LONEY:  Okay, Jim.

          MR. MICHAELS:  Just  before we close, I want  to

make  sure  that we gave everybody  the  same  opportunity

here.   Mr. Rankins is the other lender on the  panel.   I

didn't  get ask the question and I want to make  sure  you

have an opportunity.

          If  you  can give us, if you have some  idea  of

what  percentage of your loans are not just subprime,  but

also  covered  by HOEPA and how that would change  if  the

triggers are lowered by 2 point?

          MR. RANKINS:  Many percentage of ours are  HOEPA

loans.   We strictly are all subprime, no  prime  lending.

Our   position   is   unique  because   we're   the   only

African-American  mortgage banker.  The consumer comes  in

and,  as a consequence, we do home-equity loans that  have

been turned down.

          MR. MICHAELS:  They're all HOEPA, virtually?


          MR. RANKINS:  They're  all HOEPA, with  lots  of


          MR. LONEY:  And we're glad to hear that.

          We will take a ten-minute break, please, and, by

my clock, be back at 10 minutes to 11:00.

          Off the record.


          MR. LONEY:  Can  we get started?  Well, I  guess

we  can proceed, and the other panelists can trickle  back

in as they will.

          The  next  session of  this  morning's  meeting,

we're going to examine possible additional restrictions or

prohibitions for specific acts and practices.

          Under HOEPA, the Board is authorized to prohibit

acts  and  practices in a couple of ways:   In  connection

with mortgage loans, if the Board finds the practice to be

unfair,  deceptive  or  designed to evade  HOEPA;  and  in

connection  with  refinancing of mortgage  loans,  if  the

Board  finds that the practice is associated with  abusive

lending practices or otherwise not in the interest of  the


          The  Board's  notice announcing  these  meetings

raises several topics for discussion, and, because we have

limited  time, I'd like to focus on four of those  topics:

Loan  flipping,  unaffordable lending,  regulating  credit


insurance, and improving disclosures.  We'll start out  by

talking  a  little  bit about  flipping  and  getting  the

panelist views on some of the issues related to that.

          Flipping  is the, in common parlance, the  first

of   the  frequent  refinancing  of  home-secured   loans,

particularly  where  the customer derives  little  or  not

economic  benefit  from  the refinancing,  and  where  the

lender  receives significant income through  fees.   These

fees are typically added to the loan amount, thus reducing

the homeowner's equity in the property.

          What  we'd  like to talk about, in a  couple  of

respects,  is  what  regulatory  approach  the   panelists

believe would effectively curb these kinds of  refinancing

that   do   not  benefit   borrowers   without   impairing

transactions  that  do  help  borrowers.   And,  so,  it's

important that we kind of make that distinction.

          In  recent reports submitted to Congress by  the

Department of Department of Housing and Urban  Development

and  the Treasury Department, it was suggested  the  Board

should  prohibit  refinancing  within  a  specified   time

period, unless there is a tangible net benefit.

          What  would  give the Board,  in  particular,  a

basis  for deciding what a particular time  period  should

be?   Should it be 12 months, 18 months, 36 months?   What

number  should  we  do, could we use?  And  how  would  we


measure  the  notion of "benefit" to  the  consumer?   For

example:  Would lowering the payment amount and  extending

the  number of payments actually work out to be a  benefit

to the consumer?

          So,  to  start this discussion off, I  would  be

interested  in  knowing  any responses  you  have  to  the

general   question  of  what  regulatory  approach   would

effectively  curb these refinancings that do  not  benefit

borrowers  without impairing transactions that help  them.

And, then, if you could address the question of how  would

we  come  up with the time period, if that seems  like  an

appropriate  approach, and how to measure the benefits  to

the consumer in any flipping.

          So,  if  anybody has any thoughts on  this,  I'd

certainly like to hear it.

          Yes, Ms. Bose.

          MS. BOSE:  I  don't  think  it  should  be   the

frequency  of refinances that should be regulated  by  the

Federal Reserve.  The idea of flipping is most lenders now

put into their broker contracts that, if we refinance  the

loan within 12 months, we give them back our profit.   And

because  this  is very detrimental to the  industry  as  a

whole, I believe the industry has taken very strong  steps

to  discourage loan flipping throughout the industry,  and

it varies on how the penalty works.  But basically, if the


borrower refinances within a year, and they don't go  back

to that same lender, the lender penalizes the  originator.

And I think the industry takes that very seriously.

          I  hate  to  see the Federal  Reserve  start  to

regulate how frequently someone can refinance their house,

or  when  it would make sense, or when  it  wouldn't  make

sense.  I think that's just not the purview of government.

          MR. LONEY:  Anybody over here?

          MR. BLEY:  I guess I'll get in my comments in my

prepared remarks, as you predicted.

          I   guess  we  think  the  greatest   value   of

regulation  isn't in micro management terms, as you  might

guess with my previous comments.  But I think the greatest

value  in regulation is its deterrent effect.  So  how  do

you deter a predatory lending?

          One  observation  is  that we,  at  DFI,  remain

perplexed  at the existence of federal criminal  penalties

for  any  consumer who defrauding a  lending  institution,

while   the  penalties  against  lenders  for   defrauding

consumers  are,  for  the most  part,  administrative  and

financial in nature.  A general worst-case scenario for  a

lender  receiving a consumer, or deceiving a consumer,  is

disgorging the profits associated with the violation,  and

an  admonishment  not to do it again.  We know  that  some

lenders  see  no downside to the undertaking  of  mortgage


fraud.   At  worst,  the  penalty  is  to  stop  enriching


          So, we believe that the best approach to this is

to   deter  predatory  lending  by  establishing   certain

prohibited acts.  I won't go through those.  There's about

8  or  9.  I'll just point out that  they're  attached  as

Exhibit C to our comments -- by the way, we're making more

copies  of this -- on page 7, and it lists what's  in  the

state  of Washington's Mortgage Broker Practices Act,  and

lists out what the prohibitive practices to be in the  law

and  enforced.   Again,  it  focuses  on  manner,  not  on

prohibitive terms.

          MR. LONEY:  Go ahead.

          MR. SAMUELS:  Again, I have to applaud Mr. Bley.

He's  the kind of regulator we like.  Because, because  it

really  is a manner as opposed to a practice  issue  here.

And  I  absolutely agree with Ms. Bose.  As a  lender,  we

hate  brokers  coming back to us  and  refinancing  loans.

Because, then, we don't -- we've paid a premium for  these

loans, and we're going to lose that premium.

          I have to say, in my own case, I guess it was in

'93   or  '94,  I  believe  I  refinanced  my  loan   with

Countrywide  twice because I didn't hit the bottom of  the

interest rate cycle.  And, what we really don't want to do

is inhibit people from benefiting themselves when there is


a down-interest-rate market.

          Now, when we talk about benefit to the borrower,

I  mean, I hope -- and I talk to my people about this  all

the  time -- that every loan we make is a benefit  to  the

borrower. Because that's what we're in the business to do.

So that, when we talk about a loan that only puts fees  in

the  pocket of the lender, that's a predatory  act  unless

you see that there is something that is beneficial to  the


          So  I'm not sure that time frames  are  relevant

here.   Because, as I said, I think that what we  need  to

look  at  is to make sure that what is  happening  is  the

borrower  is  given  choices  to  achieve  the  borrower's

economic  objectives.   Whether it's taking cash  out,  or

medical,  educational, home-improvement needs,  or  taking

advantage of a down-interest-rate cycle, or whatever,  the

benefit  that  they see to themselves, we want,  we  don't

want  to  put stumbling blocks in the way to  be  able  to

accomplish that refinance.

          One  of  the things I've seen that  troubles  me

greatly  is a proposal that another lender  can  refinance

your  loan,  but you can't refinance it within  a  certain

period  of time.  "A Miracle on 34th Street" was  a  great

movie,  but, you know, the Macy's, Gimbels' thing  doesn't

work  in this situation.  We want to be able to  refinance


our  borrowers, and we think we could do it in a way  that

is more beneficial to the borrower because we can do it in

a  more efficient and less costly manner than some of  our

competitors.  We certainly would not want to be faced with

a law or regulation that prohibits us from doing that.

          MR. LONEY:  Mr. Courson.

          MR. COURSON:  We, as part of the process of  the

mortgage reform group over a two-year period, debated this

topic   extensively,  both  time  periods,  net   benefit,

measuring  benefit.  That group included not only  lenders

but  service  providers and consumer groups,  and  frankly

found ourselves in a quagmire.  It was a circular argument

that could never identify all the unintended  consequences

when you get into trying to identify the specific acts  by

either  regulation  or legislation that  would,  in  fact,

prevent  flipping,  and  it  totally  broke  down.    And,

therefore,  I  think, when you try to get into  that,  you

really  find  yourself never ever able  to  capture  those

precise elements that will stop the flipping. And I  think

the answer is, as the other panelists have said, you  have

to  really  look, therefore, at  the  predatory  practices


          MR. LONEY:  Did you --

          MR. MULLIGAN:  Yes.   We've also seen a  lot  of

flipping,  and  even though our associates  are  not  here


today.    But we have tried and tried as well to  come  up

with  something that could be regulated in that  area  and

none of it makes any sense in terms of the ability of  the

individual  consumer to determine.  So we also don't  urge

any  prohibition on that, or any attempt to regulate,  but

rather  to  increase the enforcement.  Perhaps  he  single

largest  issue from our point of view is to eliminate  the

pattern  and  practice requirement for  abusive  practices

under  the  code.  It becomes a monster to  litigate.   In

fact,  it  becomes  almost impossible to  either  bring  a

class-wide  claim or your own.  If that could be  removed,

then,  the  ability to go after the lender  for  predatory

conduct  would  be increased enormously on  an  individual


          MS. WIDENER:  I think what the Board -- oh.

          MR. LONEY:  Go ahead.

          MS. WIDENER:  I  don't have, I can't  offer  any

specifics  with regard to how one might regulate what  the

problem  is and prevent it specifically.  But I think,  in

general,  the Board has the power of its  CRA  examination

authority  to discourage the feeding of those who  do  the

flipping.   And that is that I believe the CRA  credit  is

given for the purpose of purchase of subprime loans.   And

to  the extent that is true -- and I don't know  how  that

exactly  works.  I just keep hearing that they  are  given



          To the extent that's true, I would encourage the

Board  to withdraw from giving credit for the purchase  of

subprime  loans  in the CRA process until there can  be  a

clearer definition with regard to what is predatory versus

what  is  subprime.   And right now, I  think  that  we're

treading too lightly on the issue of subprime in an effort

to  not  close down a flow of credit to a  certain  client

group.  But I think, in that process, we're allowing a lot

of low-wealth borrowers to get ripped off.

          So, again, I'm suggesting that the situation has

gotten to the point, and I don't have the ability to do  a

study,  but  I know through what we're looking at  in  the

NeighborWorks  Network.  I know what I'm  hearing  through

Habitat for Humanity, folks that I work closely with, that

too  many  people who have been helped are  simply  having

their equity ripped off.

          It's become an issue of the Congressional  Black

Caucus,  it's  so  big,  that  low-wealth  borrowers   are

increasingly  unable to pass on wealth to family  members,

to  future generations.  And it's getting to a point  that

we  just need to say, Halt!, and let's see what we can  do

to  just back off the whole situation of subprime  to  the

extent it cannot be clarified as not predatory.

          MR. RANKINS:  May I make a comment?


          MR. LONEY:  Sure.

          MR. RANKINS:  With respect to some of the issues

that  Ms.  Widener addressed, these borrowers are  not  as

unsophisticated as some people would contribute they  are.

I'd  say 30 percent of the homes that we refinance,  these

homes  are  paid for.  These people come  in  for  various

reasons:   weddings, buy campers.   A great deal  of  them

are  seniors  who want to buy a RV.  They want  to  put  a

grandchild through college.  That's what they do with this

equity,   and  that's  what  they  want  20,   30   years,

respectively, in order to do that.

          So, we don't want the Board to be placed in  the

position  to try to impede some of that,  called  economic

growth for us.  And some of these people, who are on fixed

incomes  or  retirement, I agree with  Ms.  Twohig,  there

should not be asset-based lending; but there should be, in

many respects these people should be given an opportunity,

if  they  qualify and there is an ability to  repay,  they

should have that opportunity to utilize that asset,  their


          MR. LONEY:  Yes.

          MR. SANDS:  Just   a   couple   of   points   on

prohibited    practices,    generally,    and    flipping,


          First  of  all, it's obivous  that  time  frames


really are a problem because it really doesn't address the

emergency.   You  will find a lot of  borrowers,  who  are

credit-impaired,  may  have  emergencies  that  come   up,

medical emergencies.  They are suddenly impaired from  the

financing and taking money out of their equity to pay  for

medical  emergencies, and they're left with no choice,  or

maybe a worse choice.

          Secondly,  I think as John Courson pointed  out,

coming  up  with these safe-harbor  minimum  standards  is

probably  impossible.   In  coming  up  with  a  amorphous

standards  means  you're  going to end  up  with  as  many

different  standards as are judicial districts.   And  I'm

not  quite  sure why that benefits anybody but me,  as  an

attorney.  So I'm not quite sure how that benefits anybody

else, though.

          Just a couple of points on safe harbors as  poor

excuses for prohibitive practices.  First of all, I'd like

to  suggest,  and  people  think  about,  whether  if  the

borrower  obtains truly independent counseling as part  of

any  prohibitive practice or term, or whatever it is  that

the  Board  considers safe harbor  for  truly  independent

counseling  -- I'm sure what that means,  necessarily,  in

each case.

          I  do  have  a client  that  sells  credit  life

insurance  and  requires the borrower to go to  legal  aid


organization   in  Los  Angeles  and   get   independently

counseled  before  they place insurance.  But  they  don't

have  a safe harbor for that.  I really think they  should

in that circumstance.  Secondly, they consider -- and that

was  part of the HUD, I can't remember which  report,  but

have a part up for credited Investors.

          One thing which certainly makes me, which I find

most  foreign in my practice, is wealthy borrowers who  --

and  the  SEC  has, for example, one standard  of  what  a

credit  means  for very wealthy borrowers who  have  their

loan  negotiated  by an attorney, and they come  back  and

say:   Well,  you know what?  You  missed  something.   We

don't like the loan.  We want to do something.  And  there

will  be,  in fact, credit investors, even  falling  under

HOEPA,  who  may be going through a  divorce,  have  their

credit  ruined,  and are going  through  difficult  times.

And, in fact, get a Section 32 loan, and then try to  take

advantage of the fact that they were sophisticated:   they

had been represented by counsel.  It's a very small group,

but it's a troublesome group.  I'm not quite sure that the

laws  would  benefit  that group.  I'd  like  to  consider

whether that makes sense.

          MR. LONEY:  Governor Gramlich, you wanted to ask

about enforcement.

          GOVERNOR GRAMLICH:  We'll do that last.


          MR. LONEY:  Last?

          GOVERNOR GRAMLICH:  After   we   do   the   next


          MR. LONEY:  Okay.   One of the things  that  has

come  up  in the context of this is the issue  of  balloon

payments.   And  we  understand  that,  to  avoid  HOEPA's

restrictions on balloon payments, some lenders may include

payable-on-demand  clauses  in HOEPA loans.  Is  this,  in

your  experience,  prevalent where flipping  occurs,  this

notion  of  payable  on  demand?   And  should  the  Board

consider restricting payable-on-demand clauses?

          Does anybody have any thoughts on that?

          MR. MULLIGAN:  We  don't  really  see  it  as  a

problem.  The use of balloon payments is very limited.  It

does have its pockets, but it's very small, small  segment

of the market.  And payable on demand is really sort of  a

term,  which,  to  me, doesn't make  much  sense,  because

you're  paying  off, you're flipping  anyway.   It  really

calls  into  question the disclosure  element  behind  the

problem.   There's nothing wrong with balloon  payment  if

you know it's there.  If you don't, it's a real killer.

          MR. LONEY:  Anybody else want to say anything on

payable-on-demand loans or flipping, generally, before  we

move on?

          (No response.)


          If not --

          MS. WIDENER:  Could   I  comment   on   flipping

generally?  I think, again, I want to emphasize that  it's

really  important  to  define  the  term  in  a  way  that

everybody  is meaning it the same way.  The work  done  by

Consumer  Advocates,  for example, on  the  definition  of

flipping,  gave  the example that was in the  Wall  Street

Journal  on April 23, 1997, where there had been a  number

of  loans in a four-year period representing in the  fees,

in the flipping process, being $29,000 for a $26,000 loan.

So  I  think  that, you know, we've just  got  to  get  to

defining  what  we're talking about here in  graphic  ways

that  everybody can understand what we're trying to  stop,

and  not inadvertently feed this activity without  knowing


          MR. LONEY:  Thank  you.  Any other  thoughts  on

this before we move on to the next item?

          (No response.)

          We're  going  to change the focus  now  to  talk

about ways to address unaffordable lending.  Jim Michaels,

here, will lead this discussion.

          MR. MICHAELS:  Thank you.

          Under HOEPA currently, creditors may not  engage

in a pattern or practice of extending credit that's  based

on  the  collateral  loan so that,  given  the  consumer's


current  and  expected  income,  current  obligations  and

employment status, a consumer will not be able to make the

scheduled  loan payments.  For purposes of  this  hearing,

there  are  a couple of questions we're not sure  that  we

would be able to cover or do justice to, and the first  is

the  question  of whether there ought to be a  pattern  or

practice requirement that is the clear requirement of  the

current statute.  It's one that dealing with that issue is

one  that's more appropriate for the Congress.   It's  not

something the Board could deal with by regulation, and  so

it's something we have to live under now.

          And  there is a second issue of how do you  know

when  you  have a pattern or practice?  It's  a  difficult

issue.   It  rises under a number of  different  statutes,

including HOEPA.  It's one that the courts have  struggled

with,  but  it  is  primary  a  legal  question.   We  can

certainly  debate it at length here, but we're  not  quite

sure.  We don't know if that would be useful.

          So,  assuming  we do have this law that  is  not

wonderful,  but  to  engage in a pattern  or  practice  of

lending  where the consumer cannot make the  scheduled  --

I'm sorry -- where the creditor has not considered whether

or not the consumer can make the scheduled repayments.  We

want  to  move  to some very specific  issues.   And  that

simply  is how do you deal with this prohibition in  terms


of enforcing it.

          Currently, and there is a requirement in our, in

HOEPA,  that,  if  there is  a  prepayment  penalty,  it's

allowable, and there are several conditions of HOEPA  from

where you might allow a prepayment penalty.  But there  is

a  yardstick  for  verifying  that  consumers  have   some

repayment ability, an additional 50 percent debt-to-income

ratio  test.   There is a documentation  requirement  that

they  have  the ability to make the payments on  the  loan

before you impose a repayment penalty.

          So what we are considering is whether or not  it

would  make some sense to have some additional  yardsticks

in  HOEPA  regulations  for when a lender  has  failed  to

consider  the  consumer's  ability to  repay.   There's  a

couple of ways we can do this.  But the one that comes  to

our minds is simply having a verification or documentation

requirement  to show that lenders did, in  fact,  consider

the  consumer's  ability  to repay by  looking  at  credit

reports, by looking -- by verifying employment income,  by

looking at current obligations.

          So  the first question I want to ask is  whether

it  makes  sense  to have some  sort  of  verification  or

documentation   requirements  in  connection   with   this

prohibition   under   HOEPA?   When  we   proposed   HOEPA

initially,  we  had  a  lot  of  comments  from   industry


suggesting that we not do that, so the current rule is to,

in  fact,  not do that.  The question now is  whether  the

Board should reconsider that and impose such documentation

and verification requirements.

          Let me open the discussion on that.  So,  Peggy,


          MS. TWOHIG:  Part of the Commission's statemenet

addresses  this issue.  And the Commission  believes  that

documentation  requirements  would be  extremely  helpful.

We've seen very poor documentation by lenders. At the same

time,   it   doesn't  appear   that   they're   adequately

considering   income.    It's  extremely   hard,   as   an

enforcement matter, to sometimes figure that out, and then

we  face the possible defense that, oh, we considered  it;

we just didn't write it down.

          What  we  have seen in our cases  so  far,  even

where  there  was very poor documentation,  for  instance,

where  there  was no income recorded at all.   Income  was

clearly  not  verified or was pretty  clearly  suspicious.

We've  seen instances where no credit report  was  pulled.

Sometimes   the   credit  report  was   pulled   and   the

debt-to-income  ratio  that was calculated  ignored  clear

obligations  in  the  credit report.  So  we've  seen  all

manner  of  problems  in  terms  of  lenders  not   really

considering ability to pay fully.


          We  think  it would be extremely  helpful,  both

from an enforcement perspective, and also making sure  the

lenders, who do need to comply with the HOEPA  asset-based

lending  provision,  are forced to specify what  they  are

considering.  We think it would have a deterrent effect in

that regard.

          MR. SAMUELS:  We talk about this issue, I think,

at  some length in our written comments.  But let me  just

say, very briefly, that we think this is a very  dangerous

area  to get into.  Because the reality is that,  in  many

communities,  including the many minority communities  and

immigrant   communities,  sometimes  it's   difficult   to

document income.  And there are a lot of jobs that carries

with it the difficulty of documenting income.

          Again,  what we're trying to do is to walk  that

very fine line between making sure that people who can  --

who apply for loans, can pay it back.  Not just out of the

equity in their homes, but out of their sources of income.

And  the issue of not restricting people who are  involved

in trades or occupations where they're in cash businesses,

where income documentation is difficult, we don't want  to

restrict those people from qualifying for home loans.

          GOVERNOR GRAMLICH:  The obvious question is:  If

you can't document the income, how do you know the income,

and how do you know they can pay the loan back?


          MR. SAMUELS:  Right.  And I would say that there

are  certain  reality checks, let's just  say.   And  I'll

take,  you know, sort of a waiter in a restaurant.   If  a

waiter in a restaurant puts down that he or she is  making

$300,000  a  year,  we're  going to ask  what  kind  of  a

restaurant  they're  working at, and,  you  know,  whether

that's real.

          There are some ranges that we have to, you know,

consider.   We  have stated income loans.   We  have,  you

know,  other  kinds of loan products where people  --  and

I'll  say doctors and lawyers are probably at the  top  of

the  list of people who want to qualify for  these  loans.

They  don't want to show us all of their verification  for

the  income  that  they  may have.   And,  so,  there  are

programs  where we do check that they can repay the  loans

under certain guidelines, but there are -- it is difficult

to  have the same kind of verification that you  would  if

some -- if the entire nation worked on a W-2 system, where

you'd have to do is, you know, call the payroll department

of a company and say how much is a person making.

          So  it  is  a  more difficult  --  it's  a  more

difficult task.  It's a difficult underwriting  challenge,

but  it's  one that we don't want to have to  worry  about

meeting every time we have a difficult borrower to  verify

their income.  We don't want to be faced afterwards with a


challenge that, oh, you didn't take into account the  fact

that I couldn't pay this loan.

          GOVERNOR GRAMLICH:  Are  there  are  a  lot   of

high-income  doctors  and lawyers who  presumably  may  be

playing  some games with the IRS, or somebody in he  HOEPA


          MR. SAMUELS:  I  don't want to impugn a  segment

of  our  borrowing base.  I'm not going to  suggest  that.

Let's  just say that some don't want to be as  forthcoming

as others.

          MR. MICHAELS:  Let  me just clear some  of  your

assumptions.   First  of  all,  if  we're  talking   about

documenting  income  and current debt, and  we're  talking

about  only  HOEPA loans, and we're talking  about  making

sure that the rule -- making sure that it's documented  as

a pattern and practice, as opposed to going to  individual

cases.   Is that still prone to saying, as a  pattern  and

practice, you must generally document income and  expenses

for HOEPA loans?  Doesn't that give you enough flexibility

that you need for individual cases?

          MR. SAMUELS:  Well, I'm not sure where we  would

end up.  If you're going to impose, for example, a certain

percentage  on  the lending industry, which we  very  much

would  not want to see happen, and you say:  Well,  in  an

individual  case, you might exceed the 50 or  55  percent;


but,  as a pattern and practice, you're not.  I'm  nervous

about that.  Because, again, I can't necessarily get to  a

50 percent -- I can't, with any certainty, say that person

falls within a 50 percent, you know, ratio, where I  can't

necessarily  verify  that  this is  what  this  person  is

making.   Now, what I may have to do is, I may have to  go

down  45 percent, you see?  Because, if I can't verify  it

and  I have to worry -- and, by the way, we're  very  much

opposed  to what Mr. Mulligan suggested before,  and  this

eliminating the pattern and practice requirement -- as you

can imagine.

          Because, you know, we don't -- you know,  people

do  make  mistakes,  sometimes, and  there  are  anomalous

results  sometimes, that don't make you a bad  actor,  you

know?  It makes you -- you need to rectify that situation;

but it doesn't mean that you violated the law.  I mean, to

the extent that you are on a -- that you are engaging in a

practice of making loans to people who can't afford to pay

them back, yes; that's a violation.

          What I'm saying is:  There are industry standard

guidelines  that legitimate lenders utilize in  trying  to

make  as  many loans as we can. That's what we're  in  the

business of doing; and that's a very good thing, we think.

What  we don't want to do is to impose restrictions on  us

to  eliminate a class of people whose income is  difficult


to develop.

          MR. MICHAELS:  Well,   let's   suppose,    let's

suppose  we were not talking debt-to-income  rations,  per

se.   That  the only requirements we're talking  about  is

just the lenders who, as a pattern and practice,  document

that they consider any common expenses, without having any

specific ratio that was required to be met.  And did  that

as it applied HOEPA loans.

          MR. SAMUELS:  That's called underwriting.

          MR. MICHAELS:  Right.   That's why I'm having  a

hard time saying --

          MR. SAMUELS:  No,  no.  We have no problem  with

underwriting.   But,  again, I have to say  that  my  CEO,

Angelo  Mazzolla,  who some of you may know,  often  talks

about  the  days when he sat across the  table  from,  you

know, borrowers and, you know, these people were saying to

him, you know, "I want this home.  I will work two jobs in

order  to  get this, you know, this home."  And  he  would

make that loan everyday of the week.

          MR. MICHAELS:  But is that really relevant?   As

a  pattern and practice, you don't make a high-cost  HOEPA

loan that way without at least documenting these things.

          MR. SAMUELS:  Is that -- I'm not sure.

          MR. MICHAELS:  In other words, as a pattern  and

practice,  you  don't make high-cost loans  covered  under


HOEPA, isn't that right?

          MR. SAMUELS:  As a practice, we do not make  any

loans where the individual, you know, where we can't  have

some degree of certainty that the person is going to repay

the  loan.   I  mean, that's, as  I  said,  that's  called

underwriting,  and that's what we do.  We don't just  say:

Let's  take  a  look at that appraisal,  okay?   Is  there

enough  money in that, in the value on that house, for  us

to  make  loan?  No.  I mean, we don't do that.   And  the

lending industry does not do that.

          MR. BLEY:  Predatory  lenders may, and  I  think

the context of this unaffordable loan discussion needs  to

be  in the context where there's high equity in the  home,

and  that the loan may be for something -- and  I'll  just

pick  an  arbitrary number -- 40 percent of  the  loan  to

value,  or 60 percent of the loan, where there  is  equity

after foreclosure.  And the issue is:  Will that loan ever

be  foreclosed  on because the consumer can't  afford  the

loan.   I  think the biggest concern here, and  one  thing

that  we've identified, is that most of the loans that  we

would consider coming from predatory lenders, are variable

rate  loans.   So  the  cost  of  the  loan  is  going  to

accelerate through the terms of the loan, especially in  a

rising interest rate environment, which we've been in.

          Now,  it's  our understanding  that  Section  32


requires  the consideration of the consumer's current  and

expected  income,  but only the current  obligations.   So

that's  best-case scenario from the point of view  of  the

lender.  That's what needs to be considered.

          We  would  suggest  that,  really,  what  public

policy  should require is the opposite of that.  That  the

borrower's  income  should  be  fixed  at  the  point   of

origination because there is much less a guarantee that  a

borrower will retain employment or receive raises than  to

guarantee  that  the  rate  will  increase,  and  use  the

worst-case  payment stream calculated at the  maximum  the

creditor could move the rate.  If that is determined to be

unaffordable, then you run a real danger that that  lender

is  going to -- will make that loan.  A  predatory  lender

will  make that loan knowing that, knowing that  the  loan

will,  or  a  high probability that the loan  will  go  in

default,  but that there's high equity and they  can  make

money off it.

          MR. LONEY:  Anybody else?

          MS. DELGADO:  I  actually -- I have  a  question

for Mr. Bley.

          Mr. Bley, how do you implement that?  How do you

enforce it?  And let me give you an example, since we  are

in the business.  Let's say that we underwrite a loan at 2

percent  above prime, 11.5 percent.  How would you do  the


debt-to-service  ratio calculation?  I mean,  assuming  --

would you assume that prime rises 10 points?  I mean, that

could  actually  disqualify the  borrower  from  obtaining

financing.   I  don't know how you  would  implement  that

proposal such that the borrower is still eligible for  the

loan.  Am I misinterpreting what you said?

          MR. BLEY:  I --

          MS. DELGADO:  It's  not a bad idea.   It's  just

that --

          MR. MULLIGAN:  Let  me ask it this way.  Let  me

rephrase the question to you.  How do underwrite that loan


          MS. DELGADO:  You  underwrite the loan based  on

the current prime.

          MR. MULLIGAN:  And given that the interest rates

are going up or down, and, in fact, I haven't seen anybody

without  a  4  on their notes in  recent  years,  so  they

actually go up and don't go down, what is your  assumption

for the future?

          MS. DELGADO:  Well, I mean, at what point do you

assume  payment shock occurs and the borrower  can't  make

the payment?

          MR. MULLIGAN:  Exactly.  So you're  underwriting

is really loan to value, isn't it?

          MS. DELGADO:  Our  underwriting is not  loan  to



          MR. MULLIGAN:  I  understand.  I mean, not  your

company; but, in reality --

          MS. DELGADO:  We're a lender.

          MR. MULLIGAN:  Yes.   But  in  reality,   what's

you're looking at in these types of loans, especially with

no-doc  or income-stated loans, is, with all due  respect,

is just loan to value.  That's all your looking at.

          If   you've  got  a  borrower  sitting  in   the

inner-city,  or  wherever, that is qualified  under  these

standards,  and you're taking an income-stated  or  no-doc

loan,  that's about all you're looking at is  the  equity.

That's all you've got.  And I'll tell you what you get  in

terms  of  the package -- and I've seen a lot of  them  --

handwritten  statements saying, gee, I run  a  babysitting

service,  I make -- I've seen $5,000 dollars a month by  a

woman who is fully employed, they had the W-2s.  Or,  gee,

doesn't your son live here? He could probably pay rent  of

X.   Or, you know, golly, you can probably rent that  part

of  your house out for this.  Write that down for us,  and

that   goes  in  the  loan  package,  and  there   is   no


          So,  if you're looking at verifying, be  careful

of  what you're looking at.  Because, the moment you  turn

around and turn on the lender and say:  I want some relief


from   this  borrower.   The  counterclaim  is  that   you

defrauded us in the loan application.  Look!  It's in your

own writing, right here.

          And to finally answer your question, Mr. Bley, I

don't  know how you would actually consider  the  variable

rate.   I don't know how you do it now, and I  don't  know

how  you  would do it if you were doing it now.   I  agree

with it, but I don't know how to do it.

          MR. BLEY:  I think I'll give a lawyerly  answer.

I think it depends on the facts and circumstances.


          But I think, but I think, I think it states  the

point,  that  there's a tendency in these  areas  to  find

absolute objective criteria.  And that, in my opinion,  is

not  the real world.  My constant theme this  morning  has

been  prohibiting  acts  or  practices  and   enforcement.

Inherent  in  that  there's lot of  discovery,  a  lot  of

interviewing,   a  lot  of,  in  some  cases,  a  lot   of

confrontational,  adversarial type  deposition  processes.

And  I think part of the burden of the state in this  area

is that maybe this is the prima facie elements of a  case.

But, then, I think the state would have to prove some sort

of -- in deference to Dan -- pattern or practice, maybe in

an individual case, but some form of intent that really at

the  base of this transaction it wasn't to make a loan  at


all.  It was to steal the equity.

          So, to answer your question, there is no  silver

bullet.   It's  based  on  facts  and  circumstances,  and

probably  it's  the state's, it's got to  be  the  state's

responsibility to prove that.

          MS. DELGADO:  And, so, maybe the way to regulate

this  type of activity, making unaffordable loans,  is  to

force  lenders  to  submit, to  disclose  foreclosure  and

repossession activity.  And that can very easily be done.

          MR. BLEY:  That's a good regulatory technique to

determine whether that pattern or practice may be made.

          MS. TWOHIG:  On the documentation point, I  just

want to state that I don't think we're asking for a  whole

lot.   As  has been pointed out, HOEPA does  require  that

current,  that income and expected income and  employment,

and  at least current obligations be considered.  And  all

we're asking for is that the lender be required to  record

what  that is so we can then evaluate it and do  our  job.

And,  right now, it's not a requirement.  So we have  seen


          Mr.  Samuels  said  that they do  some  kind  of

verification.   That's  fine.   Just  note  what  it  was.

Because we have seen many instances where that's just  not

noted, and they'll come back and say:  Oh, we did this, we

did  that.  But it's very hard to know, for  sure,  really


what was done, and to investigate whether that really  was

done, when it's not even noted.

          MR. GNAIZDA:  If   I   might  ask   a   question

regarding  foreclosures.  I'd like to ask it of  you,  Mr.

Michaels.  Does the Federal Reserve, or anyone else,  have

that data by state, and then by companies?  Wouldn't  that

--  and  then my second question would be:  If  you  don't

have it, wouldn't that be highly useful, given what  we've

heard  today?  I'm not sure what you've heard in  Chicago,

in Boston or North Carolina.

          MR. MICHAELS:  I'm  not sure anybody  came  here

today to hear my opinions.

          MR. GNAIZDA:  I'm very curious.

          MR. MICHAELS:  It's my understanding that we  do

not have any data.  But I think it would be helpful.

          MR. GNAIZDA:  Could I ask how helpful?   Because

I'd  like  to  make a recommendation, if  you  think  it's

highly  helpful, that we get it.  And I would  think  that

among the various regulators, nine of them who are working

with  you  --  including  yourself,  you  had  nine   major

regulators -- you should be able, with your  jurisdiction,

to  be able to get a good cross-section, particularly,  if

you  call  upon  the  leadership, such  as  the  state  of

Washington and a few other major states.

          So  I'd  like to make a request that  that,  the


effort,  be  made within the next 30 days  to  gather  the

information,  and, hopefully, we can have a report  within

six months.

          MR. MICHAELS:  I will tell you the issue came up

in  some of the other hearings, as well.   It's  obviously

something we're going to consider.

          MS. WIDENER:  Could  I comment?  I just want  to

go   on   record   supporting   Peggy's   comments   about

documentation.   That  is about the minimum  that  we  can

require  with regard to a practice.  I mean, the  minimum.

There  has to be evidence that the lender made a  judgment

that the person could pay back the loan.  If they did  not

make a judgement that the person could pay back the  loan,

they  have  violated the law, and I think that  should  be


          MR. MICHAELS:  Let   me,   let  me   take   this

discussion  one  different step; and that is:   HOEPA  now

currently says that it's a violation to engage in  pattern

and practice in asset-based lending, but that applies only

for  HOEPA loans.  What if that prohibition were  extended

to  non-HOEPA  loans?  I want to  consider  that  question

separate  from the question we were discussing about  what

you  do in terms of adding documentation and  verification

practices.  Assuming, for a second, that we're not talking

about    additional   verification    and    documentation


requirements, what if we just extended the prohibition  on

asset-based lending to non-HOEPA loans, as well?  The idea

is  that it's probably no better a practice to  engage  in

that  type  of activity at interest rates just  below  the

HOEPA trigger on loans that are at the HOEPA triggers,  or

above the HOEPA triggers.

          MS. TWOHIG:  Would  you  define  what  you  mean

before I answer it?

          MR. MICHAELS:  Yeah.   I'm  now  using  that  as

shorthand for the whole -- the HOEPA prohibition says  you

don't  engage  in some pattern or practice in  making  the

loans  where you don't consider the consumer's ability  to

meet the scheduled payments.

          MR. RANKINS:  Since we admittedly admit that  we

do many 8 percent HOEPA loans, we do use the stated-income

program.  That's a good product that we've used  over  the

last  four  years.   There are  an  array  of  contrators,

beauticians,  different  people  will  are   self-employed

that  stated-income  program mostly applies to.   We  have

never made a loan that we haven't used bank statements  or

tax   returns.   Okay?   The  tax  returns  --   I   think

beauticians  are  the ones.  That's a cash  cow  business.

They'll  maintain, well, I make $30,000, with  respect  to

the  revenue.  But then they'll bring me a bank  statement

with $100,000, because there's some savings account.


          So  we  have ways of being able to  protect  the

investment,  and that's not looked upon as an  asset-based

loan.   I think that has been the documentation that  I've

used.  To date, I've never used the program, when I had  a

program  implemented,  where  it  was  just  we  wrote   a

statement.  It was some verification of some kind.

          MR. MICHAELS:  I guess -- I take it, then,  that

the  current prohibition doesn't affect your  98  percent.

Expanding it isn't going to be a problem for you, either.

          MR. GNAIZDA:  I'd  like to make a comment  along

that line.

          MR. MICHAELS:  Go ahead.

          MR. GNAIZDA:  As   you   know,   we   have    an

underground  economy in the Unites States.  No  one  knows

the  extent of of it.  It's estimated to be at  least  155

percent.   In many minority communities, it's 25  percent.

I've been told that, in California, like Calexico, on  the

border,   it's   50  percent.   We   can't   deny   people

opportunities to get credit because they're  participating

in  the  underground economy.  And what I think  would  be

interesting is using Mr. Rankins as an example.  Because I

have  a feeling you're doing very good work.  You have  to

get  back  to what John Bley has talked about,  the  whole

trust relationship.  And one of the things I would look at

is:  What's the percentage of foreclosures?


          I'm not asking you to give that.

          MR. RANKINS:  I will.

          MR. GNAIZDA:  Okay.

          MR. RANKINS:  I came here to disclose.

          MR. GNAIZDA:  Right.


          MR. RANKINS:  I   most   definitely   am   doing


          MR. GNAIZDA:  Okay.

          MR. RANKINS:  From my recollection on the stated

loans,  and that's what we call them in the industry,  the

stated  loans, to date, the ones that we've made, I  can't

recall a default.

          MR. GNAIZDA:  Congratulations.

          MR. RANKINS:  I can't recall one default.  But I

was just telling Dan, a minute ago, why would an  investor

make a loan that has the inability to repay?  We're not in

the real estate business.  And trust me, whenever even the

broker or the correspondent makes a loan and it goes  into

foreclosure,  it  all comes back to him.   It  becomes  an

issue,  all the issues associated with making  this  loan.

You're  looked upon making laws, bad laws.  It's a  domino

process.   So,  we want to be very, very careful  of  what

type of loans we make.

          MR. SAMUELS:  If  I can address the  foreclosure


issue,  for  a  minute, because I  think  that  it's  very

important.   Again, I think that we do not,  we  shouldn't

fall into the trap of saying foreclose equals a  predatory

loan.  In fact, we looked at this.

          We've  looked  at  this in  some  parts  of  the

country,  in particular, because we were concerned  about,

you  know, some statistics that we saw.  And  we  analyzed

every  single  one of the foreclosures that we  did  in  a

particular Zip Code.  It was interesting that I think  one

of  the  26 that we looked at was a  subprime  loan.   The

others were I think FHA or conventional.  But what we  saw

in  each  case was a tragedy of some sort:  a  divorce,  a

death, a medical, a serious medical problem.   Every  case

was  one  of those.  Our big problem  in  connection  with

foreclosures was the fact that the borrower would not call

us,  or return our calls, or answer the door when we  sent

people to, you know, to the door.

          We  have  a,  we  have  a  SWAT  Team,  a   loss

mitigation  SWAT Team, that we send into areas because  we

don't  want to foreclose on people.  That is a bad  thing.

We  lose money, the investor loses money.  I see  all  the

lenders,  sitting around the table, nodding  their  heads.

And that is the fact.

          And,  so,  when  we sit and hear:  Oh,  you  are

making  --  you know, directed at us --  the  industry  is


making predatory loans so that they can foreclose.   We're

saying:  What  are they talking about?  Because  it  is  a

lose-lose  situation for all of us.  And I will  tell  you

that it's difficult sometimes for us to get people to call

us  when they are in dire straits.  Embarrassment,  hoping

it'll  go away if they don't deal with it.  I mean,  there

are  a  lot  of reasons why  people  don't  address  these


          We  have an excellent track record when  we  are

able to sit down with the borrower, who is in default, and

work something out with them so that they don't lose their

homes.  I mean, we have some tremendous statistics in that

regard.   But  I think it's very important that,  when  we

talk about bald foreclosure statistics, we don't say:  Ah,

there's a lot of foreclosures here.  It must mean  there's

predatory lending.  I'm not saying that it doesn't go  on.

But  I  have to say that, in our experience, and  I  would

venture  to  say  in the experience  of  everyone  who  is

sitting  at this table, that a foreclosure is a bad  thing

not just for the borrower, but also for the lender.

          MR. GNAIZDA:  I want to make a comment.  I don't

think that's the case with many of the lenders.  I want to

get  into the circumstances.  I know it is for you, but  I

want to ask a question that I think is very relevant.  You

gave  me a statistic, basically, only 15 percent of  those


that were involved in the foreclosure respond to you.  And

I'd  like -- it gets back to Mr. Bley's point about  trust

and understanding.

          Mr.  Rankins,  when  you have  a  problem,  what

percent of the people you make loans to respond?

          MR. RANKINS:  With respect to foreclosure?

          MR. GNAIZDA:  Not   even   foreclosure.     Just

generally problems.  Do you find that --

          MR. RANKINS:  The   payments,  things  of   that


          MR. GNAIZDA:  Yeah.

          MR. RANKINS:  I  would say that we get a  pretty

good  -- I would have to say, you know, I  would  probably

have to get with one of my branch managers who handles the

delinquencies.   But delinquencies that we  experience  is

probably that we get a pretty good response.  We call  and

we  even go to the home, as Mr. Samuels said.  But in  our

community,  we  personalize a lot of that.  So  we  get  a

pretty  good response.  I would say 90 percent.  Very  few

-- and, if we don't get a response, there is a problem,  a

death, they're out of town, or something like that.

          MR. GNAIZDA:  I wasn't intending to say anything

to  be critical because you told me that you're trying  to

improve  your  ability to communicate.  But what  it  does

indicate  is that there is a fundamental problem  that  we


can't  get around unless we directly address it, and  that

is  the relationship of the lender to the  borrower.   Now

some  lenders  take  advantage of that,  as  Dan  Mulligan

discussed  regarding First Alliance, and  their  predatory

practices.   But  you have Countrywide,  which  is  taking

advantage of it in a positive way.

          MR. MICHAELS:  We have several people who  still

want  to  --  we want to try and wrap  this  part  of  the

discussion  up  in a couple of minutes.  So I'm  going  to

call on everybody, with the understanding that we're going

to  try  to  keep it short.  So, you  first,  Mr.  Courson

second.  Was there somebody else?

          MS. GARCIA:  Very  briefly, I want to  say  that

foreclosure  information is very, very helpful and  useful

for  us  to see if there is a trend  there.   Foreclosures

don't  always  equate to predatory lending.   But  a  high

percentage  of foreclsoures might be some sort of  indicia

that  there  is a problem there.  I think  you  heard  the

gentleman  at the end of the table, Mr. Rankins, say  that

he  lets  to  HOEPA  borrowers.   HOEPA  borrowers   don't

necessarily   equate   with   poor   borrowers.    They're

performing  borrowers.   So it is possible to  make  HOEPA

loans   and   have  performing  borrowers  and   do   this


          It is very interesting that such a large portion


of your business is HOEPA, but you have a very low rate of

foreclosure.  I think that's fascinating.  I mean, I think

that's  something that the industry should study and  find

out  what  is it that Mr. Rankins does that  other  people

aren't doing?  How can he make HOEPA borrowers  successful


          MR. COURSON:  I  want  to  quickly  address  the

point.   You  asked  the  question  about  extending   the

asset-based  restrictions, stated-income restrictions,  to

non-HOEPA loans.  And I don't want to, I don't want to let

the  moment pass saying that I think that is fraught  with

problems  in terms, again, going back to the same type  of

discussion  we  had on flipping, of capturing all  of  the

elements that might, in fact, make that a very legitimate,

bona fide loan.

          So,  I  have to tell you, I  was  laughing  with

Sandy  coming  in today.  You are now looking  at  one  of

those, as of yesterday.  I just bought a condominium,  and

just  bought the company from City Group.  And I was  told

that, well, now, since you're a sole proprietor, we  can't

trust  your income going forward, so you are now a  stated

income.  So, I are one.


          I think there are circumstances and it just goes

to point out that, when you drop that back into the  total


population  of  mortgage  loans, there  are  going  to  be

undetermined  circumstances  that  we really  need  to  be

involved in and aware of.

          MR. SAMUELS:  I  gave  him my card,  though.   I

won't give him disclosure.


          MR. COURSON:  So did Mr. Rankins.

          MR. RANKINS:  I  are  too.  I have  a  mortgage,

too.  It's stated.

          MR. MICHAELS:  Was there one more.

          MR. SANDS:  Yes.  Just one other thing.  I think

it's really critical and just want to reiterate the  point

that  Sandy  made,  and some other  people  made.   It  is

critical  that  underwriting standards be  kept  flexible.

You  know, every client I know that I have does some  sort

of income verification review.  Can the person repay  that

loan?  But the loan is based on character, collateral  and

credit.   And,  so, it's disingenuous for anybody  to  say

that  don't look at collateral.  They absolutely  look  at

collateral.  And, you know, I don't want anybody to  think

that's  not  the  case, but just make sure  it's  kept  as

flexible as possible.

          Secondly,  the  big problem, and we are  on  the

other  side of some cases, as is -- the same side  as  Mr.

Mulligan  on some cases involving a company he  mentioned.


These are sales tax issues.  Every single one was a  sales

tax  problem.   They  were  misleading,  fraudulent  sales

taxes.   So I'm not quite sure, by anything  we  discussed

today, that, unfortunately, would address that.

          Thirdly,  I do want to reiterate this point:   I

really  hope  the Board puts, in some way, that  allows  a

creditor to correct Section 32 problems.

          MS. WIDENER:  I'll be very brief.  On the  point

of  the  cash  economy, let me just  suggest  that,  as  a

direction, we work very hard to push borrowers to document

their income. That the value of forcing them to do that so

that  they create the type records, that they need  to  be

solid  borrowers in the future, is very,  very  important.

Not  only  in terms of fairness to the  country  and  them

paying  their  taxes, but in fairness  to  themselves  and

getting  brought  under the Social  Security  System,  for

their own future.  So I just think that everything that we

can  do  to push people in the right direction to  have  a

sounder society is what we should do.

          MR. MICHAELS:  Thank you.

          We  have  two or three topics we still  want  to

cover,  and  we have about an hour left.   So,  with  that

understanding, we can cover them in 20, 30 minutes,  we'll

try.  The next issue we're going to bring up may  engender

a much longer debate, so that's why I'm telling you.


          It's the issue of credit insurance.  We  touched

on  it a little earlier in the limited context of  whether

or  not  the premiums for credit insurance should  be  put

into  the  HOEPA  points and fees trigger.   I'd  like  to

broaden the discussion as to talk about credit  insurance.

We  have heard a number of recommendations during both  in

the HUD-Treasury Report and the hearings we've held.   The

clearest  of these has been the suggestion that  we  just,

that  HOEPA  just  ban  or  forgive  the  sale  of  credit

insurance  in  connection  with HOEPA  loans.   The  other

suggestion  is  that  we  prohibit  the  sale  of   credit

insurance at that time and allow the sale to be delayed to

post closing.

          MR. SAMUELS:  Can  I  ask are you  just  talking

about single premium?

          MR. MICHAELS:  Single premium.

          MR. SAMUELS:  Single premium, right.

          MR. MICHAELS:  Single-premium  credit  life  for

those  who  are -- it's the practice of a  selling  credit

insurance policy with a premium for the entire term of the

policy, which is due and payable at that time of purchase;

but, then, the entire cost is put into the loan amount and

financed.  So the consumer is, in fact, paying the  credit

insurance every month as part of their loan payment.   The

alternative to that is to have a policy where you pay  the


premium  monthly for as long as the insurance lasts.   The

practical difference is, if it's a -- let's say it's a 15-

or  a 20-year loan, the credit insurance policy  may  only

last 5 years.  So it's a difference about whether you  pay

the premiums divided up over 5 years, as you pay  monthly;

or  whether you pay it up front and finance it and  pay  a

little  bit over the entire life of the loan, which is  15

or  20  years,  which reduces the amount  of  the  monthly

payment  for  the credit insurance, but then you  do  also

have  to  pay the interest on the amount you  borrowed  up

front.  So it's a complex issue.

          We've  heard  these  suggestions.   What   we're

looking  for is whether there are other  suggestions  that

might  also work.  One of the things that had occurred  to

us  is that, under HOEPA, you get a disclosure three  days

before loan closing.  That disclosure has in it the amount

of  your  monthly  payments.  If you  have  not  purchased

credit insurance at that time, that monthly payment should

only be the amount of the loan, the amount that repays the

loan  principal and interest.  If you go to  closing,  and

then  you  purchase credit insurance, and you  finance  it

with this lump-sum premium, your monthly payment is  going

to  up and there should be, at that point, a  redisclosure

under  HOEPA of what the new monthly payment is  going  to

be, and an additional 3-day waiting period before closing.


That's the way we believe our current rules work.

          The question is whether or not there needs to be

a  better  disclosure at closing in situations  where  the

insurance may be part of the transaction prior to closing,

or  whether  there  needs  to  be  better  disclosures  at

closing,  or whether there needs to be better  disclosures

after closing.

          After  closing,  the  issue is, and  I  use  the

phrase,  "packing," where the loans automatically  include

insurance.  The consumer is told very little, if anything,

at  the  closing.   Is given a stack  of  documents  where

insurance is clearly in there, but the consumer never  has

a  chance to focus on it.  And, then, the  question  would

be:  What additional disclosure, after the closing,  might

help  the consumer focus on that insurance  purchase,  and

whether or not the consumer might have some right at  that

time  to  cancel  the insurance and get a  rebate  of  the


          That's  a  lot.  I know I've rambled on  a  bit.

Those  are  some of the things we've talked about  at  our

other hearings, so I want to open it up for discussion  as

to what we should do under HOEPA about credit insurance.

          MR. SANDS:  I  can't say I know a heck of a  lot

about  credit insurance, but I do have a couple of  points

to offer.


          You   know,   obviously,  the   one   issue   is

disclosure.  I think everybody at this table, and probably

everybody  in the room, is aware that adding a  disclosure

is always of questionable substantive value to anybody.  I

mean,  it would be nice to have a disclosure  which  says:

Here's your loan, with credit insurance; here's your  loan

without  it.  Here's the differences.  Please  review  and

initial it.  If you really want it, that's fine.  And,  in

a perfect world, that'd be great.  I'm not sure if that's,

if that really is going to work.

          I  guess  what I mean, what one  of  my  clients

actually  suggested, and I might have  mentioned  earlier,

and  I think it is a good idea, is to simply say:  If  you

want  to offer single-premium insurance, you have  to  get

counseling.   You have to have somebody else, go  outside,

get somebody else to look at it, and get somebody else  to

sign  off  on  it; and, then, come  back,  away  from  the

lender,  away from any affiliates of the lender,  and,  if

you still want it, you can have it at that point.

          MR. MICHAELS:  Peggy.

          MS. TWOHIG:  At  the  risk  of  being   slightly

repetitive,   as  I  said  in  my  opening  remarks,   the

Commission's  position on this is clear.   The  Commission

believes  that, given the abuses it's seen in the sale  of

credit insurance packing, there should be a prohibition on


the financing of single-premium credit insurance.

          And, by the way, it's not just credit insurance.

There is also insurance that's sold with the loans  that's

not related to credit at all.  It's just extra  insurance.

We've  seen  auto  club  memberships.  We've  seen   other

membership  type  things  sold.   We've  seen  auto   club

memberships  sold  to  people who don't  even  have  cars.

There's all kinds of extra products that are sold with the

loan.  So I just want to make sure that that's understood.

          But   even  with  that  ban,  the   Commission's

statement also says that, for any sale of credit insurance

that's on a monthly basis, we think that there should be a

further  requirement  that the Board should  require  that

each  billing statement disclose the cost of  the  monthly

credit  insurance, and that the insurance is optional  and

can be canceled at any time.

          If  a prohibition is not mandated, of  the  type

that   I've   just  talked  about,  then,  as   a   second

alternative,  Plan  B, the Commission  suggests  that  the

transaction should be -- the credit insurance sale  should

be separated or unpacked as much as possible from the sale

of the credit.  I believe that consumers are vulnerable to

the packing of credit insurance, and other extras, at  any

time  before the loan is closed, and even before they  get

the  money,  because  they just  are  too  susceptible  to


thinking that they have to buy it, to go through with  it.

It's  a  highly unequal bargaining  position.   It's  very

complex.  There's high pressure.  We've seen either -- and

with little opportunity to read a huge stack of documents,

and  it's very -- it's so rife with overreaching  that  we

think that very strong remedies are warranted.

          MR. MICHAELS:  Do  you  address  --  could   you

address the issue of pressure and sales tactics by sending

the  consumer a separate letter after the closing  saying:

By  the way, you've purchased credit insurance.   This  is

how  much you purchased, this is how much you pay  for  it

every  month as a result.  And, if you want to cancel  it,

here's you call.  This is how much we're going to have  to

pay you back.

          MS. TWOHIG:  My own view is that that is way too

little,  too  late.   There really needs  to  be  stronger

remedies that address the problem up front.

          MS. WIDENER:  I'd  like to say that,  until  you

get stronger remedies, do the letter and making it crystal

clear what they can get back and how.

          MS. GARCIA:  I   agree  with  Ms.  Twohig   that

providing  the  consumer disclosure after the fact  is  of

little value to the consumer.  In fact, what we need to do

is  to prevent the abuses on the front end,  because  many

consumers don't even realize they've been taken  advantage


of.   So  they may have legitimate claims,  or  legitimate

reasons  to get out of that credit insurance;  but  you're

asking  them  to proactively respond to an  abuse  in  the

first place.  And that's not fair to the consumer.

          MR. MICHAELS:  If  the  Board is  not  going  to

consider  banning,  I would agree with Mr. Sands  and  Mr.

Bley  and  join them together.  The only way to  stop  the

practice and avoid the sales pressure tactics is take  the

profit out of it.  So if there aren't any better penalties

than you have to refund the premium, there's no reason  to

do it.

          MR. RANKINS:  I   used  to  sell   credit   life

insurance;  but, for the past four years, I have not  sold

the product.  We don't sell it, and you don't want to sell

it  after the loan has closed.  We advise the client  that

this  is  not a good product, this is not  in  their  best

interest,  and  that's  what we do.   That's  a  dichotomy

because  I've  lost 2 or 3 loans from clients  who  wanted

credit life insurance because their daddy had credit life,

their  grandfathrer had credit life.  So that's the  thing

that I have to combat.

          I also, with my colleagues, they may not  charge

the points to be charged, and they may use the credit-life

portion  of  the  business as a means of  income.   So,  I

support my colleagues that can sell the product.  I  don't


sell  it  because I don't think it's a  good  product.   I

think that, in my opinion, there should be -- that is  one

thing I will say, that I think the Board should put in the

fees:   It should be disclosed within the fees.  That's  a

corporate decision we made.  We don't sell it and probably

never will.

          MR. BLEY:  Jim,  I think this gets to the  issue

of improving disclosures.  So, in my comments, that's  one

of  the topics.  But, in my comments, I said that we  need

to   simplify  disclosures.   Referring  to  my   prepared

remarks,  Exhibit B, we take a stab at rewriting Truth  In

Lending, and try to make a one-page disclosure out of  it.

If you notice that it gets rid of the concept of APR.

          Also, I'll refer you to the cover of that, which

suggests  that  the 20-minute video be  created,  possibly

using  a sports star to help educate consumers on what  an

equity  transaction  is, which would become  part  of  the

disclosure  early  on in the transaction.  It would  be  a

bulky  thing  with  the video in there,  so  it  would  be

difficult for somebody to just throw it away as junk mail.

          But  within that, on one of the --  there's  two

alternatives.  We couldn't agree in the Department, so  we

put   both  of  them  in  there.   But,  in  one  of   the

alternatives, there is a small paragraph in here that says

who gets the money, break it down where the money goes.  I


guess it might remind you of the movie that was out a year

ago,  or so:  Show me the money, but who gets  the  money.

And  that  may  be a simple way at least to  show  that  a

certain  amount -- especially when that single premium  is

financed, a certain chunk of that loan is going to go  for

credit life purposes or disability, whatever.

          MR. MICHAELS:  Well, one of the ideas we  talked

in  our  other  hearings  was that,  no  matter  when  the

insurance  is  sold,  you're  going  to  have  to  have  a

disclosure  under HOEPA that's three days before  closing.

If  it's  a lump-sum premium that's  been  financed,  your

monthly  payment is going to show, including not just  the

required  amount to repay the loan and the  interest,  but

any  amounts  for,  whether  it's  auto  club,  or  credit

insurance,  or  any other products or services  that  were

added in.

          So  what we talked about is:  Should  the  HOEPA

disclosure be broken down into the monthly payment to  pay

this loan, and the portion of the monthly payment --  they

could  list  anything that's optional,  and  the  consumer

knows right there that, maybe they don't want to pay  that

portion  of  the monthly payment.  Maybe that's  the  part

that there not interested in.  Would that help?  You know,

you  can  do  that  without  complicating  the  whole  the

insurance thing.


          MR. BLEY:  Well,  we're suggesting that you  try

to get it down to one disclosure.  I'm not so sure, on the

margin,  the value of that.  I understand that  reasonable

minds may differ.

          MR. SAMUELS:  I'm    going   to   be    speaking

theoretically,  because don't offer it either.  But  there

are  a  lot of issues involved with  the  single  premium.

When  the loan is canceled, how much money gets  refunded?

Do  they  use actuarial methods?  You  know,  things  like

that,  those are big issues.  I know I'm talking to a  lot

of  my colleagues, who are representing  consumer  groups,

that  those  are very big issues. We all  know  about  the

packing and not disclosing that the loan amount does  have

that hanging in there.  That's a despicable practice.

          I  think  we  come back down  to  the  issue  of

whether this is a product that is neutral on its face, but

horrible  in  its  implementation.  Or is  it  a  horrible

product,  you know, and should be banned from the face  of

the earth?

          I had a discussion with a fellow who is  working

in  our  subprime group, and, in a prior life,  a  company

that he worked for, he told me exactly the same story that

Mr. Rankins mentioned, but it wasn't two or three.  It was

a  vast majority of people who he dealt with who said:   I

want  single-premium credit life insurance.  And he  would


try to talk them out of it, and they would say:  No,  this

is  what I want, because I can't get any other  insurance,

for whatever reason.  And this is an easy way for them  to

get it.

          So,  I would say, done properly, I  guess  there

are  situations in which it is a benefit to the  consumer.

Perhaps there's so many incidents of abuse that, you know,

maybe we do want to throw the baby out with the bath water

in  this kind of a situation.  But it's not, I  think,  as

cut and dry.  There are people who feel that that this  is

a  benefit  to them.  But, again, you know, we,  like  Mr.

Rankins' company, made the decision of not to offer it.

          MS. TWOHIG:  I just want to make sure there's no

misunderstanding.   We are not talking  about  prohibiting

the   product.   We're  talking  about   prohibiting   the

financing of single-premium insurance.

          MR. MICHAELS:  Right.

          MS. TWOHIG:  So, in the instance you're  talking

about,  yes, definitely; that consumer could be  sold  the

insurance  on a monthly basis, with full disclosure  every

month  of how much is for credit insurance;  if  optional,

can be canceled.  That would be no problem.

          MR. SAMUELS:  But they might want to finance it,

and  they might want to finance.  And I would say  that  I

can envision a situation where, if they canceled the loan,


they get, you know, the appropriate amount of money  back,

and  that,  you know -- so that they made a  decision,  an

informed decision.  Okay?

          MS. TWOHIG:  My  response  to  that  would   be:

fine.   If  they say, I don't want to pay  so  much  every

month.   I  really want to pay for it all at once,  and  I

want  to pay interest on it, and I want you to  charge  me

points on that.  That's fine.  They can do that as long as

it  is well after the closing of the loan,  perhaps  after

the  three-day decision period, where they  actually  have

their funds in hand.  For those who don't want it, and who

are subject to coercision, then you can, if that's  really

what consumers want.

          MR. MICHAELS:  It seems that we've already  sort

of sequed into the disclosure issue, so I'm going to  take

us there intentionally.

          We've asked for comment in our published  notice

on  the  number of disclosures  issues,  including  credit

insurance.   Also  asked about official  disclosures,  the

nature  of referrals of consumers to counseling for  HOEPA

loans, who discloses balloon payments, improving the HOEPA

disclosures  themselves that are given three  days  before

the  loan  closing,  improved  disclosures  dealing   with

foreclosure situations.

          Let  me start this out, because we opened up  --


in  the  opening  statements, I think  Mr.  Bley  and  Mr.

Courson,   both,   raised  this   issue   of   simplifying

disclosures.  And this issue keeps coming up.  I was  part

of  the  team of folks who were involved in  the  Mortgage

Reform  Process  that went on for several years,  and  the

Board -- there is obviously a lengthy report on where  our

view  are  on  reforming  Truth  In  Lending   disclosures


          The   thing  about  HOEPA  is  that  the   HOEPA

disclosures themselves come three days before closing.  In

my  view,  they're  relatively  simple  disclosures.   The

complexity  comes  from the disclosures at  closure.   The

question is, that I would ask first of all: What can we do

--  we have to report on things we can do to simplify  the

lending  disclosures  at  closing -- what  can  we  do  to

improve  disclosures for HOEPA borrowers, particularly  to

HOEPA  disclosures?  The idea behind those disclosures  is

you  get  them at a time when you're not  in  the  closing

table,  you're not in a pressured environment,  you  still

have  some  time to think about, for the next  three  days

before  closing  at  least, if not more,  and  during  the

rescission  period, about whether this is the  transaction

that  makes  sense for you.  What can we do to  make  that

HOEPA  disclosure  more effective?  And is it  really  too

complex now?


          So I just want to open up with that.

          MR. COURSON:  Since my name was mentioned,  I'll


          I  think that the issue with the  disclosure  is

that it's not early enough.  The whole -- I'm going to  go

outside of HOEPA, because HOEPA is a piece of this --  but

the  entire disclosure scheme is fair  today.   Good-faith

estimates,  Truth In Lending, APR, and so on, is  not,  is

not  consumer  friendly.   So, even though  you  may  have

another  opportunity  on a HOEPA loan, three  days  before

funding, to take another look, I'm going to suggest to you

that  much  earlier in the process we need  to  streamline

these  disclosures  down  to  a  one-page,  and  tell  the

consumer  what they want to know in simple terms  so  they

can  have  the opportunity to shop.  You can't  shop  APR.

You may think you can, but I'm going to guarantee you that

no  consumer  --  if somebody came into our  office  as  a

consumer  and  said,  What's your  APR?,  we  would  think

they're either an auditor, a regulator, but they aren't  a

consumer.   And, people, that's not the comparison.   It's

what's  my loan amount?  How much cash do I have to  bring

to  closing?   What's  my  interest  rate  and  what's  my


          So  I  think it's starts much  earlier  to  give

someone the opportunity to shop.  Then, when you come down


to the HOEPA, the simplification, if they've got that very

simple,  one-page disclosure, looking at the  transaction,

again,  it  really becomes much  more  relevant.   Because

they're  lost  in  the  morass.   They're  already  there.

They're  already with the predator, and they are in  their

clutches, and they're not going to -- that disclosure  and

the  question of how many people see that and  truly  say,

oh,  I  better go call another lender, has to  be  a  very

small number of those loans.

          So I think you've got to capture the  disclosure

much  earlier in the process, at the time of  the  initial


          MR. MICHAELS:  Anyone else?

          (No response.)

          Let's talk about -- we did talk about the credit

insurance.  Before we leave the HOEPA disclosures, one  of

the other things we talked about is what the consumer gets

on a HOEPA disclosure, which is APR and a monthly payment,

and some general friendly advice about you could lose your

home  if  you  don't repay this loan.   But  in  terms  of

specifics,  one  of the things they don't know  from  that

disclosure is how they're going to be borrowing.   There's

a monthly payment there, but they don't know what the loan

amount  is  that  leads  to  that  monthly  payment.    My

understanding is that, given the amount of fees that might


be  financed, they may be surprised to learn how they  got

to  that montly payment.  If they knew part of that  might

be  optional  because it includes credit  insurance,  they

might be surprised to learn they could lower their monthly

payment.   Just the loan amount itself might  give  people

pause  as  to whether this was a transaction  they  really

wanted to enter into.

          Would that additional information help consumers

before closing?

          MR. BLEY:  I  think,  Jim, I think  that's  very

consistent  with  what our staff has found.  We  have  two

problems with HOEPA disclosure.  I kind of have to chuckle

with this.  It's content and timing.  What else is left?


          We've identified five terms, five key terms  the

borrower's  decisions  are based on:   Loan  amount,  loan

type,  note rate, all costs, and actual payment  of  them.

But nowhere does the regulation require these variables to

be disclosed.

          In  terms of timing, the problems we've  had  in

the  examination  side  is that the  following  terms  are

nowhere  to  be  found:  make,  provide,  deliver,  place,

furnish,  application  and consummation.  And,  do,  we're

constantly  embattled  about the interpretation  of  those

provisions.    And  I  think, in some  cases,  we've  been


forced  to provide some more clarification on  that  state

law.   We cite one single sentence in 226.19  (a)(1)  with

the   following   undefined   terms   are   used:    make,

consummation, deliver, place and application.

          So,   to  the  extent  that  it's   deemed   the

disclosures  should be made, I think you may want to  look

at  clarifying,  adding  some of the  key  variables  that

borrowers  want to know, and not just wrapped up  into  an

APR.   Also the terms I talked about in terms  of  timing,

when  is something actually delivered.  Is it  dropped  in

the mail?  Is that delivered?  Or is it actually received?

Constant debates about that.

          GOVERNOR GRAMLICH:  We  think  that  the   HOEPA

disclosure  needs to be concise, but complete; simple  and

thought  provoking.  We looked at the draft that you  have

suggested and came up with an idea that actually  combines

some  of  our own ideas, and came up with a  proposal  for

HOEPA disclosures.  It's on page 11 of my testimony.

          What  we're  saying  to  the  consumer  here  is

they're  getting  an  important  notice  about  fees   and

interest rates.

          "You  are receiving this special notice  because

           the fees or interest rate this lender wants  to

           charge  you are much higher than normal.   They

           are so high that they greatly increase the risk


           that  you  will end up losing your  home.   You

           could lose your home if you take this loan  and

           can't  afford the payment.  You  are  borrowing

           X-number of dollars.  Your loan requires you to

           pay  X-amount  of  dollars  per  month.    Your

           incomes  is  X-number  of  dollars  per  month.

           Before you sign this contract, you should  look

           for  a cheaper source of credit.  There may  be

           other creditors that offer other choices.   You

           have  the  right not to go  through  with  this

           loan, even though you signed a loan application

           or  received this notice.  Call this  toll-free

           number:   1-800- etc.  Housing  counselors  can

           help for free."

          We  think it's concise, complete, to the  point,

and simple.  We offer that for your consideration.

          MR. MICHAELS:  You  raised a point there that  I

raised  earlier,  which is:  Do consumers  need  to  have,

particularly HOEPA borrowers, better information about the

availability of counseling and where it is available?  The

issues  of  how to make counseling  available,  those  are

topics  we can talk about this afternoon,  because  that's

what we scheduled the time for.  But in terms of would  it

be  effective  to  include  counseling  as  part  of   the



          GOVERNOR GRAMLICH:  In   out  experiences   with

consumers,  who have reported cases of predatory  lending,

overwhelmingly they have said:  If we had known that  this

is  what  we  were  getting into,  we  would  have  looked


          In  our consumer education campaign that we  had

here  in the Bay Area, the five Bay Area counties, one  of

the things we did was we told consumers about alternatives

for borrowing.  For example:  If someone was interested in

borrowing  money  because they needed to make  their  home

wheelchair  accessible,  we let them know  about  programs

available  in their city or county that provided  low-cost

funds  in the form of a loan, or in some cases grants,  in

order  to make those improvements.  This very same  person

could have gone to a lender to try and get money for  this

purpose  when,  in  fact,  they  may  have  qualified  for

lower-coast  credit  through one  of  these  alternatives.

This  is  the  kind  of  information  that  an  objective,

qualified  counselor can provide to a consumer before  the

fact.  And this is information that's extremely valuable.

          In  addition,  if a consumer decides  that  they

want  to go through with the loan that is expensive,  they

still have that option, but at least you know you have  an

informed  borrower.  And in my discussions  with  lenders,

they  always  say  that  informed  borrowers  are   better



          MR. RANKINS:  I  think that we have to  be  very

careful.  The client that walks in my office, the  typical

client,  for instance, this 3-day rescission, the  average

client  wants  to know why he can't get  his  money  right

then.   Then,  we  proceed to explain  that,  under  HOEPA

federal  regulations,  they  can't.  It's  for  their  own

protection.  Well, a lot of them leave the office mad.

          I think if we look at the possibility of  trying

to put additional counseling and say you have to go in and

receive  counseling prior to closing, we're going to  have

some problems with some of those clients.

          Yes,  I think that some of that is good.  But  I

am  responding  now to what the clients say  to  us.   The

rescission,  I'll  tell  you, that's a  nightmare  to  the

clients.   They  want their money right then.   But  I  do

agree that I think the rescission period is good.  Because

we've  had some at midnight that decided they didn't  want

to  do  that.  I think we need to be  very  careful  about


          MR. MICHAELS:  I was trying to be careful  that,

too,   I just thing that mandatory counseling --  I  mean,

manadatory  notice,  that counseling  services  exist  and

here's  how  you find one, and here's what they  might  be

able to do for you, but it's up to you.  You know,  either


way are approaches we've heard discussed.

          MR. RANKINS:  Who is going to pay for this?


          MR. SAMUELS:  I'm glad you raised that.  Because

we  are -- I second Mr. Rankins' comments.  And I want  to

talk  about  two things:  (1) is we very much  favor  good

disclosures,  making  available notices  and  just  making

accessible  counseling, legal services.  You  know,  those

kinds of services to people are very, very important.   On

a  mandatory basis, we've had exactly the same  experience

that Mr. Rankins has talked about.  I'm going to take that

one step further and talk about this three days.

          You  have  to  furnish  to  the  consumer  these

disclosures  three  days  before  the  closing.   And   if

something  changes, even at the request of  the  consumer,

you  have to say:  No, I'm sorry.  We can't close on  that

day.  It's going to take another three days.  I'm too much

of a gentleman to repeat some of the things that have been

said to us, or to our branch people, to give a response to

that; but I think that, again, seeing a lot of the lenders

around  the  table nodding their heads yes,  it's  a  real


          It's  a  real problem because  people  need  the

money right now, for various purposes.  And having to  say

to them we have to extend this period for three days,  and


we  don't  have  any choice.   Because,  again,  the  zero

tolerance for making a mistake, and making a misstatement.

And  we  would even be liable if we can't  prove  that  we

didn't,  that  we didn't furnish it three  days  ahead  of

time.   Even  if the disclosure was  absolutely  accurate,

we're still liable, see.  And, again, this is part of  the

regulatory  burden  that  we've  been  talking  about   in

connection with HOEPA.  So that's another issue that is --

it's  good to talk about theoretically from  a  regulatory

standpoint; it's far different when you have to sit across

the table from a borrower who is expecting certain  things

and   you  can't  meet  those  expectations   because   of

regulatory burdens.

          MS. BOSE:  In the few HOEPA loans I've done,  my

experience has been that they want their money right  now.

That's  the nature of the beast, and that disclosure is  a

problem.   We had to do that twice on one of three that  I

did.  It was very tough.

          What I want to talk about, very briefly, was the

importance  of consumer education.  I think we  all  agree

that  it's important, but -- one of the things that  I  do

with  my  customers, because I'm a broker and  there's  so

many option, is I spend quite a bit of time educating them

as to their options.  And I do it because it empowers them

to make a decision, and it also enables them to see if I'm


giving them a good deal or not.

          So  that's  what  I do.  I'm  not  saying  other

people  do  it, but I know that I do a good job.   I  want

them  to understand I do a good job.  I want them to  come

back.   I work strictly on referral.  But it seems  to  me

that consumer education would go a long way to  empowering

these people to protect themselves.  And it seems like the

consumer organizations sitting at this table would be  the

ones to provide that counseling to people, if they  wanted

it, at an affordable rate.

          But  I  just think, of the three things  that  I

said   at   the  very  beginning,  which   was   increased

enforcement,   industry  self-regulation,   and   consumer

education,  it's a very, very important part of  consumers

protecting themselves, and empowering them to feel they're

in control of the transactions.

          MR. MULLIGAN:  Basically,  just to give you  our

experience with counseling, along with Consumers Union and

VOSP,  we  worked  for  about  five  years  on   programs,

especially  for seniors and minorities in  San  Francisco,

even  to the point of providing some seed funds to set  up

800 numbers.  You could call in and get a lawyer for  free

to  review  their loan documents,  Saturdays,  at  various

senior  centers,  Norma,  and so on, all  free.   And  the

response  rates averaged less than two calls a month.   It


just was not something that was effective.

          I'm not really found of mandatory counseling.  I

don't think that works very well, either.  I don't have  a

real  solution to that problem because that's  there  with

the  voluntary  program that we set up, or  help  set  up,

rather.  It was fully funded, but was totaly ineffective.

          MR. MICHAELS:  Why was that?

          MR. MULLIGAN:  People  would not call in.   They

would not --

          MR. MICHAELS:  Because  it  wasn't  well  known?

Because it was --

          MR. MULLIGAN:  I'll  tell you.  They  advertised

it in Norma's group, VOSP.  They went out to the churches,

they  went  to  the  senior centers.   They  went  to  the

neighborhoods, they went to the brokers.  Put out  flyers.

And short of doing TV ads, which gets a little  expensive,

and  we  did radio ads.  I don't know how you  could  have

advertised it any better.  And it was, as I said,  totally

free under the Bar Associations program.

          I  guess what we come back to is Ms.  Bose  said

today:   The  only way to really handle the  really  nasty

players to to increase the enforcement.  We do this day in

and day out, receive letters every day at the door.   I've

never  seen  state funding.  I've never seen  Rankins.   I

haven't  seen Countrywide in five years.  But you  do  see


the same players over and over.  As Mr. Bley said, if  the

result  of an action, whether it's by the FTC  or  private

action, is: Gee, you have to pay back fifty cents on every

dollar  that  you stole, and that's the result,  you'd  be

have to be pretty stupid not to go into that business.

          MR. COURSON:  Two  points:   We  see   borrowers

coming into our offices, consumers, and there are  certain

loan  programs  that  we participate in  that  do  require

counseling.   And when told that, for that particular,  to

be  eligible for that particular loan product, which  they

want, that they have to have the counseling.  They  really

resent  it.  I don't have the time.  I don't want  it.   I

don't  need  it,  and  I  trust  you.   You  can  tell  me

everything  you  want.  Now that's the sheep and  lion  in

some cases, also.  But I think it's a recognition from the

consumers  that  the reality that they  don't  necessarily

perceive that they need that, that they're looking at  the


          We  have  -- part of  our  comprehensive  reform

effort  that we're working on and we've  had  discussions,

both  with  The Fed and with HUD, we  believe  that  there

needs  to  be  a  very,  plain-English,  simple   mortgage

information  book that is given to every consumer  at  the

first  contact with any settlement service  provider,  any

settlement service provider.  It can be written in  simple


language.   It  can  clearly  have  information  in  there

characterizing  flipping, characterizing packing,  talking

about  voluntary counseling, and so on, that's very  plain

English, that's give to that consumer right up front.

          Now,  granted -- back to the example -- if  they

choose to utilize it, at least they have it.  Now  they're

getting  it in bits and pieces.  It's only as good as  the

settlement  service  provider they're talking to,  but  at

least  they won't have one, well-thought-out,  cooperative

effort  coming  from the regulators that they  have,  that

gives them the information.

          MS. WIDENER:  I'd  like to support  that  final,

that  comment,  to put together  something  that  everyone

gets.   It's, again, reinforcing the issue  of  definition

and  educating  people  as broadly as  you  can  in  every

settlement situation, every single one.

          With regard to counseling, I don't know how  you

make  it  mandatory and have it mean what you want  it  to

mean.   But  I  feel  the  value  of  it  is  very  clear.

Counseling is valuable.  And in the NeighborWorks Network,

we require it.  The consumers don't always want it, but it

makes them better borrowers if they are made to understand

what  it  means to own and care for a home  and  the  type

expenditures beyond the loan and repair and maintenance of

the  home,  that they will have to be  prepared  to  meet.


Good  counseling includes budget counseling, so  they  are

forced   to  look  at  their  own  income  and   expenses.

Sometimes,  they like to bury their heads in the sand,  as

well, and just let me get this loan and somehow I'll  make

it  work.  Well, if you can't make it work on paper,  it's

very hard to make it work otherwise.

          So I think counseling has a real value.  I would

encourage  that  you encourage  it.   Through  incentives,

encourage  lenders  to  use  it.  I  don't  know  how  you

regulate it.  I don't know how you make it law.

          MS. DELGADO:  I'm  in favor of  counseling,  and

I'm  also in favor of writing simple disclosures that  get

to  the point and that are better written in English.  But

I actually have another question, and I don't know exactly

where  to  stick it in.  And that has to do with  at  what

point  do  we, or should we -- we think we  should  --  be

treating  second  mortgages and junior  liens  differently

than we do for a senior.

          We  don't know why HOEPA doesn't have  different

triggers for a junior lien loan and senor lien loan.  They

carry  with them very, very different risks.  The cost  of

underwriting are relatively the same, but the loans  carry

with them a very, very different risk, and they're  priced

very  differently than market rates.  So by comparing,  by

treating  all  high-cost  loans as subprime  is  just  not


accurate, and you're lumping in second mortgages in there.

We  think  that  there  should  be  different   disclosure

requirements,  different triggers, that  actually  explain

the   differences  between  the  products  and  the   lien


          MS. TWOHIG:  On the HOEPA disclosure, generally,

and  also where counseling gets into that, I'd  guess  I'd

just like to make a few points.

          One,   I  think  it's  important  to  keep   the

disclosure as simple as possible.

          Going  back to something you asked  awhile  ago,

though,  Jim,  I  think it would be worthwhile  to  add  a

requirement that it be disclosed how much the borrower  is

borrowing.   Because,  often, that is  confusing  and  the

borrower  just simply doesn't know.   That's  particularly

true with the huge points and fees that are added in  some

of  these loans.  I think the Commission's statement  also

recommends that the Board consider something if prepayment

penalties  are allowed, that there be a  disclosure  about

prepayment  penalties.   Because, also, that  could  be  a

surprise  because they are allowable in HOEPA loans  under

certain conditions.

          In terms of counseling, I think, I guess, I have

my  doubts about whether a disclosure that  counseling  is

encouraged  would do much good.  But I think it  might  do


some good in some instances; and, so, I think it might  be

worth adding that sentence.  You know, in addition to  you

could lose your home, we encourage you to seek counseling.

I think if the consumer does find counseling, then another

issue  is whether there is such counselors  are  available

out  there.  But I think it might help capture  the  front

end,  which  is extremely important to catch some  of  the

deceptive  practices  we see going on out  there.   Things

where  they're being sold alone, that's  adjustable  rate,

and  comparing  it to a current fixed rate.   Things  like

where  they're  being compared, a non-escrow  loan  to  an

escrow  loan monthly payment.  Things where they're  being

told  that they will save money when, in fact, they  might

lower  their  monthly payments; but, over the  long  term,

they are not saving money.

          So it could be that the answer would spot  those

sort  of  misrepresentations,  or  misunderstandings  they

might  have at the front end. That's why I think it  would

be  helpful.   I do think it's an important  part  of  the

solution to these problems.

          MR. MICHAELS:  I  wanted to cover, quickly,  one

more  disclosure, then I want to talk about enforcement  a

little bit.  That has come up several times.

          One of the other areas where we question whether

there could be additional, better disclosures is the  area


of  foreclosure.   Where consumers have  HOEPA  loans  and

there  are  actually HOEPA violations, consumers  need  to

know  that they're being foreclosed on and that  they  may

have a defense.

          We understand that state law and local practices

generally  govern foreclosure process procedures that  are

followed.   Most  states  require  actual  notive  to  the

consumer   before  initiating  a  foreclosure.   We   also

understand that there are some cases in some states  where

the consumer does not get actual notice that a foreclosure

is  being initiated.  It's done by publication.  And  even

when  consumers do get notice, they may not get the  right

information  in that foreclosure notice about  what  their

legal options are at that point.

          So we've asked for comment on whether or not the

Board  should  consider  adopting  some  sort  of  minimum

federal  standards for actual notice to  consumers  before

foreclosure  in HOEPA cases, so that consumers,  who  have

been   treated  unfairly  or  are  subject  to   predatory

practices,  do have the opportunity to raise any  defenses

they have on seeking advice of counsel.

          And I'll open  that discussion now.  Do we  have

any comments?

          MR. SANDS:  I'm just sort of confused about  the

notice.   Because,  in most states, I mean  it's  probably


governed  by every state, the HOEPA  foreclosure  process,

and  even the substance of the notice.  So how is it  that

you  promulgate by regulation?  I mean, you're looking  to

preempt  state  law.  I'm not even sure how you  could  do


          MR. MICHAELS:  Well,  we can do that.   No,  the

question is -- we're aware that --


          MR. SANDS:  No, but on the other side, you  have

to figure how does it work with the state notice, and what

is  conflicting with the state notice.  How does  it  work

with the timing? I mean --

          MR. MICHAELS:  Those  are  all  key  issues.   I

think  we started out with the question of whether or  not

it  makes  sense  -- most states  do  have  a  foreclosure

process  where there is notice to the consumer.   It  just

seems  that in those few states where the consumer is  not

getting  actual  notice that there should  be  some  basic

level  of minimum standards where we'd say:  Look!   These

are HOEPA loans.  You have to at least give the  consumer,

you  know,  at least attempt to notice them that  you  are

actually foreclosing on them.

          If  the state has a process that works and  it's

in place, that's fine.  The next question would be whether

or  not, even in states that already have that process  of


actually  notice.  whether  or not  there's  some  minimum

standard  that's not being met in terms of, you  know,  if

you do have a right to redeem the property, if you do have

a  right to cure the deficiency, does that notice  clearly

state  that and tell you what your deadline is  for  doing

so.  I presume in a lot of states that is true:  when  you

have  those rights, you're told that.  But if you're  not,

the question is:  Should you be?

          MR. SANDS:  I  guess, theoretically,  it  sounds

great, but obviously the issue is another notice.  And  it

really,  in my practice, you know, typically we see  loans

when  they're  problems on the front end we're  trying  to

fix.   Not so much at the foreclosure time.  But if  we're

dealing  with foreclosure issues, I don't think that  that

would have made a heck of a lot of difference.   Probably,

I'd just turn it over to the consumer representatives  and

ask them whether it makes a difference.  I just don't  see

that  it would make a difference in the type of -- in  the

phone calls I've been through, the transactions I've  been

through,  that it wouldn't have made a difference one  way

or the other.

          MS. WIDENER:  I'd  certainly like  to  encourage

you   to,   in  whatever  way  you  can,  pull   off   the

establishment of a minimum standard.  In addition, I think

the foreclosure -- and I may not be understanding you; but


I'am assuming that you're saying that you would require  a

foreclosure  notice  to the borrower in a  timely  fashion

that covered basic information that's considered to --

          MR. MICHAELS:  Right.

          MS. WIDENER:  Okay.   And in addition to all  of

that, I think the foreclosure notices should have to go to

second,  to  other main holders. There are,  for  example,

deed  restrictions  on property when borrowers  have  been

recipients  of  nonprofit  and  local  government  benefit

programs.   And at present, not every state has to  notify

those lien holders. And if, for example, the NeighborWorks

Network  is one of those that has a great deal  of  those,

and, when the states don't have to -- when the lender does

not  have to notify us, it's too late.  The  property  has

been  sold,  foreclosed  on, it's  gone,  and  these  lien

holders   are   wiped  out.   Whereas,   if   there   were

notification  and we knew the property was in trouble,  it

would  give  us  an  opportunity to go  in  and  help  the


          MR. MICHAELS:  I  want  to ask you  about  that.

That's  interesting that you bring that up.   Because  the

question  is:  Is that lien holder receiving  less  notice

than the consumer?  Or is the same problem and neither one

of you is receiving notice?

          MS. WIDENER:  I  don't  know what  the  consumer


necessarily  got.   We don't always know.   Sometimes,  we

can't  get  the consumer to talk with  us  partly  because

they're so embarrassed that this really happened.  So I --

but we get nothing in some of these cases.

          In  a recent case that I've tried to  pursue  in

Texas,  we were told unequivocally by the lender  the  law

did  not  require them to notify us, and they  refused  to

give us any information.

          MR. MICHAELS:  Mr. Bley.

          MR. BLEY:  Of   course,   we   are   much   more

interested,  in the state of Washington, in  dealing  with

the  issue  of predatory practices, rather  than  imposing

additional requirements on those who may have HOEPA loans.

But in that context, what I understand is that a  borrower

in  the foreclosure process, may not even  be  foreclosure

process,  but  if  they can show  deception  or  abuse  at

origination,  there's a right of rescission in  the  three


          In  the real world, predatory lenders are  going

to conduct their practices for about a year or a year  and

a  half before the regulators even get an idea that  there

might be a problem.  It just takes that long to go through

the examination process.  And then it takes, at a minimum,

another half-year, or a year at the minimum, to build  the

case,  another  two-and-a-half years.   Then,  we're  just


starting  the administrative procedure action.   So  these

cases  are  difficult,  they're  confrontational,  they're

complex.   What's very frustrating for us is that  we  can

get through to the process of finally being able to  prove

the case from the three-year right of rescission.

          So  we would strongly advocate an  extension  of

that three-year right of rescission.  And, incidentally, I

would suggest -- I think it was Robert who brought up  the

issue  of  imposing  some  discipline  on  the  securities

markets that are buying these securitized loans.  I  think

that   would  be  some  self-regulation  effect  if   that

rescission   period  was  long  enough  that  it  made   a

difference in their decision to buy those loans.  If there

was  exposure on predatory loans that those  loans,  those

loans could be rescinded.

          MS. DELGADO:  Mr. Bley, the secondary markets do

pay  attention to them.  I just thought you would want  to

know  that  there's  a list of things that  they  have  to

comply with, and one of them is a rescission period.

          MR. BLEY:  And I'm suggesting to you that,  from

a  practical  standpoint, three years is not  long  enough

because  of  the  difficulty  it is  to  put  these  cases


          MS. DELGADO:  Right.  And it may not.

          MS. WIDENER:  I  agree. Three years is not  long



          MR. RANKINS:  Let me make another comment here.

          Once  again, in my opening statement, if  we  go

beyond  that  three years, we're going to have  a  problem

with  investors  staying in this  subprime  market.   That

three-year  rescission period is part of the reason a  lot

of  people  have exited from this market.  It's  going  to

have an adverse effect upon the consumer.  Three years  is

a  lifetime in this industry.  I would not like to see  it

expanded  at all.  I think we've got to be  very  careful.

There are a lot of good things we can do, but we've got to

be  very careful what we impose on investors and  lenders.

Because, if they exit the market, there's going to be only

a few of us that remain in the market.

          Now,  those  things  that  we  impose  on  those

consumers,  some  of those things I can control,  some  of

those  things  I  can't.  If I offer  9.5  interest  rates

because  I am of investors, and those investors exit,  and

I  have  to  start offering 12.5, that's  adverse  to  the

consumer.   So  we've got to be careful on  expanding  the

three-year rescissions, and things of that nature.

          MR. COURSON:  We, going back to the  foreclosure

issue, we have -- it was discussed as part of the mortgage

reform  and  with consumers groups, and we  have,  in  our

package,  our  comprehensive  reform  package  that  we're


preparing to come forward with, a provision in there  that

talks about -- the concern in many cases of foreclosure is

the  loss of equity, where we have substantial equity  and

the  lender is coming in, the creditor comes in and  tries

to  grab  that equity.  So we have a provision  that  says

that, if, in fact, a loan-to-value is less than 80 percent

where there is some substantive equity in the property  to

the consumer, that they would be given, there would be, in

this  federal statute, a notice given at the time  of  the

default, saying your loan is in default.  We're proceeding

with  foreclosure.  You have the opportunity to sell  your

home,  dispose  of your home, to satisfy  your  debt,  and

given  some specific period of time to do that, no  longer

continuing  on with the foreclosure  process.   Obviously,

moving  forward  through  the  foreclosure  process,   but

noticing and giving the borrower an opportunity to protect

that equity.

          MR. MICHAELS:  All right.  I'd like to spend the

rest  of  the  time we have  this  morning  talking  about

enforcement.   The  subject comes up over and  over  again

about   improving  enforcement.   Because,   really,   the

question is how?  What specifically can be done?  And more

particularly,  what specifically can the  Federal  Reserve

Board do to enhance or improve enforcement efforts?

          MS. BOSE:  All  I  can  tell  you  is  that  the


enforcement  is  so inadequate that there's not  even  the

ability  to audit what's going on, on a day-to-day  basis.

That's why I said in the very beginning I don't see how we

can  impose  more stringent laws until we're  able  to  at

least have an adequate enforcement procedure.

          But one of the things that I wanted to emphasize

was  that,  when I said industry  self-regulation,  I  was

talking  specifically  about our best  business  practices

initiative that NBA and NAMB have been working on, which I

think will quite interesting and very effective.  Part  of

it  involves the proposed registration of all  originators

to  isolate  the  problem of  originators.   So  that  all

originators,  everyone  who  originates  loans,  will   be

registered.   If there are problems associated with  those

loans, they will be able to create a history.  And we will

be able to identify those and do something about it.  But,

right  now, we can't even identify them.  They  just  move

from  company  to  company.   And I think  it  is  in  the

origination,  a  great  deal of the problems  are  at  the

origination table.

          The  other  comment  I wanted  to  make  is  the

plethora  of  disclosure  forces us,  as  originators,  to

interpret  them.  People say:  I don't  understand  these.

Would  you tell me what they mean?  I've got 20 pieces  of

paper  here and I have to explain it to them because  they


can't  even  begin to shuffle through it all.   So  you're

imposing on originators certain responsibilities that they

shouldn't have, and opening opportunities to  misrepresent

those things.

          Thank you very much.

          MR. BLEY:  I've  been  talking  about  this  all

morning,  so I don't want to repeat myself.   But,  again,

I'd  refer you to our comment to the ANPR of the  OTS.   I

would  be very concerned, so far, in the area of the  OTS,

the  Office  of Thrift Supervision and the Office  of  the

Comptroller of the Currency, who have been very aggressive

in  interpreting  federal laws that  preempt  the  states.

Whether I'm going to get into public policy next, I won't.

But,  for now, most of those preemptions have been in  the

area of eliminating terms.

          I very much hope that federal agencies will  not

get into the area of preempting states' ability to enforce

the manner in which these loans are made.  I think  you'll

see  a very significant diluted effect in the  ability  of

the  states to regulate this.  We've done 100  enforcement

actions  in the last year, and we're a  small  department.

We  can  get  it done.  We think  there's  less  predatory

lending in the state of Washington as a result of it.

          How you do that?  Again, I'll refer you to  page

7  of our comment to the OTS, where we list what's in  our


Mortgage Broker Practices Act.  It isn't perfect, but it's

a good start.  A comment on that, I'll give you, again, is

that these are heavily fact specific.  These are difficult

cases.  They take a long time to prosecute, and  it  costs

money.   For those of you -- I've heard unanimous  opinion

of the industry that says that, you know, this is the  way

to  do  it.  Understand that it's you that  pays  for  the

enforcement actions.  So you'd have to be willing to  come

to the table in your states and say we're willing to  fund

more  FTEs, more full-time equivalents, for the states  to

pursue these actions.

          MR. SANDS:  John,  let  me  just  ask  a   quick

question.   Do  you  guys  post  your  enforcement  action

somewhere  publicly,  like on-line.  Often, in  cases,  we

have clients that say so-and-so wants to do business  with

us.  We do business in the state of Washington, how do  we

go  about  finding out if you're  not  taking  enforcement

action against, or you haven't taken enforcement action?

          MR. BLEY:  Yes or no, Mark?

          MR. THOMSON:  They can call us.  It's not posted

on the net, but they can call us.

          MR. BLEY:  It's  not posted on the web yet,  but

they can call us.  Maybe that's a good idea.

          MR. MICHAELS:  I've got Peggy, and if you hadn't

raised  your  hand,  I was going to call  on  you  anyway.


Which  is, from the FTC's perspective, what will help  the

FTC in its enforcement efforts?  Is there some  additional

data  that  they  need to have, a public  data  source,  a

non-public data source, that would help tie down where the

problems are?

          MS. TWOHIG:  I  guess  I  can say  a  couple  of

things on enforcement.  Can you give us more money?


          MR. LONEY:  We can't give you any money.

          MS. TWOHIG:  Given  that,  but  there  are  some

things that would be helpful.  It is very difficult for us

to  know, because it's not required to be  reported  under

HMDA  or  anywhere else, where the lenders  are  that  are

making  the higher cost loans, and to the extent  that  is

associated  -- not always, but sometimes --  with  problem

practices.    That  is  something  --  if  we   had   more

information on that, that would be very helpful.

          In  addition,  the Commission, a couple  of  the

recommendations  in the Commission's statement I think  go

to  this.  I mentioned already, and I won't repeat it,  in

terms  of  the documentation that would be helpful  to  be

required for, on asset-based lending issues.

          In  addition, the Commission's  statement  talks

about   mandatory  arbitration.   That's  not   Commission

enforcement,  but I think that's very much in  recognition


of the fact that our resources are limited and we can only

do so much.  It's very important for consumers to be  able

to   protect  their  rights  themselves.   And  we   think

mandatory  arbitration limits that too much, at least  for

HOEPA loans.

          And  beyond  that,  I think some  of  the  other

recommendations  also go to things that would  help,  like

clarifying what the pattern or practice is.  We think that

the appropriate standard for pattern and practice would be

something  along  the lines of the Fair Housing  Act,  and

other civil rights statutes, and not the standard that has

been  interpreted  by  one  court  that  would  make  that

standard hold.  The Newton Case would make our enforcement

job extremely difficult.

          So there are some of the recommendations of  the

Commission has made do go to things that we think would be

helpful to make our job easier.  But that's just from  the

Commission's perspective.  I'm not sure if there's  anyone

here  who could speak to some of the  private  plaintiff's

ability to go after deceptive practices.  Because we  have

the FTC Act.  So we can, if we see deceptive practices, we

do  have the authority we need now to go after that.   And

I'm not sure that's the case for private plaintiffs in all

states.  I'm not an expert on that, so I just put that out

there as one idea.


          MR. MICHAELS:  Did you qualify that with "if  we

see"?  The question is:  When you have the opportunity  to

see those, what helps you focus in on them?

          MS. TWOHIG:  Well, there's a variety of ways  we

target  lenders  for  investigation.  I  think  it's  very

important  for the lenders out there to know also that  we

sometimes look at lenders, not necessarily because we know

there's  a  problem.  It's more like in the nature  of  an

examination,  and  we  have to  explain  that  to  lenders

sometimes when we start doing an investigation.

          With that said, there are some things that cause

us  to  look  sometimes at certain lenders.  That  can  be

consumer complaints.  That can be information we get  from

some  state regulators or other enforcement entities.   We

had,  for example, a very good,  cooperative  relationship

with the Kentucky State regulators that told us about some

of  the  problems that led to at least two  of  our  HOEPA

cases and Operation Home Equity.  So we obtain information

from  various sources and it's very, you know --  I  don't

know if hit or miss is the right word; but it's not,  it's

certainly not complete information.  There is  information

where we can find it in consumer complaints and by talking

to other people who are in the field.  But there isn't any

data  we can use, right now, to try to better  target  our

enforcement efforts.  And I think, if there were reporting


required  of  the  cost of the APRs,  for  example,  under

HOEPA, it would help us.

          MR. MICHAELS:  Does there need to be some better

information   sharing,   or  some   formal   network   for

information  sharing, among state regulators who  regulate

and  license mortgage lenders, non-bank  mortgage  lenders

particularly,  since  they're  the  ones  who  are   being


          MS. TWOHIG:  There already is, I think, quite  a

bit  of information sharing.  We try to talk to the  state

regulators as much as possible.  And I'm not sure  whether

a more formal setting would help that.  It might. I mean,I

think  that information sharing is very beneficial, and  I

think  it can help leverage resources, combine  resources,

in a way that it does help with the problem.

          MR. MICHAELS:  Can  I  ask a question  on  that?

You mention mandatory arbitration a couple of times.   Are

you  talking about all mandatory arbitration, or  are  you

talking about abusive mandatory arbitration?  And, when  I

say  "abusive mandatory arbitration," I would give  as  an

example  arbitration  clauses  that have  choice  of  form

clauses,  being the hometown of the lender, or, you  know,

things like that, which I, which I consider to be abusive.

But  are  -- you're not talking about getting rid  of  all

mandatory arbitration clauses, are you?


          MS. TWOHIG:  The Commission has recommended that

mandatory  arbitration provisions be prohibited  in  HOEPA

loans,  and  it's for a number of reasons.  But  it's,  in

large  part, because we think that  mandatory  arbitration

can have the effect of essentially very much limiting  the

consumer's  ability  to  assert  their  rights.    There's

sometimes   very  high  cost  to   arbitration.    There's

sometimes  the inability to obtain attorney's fees,  which

we  think  they can't get counsel in the  first  instance.

There's  limitations on class actions.  There's no  review

of arbitrator's decisions that's required, or very limited

review, is my understanding.   And, so, it doesn't  really

help  set  a  precedent and law in  this  area  for  other

consumers  that  might be taken advantage  of  in  abusive

lending practices.

          So  we think there's a lot of problems  with  --

and we're talking about mandatory arbitration.

          MR. MICHAELS:  I understand.

          MS. TWOHIG:  Not   talking   about   where   the

consumer  is  given  the option at the  time  the  dispute

arises  to pursue arbitration.  We think that's fine,  you

know,  for  voluntary arbitration to  settle  disputes  is

probably  a  very good thing.  But  mandatory  arbitration

agreements in the kinds of circumstances I'm talking about

--  we're  talking about the consumers where  it  is  very


unequal  bargaining position.  They sometimes  desperately

need the money.  And your talking a bout a provision  that

would  require  them  to  look  ahead  for  an  uncertain,

possible  future  event, and try to analyze  that  in  the

context  of  whether to walk away from the table  and  not

take that money.  And we think it's unrealistic to  expect

consumers  to shop if, indeed, they have any market  power

in that market based on that kind of provision.

          So  those  are  some  of  the  reasons  why  the

Commission  has  recommended  that  mandatory  arbitration

provisions be prohibited in HOEPA loans.

          MR. SAMUELS:  If I may respond just briefly, and

I know I'm not going to make any friends with the  private

lawyers sitting at the table.  But our experience has been

very  different  with  regard  to  mandatory  arbitration.

Sitting on our side of the table, I will tell you that  we

spent a lot of time and money on court actions, on  issues

that I'm going to say, without fear of being contradicted,

are frivolous.  And we find that arbitrations -- again,  I

want  to  make clear that I'm  talking  about  non-abusive

arbitration provisions, where, really, the only thing that

is   limited  is  where  the  dispute  is  litigated,   is

arbitrated,  I should say, where we do not limit  damages,

we  do not limit causes of action, et cetera,  et  cetera.

But  it  tends  to  be a very,  a  much  more  inexpensive


process.  Also, it does deter, in our experience, some  of

the  more frivolous actions.  And, even though we get  out

of  the frivolous actions with no liability, the  attorney

fees  that we are forced to pay in a regular court  action

are really quite onerous for us.  And, frankly, it  causes

our  overall  costs  of lending to be,  you  know,  to  be


          So   I  would  ask  if  there  is  a  study   on

arbitration clauses to look at it from both sides, because

I think the lending community would have a very  different

view.   Again, we would want them to be  fair  arbitration

clauses, but I think that they do have some benefits  both

to the consumer and also to the lender.

          MR. MULLIGAN:  Well,  from the  private  lawyers

perspective,  we  started to listen to that  argument.   I

mean,  start,  the moment that these  lenders,  and  other

consumer-oriented  firms,  not  just  lenders,  to   start

reporting  the results of their arbitrations.  Until  that

happens,  all  we've  got is our  experience,  and  that's

really bad.

          MR. LONEY:  If  we may have to, we have to  have

the last comment.

          MR. BLEY:  I  think it will be.  You're  talking

about   enforcement   action.   You're  talking   who   is

accountable  for doing the enforcement action.  And  let's


be   frank  about  it.   I  think  the  primary   way   to

accountability on enforcement action falls to the  states,

and  falls with the FTIC, FTC.  I'm not here to  I'll  let

the  FTC's records speak for itself.  And I'm not here  to

defend or talk about -- I'm not here to defend the states'

actions,  either.   I'll give you, I'll raise  one  issue,


          I   frankly  do  not  think  that  the   states'

enforcements actions in this area are inadequate.  I think

there's  two  reasons for  that.  I think one of  them  is

performance.   They're  simply  some  states  that   abhor

confrontational  aspects  of enforcement.  But  it  cannot

just  stay there.  Part of the accountability has to  rest

with  the  industry itself for not going  into  the  state

governments  and  supporting those  agencies  for  greater

resources to do enforcement actions.  I think the will  is

there for many states, but the funding needs to be  there.

But  I have told my division director that we have  to  be

more  like  warriors and less like pencil nicks,  when  it

comes to enforcement actions on this issue.

          Thank you.

          MR. LONEY:  Pencil nicks?


          Well,  we'll  have  to  let  that  be  the  last




          First  of all, I want to thank all of you  folks

that  have participated, for the energy and intellect  and

experience  you've  brought to the table.   I  think  that

we're clearly going to find it useful in the deliberations

that we face going forward.

          I  want to thank my colleagues on the  panel  up

here.  I think it's been a very useful morning.

          Let  me just say that we are going to take --  I

think half hour? -- a half-hour only for lunch.  So  we're

going to have to be back here around 1:30.

          If  any of you in the audience want to  sign  up

for  the open-mic, I remind you that the sheet is down  in

the west entrance.  So you might take this opportunity  to

do that.

          Again, thank you all very much, and we'll be  in

recess for about 30 minutes.

          (Whereupon,  at  1:05  p.m.,  the  meeting   was

adjourned, to reconvene at 1:30 p.m., this same day.


            A F T E R N O O N   S E S S I O N

                                                 1:40 p.m.

          MS. SMITH:  We're ready to launch the  afternoon


          Thank  you,  for being here.  If you  were  this

morning, then you know that this is the fourth in a series

of four public hearings that the Federal Reserve Board  is

holding  on  predatory  lending,  well,  will  home-equity

lending, with a focus on predatory lending, and on looking

at  what  uses the Board, the Federal Reserve  Board,  can

make of its authority under HOEPA, and other  regulations,

for  addressing  some of the abusive practices  that  have

been reported in the media, and in other forums, in recent

months and weeks, and maybe going back years.

          This   morning,   we   focused   on   regulatory

initiatives  in  terms  of authority that  the  Board  can

exercise  under the Home Ownership and  Equity  Protection

Act.   This afternoon, we will take a  slightly  different

focus on consumer, on community and consumer outreach  and

education.   So  this afternoon, as in the  case  of  this

morning, we have invited panelists who will, first of all,

make opening statements; and, then, will engage with us on

some suggestions for dealing with ways to inform consumers

on  how to avoid predatory lending practices in the  first



          My  name  is Dolores Smith.   I'm  the  division

director for Consumer and Community Affairs at the Federal

Reserve Board in Washington.  I will be the moderator  for

the afternoon session.

          For those of you who have just joined us, and we

welcome  you, this morning we did have a very  interesting

presentation  of views, with differing perspectives,  from

our panelists.  And, then, as in the case of this morning,

we  hope to learn from the panelists about any studies  or

research  on  the subprime or equity  lending  that  would

inform the Board in its deliberations.

          I'm going to start by introducing our panel, our

Federal Reserve panel.  I'm going to start with my extreme

right,  Joy Hoffman Molloy, who is the Public  Information

Officer  and  Community Affairs Officer  for  the  Federal

Reserve Bank of San Francisco.

          Then,  to  right,  Sandy  Braunstein,  from  the

Board,  who is assistant director and also  the  Community

Affairs Officer for the Board.

          To  my  left,  Jim  Michaels,  who  is  managing

counsel;  and  Jane Ahrens, senior counsel, both  of  whom

work on Truth In Lending Act matters at the Board.

          I'll  say  a  little  bit  about  the  rules  of

procedure  that  we  will  be  following,  which  will  be

following,  which will be -- which will parallel the  ones


that   we  used  this  morning.   We  will  have   opening

statements from each of the panelists.  They are asked  to

keep  their  remarks  to three  minutes,  with  the  clear

understanding  that  there will be an opportunity,  as  we

engage in dialogue, for them to cover points that  perhaps

they can't encompass within the three-minute limitation.

          We  do  have a time keeper, Georgette --  and  I

have  your name written down, and I -- Blathena,  which  I

can  spell  but I didn't write down.   Georgette  will  be

giving you -- if you will sort of keep an eye on her --  a

one-minute  time  warning; and, then, she will  also  will

hold  up  a  sign  letting you know  when  your  time  has

expired.   If  she  holds the sign up and  you're  in  the

middle of a sentence, please complete your thought, but do

bring it to a conclusion.

          So,  with that, we will -- well, I'll  also  say

that, the afternoon's agenda, we will be discussing  these

issues until 3:00 o'clock, at which time we're going  into

our  open-mic session.  And, again, we invite  members  of

the  audience,  if you have not signed up  to  speak  this

afternoon,  but do have an interest in doing so, then  you

can  register -- you can probably, rather than  going  all

the  way  downstairs  -- check with  one  of  our  Federal

Reserve people here in the room.

          Do  we  have anyone here now  from  the  Federal


Reserve Bank?  Well, yes, at the back of the room.  So  if

you  have an interest, if you will just speak with one  of

them, then it'll save you a trip downstairs.

          So with that, we will turn to Alan Fisher.  I'll

ask  each panelist to introduce themselves with your  full

name,  for  the  record;  and,  also,  the  name  of   the

organization that you represent.

                       STATEMENT OF



          MR. FISHER:  Thank you.  My name is Alan Fisher.

I'm the executive director of the California  Reinvestment

Committee.  We're a coalition of more than 200  nonprofits

in the state of California.

          I  appreciate  very  much  the  Federal  Reserve

holding   these  hearings.   I  think  this   is   another

opportunity  to highlight the sort of predatory  practices

that  destroy neighborhoods in California, and  that  ruin

the one asset that many people have.

          I  think consumer education plays  an  important

role.   And  I think some of that was  talked  about  this

morning.  I think that The Fed can continue to play a good

role  with that, within its conferences, and really  maybe

bringing  consumer activists there.  People like  some  of

the  folks  who are on panels, and others, to  talk  about


what they're seeing in the community, and educate many  of

the bankers.

          VOICE:  Speak into the mic.

          MR. FISHER:  I  thought  I was,  sorry.   That's

better?  Get closer?

          But I think, at the same time, I wanted to  talk

a  lot more about The Fed's role, and about the  kinds  of

things that I think The Fed could do beyond HOEPA.

          From  my  own experience in talking  to  people,

consumer  education is very useful, but many people  don't

take  advantage of it.  And for many elderly people,  some

charming person on the phone, who assures them this solves

their problems, it's only later that they find out they're

losing their home.

          So  I  think that The Fed, you know,  it's  very

good that these hearings are happening, but the next  step

really  should be, I think, a study, that The Fed has  the

ability to do with subsidiaries of the holding  companies:

Bank  of America, US Bank, Wells Fargo, and now, I  guess,

this  week, we now have City Group owning Associates.  The

Fed should really look at those practices because I  think

what you're hearing over and over today is:  No one  knows

all of the details.

          CRC  is  embarking  on  a  small  study,   doing

interviews  with  a few hundred people  around  California


this  year.   But I think, really, The Fed can go  in  and

play  an  historic  role in the way you  did  in  1982  in

Boston,  with  the HMDA research, and really  show  what's

going on.

           I  also think that HMDA needs other  categories

that would reflect subprime lending.  Something that shows

whether it's subprime or not, whether it's the FICA score,

whatever, foreclosures, fees, things like that, insurance.

And I think that you need also to expand the definition of

unfair  and deceptive practices.  I think that's  some  of

what  people  are getting, a further  definition  of  what

subprime is, what predatory is.

          CRC has negotiated with a number of large banks,

which  have  subprime subsidiaries'  referral  agreements,

where,  because  there  are  many  people  who  should  be

conventional  borrowers,  who get  lumped  into  subprime,

either  because  of  the neighborhood  they  live  in,  or

because of their color, their age, or the broker they  run

into.   But none of these have yet been  implemented.   So

it's  very nice wording, but I think that's another  thing

that  The  Fed could look at.  I mean, on top of  all  the

other things that are being talked about, people who could

get conventional loans are not getting them.

          I  think the other couple things,  quickly,  are

that -- I mean, I just got, I just got an equity line  for


myself.   I wanted the money right away.  But  I  couldn't

get  it  right  away  because that  wasn't  how  the  bank

operated.   So to blame these things on HOEPA it seems  to

me to sort of skews the discussion.

          I  also think -- we haven't heard as much  here,

but  my colleagues across the country have said  that,  in

other situations, mortgage lenders are saying that they'll

pull out.  And I think is that predatory lenders pull out,

yes; that'll be great for the state.

          Thank you.

          MS. SMITH:  Ms. McKinney.

                       STATEMENT OF



          MS. MC KINNEY:  Good  afternoon.   My  name   is

Francine  McKinney.   I'm  the  president  of  Home  Buyer

Assistance Center.  And I just appreciate the fact that  I

was  invited  to  participate here  on  the  panel  today,

particularly to talk about such an important issue  that's

affecting many of the families here in the Bay Area.

          My organization primarily provides education and

counseling  for the community related mostly  the  initial

home purchase.  But what we are finding is that there  are

predatory lending practices, of course, in refinances; but

also in the initial home buying process.


          One  of the things I think should  change  about

the law is that it should also include the home  purchase,

as  well.  What we're seeing is clients of ours  who  have

blemishes  on  their credit report  that  aren't  serious.

But, when they meet with the lender or a mortgage  broker,

they  are told that, because they have these blemishes  on

their credit report, the only type of loan they can  apply

for  is  a high-cost loan.  So that's a pattern  that  I'm

seeing  that's  been  going on for  some  time  now.   And

because  they  don't have the education in  advance,  they

think  those are the only loans they can actually  qualify


          So  one thing is, I know there was, in  some  of

the  notes  that I received, the  point  about  counseling

being applied, being provided a few days prior to  closing

on  some of these loans.  I really think  that  counseling

should   start  at  the  application.   Because,  if   the

applicant  is  not educated when they start  the  process,

when  it's time for the loan to close, they're  going  too

far  in it and too anxious to get the money  that  they've

actually  applied for.  So it's more likely  that  they're

going  to  go ahead and accept that loan  at  that  point,

versus, if they were educated early on in the process  and

were  really aware that that was not a good loan for  them

to apply for.


          The   other  thing  is,  when  we   talk   about

counseling being provided for these applicants, there  are

several nonprofit organizations around the country that do

counseling.   The  problem  is we're  always  looking  for

funding.   So  we  cannot do the  kind  of  marketing  and

outreach   that  really  needs  to  take  place   in   the

communities  to  reduce  some of the  problem  that  we're

seeing.    Some  of  these  mortgage  brokers  are   going

door-to-door.   They're sending out regular  mailings  all

the  time.   We  don't have the funding to  do  that.   So

marketing really needs to be increased so that people  can

become  more  aware  of what's going on  and  become  more

educated  about  the  types of loans that  they  might  be

applying  for.  But, then, just in terms of being able  to

provide  the service to counsel some of these  victims  of

predatory lending there aren't enough resources  available

for the organizations to be able to do that.

          MS. SMITH:  Thank you very much.

          Mr. Carl.

                       STATEMENT OF

                  CHESTER CARL, CHAIRMAN


          MR. CARL:  Thank  you.  Chester Carl,  Chairman,

National American Indian Housing Council.

          Before  I begin with my statement, I'd  like  to


introduce  three guests that I have with me.  I  have  two

members of the Navajo Housing Authority Board  Commission,

the  Chairman,  Mr.  Johnny Naize; the  secretary  of  the

Board,  Gill Arviso; and Jane DeMarines, who  directs  the

mortgage  program  at  National  American  Indian  Housing


          Members  of the Federal Reserve  Board,  honored

speakers  and guests, I am here today as chairman  of  the

National  American  Indian Housing  Council,  representing

Native  Americans,  one  of the  groups  with  the  severe

housing  needs  in the country, and of the most  with  the

greatest potential risk for predatory lending.

          First  of all, I'd like to applaud  the  Federal

Reserve  for undertaking this hearing, to five the  public

and  groups,  such  as mine, an opportunity  to  tell  our

story.   As undeniably the most underhoused and  the  most

undermortgaged group in the United States, we're glad  you

want to hear our comments.  We also know that our  members

are victims of abuse.  We have conducted a study a  survey

of  our membership, and we'd like to provide some of  that

information and examples of predatory lending practices.

          Let  me summarize some of these  results,  which

includes  roughly 10 percent of the tribes.  Some  of  the

tribes that we surveyed did not respond because they  have

yet to experience mortgage lending.


          Sixty-five percent of the respondents said their

members were victims of predatory lending practices,  most

notably specific examples, such as this.

          Respondents   reported   examples   of   housing

interest rates as high as 25 percent.  They reported  that

tribes  within their state cannot get  conventional  loans

and  they  can  only  get HUD  loans.   And  they  do  not

anticipate  getting conventional home loans for 10  to  15


          Many  lending institutions do not even  consider

working with Indian people.  Most home loans, or  mortgage

home  loans,  are offered at interest rates of  18  to  24

percent.   Home  improvement  loans  were  offered  at  25


          Behind  the  stories  and behind  the  data  are

stories that are more revealing.  There was a parent of  a

double amputee who owned his home outright after  payments

of 30 years; but, then, lost it through abusive  practices

and predatory lending.

          The survey paints a grim picture that we know to

be true.  As head of the Navajo Housing Authority, I  have

watched  my reservation seek banking services that  others

take  for granted.  The Navajo Reservation spans  an  area

the size of the state of West Virgina and has a population

of a quarter-million people.  But we only have four  banks


and one credit union.

          My point is that Indian Country already  suffers

neglect   of   the  nation's  financial  system   and   is

undercaptialized  and misunderstood.  The lack of  banking

services  creates fewer credit options, and this leads  to

predatory lending practices.  We know in Indian Country we

have  38,000 qualified home buyers right now. But,  often,

the  families,  because  of few  financing  options,  fall

victim  to  mobile  home dealers  selling  homes  at  high

interest  rates.   If some of our people are  poor,  well,

then,  they  deserve  the same housing  benefits  and  the

financial services as urban poor.

          There are things that we're doing, and I'd  like

to share those with you.  One of them is in the program of

homebuyer  education,  where we  train  approximately  100

tribes  per year.  We do this through workshops,  training

staffs so others can also be provided that same  training.

We also provide downpayment assistance for families to get

involved in home ownership programs.

          Before  I finish with some of the  opportunities

that I have to speak before you, I'd like to also  provide

some  recommendations.   These  recommendations  are:   To

provide   greater   enforcement   of   lenders   to   meet

requirements  of the Home Ownership and Equity  Protection

Act in Indian Country.  Enforcement to require lenders  to


provide   fair  rates,  repayment  terms  and   reasonable

insurance does not happen in Indian Country.

          The Federal Reserve Board, to seriously consider

a  study specific to geographic Indian areas to  determine

whether   lenders  actually  work  with  Native   American


          Recognition  that Indian Nations have  sovereign

rights  to enact laws.  I also urge this Board  to  assist

with a pilot program and resources to insure compliance.

          Create  rewards  for  banks  who  provide   fair

lending to Indian County, provide incentives.

          Assist  banks in creating consortia for  lending

to Indian Country, and to provide technical assistance  to

new banks on and near the reservations.

          The  tribes are not unsophisticated.  Our  dream

of  a  home  is,  to  an  individual,  is  our   long-held

traditional  belief  that the home is the  center  of  our

lives.   We hope the Federal Reserve Board will use  their

powers  to  help  interrupt the cycle of  abuse  that  has

manifest itself in predatory lending.

          Thank you very much.

          MS. SMITH:  Thank you very much.

          Ms. Lamberti.




                       STATEMENT OF

                  CHRIS LAMBERTI, MEMBER

                 BOARD OF DIRECTORS, AARP

          MS. LAMBERTI:  Good   afternoon.   I  am   Chris

Lamberti, a member of the AARP Board of Directors.

          I'm here today to discuss consumer education and

counseling  options  that may help  borrowers  to  protect

their  self-interest  when  obtaining  home-equity  loans.

Getting or refinancing a home-equity loan can be a  trying

experience for borrowers.  It may also pose a  significant

risk to their ownership.  The investment in home ownerhsip

among older Americans is substantial.  For many, it's  the

largest financial asset they have.

          Before  we begin our panel discussion,  I  would

like  to  make  three  basic  points  regarding  risk   to

homeowners that are associated with high-cost  home-equity


          First,  more work needs to be done  in  defining

and  measuring  home-equity  loans  that  are  priced   at

interest  rates and contain fees that cannot be  justified

by  the  borrower's  credit risk.  It  is  for  those  who

already  have been, or will be, victimized  that  enhanced

legislative protections and tighter regulatory enforcement

are important.  Sttutorily-based consumer protections have

a  sentinel effect on lenders, but a consumer's  right  to


secure relief and restitution are premised on them.

          The second point I wish to make is that consumer

education  and housing finance counseling  would  probably

benefit us all, but are particular importance services for

those  who are the most vulnerable to  high-cost  lending.

Those victimized are often the older, less affluent,  less

well educated, whose primary financial asset is the equity

in  their home.  We need not wait for additional  research

to  do  something  beneficial,  but  do  need   additional

appropriations.   It is already possible to identify  from

an  examaintion  of existing HOEPA  case  proceedings  and

settlements   an  array  of  lending   circumstances   and

practices  that  can  represent  substantial  risk  to   a

potential  borrower.  AARP believes in consumer  education

and  counseling, and invests in them, for its members  and

for  the broader community of mid-life and older  American

we serve.

          I hope to talk more during our discussions about

a consumer education program AARP has been developing  for

a   particular   type   of   home-equity   loan   designed

specifically   for  older  Americans,  called  a   reverse

mortgage.   The efforts that the Association has  made  in

partnership  with  HUD, and others, to  provide  effective

counseling  to  borrowers may be adaptable  elsewhere.   I

have  attached  some additional materials  regarding  this


program to my written statement.

          And third, however useful education, counseling,

community  outreach  may be, these efforts alone  are  not

sufficient   to  curtail  the  problem  linked  with   the

high-cost  equity  loans.   Many of  the  individuals  and

families,  who have suffered the most from the  disruptive

financial  practices  commonly referred  to  as  predatory

lending,  are  also those with the weakest  public  policy


          I'm looking forward to our panel discussion.

          MS. SMITH:  Thank you.  Mr. Hornburg.

                       STATEMENT OF



          MR. HORNBURG:  Hi!   I'm Steven  Hornburg.   I'm

the  executive  director  of the  Research  Institute  for

Housing  America.  I'll try to talk very fast,  because  I

know what it's like on both sides.


          I'm hell on transcribers.

          I  appreciate  the opportunity to  release  some

preliminary  findings  from  a  national  study  that  the

Institute is going to be publishing soon.  It really  asks

the  question:  Who is using the subprime market, and  why

are they using it?  Why are they there?  We have submitted


a copy, an advanced copy, for the record.

          There's   very  little  in  terms  of   national

studies.   We've  heard a lot  of  on-the-ground  evidence

today.   But  in  terms  of  the  national  look  at   the

statistics, I'm only aware of one other study that's  been

done by Freddie Mac on this question.

          So,  what was done in this study we're going  to

publish  is  that  it looks at  home  purchase  fixed-rate

mortgages below the FHA limit, and segments of market into

prime  FHA  and  subprime.  It uses  a  standard  mortgage

choice  estimation model, but the real innovation  is  the

inclusion  of HUD-defined subprime lending and the  actual

credit  histories  and scores of the  borrowers.   And  in

plain  English, the model takes the data  and  essentially

mimics   the   underwriting  decision   to   predict   the

probabilities  of  borrowers  using  each  of  the  market

segments  that are discussed.  The data is drawn from  HUD

databases  that  they use to update  their  FHA  actuarial


          The  findings are two:  First of all,  based  on

the  study,  it  looks  like  the  market  essentially  is

working.    Credit  scores  and   histories,   downpayment

constraints and income explain the mortgage choice and the

use  of  a  particular market or product  type.   So,  for

instance,  for  the  subprime market,  credit  scores  and


histories  and  non-real-estate debt are really  the  most

important determinants for use in the subprime market.  So

there,  you  find credit and compare borrowers  that  have

bankruptcies,  legal  claims or  judgments  against  them,

there are excessive delinquencies.

          For   the   FHA  market,  the   most   important

determinant  seems to be downpayment and income.  So  that

essentially  means borrowers with low income,  low  wealth

but   adequate   credit   scores   utilize   that   market

predominantly.  Which these findings essentially echo  the

Freddie  Mac findings, and I quote:  "Risk is clearly  the

single most important determinant of why borrowers end  up

with subprime loans."

          Now this leads into the second finding, and that

is:   Contrary to the stereotype of all  subprime  lending

that  sometimes  seems to exist, the distribution  of  the

market  in  terms of income roughly parallels  the  entire

mortgage  market.   So  about half subprime  loans  go  to

households with income over 80 percent of area and  median

income, while about half of all loans, all mortgage  loans

in the entire market go to that same household population.

          This  aggregating  the overall  sample,  though,

there  are  some unexplained differences  that  have  been

found.   For  instance:  compared to  the  overall  sample

probability,  non-White Hispanic, and Hispanics, also  are


less  likely to use subprime, slightly less likely to  use

subprime     market,    while    African-Americans     and

Asian-Americans  are  slightly  more  likely  to  use  the

subprime  market.  Differences between similarly  situated

borrowers could very well be technical issues. These types

of studies have always had missing variable problems.  So,

for instance:  While the borrower with an income may  look

like a prime borrower on paper, their lack of  willingness

to  permit  verification  of their income  could  lead  to

low-doc,  no-doc subprime products and put them  into  the

subprime market.  And while downpayments may appear  large

and  therefore  suggest  a prime  market  allocation,  the

source  of  the  downpayment, such as  family  gifting  or

out-of-country  sources, could lead to use of  a  subprime


          So,  the history of this literature is  as  more

sophisticated  studies, with more complete data are  done,

these  unexplained  differences  tend to  go  away.   But,

nevertheless,   such   differences  could   suggest   that

borrowers  may not be in the right market.  So  it's  very

important  that we get a handle on this.  These  technical

problems  have  to  be  addressed  before  any   remaining

unexplained differences can be properly interpreted.   But

the  bottom line, again from this study, is  clear:   Risk

dictates market assignment, which suggests that,  overall,


the market is generally working.

          Thank you.

          MS. SMITH:  Thank you very much.  And with that,

I  will ask Sandy Braunstein to lead our discussion,  lead

off our discussion.

          MS. BRAUNSTEIN:  Thank you.

          I'd like to extend my welcome to everybody,  and

thank  you all for being here.  And I'd like to start  out

by asking some questions about our major stated topic  for

this afternoon, which was consumer education and community

outreach.   And I know we've got a variety of  folks  here

from a variety of groups.

          I  would  ask you, first of all, what  we  would

like  to  know  at the Board is:  Have  you  observed  any

methodologies  that  have been particularly  effective  or

useful  in  terms  of  outreaching  to  the  preyed   upon

populations in terms of getting information and  education

out there?  Because, what we have been hearing during  the

hearings, and also private meetings we're having, is  that

this  is very difficult and it's hard to compete with  the

predatory lenders.  We'd like to know if you've heard  any

successes or you've had any successes in this area.

          Chester,  you  look like you were going  to  say


          MR. CARL:  Not necessarily at this point.  But I


still  can't -- the issue that's tabled for discussion  is

twofold,  where my communities are at the level where  the

literacy  of not only banking services, but also  mortgage

lending,  has to start at grade level, high school  level,

to  educate  our  Indian families the dos  and  don'ts  of

actually  anything  from checking book  to  what  actually

mortgage means.  So we have encouraged other programs, and

I  would  also  encourage the  Federal  Reserve  Board  to

support us in developing the literacy program that  starts

at that level.

          Beyond  that,  we have gone  to  home  ownership

programs to outreach through several nonprofits.  What  we

find  is  that,  a lot of times, when  we  worked  with  a

nonprofit,   they're   very   exclusive,   for    example:

NeighborWorks  Program.   They're only catering  to  their

employees to provide these types of certifications.  So we

have  gone  out there and pursued the  curriculum  program

with  the  National  American Indian  Housing  Council  to

provide  this education.  Also, at the same time,  provide

certification  to  the  counselors,  to  educate  them  on

mortgage financing.

          So we're basically doing that at this point.

          MS. BRAUNSTEIN:  I'd just like to add  something

and  we can discuss it later, but I don't know  if  you're

aware  that  the Federal Reserve Bank of  Minneapolis  has


been  working  with First Nations to develop  a  financial

literacy curriculum for Native Americans and that  they've

implemented  at  some of the tribal colleges.  And  I  can

talk  to you more about it later, if you need  information

on it.


          MS. MC KINNEY:  I  think there are a  couple  of

forms  of outreach that tend to be effective.  One is  the

community  meeting.   And  by  "community,"  I  mean   the

neighborhood association meetings, meetings at the  senior

centers,  and  then  community meetings  that  would  vary

depending on the locality in different areas.

          The   other  is  really  door-to-door.    People

knocking  on  doors to make sure that  they  are  actually

communicating  with the potential victims of,  or  victims

of,  predatory lending.  Because that's how some  of  them

mortgage  brokers actually operate, going around  knocking

on  the doors.  It's hard to get seniors to come out  many

times,  or  others who might be victims to come  out,  and

really  admit  what's actually going on.  But  if  someone

knocks  on the door, many of -- particularly  the  elderly

like  to  talk, because perhaps they're living  alone,  or

they don't get visitors very often, and they like to spend

time talking.  And, so, many times that's really a way  to

start to connect with some of the people in the community.


But it's certainly intensive and it's going to take a  lot

of effort in order to do that.

          MS. BRAUNSTEIN:  Have  you  found  --  we  heard

similar kinds of things in Boston where they're doing --

          MS. MC KINNEY:  Right.

          MS. BRAUNSTEIN:  -- and they said that that kind

of effort seemed to work the best.  And we were wondering,

do  you find that written materials are helpful?   Or  how

helpful are written materials?

          MS. MC KINNEY:  I don't think written  materials

are that helpful unless you get someone into a room  where

you're  particularly  focused on some  consumer  education

program,  where  you're  educating  specifically  about  a

particular  product  or program.  But I think,  if  you're

mailing  out  literature or leaving  literature  at  their

door, I don't think it's been effective at all.

          MS. BRAUNSTEIN:  Chris.

          MS. LAMBERTI:  I understood that we were talking

about  two different ways.  There was the education  part,

as  well as the counseling.  So let me just address  first

educational part.

          As  I  made  the  statement  before,  AARP  does

heavily  invest in it.  So I'm just giving you samples  of

it, and there's no one cure, definitely, for the nature of

the beast here.  So I'm giving an example of the  material


we have developed.

          For   home-equity  loans,  we  have   particular

guidelines for avoiding scams.  I think that's what we are

trying to target first:  Avoiding the problems and  curing

it later on.

          Fraud prevention kits for people, for borrowers,

who  want  to get into home-improvement  loans.   We  have

developed  videos which have been used by our  counselors.

At the moment, we also trying to -- we're in the  process,

actually,  of producing a Spanish version of it.  We  have

expanded  quite a bit of the AARP web site in making  more

information  available about home repair financing,  which

is particularly something the older people are  interested

in,  as they have built up the equity in their homes,  but

repair needs to be done.

          Again, examples here, one web site is focused on

the  basic steps, so it's really written for consumers  in

easy  language,  easy  to  understand,  making  decisions.

There  are many different types of loans so it helps  them

to make a decision if they're using the home as an equity,

which particularly something the elderly is looking into.

          And,  then,  which is really  the  main  subject

here, is understanding predatory lending.  We have, at the

very moment, we are working on the consumer guidelines  on

reverse mortgages, which I want to get into later when  we


talk  about  the counseling.  For the next year,  we  have

already put aside a budget for this.  So our side,  having

34  million-plus members, plus the entire society, we  are

really working hard on it.

          MS. BRAUNSTEIN:  When   we   talked   about   --

Francine  had  a comment about written materials.   I  was

just  wondering -- because I know AARP does put out a  lot

of  written  material -- do you find that  beneficial  for

your members?

          MS. LAMBERTI:  Again, I do not see that  there's

only one solution to it.  Written material is  supporting.

We  do have AARP chapters, where we get the word out.   We

have  this -- that would be on one-to-one, more  or  less.

As  I  said,  this  subject, later  on,  as  we   go  into

counseling,  there's one-to-one again.  So there are  many

vehicles  how  it  could be done.  One way  alone  is  not


          MS. BRAUNSTEIN:  Steve.

          MR. HORNBURG:  It depends upon what you want  to

do.   And  I'm a firm believer that there has to  be  some

type of effect from homeowner counseling.   Unfortunately,

from a research standpoint, there has never been any good,

rigorous  analysis  showing  any kind of  impact  on,  for

instance,  defaults or sustaining home ownership.  I  know

that  the NeighborWorks Program has a  longitudinal  study


that's going on that hopefully will be able to demonstrate

some social benefits, as well as mortgage performance.

          I  think,  if your thinking of  doing  something

under this specific focus of the HOEPA, you need to figure

out are you looking to encourage fraud prevention, or  are

you  looking to encourage general education about  how  to

look for a mortgage?  Or are you looking to help  somebody

sustain home ownership?  Because, one of the big  problems

is  that  there  are many  variations  on  what  homeowner

education and counseling is.  And the market has not  been

sorted out.  There's actually a national organization that

I hope that you're talking to at some point, the  American

Home Owner Education --


          MR. HORNBURG:  AHECI, thank you.

          MS. BRAUNSTEIN:  Yes.

          MR. HORNBURG:  And   they're   doing   a    very

admirable   job  to  try  to  organize  the   market   and

rationalize  it,  and get to a point  to  understand  what

works and what doesn't, for what purposes.  I don't  think

they're there yet, either.  But they have developed  some,

you  know,  basic  standards of practice  and  some  model

curricula   that  they're  trying  to  dissemminate   more

broadly,  to  try  to  get to  a  point  where  it's  more



          MS. BRAUNSTEIN:  Steve,  let  me   do  just  one

follow-up, and then Alan.

          You said that there's been no research to really

show  the  benefits  of this.  Has  there  been,  in  your

knowledge,  research  that shows that it's not?   And  the

reason  I ask this is because conventional wisdom I  think

has been that counseling is beneficial.  I know that's why

Fannie and Freddie instituted products where they required

it.   And, you know, other banks have instituted  products

where  they've  required some kind of counseling  at  some

time. There was a general feeling that that would help the

performance.   I  was  just  wondering  if  you've   heard

anything differently.

          MR. HORNBURG:  I have not heard of public  work,

nor proprietary studies, that have done that.  In fact, we

did our annual conference on housing opportunity just this

last year in partnership with AHECI.  And just for further

background,   you   can   look  on   our   web   site   at,  because there's actually video  clips

from the conference.

          The basic -- one of the studies that we released

there  answered  questions that have been nagging  me  for

quite awhile, and that is:  In the absence of any type  of

research that specifically shows that mortgage performance

is  enhanced -- okay? -- why is there such an  investment?


You mentioned Freddie and Fannie, you mentioned banks,  et

cetera.  And the researchers came back to me and basically

said;   We can't answer the question in terms of  mortgage

performance;  but  looking at it, the counseling  and  the

partnerships it entails, gives some non-economic  benefits

to  financial institutions.  No. 1, it helps  satisfy  CRA

and  affordable housing requirements.  It  brings  people,

who  are  creditworthy and mortgage-ready  to  their  loan

officers, basically, so that they reduced screening costs.

It  helps  them  access  communities  better,  working  in

partnerships  with nonprofits that have the trust  of  the

communities  to get to some of these  underserved  markets

where  they haven't been traditionally able to get  access

or loans to go out and work on it.

          So  it really has some non-economic benefits  to

expanding  the  market.  And that they  attribute  to  the

reason  for  heavy  investment in it.   Not  the  mortgage


          MR. FISHER:  I  don't know if I'm  understanding

Steve  correctly or not.  But I would agree that  I  think

just  consumer education is not enough, and  there  really

needs to be oversight of the institutions.

          But  I think on the consumer education, I  think

it's there's so much variety in what takes place.  I mean,

I  know that Fannie Mae had a four-hour training,  but  we


heard that, in many cases, people just had to fill out the

test.    They  never really had it.  And that  wasn't  the

fault of Fannie Mae.  That was the financial institutions.

          So  think  that, you know, you really, to  do  a

study  like,  you know, in this sort of  case,  you  would

really need to look at what's going on.

          I think there were two quick things I wanted  to

say, and one is:  Since you're in California, there are  a

tremendous  variety of people in California and  cultures.

And so to do something properly here, there are a  variety

of  languages  that  need  to  be  used.   If  I  remember

correctly,  LA General Hospital, they have to be  able  to

supply translators for 30, or so, languages, and there are

a  lot  of cultural issues.  So I think it's  --  I  mean,

that's   something  else  that  needs  to  be  in   there,

particularly for California, but lots of other places.

          And  I  think that also there is  the  issue  of

scope.  As Francine was saying earlier, there isn't enough

funding to really do this, the consumer education, in  the

way  it needs to happen.  Many financial institutions  are

cutting  back and saying to consumer counselors:   If  you

aren't  referring to me, then I'm not giving you  funding.

And, so, I think that, you know, this may be something The

Fed  wants  to look at, as well, as sort of  what  is  the

scope  of  this and what are the terms.  Because,  to  me,


grant making shouldn't be marketing money.   You know,  it

should be one or the other.

          MS. HOFFMAN MOLLOY:  Francine,  may I ask you  a

question about those community meetings that you hold?  Do

you actually target current home owners?

          MS. MC KINNEY:  When we do the --

          MS. HOFFMAN MOLLOY:  Yes.

          MS. MC KINNEY:  What  we're doing right  now  is

primarily  only  attending meetings that are held  in  the

different communities, well in Oakland, which is where  we

primarily   work,   and   different   communities   making

presentations.   And,  so, typically, you're  having  home

owners   from  those  particular  communities   that   are

attending those meetings.

          MS. HOFFMAN MOLLOY:  Okay.   The  questions  is,

then:  How do we actually get to those individuals who are

most  vulnerable?   I  know a  lot  of  organizations  are

starting  to  work directly with  churches  and  different


          MS. MC KINNEY:  Right.

          MS. HOFFMAN MOLLOY:  Just another question about

the issue of post-loan counseling.  So we heard a lot this

morning, despite the fact that we were focusing very  much

on the technical aspects of the HOEPA regulation, we heard

a  lot  about,  you  know, the fact  that  people  are  so


desperate  to  get the loans that they don't  care  to  be

educated.   They resent the fact that there are even  ties

to  some  kind of formal counseling.  And  I'm  sure  that

you've  experienced  that.  In your -- you  know,  I  know

you've  been doing this for a long time.  How do  you  get

people  motivated  to not only go through the  process  of

home-purchase  counseling, but once they own  their  home,

how  do  you get them motivated to understand all  of  the

aspects  that follow the actual signing of the  documents?

How do you keep them hooked in?

          MS. MC KINNEY:  Well,  part of our  pre-purchase

education  process  includes a pretty thorough  review  of

documents  that they would be signing that show where  the

costs  are for the loan that they're applying for.  So  we

educate  them  in  advance so they'll  know  when  they're

applying for the initial loan.  But, then, we also talk to

them about if they want to refinance later on, or if  they

want to get a home-improvement loan.  So they already know

how to read those documents, where certain fees are  going

to  show up in the event that that happens.  But  we  also

keep  in  contact with all of our clients as part  of  our

post-purchase program.

          We  call clients every 90 days during the  first

two years of home ownership, for a couple of reasons:  (1)

because, once escrow closes, they're going to get  letters


from  many  different  companies,  not  only  pre-approved

credit  card offers, but offers to get equity  lines,  125

percent loans, equity loans on the property.   So we  want

to  make sure that, if we're in close contact  with  them,

that  if  some of those things come in the  mail,  they're

talking to our counselors about it.  We want them to  know

that  we're  available for them to ask questions  if  they

need  any  help,  or  if  they  run  into  any   financial


          So  one  is to be available in  the  event  that

something  does come up  where they are experiencing  some

problems;   but  the  other  is  to  keep  the   line   of

communication open so they'll know that, if they have  any

questions, they can contact us.

          MS. HOFFMAN MOLLOY:  Can  I ask one other  quick

question?  With the increase in home values, let's use the

Bay Area as an example we all know well, with people being

able  to buy in places in Oakland, for instance, and  they

are  seeing  equity, are you seeing --  are  they  somehow

specifically  targeted by a lot of these  companies  we're

talking  about  with marketing materials?   We're  hearing

that  they're sort of tapping into that equity  early  on.

Is there any counseling going on around that?

          MS. MC KINNEY:  Well, I think probably everybody

is  getting  something  in the mail  from  some  of  these



          MS. HOFFMAN MOLLOY:  Oh, yeah.

          MS. MC KINNEY:  And many of the clients that  we

work with have also used some kind of assistance  program.

And if they've used some kind of assistance program,  they

can be limited in terms of getting additional loans on the

property, or taking out new loans.

          MS. BRAUNSTEIN:  I'm sorry, Chris.

          MS. LAMBERTI:  Allow me to make a statement.

          MS. BRAUNSTEIN:  Sure.

          MS. LAMBERTI:  Your  question  about   education

here, what is the best type of education.  And I think  in

terms  of I'm wearing a size 4 to 6, and, once in  awhile,

I'm  supposed to wear one size fits all.  It just  doesn't

fit.   So  when it comes to education, I  would  say  most

likely  the well-educated will pick up on  education  much

faster.  But what we are concerned, particularly in  AARP,

is  the  group of people who are low-income,  who  have  a

harder time and who really need additional counseling.  So

education,  by  its own, would not be  enough,  definitely

not.   Plus  regulation  and  legislation.   But,  anyway,

education itself wouldn't do it.

          MS. BRAUNSTEIN:  Have you, those of you who were

actually  doing counseling, or associated with  counseling

programs,  do  you  find  --  we've  heard  a  lot   about


counseling  and trying to get to somebody before they  get

caught up in one of these deals.  But have you found cases

where  you've been able to reach somebody  before  they've

signed  papers,  and,  even  though  you've  gone  over  a

detailed explanation of why maybe this is a bad loan, that

somebody  enters into it anyway, possibly because of  lack

of alternatives, or, you know, needing the money?  Is that

a big problem around here?


          MS. MC KINNEY:  I have had that experience.  And

even  though  this  person  had  gone  through  our  whole

education program, we did one-on-one counseling with  them

several  times, helped them get their credit  cleaned  up,

and  two  years  after they got into the  home  they  were

approached,  and  they  were going to end  up  with  about

$20,000.   And,  so,  we actually  had  loaned  them  some

downpayment  assistance.   And the  company  contacted  us

because they wanted us to subordinate ours when they  were

refinancing  the  first loan, and I wouldn't agree  to  do

that.   And,  so, since I wouldn't agree  to  subordinate,

they  just put me in first position and put their loan  in

second  position, because mine was going to go away  after

five years.

          I  talked to our client and I actually  had  the

lender  fax  me a copy of the good-faith  estimates  so  I


could   see  what  all  the  costs  were.   There  was   a

single-premium life insurance.  Three thousand dollars for

that.   And they had convinced this woman that she  --  it

was  absolutely necessary because she had a  daughter  and

she wanted to make sure she was taken care of in the event

that   something   happened  to  her.    The   fees   were

astronomical.   So the entire cost for the loan -- it  was

$20,000 she was actually going to be applying for, getting

cash out technically, but she was going to get $9,000.  So

the  other  $11,000 was for fees and insurance.   But  she

went ahead with it anyway, because she wanted some money.

          So that's the thing.  And she was unemployed  at

the time.  She was on disability.  So they were giving her

a loan on the property, where she was off from work.   She

was  disabled, and she needed some cash.  So she was  just

willing to sign.

          MS. BRAUNSTEIN:  Chester.

          MR. CARL:  The story that Francine provides is a

picture that we often experience.  Not necessarily through

mortgage  refinance, but more in an entity like a  finance

company.    Not  only  is  life  insurance,  credit   life

insurance,  a part of that, but disability insurance is  a

part of that.  Then you also find that it's anywhere  from

32  percent, 25 percent interest rate.  And  only  because

the  opportunity  to have banks provide  loans  in  Indian


Country, no; it's not there.  And that's the basic type of

loans families have to undertake to provide renovation for

their homes.

          MS. BRAUNSTEIN:  Chris.

          MS. LAMBERTI:  It's  quite obvious that you  are

looking  for data, and I've always supporting having  date

on   hand  to  make  decisions,  or  whatever.   In   this

particular  case,  if we were having another  meeting  two

years  from now, I could assure you that I probably  would

come  with data in a different type of format, and  that's

about the reverse mortgages.

          As you may be all aware, new standards have been

developed there, and that's really the benchmark.   Before

you  have  any standards, it's hard,  really,  to  measure

anything.   So the standards have been developed and  AARP

has  been very successful in being the leader  there,  and

making  sure  that  there  are  exams  that  we  have  for

certified  counselors in the future.  And I think once  we

have all this in place here, then we can really  determine

the  number of applicants who were just desperate  to  get

their loan because they wanted it, rather than being  able

to  afford  it,  that  they  made  a  decision  based   on

knowledge.   Maybe they decide, then, if I  cannot  afford

it, I'd rather wait.

          So  we  are  talking in terms  of  a  transition


period.   Although the reverse mortgage is rather a  small

portion of that, again, it's something we can learn  from.

In  general,  that  program has  been  rather  successful.

There's some data now available, and this is something you

may  want  to look into that could be adopted  into  HOEPA

loans.  It's just some kind of idea I wanted to share with

you here.

          MS. BRAUNSTEIN:  One of the things that we would

like to learn, our real, kind of bottom line here I think,

is:   We'd all like to hear what basically you  think  The

Fed can do in regard to consumer education.  We've  heard,

you  know, a lot of talk this morning about the  different

kinds  of things we can do with our regulatory  authority.

But we're trying to hear something here this afternoon  as

to  what  our  role would be in  the  consumer  education,

community outreach area.

          So, who would like to go first?  Steve.

          MR. HORNBURG:  I  would certainly encourage  you

to  work with AHECI.  I think that they're really  tilling

the  soil  to try to answer some of  the  basic  questions

about  what  works, what doesn't work, what  ought  to  be

required  as  a minimum, so you don't have,  you  know,  a

20-minute phone conversation qualifying as counseling, and

you get an idea, you know, of what purposes you're  trying

to address, what goals you're trying to address.  Again, I


go  back  to are you trying to address  fraud  prevention?

Are  you trying to address general financial literacy,  et


          The  other thing I suggest is:  You all  have  a

great  research  capacity.   I think it's --  I  know  the

Philadelphia  Fed,  for  instance, a  researcher  there  I

worked with before came by and talked to me the other day.

They're  doing  some  exploration into  what's  known  and

what's not known about counseling with an eye cast towards

possibly  doing some research in the area to get a  better

handle  on  it.   The  Fed's  research  has  always   been

fantastic.  You've got the capacity.  I think, working  in

partnership   with   the  community   that's   doing   the

counseling, you can make some real strides there, too.

          MS. BRAUNSTEIN:  Thank you.  Francine.

          MS. MC KINNEY:  I  did want to  agree.   Working

with AHECI I think is a good idea, because they are moving

towards  standardized  guidelines for counseling.   And  I

think that's correct, a four-hour, a two-hour --  whatever

it is -- conversation should not be considered counseling.

But,  then,  also,  AHECI  is trying to  come  up  with  a

standard  for counseling; however, the lenders still  have

to  buy  in.  And, so, I know initially, when  certain  --

when  Fannie  Mae  came  out  with  their  guidelines  for

home-buyer  education,  and just as Alan  was  mentioning,


someone could complete four worksheets in the back of  the

Fannie   Mae  workbook  and  they  could  still  issue   a


          So I think the work that AHECI is doing is  good

work, but if the lending community is not going to buy in,

then the work is all in vain.  And I know the lenders I've

been  working with have been working with AHECI,  too.   I

know lenders are all involved, they're all on board.   But

I  asked the question at one of the AHECI  meetings,  does

this  now mean that that is going to be the  certification

that  lenders  are  going to require?  And  no  one  could

answer  that question.  So I do have some  concerns  about


          Marketing,  I  think, just as  Chris  mentioned,

there are different types and methods of reaching  people.

I  think marketing is still important.  Just as  community

education  is, one-on-one counseling is; but I  think  one

way that The Fed might be able to help is with  marketing.

And,   then,  also,  supporting  additional  funding   for

counseling.   And  by  counseling, I  generally  mean  not

workshops,  but  I mean one-on-one counseling.   It's  one

thing  to do workshops where you're educating in  a  large

group,  but  it's really the  one-on-one  counseling  that

really   helps   people.   Because  they   get   a   clear

understanding of their particular situation and the things


that they actually need to be looking at.

          MS. BRAUNSTEIN:  Chester.

          MR. CARL:  In  regards to consumer education,  I

know banks do a tremendous job of marketing equity  loans,

and so on.  But on the same token, there's not a whole lot

of marketing that goes on against predatory lending.   And

I  think that's one that should be pursued by The Fed,  as

far  as  protection the consumer may have in  regards   to

predatory lending.

          Also,  with  regard  to  that  is  knowing   the

specifics  of  predatory  lending abuses  that  happen  in

regards  to  Indian  Country.   I  don't  believe  there's

information  that's available to put on the table  to  say

this is actually what's happened.

          One of my encouragements to the Federal  Reserve

Board   is  to  create  a  partnership  with  other   bank

regulators  to create a CRA Task Force specific to  Indian

Country.   Oftentimes, I'm sure that the assessments  that

are  done  for CRA enforcement are done  excluding  Indian

Country.   So a lot  of that information does not get  out

to the public, or out to the policy makers, as far as some

of these shortfalls that are happening in Indian Country.

          MS. BRAUNSTEIN:  Thank you.  Alan.

          MR. FISHER:  When   I   think   about   consumer

education  with  The  Fed,  I  usually  think  about  your


research, like Steve was saying, and also the conferences.

And it does seem to me, like I was saying before, that you

have the opportunity here to really, you know, delve  into

the  files of some of these banks and see what's going  on

and  educate people.  But, as well, it seems to me that  a

best  practices approach -- with the consolidation of  the

industry,  there's going to be more and more  banks,  like

Bank of America, that are going to own equicredits,  where

their marketing, their sales, and their whole way of doing

things is very different.

          What is the right way?  To have  cross-referral?

What's the right way for the bank to look at the  subprime

entities so that it is not predatory.  You know, what  are

examples of that?

          I think in your conferences, and maybe with this

kind  of research, those are kinds of things that are  the

way things work.

          MS. BRAUNSTEIN:  Thank you.  Chris.

          MS. LAMBERTI:  I  just  want to point  out  that

AARP  did  submit  a special paper,  a  written  document,

addressing  what  The Fed could do.  I want to  make  sure

that it's available to you.

          MS. BRAUNSTEIN:  Thank you.

          MS. LAMBERTI:  Since there is no question --

          MS. BRAUNSTEIN:  Yes.


          MS. LAMBERTI:  --  let  me expand a  little  bit

about  what  we're  doing  at  AARP.   Our  Public  Policy

Institute has a role, a model, on how the rate,  high-cost

rates  can  be better compared.  And based on  this,  now,

software  had  been  developed.  So,  in  the  future,  as

there's  no  requirement  right  now  to  have  one-to-one

counseling,  which  is rather difficult,  particularly  in

rural  areas,  we think, as technology allows  us  in  the

future,  that software makes it somewhat easier where  you

would  enter certain data and either an expert or  even  a

layman  could handle this most likely over  the  internet.

So that is one additional avenue.

          Again,  there is no one way one size  fits  all.

There's another possibility to prescreen.  And when we, in

particular we think that there are two target areas  where

there's counseling necessary.  That's the group that  most

likely  cannot repay the loans, where their  situation  is

rather fragile, so they can really make a better  consumer

decision.  And the second group, which is not unusual that

someone  takes out a loan and they put a  qualified,  they

could  qualify  for a better rate or a different  type  of

loan.   So those are the two groups we think would  really

benefit  from  counseling.  You  can't  counsel  everyone.

Most likely, it's too expensive, but you could  definitely

target the groups.


          MS. BRAUNSTEIN:  With internet programs, do  you

have  a  concern  about  people's  access  to  the  proper

equipment to utilize it?

          MS. LAMBERTI:  Well,  at first, it  seems  like.

But my own experience, since I'm working with the  elderly

all  the  time,  it is usually  they  relatives  who  have

access,  to  the public libraries now  they  have  access.

There's bound to be someone, and the counselor himself who

has access.  So, again, it's not the one and only way, but

it will help definitely as we move forward to the future.

          MS. BRAUNSTEIN:  One   of  the  things  I   just

thought of, because, when Francine was talking, I  thought

of  this, and again when Chris was, is that we --  one  of

the  dilemmas that we face at the Board in terms  of  even

getting  regulatory changes, and this was alluded to  this

morning  I think in conversation, is that, if we  were  --

it's  an option that's been talked about to us,  which  is

that  we  do require some type of counseling  for  anybody

entering into a HOEPA loan.  And I know, this morning, the

panel discussed people's negative reactions to that.  That

was  one  side of the issue.  And I was --  we  were  just

wondering,  too,  about  that.  How --  do  you  have  any

suggestions as to how that would be worded?  Because,   as

Francine   mentioned  and  hearing  Chris  talk,   there's

counseling  and  then there's counseling.   And  it  seems


that,  if we wanted to insure that there was some type  of

real  quality  counseling, I mean, how?  Do you  have  any

suggestions  as to how that could be addressed?   Because,

otherwise, if we put something in there and it just  meant

somebody  could  fill out three worksheets, I'm  not  sure

that that would be beneficial.

          MS. MC KINNEY:  I  think it might  be  something

that you would want to work with AHECI on. Because,  since

they are establishing standards for counseling --

          MS. BRAUNSTEIN:  And certification.

          MS. MC KINNEY:  --  and  certification,  then  I

think it should be based on the --

          MS. BRAUNSTEIN:  HUD also has certification.

          MS. MC KINNEY:  I know HUD is working along with

AHECI, so --

          MS. BRAUNSTEIN:  Are  they planning  to  combine


          MR. HORNBURG:  I  can't  tell  you.   They   are

working in concert.  I think they are trying to.

          MS. BRAUNSTEIN:  Okay

          MS. MC KINNEY:  And then the other thing I  just

wanted  to mention, in terms of people being resistant  to

education, we found that to be the case, also, until  they

come  in and they go through a workshop, or they sit  down

with someone and we seek one-on-one counseling.  Then they


learn to appreciate what the benefits are.  But  initially

it  is difficult.  Usually, we don't have  anyone  saying:

Gee, what a waste of time.

          MS. HOFFMAN MOLLOY:  Can we go back to -- I'm  a

little  bit haunted by your story of the $9,000  from  the

$20,000  loan.  I keep -- I'm sort of processing that  and

thinking,  you  know,  I  think  about  it.   A   brochure

certainly  wouldn't have solved her problem.  And I  heard

recently that, if we could solve the world's problem  with

brochures,  we would have done that a long time  ago.   We

probably  don't  need a lot more brochures.  But  what  is

sticking  with me is that, despite the fact that she  went

through the home-buyers counselings, and despite the  fact

that  you  intervened  and sat down  with  her  and  said,

"Here's  the information," she still made the decision  to

take the $9,000 of the $20,000.

          MS. MC KINNEY:  Right.

          MS. HOFFMAN MOLLOY:  What  I want to  understand

is, in your estimation, was that really the lender of last

resort for her, given her disability payments and  income,

the  cash-flow issues, was that really all she could  have


          MS. MC KINNEY:  I  think that was the lender  of

last  resort.  And the reality is she probably should  not

have been borrowing on her home because her -- I went back


and  looked  at her credit report.  She  really  had  very

little debt.  And she had gotten an excellent deal,  along

with  the down-payment assistance, when she purchased  her

home.   So  her house payment was very low.  It  was  only

about five-something.  So her disability payment  actually

covered  her  house  note and  her  other  expenses.   But

someone came along and knocked on her door and said:  Gee,

you  need a new fence around your house.  So part  of  the

money was going to build a new fence.

          The  reality is that we aren't going to be  able

to help everyone.  There are some people that are going to

decide that they just want the money regardless of what it

costs,  and there's not going to be much that we  can  do.

So  we have to try and figure out how we can get to  those

that we actually can help.

          MS. HOFFMAN MOLLOY:  Okay.

          MR. FISHER:  I'd  like  to  speak  to  that.   I

think,  and  I sense this point in  this  discussion,  the

strengths and weaknesses of the consumer counseling.   You

know, the consumer counseling lays it on the individual to

make  that  decision,  rather than a  systematic  kind  of

thing.  We sort like -- you know, not that this is exactly

right;  but I mean that people have vices, like  gambling.

And, if gambling was not available, they wouldn't gamble.

          So,  I  mean, I hope that you look  at  systemic


issues  and regulation, because there's never going to  be

enough  consumer  counseling  to  reach  out  to  all  the

individuals.   And  even  when it  does,  sometimes,  it's

different than what we really hope to do.  So,  hopefully,

there will be regulation that can look at things and start

judging  what's really going on and limit  the  predatory,

not all the subprime, but the predatory portion of it.

          MR. HORNBURG:  I  also  go back  to,  again,  to

where the goals of the counseling, and you just spoke very

eloquently.  The goals of counseling aren't always to  the

borrower  who,  with the right terms, can  become  a  home

owner.   It's  empowering the consumer to make  the  right

decision for themselves. And, sometimes, the decision  is:

I shouldn't borrow; I shouldn't become a home owner  right


          The  other side of the coing is:  I know I  made

some dumb decisions in my life before, but there's got  to

be  some role for consumers here without going too far  to

take  that away.  Because we all might look at  somebody's

individual circumstance and say:  Gee, I wouldn't do that.

Okay?   But  I know some people look at some  decisions  I

made  and say:  I wouldn't do that.  So just a little  bit

of rationality on the part of some.

          MS. LAMBERTI:  This  seems like a  sidestep.   I

didn't notice on the bio it said that I was still with the


Tax-Aide  Program  as a volunteer.  Well, I  haven't  been

there  for the last two years.  However, allow me to  just

share  with you some experience there.  Because there,  we

have strict standards in the Tax-Aide Program, and we know

that  we  help 1.6 million there, people.   We  definitely

have  numbers  and  how many  penalties.   We  have  maybe

sometimes even divorces.

          So the point I want to make here is:  If I  look

back,  the  program  was started 30 years  ago,  with  ten

counselings, and now they're 1.6.  So it takes a number of

years, really, to get hold.  If the counseling program  is

established,   with   standards,   and   qualified,    the

counselors,  it would take a number of years.  You can  do

all the advertisements in the world, but not everyone will

appreciate  it.   That's the nature.  However, if  we  can

reach  more and prevent more damage, then that's  what  we

want to do.

          MR. MICHAELS:  Chris,  I think you  raised  this

earlier, and I just want some support a little bit because

of  some things I've heard over the last couple  years  as

we've talked about abusive lending and predatory practices

in the traditional mortgage market.

          What  do  you think, generally, of the  idea  of

user of first mortgages as a wider basis to avoid some  of

the  predatory  lending that goes on  in  the  traditional



          MS. LAMBERTI:  Well,  AARP doesn't believe  that

we  should  go back to it.  We think it's  very  important

that  credit  is available to anyone who  can  afford  it.

It's really the -- any kind of policy we establish that we

want  it  to be fair.  So when we refer to  predatory  and

abusive lending, it's really abusive, though.  That's what

we want to do.  We do not want to limit the lending.

          MR. MICHAELS:  I guess what I was trying to  get

at  is there's been some, I guess, belief that  there  are

less,  there  are fewer opportunities for  abuses  in  the

reverse mortgage market.  Maybe some of the people who are

getting abused in the HOEPA mortgage market may be  better

off    with   reverse   mortgages,   depending   on    the


          MS. LAMBERTI:  Exactly,    depending   on    the

circumstances.   It  partly might be the  reason  because,

first of all, the reverse mortgage market is rather small.

As you know, it's about 1 percent only.  And there,  there

is  mandatory counseling.  And we know, for a  fact,  that

one  out of three only will apply for a reverse  mortgage.

However, there's slightly a drawback on it because of  the

general reputation, because of predatory lending,  there's

some  borrowers out there, potential borrowers, who  would

be  eligible for a reverse mortgage and would  help  them,


but  they're  not  going for it.  So  that's  where  we're

concerned,  too.  It's not just only the one who had  been

victimized  by the abusive lending, but also the ones  who

will  be  eligible  and stay away from it.   As  you  said

before I made the statement, it's circumstances.

          MR. MICHAELS:  You alluded earlier to something,

and I guess AARP was doing in terms of reverse  mortgages.

And  I don't remember exactly what you said about it.   It

was  something  about a program established and  it  would

create more data.  Could you elaborate on that?

          MS. LAMBERTI:  Well,  you're always -- when  was

it?   About  a  year ago, they were  trying  to  establish

standards,  first of all.  And, so, we supported this.  We

said, well, you can only do qualified counseling if  there

are  certain standards in place.  And at that  moment,  we

were  inviting counselors to participate in a test to  see

if they qualified, and only about 300 to 400 did  actually

qualify.   And we, in AARP, tried to call a  small  group,

like 20 or 30 out of this group, train them and make  them

available  for networking, to be trainers of someone  else

for  consumer hotlines and 800 numbers.  So we think  it's

important to have certified, qualified counselors, because

the result really depends on the quality of the counselor.

          And   we  have  noticed  there's  not   a   wide

understanding  of  what reverse mortgages are.   And,  for


some,  they're good; and for some, they are not.   And  if

someone  is over 62 and takes out a reverse  mortgage,  it

would also be eligible for another type of loan.  They may

want to take another loan. So counseling would bring  this

out,  and  it gives them the option to decide  what's  the

best one.

          MR. MICHAELS:  You  had said something about  in

two years, we'll have better data.  What specifically were

you referring to?

          MS. LAMBERTI:  Now  that  we  have   established

standards  here, and we have qualified  counselors,  then,

this was more or less a benchmark that we could say, okay,

from here on the number of qualified counselings, how many

did  not  take  the loan out based on this.   So,  it's  a

different understanding now that we have standards.

          MS. BRAUNSTEIN:  Chester,  you  wanted  to   say


          MR. CARL:  Yes.   I would strongly  support  the

encouragement  to have standards in counseling,  but  also

policies  to  support that.  But in addition  to  that,  I

still  need  to  note,  for the  record,  that  in  Indian

Country,  not  only  do we need to  provide  education  to

consumers,  but also education to financial  institutions.

That's something we're in dire need of.

          I   would  also,  along  that  line,   encourage


financial  institutions  to  partnership  with  tribes  to

identify  the consumer education programs that's  relevant

to each sovereign nation.  I think that's the only way  we

reach  the  people  that are in dire need  of  housing  in

Indian Country.

          MS. BRAUNSTEIN:  Thank you.

          MS. SMITH:  Any  other comments or  observations

from any members of our invited panel?

          (No response.)

          Well, if not, we thank you very much for  coming

here this afternoon to offer us your views.  And we  thank

also members of the audience who have taken an interest in

this area.

          We're  going to -- shall we take a break, or  do

we  continue?   Why don't we take a 10-minute  break,  and

then we will reconvene with the open-mic session.


          MS. SMITH:  Okay.  I think we are ready now  for

our  open-mic  session.  And I'll read the  order  of  the

names,  and then you can approach the mic, and we'll  call

the name again in case there's any confusion.

          I  have Terry Macken, Stephen Cogswell,  Barrett

Bates,  George Duarte, Louis Bruno, Milton  Hodge,  Linnie

Cobb, Howard Beckerman, Jim Bleisner and Shanelle Coleman.

So Terry Macken, if you are in the room.


          Let me mention that our timekeeper has moved  up

here  so that we can -- so that the speakers will be  able

to see the one-minute and the time's-up mark. We have John

Olson taking over as timekeeper.

          So,  with that, if you will  introduce  yourself

and start your three minutes.

                       STATEMENT OF

                       TERRY MACKEN

          MR. MACKEN:  Good  afternoon.  My name is  Terry

Macken.   I'm  a  mortgage broker, for 30  years.   We  do

asset-based  lending,  and have for 30 years.  We  do  not

check credit and income, nor do we charge a pre-pay.

          Everyone  talks about how lowering the  triggers

on  APR,  on  the points and  fees  section,  is  valuable

because  it  will bring more loans under  HOEPA  coverage.

That's  nonsense.  That is not the solution.   Almost  all

the  cases  complained  about today, and  in  the  earlier

hearings,  were probably illegal in one form  or  another.

We  wouldn't  be  having these  hearings  if  the  various

regulators would enforce the laws, existing laws.   That's

what  discourages  these things.   Lowering  the  triggers

won't  decrease  the  fraud.  What it  will  do,  as  many

speakers here have acknowledged, is cut down on the number

of loans available to folks who need them the most.  These

things are illegal, but the actions only decrease when the


enforcement increases.

          The  biggest single deterrent to a lot of  these

problems  is adequate disclosure of what a loan is and  is

not.    Some  of  these  disclosures  should  be  on   the

application,  right above where the borrowers signs  there

names.   Then,  if there is something a  borrower  doesn't

like,   they  don't  sign  the  application  and  can   go

elsewhere.   We have submitted proposals on what  we  feel

would help in this area.

          As  a  broker for 30 years, making  pure  equity

loans,  where  we  don't  check  credit  or  income,  what

concerns me most is a blatant discrimination in so many of

these proposals.  Why are you treating subprime lenders as

second-class  citizens?  Why are so many  things  verboten

for subprime lenders that are universally accepted when an

A-paper lender does them?  Things, such as stated  income,

where  everyone knows that the income is questionable,  or

wouldn't  be  done  that  way.   Take  such  as   negative

amortization  loans.  Many home owners wouldn't be  if  it

weren't  for  this type of loan.  They'd still  be  paying

rent somewhere instead of getting on board with  inflation

through home ownership.

          Interest-only   loans  keep  payments  down   on

short-term loans where the borrower needs some money for a

short term, and the investor is unwilling to loan for more


than  one  to  five years.  We look at  these  as  interim

loans.  We make a lot of them to help people over a  rough

spot, for whatever reason, until they qualify for a 3-year

loan at its lower rates. And what's wrong with making more

than one loan to a person?  It's not impossible, you know,

that their situation might change and they may need  money

again  before  they thought they would.  Is there  no  one

here that's ever had to refinance a loan?

          There  seems  to  be a  number  of  myths  being

bandied  about  on the subject of predatory  lending  that

would  have one believe all sorts of things that  are  not

true.   I  hear  a lot of people  talk  about  the  higher

foreclosure  rates  on subprime loans by the  same  people

that the rates are too high.  Folks, the rates are  higher

because   of   the   foreclosures.    No   lender    wants

foreclosures.   They mean a loss of time and  money.   The

higher rates are an offset to the risk.

          Now  many  of the speakers today, and  in  other

hearings,  want to penalize the broker for not  giving  an

unemployed  person,  with  bad credit, the  same  rate  as

A-paper lenders do.  Incredible.  You need to walk a  mile

in my shoes.

          People say you should check a borrower's income.

A-paper  lenders  don't have to, so why  should  subprime?

The  reason  many people are subprime is  because  they've


lost  their  job.  Some people are out of work  for  quite

awhile  because of their specialty or even their age.   Is

there something wrong with helping these people?  Or would

you prefer they lose their homes to a foreclosure?

          Balloon  payments  are  verboten  for   subprime

lenders.   Why, if they're okay for A-paper lenders?   The

business about not being able to rewrite your own loans is

180  degrees opposed to the American idea of doing such  a

good  job  that a client will want to come  back  to  you.

That   applies   to  any  business,   phones,   computers,

eyeglasses,  doctors,  et cetera.  Why  say  loan  brokers

can't  do the same thing?  Many of these proposals are  so

discriminatory as to be un-American.

          In  closing, I'd like to say that no  one  would

object to disclosures if it weren't for the discrimination

that accompanies them.  They are discriminatory and unfair

to mortgage brokers.  They're discriminatory and unfair to

borrowers.  People are entitled to know about their loans,

just like other things they buy.  But you shouldn't try to

put the people out of business that do the disclosures.

          Thank you.

          MS. SMITH:  Thank you very much.  Mr. Cogswell.

                       STATEMENT OF

                     STEPHEN COGSWELL

          MR. COGSWELL:  My  name is Steve Cogswell.   I'm


with  Sentinel Fair Housing.  We're a  housing  counseling

agency in Alameda.  We're also do fair housing enforcement

in  the same area.  We're aligned with the  National  Fair

Housing  Alliance  and  we're also involved  in  with  the

California  Reinvestment  Committee  in  their   predatory

lending project.

          Just   want  to  make  several  comments,   very

quickly, I hope.

          We  found  ACORN published a study a  couple  of

years  ago,  say  1998, with  market  share  for  subprime

lenders  representing  about 2 percent of the  lending  in

Oakland.  We've gone through with those lenders and  taken

a  look at their foreclosure rates, and  they  represented

about  13 percent of the foreclosures that  are  currently

going on, or at least occurred in the first six months  of

this  year  in the county of Alameda, actually.   This  is

preliminary  data,  and actually grossly  understates  the

actual  share  of both the market share  subprime  lending

within the area because we were able to identify a  number

of non-reporting subprime lenders that are  current,  that

are  doing  business in Oakland and Alameda, but  are  not

reporting their market share analysis that ACORN did.

          Relative   to  the  recommendations  here,   and

specifically  I  want  to speak to  enforcement,  we  very

strongly  support  the  idea  that  subprime  lenders   be


included  and be required to do underreporting so that  we

can  actually  get  some market share data that  is  of  a

reasonable nature.

          Secondly, I would strongly recommend that people

look at the FHA foreclosure reporting requirements of  the

Cranston-Gonzales  Bill,  and the data that comes  out  of

that, which is very similar to HMDA data, but includes the

foreclosure  statistics for FHA loans.  It's available  by

Census  Tracks.   But  it has a  model  for  reporting  of

foreclosure  data.   And  that, then,  also  goes  to  the

enforcement.   If  you know  who these folks are,  we  can

take a look at that.

          Earlier  today, one of the lenders who was  here

was a lender that I looked at very closely with that data,

because  it appeared to me that they were doing  predatory

lending.   And, indeed, on a closer look, they  were  not.

Okay?   I have to say that.  But it does raise a red  flag

and  give you at least the initial capacity to be able  to

look at these things for enforcement.

          Thank you.

          MS. SMITH:  Thank you very much.

          Mr. Bates.

                       STATEMENT OF

                     BARRETT R. BATES

          MR. BATES:  Hello!  My name is Barry Bates,  and


I'm  a  28-year  veteran  of  the  mortgage  industry   in

appraisals.  But, also, in the last 15, working for major,

regional  and national lenders engaged both in  prime  and

subprime  lending.   And  I thought  I'd  share  a  little

experience that I've had along these lines with regard  to

predatory lending and the rate and fee triggers in HOEPA.

          The  rate  and  fee  triggers  seem  to  address

primarily the issue usury, high rates, high fees, that are

unconscionably   high,   and   drive   a   borrower   into

foreclosure.   But I would submit that it really is  about

the    inadequate    controls    over    the    front-end,

incentive-commissioned  loan  originators.   And  I  would

argue that, as these agents, it's really a breach of sound

business  practices  and  a  structural  problem  in   the

mortgage industry, rather than it is a breach of trust  at

the point of origination.

          Predatory  lending may indeed be.  Instances  of

it  may be anecdotal.  But I believe that  either  through

the  SEC and through the securitization of subprime  loans

it is possible to gather evidence through that conduit  in

order to determine, for example, whether, what percent  of

loans  are  covered by HOEPA; and, also,  what  foreclosed

loans resulted from these types of practices.

          On  the  prime lending side, the Office  of  the

Comptroller  of  the Currency, the NCUSA, the  FDIC,  OTS,


Fannie  and Freddie, the Federal Home Loan Bank, all  have

the ability to examine these types of loans.   But it does

little  good  because  they're looking  at  the  federally

regulated  lending  industry, primarily engaged  in  prime

lending, and which have been adequately overseen since the

S&L  debacle  in  the 1980s, and the  inculcation  of  the

Federal   Financial  Institutions  Recovery   Reform   and

Enforcement Act of 1989.

          I  would submit that two questions only need  to

be  asked  in  order  to  determine  whether  a  loan   is

predatory.   But  I'd  say  the  definition  of  predatory

lending   is   any  business  practice  related   to   the

origination  of a mortgage which creates economic  benefit

for  the originator at the actual or probably  expense  of

the  borrower's  financial stability.  And  I  think  that

those  things can be concretely determined (1)  by  asking

the question did the borrower gain a tangible benefit from

this  loan?  If it's a debt-consolidation loan, did  their

gross  net  ratio  go up or down after  the  mortgage  was

instituted?   If it was home improvement, were the  monies

released to the contractor instead of to the borrower?  If

it's a cash-out mortgage, what is the LTV and what is  the

highest LTV that this borrower could stand?

          The other major question from my perspective is:

Who controlled the valuation of the property?  As long  as


incentive-loan  originators are controlling the hiring  of

appraisers, are controlling the transmittal of the  credit

report  to an underwriter, or the transmittal of  some  of

the  underwriting  rules  prepared up  front,  this  is  a

predatory  lending and will not be a problem that will  be

resolved  in  the  near  future.   So  I  don't  see   the

necesssity to reduce the triggers at this point because  I

think  the  overriding  problem  is  really  in   business

structure.  Thank you.

          MS. SMITH:  Thank you very much.  Mr. Duarte.

                       STATEMENT OF

                      GEORGE DUARTE

          MR. DUARTE:  Good    afternoon,    ladies    and

gentlemen.  Thank you for allowing this opportunity.

          My  name is George Duarte, and I own a  mortgage

brokerage company here in the Bay Area, Fremont.  And  I'm

the  immediate past-chairman of the Legislative  Committee

for  the California Association of Mortgage  Brokers.  And

I'm  glad that you're having this hearing today,  and  I'm

glad to be able to participate.

          I just wanted to go over a few points that  I've

observed  and  that are important to  our  Association  of

Mortgage  Brokers.  One is that we are absolutely  against

predatory lending practices.  Second is that we feel  that

a  consistent  enforcement of existing state  and  federal


regulations  and  laws would go a long way towards  --  as

part of alleviating the process.

          The  definition of predatory lending is  a  very

important  situation,  and would go a  long  way  towards,

again,  addressing the situation in that, first, you  need

to  define  what  the  problem is, and  then  be  able  to

quantify   it  to  see  to  what  extent  to  remove   the

emotionality out of the debate.

          I  was very impressed with the  definition  from

the  state of Washington of predatory lending:   Deceptive

and  fraudulent  practices in mortgage  loan  origination.

And,  ultimately, it doesn't really matter how  many  laws

and  regulations there are, if you have a license and  who

you  work for.  If you're an individual or a company  that

has  the  intent  of creating  an  illegality  and  taking

advantage  of  a consumer, then you're a  bad  person  and

you're going to do that whether there are laws against  it

or  not.  So what's important is to create an  environment

so that those activities will be able to be found out  and

will be enforced.

          We  also  advocate  plain  English  disclosures.

This  would  go  a long way in  alleviating  the  problem.

Again, as the gentleman from Washington alluded to earlier

today,  to get those plain English disclosures out at  the

beginning  of  the loan process very clearly so  that  the


borrower  would understand what the terms are of the  loan

in  nice,  big  print,  so it  would  make  it  much  more

difficult  to obfuscate what the consumer is  getting,  so

that  they'll  know  what they get at the end  of  a  loan


          We  would  encourage that  the  Federal  Reserve

encourage  and assist industry efforts  at  self-policing,

elimination  of  dishonest loan  originators  and  current

consistency  of disclosure requirements for  all  mortgage

loan  originators regardless of what industry  group  they

belong  to  --  be it  banks,  mortgage  brokers,  finance

companies,  home-equity lending.  Have the same rules  and

regulations  apply  to all originators to  the  consumers,

that  the  consumer  will  be  consistently  understanding

what's happening.

          I  would  also urge that you do not  reduce  the

consumer's  choices by eliminating different  features  of

loan  programs,  prepayment penalties,  balloon  payments.

These  can  all be useful tools in providing  services  to

individual  consumers  being able to tailor a loan  to  an

individual consumer.

          In  terms  of counseling, where  counseling  and

education  is  very good, but we're  very  concerned  that

counselors  be  properly  educated.   That  somebody  just

doesn't read a pamphlet, fill out a form, and then, all of


a  sudden,  they're a counselor.  Mortgage  loans  can  be

quite  complex,  especially when applied to  a  particular

individual;   and,   therefore,  the  people   doing   the

counseling should be properly educated.

          Thank you very much for the opportunity.

          MS. SMITH:  Thank you.  Mr. Bruno.

                       STATEMENT OF

                    LOUIS BRUNO, ESQ.

          MR. BRUNO:  Good  afternoon.   My  name  is  Lou

Bruno.   I'm a private attorney in Escondido,  California.

I  have a couple of quick observations and nine  points  I

thought I would try and raise in response to the questions

by the Board.

          There's   been  a  long  question  as   to   the

effectiveness,  as  discussed  in  terms  of  HOEPA  here.

There's  been  articles on the effectiveness of  TILA.   I

think  one  of the problems you all have  in  finding  the

benefit  of TILA at this time, and HOEPA, is your  looking

at  the consumer at the beginning of the transaction.   It

would be nice if the consumers understood enough about the

loan process and they felt and realized what options  they

had that they could go into the deal fairly, squarely, and

understand it.

          I  think the key benefits we've had  from  TILA,

and  that  we  are seeing from HOEPA,  come  at  the  end,


especially  the  power to rescind.  Testimony  given  here

this  morning,  by Countrywide, made it  very  clear  that

damages are not sufficient.  The testimony was:  We have a

lot of frivolous actions where we pay the attorneys  fees.

If you paid the attorneys fees, he had the violations.  He

didn't believe that he had any substantive violations.

          To address the questions of the panel, the first

question was on education.  Based on what I've just  said,

I  would recommend that this panel has to  understand  the

tremendous  advantage you have.  You know TILA exists.   I

have had real estate brokers tell me:  You don't mean  you

can actually rescind?  I have had a federal judge ask  me:

Do  you, are you serious that TILA allows you  to  rescind

alone?   That's the kind of background that you're  trying

to educate consumers in.  They go to a counseling and,  if

they go for a second opinion, where are they going to  go?

The  National Association of Consumer Attorneys?   I  have

checked through their directory and there are some  stated

that  have absolutely no attorneys that are  members  that

are  listed.  How do you find the attorney who knows  what

TILA is and how to enforce it, and even evaluate it?

          I would suggest that increased news coverage  of

enforcement efforts by the different enforcement  agencies

will help build awareness, as well.

          Certifying  attorneys as specialists also  gives


-- it creates a heading in the listings where boards  will

know where to refer.

          Statute of Limitations, as far as applying  this

is  one  of the keys.  Beach v. Ocwen is  currently  being

interpreted  by many federal judges to mean that you  must

both  rescind  and file your lawsuit within  three  years.

They   don't  understand  the  philosophy.    They   don't

understand   the  limitations  of  Beach  v.   Ocwen.    A

clarification  by  the Board, in that point  alone,  would


          Furthermore,   a  clarification  of  the   Board

supporting  Beach v. Ocwen as to the application of  state

remedies would also be helpful.

          As to the triggers, the other problem we've come

into  is:  While you are putting limitations, it is  often

interpreted as a license.  Anecdotal evidence that I  have

indicates that there is -- if I can have leave to  finish,

I'll rush?  I'm sorry.

          Anecdotal  evidence I have indicates --  I  have

one expert on a totally different case, who is  attempting

to  prove a HOEPA violation.  He has to prove 21  percent.

The   highest  he  can  go  is  20.5.   That  has  to   be

dramatically above whatever the state regulation is.   But

because he can't quite get to the limit you have drawn, he

is  ready  to look at no violation.  I think  one  of  the


remedies to that would be a differentiation recognized  by

the  Board  of  a  de facto violation,  and  then  per  se

violations  being  defined  by  specific  numbers  in  the

triggers.    That  would  allow  any  attorney,   who   is

attempting  to  defend a foreclosure, to  say:   I've  got

issues of fact.  I cannot get a summary judgment based  on

actual, clear-cut violation.  But there is still an issue,

especially  as some of the testimony you had  today.   The

borrower doesn't believe they have a choice.  How can  you

actually say they had fair disclosure?

          One of the things I would suggest that should be

added  to the form is the credit rater.  You are A  paper,

you  are  B paper, you are C paper.  Let  them  know  what

their  rating is, and is there any other source that  they

are likely to be able to go to?  If that's required to  be

shown  to  them,  they will understand yes, I  do  have  a

choice,  or  not.  They do understand  when  they've  been

abused at the end.

          As  to the rescission, the testimony that  there

is a SWAT Squad that rushes into avoid foreclosures,  I've

never seen it.  I've never met anybody that has.  It would

help  if lenders were required, or were given,  direction.

If  you  want to avoid the effect  of  rescission,  here's

where  you go for judicial relief.  At the  current  time,

1635,  and the regs, are totally silent as what to  happen


if the lender ignores the rescission.

          Also,  on the definition of tender.  I've had  a

lender actually try and tell me that I need to surrender a

$750,000  home  to  tender on a  $400,000  note  that  was

rescinded after 3 years.  Proper rescission amount  should

have been about $290,000.

          MS. SMITH:  What number are you on?

          MR. BRUNO:  Six.

          MS. SMITH:  Can you just read the rest?

          MR. BRUNO:  Basically,  as far as -- I  think  I

may have -- one final request, I would make -- and I think

the  rest of it may be by implication -- is the  statutory

damages  provided  in TILA.  It would be  helpful  if  the

Board  were  to clarify that statutory damages are  not  a

replacement  for a prohibition of punitive  damages.  Even

those  few modifications that can be addressed  either  in

comments  or rules would give the few  attorneys  that  do

know  what is involved with TILA a chance to have  a  fair

shot at presenting their case.

          Thank you.

          MS. SMITH:  Thank you very much.  Mr. Hodge.

                       STATEMENT OF

                       MILTON HODGE

          MR. HODGE:  Good  afternoon,  folks.   I'm  here

from  ACORN, as a member of the ACORN Association.  And  I


would  like to take this opportunity to invite all of  you

here to join ACORN.  You're all very knowledgeable, and we

welcome  you. We have three young ladies back  there  that

will be glad to write you up.  No question about it.   Now

to get down to business here.

          I   am  interested  in  the  predatory   lending

associated  business  here.   Because, when  my  wife  was

living, we got involved with a finance company.  We had  a

balloon  payment  at the end of what we  thought  was  the

final  payment.  So my wife went in to pay it.   When  she

came  out, she came out crying.  So I said to  her,  "What


          She said. "We owe fifteen hundred dollars more."

So  I parked the car.  I was double-parked.  I parked  the

car and I went in.  The people told me that we had to come

up  with  fifteen hundred dollars in a  hurry.   Well,  we

didn't  know  where  we  were  going  to  get  it.    But,

overnight, we thought about it, so we mortgaged the  house

through the Bank of America.  They came to our aid and  we

got out of that.

          We  learned from experience.  From then  on,  we

watched  everything  we  did.   Not  that  we  were   that

intelligent.  I'm not an intelligent man; I'm an old  man.

See,  I  wasn't that either.  But the facts  was  that  we

learned from that experience.  And if you could open  this


to  a  point where the lender would have to  specify  that

there is a balloon payment, that he would be flipping  the

loan.   So  we want to get this on record now.   Bring  it

into focus where the simple people can deal with it.   All

of you here are very knowledgeable, but, as I say, if  you

want  to join ACORN, I don't want you over 80,  because  I

don't  want nobody telling me:  Sit down, Boy!  You  don't

know what you're talking about.


          Thank you.

          MS. SMITH:  Thank you very much.  Linnie Cobb.

                       STATEMENT OF

                       LINNIE COBB

          MS. COBB:  Good afternoon, each and everyone  of

you.   I'm very happy to be here, to be able to  speak  on

behalf of our community.

          I'm  Linnie Cobb, and I am a member  of  Oakland

ACORN.   And  I'm here today on behalf of  the  California

ACORN.   We  are  a community  organization  of  low-  and

moderate-income people, and we are coming together to make

changes  in  our  neighborhoods  in  Oakland,  San   Jose,

Sacramento and Los Angeles.

          We   have   been  working  hard  to   keep   our

neighborhoods  safe  from predatory lenders,  or  subprime

mortgage lenders who prey on our communities by convincing


residents  to sign up for bad loans, which result  in  our

neighbors losing their homes.

          We  call on the Federal Reserve to  take  action

against  predatory lenders that are destroying our  dreams

of home ownership.   At ACORN, our knowledge of  predatory

lending comes directly from the community. We organize our

neighborhoods   house  by  house,  and  block  by   block.

Unfortunately, we have found far too many of our neighbors

who have become victims of predatory lending practices.

          I would like to share with you just a couple  of

the reasons why this is so important to us.  The first  of

these   reasons   is:   Estella   Padenas,   of   Salinas,

California.  Estella heard about the company,  Beneficial,

through  a  neighbor.   She got her loan  in  1994  at  an

interst  rate of 8.5 percent.  The loan agents  made  some

mistakes  on  the papers, and had her sign  several  blank

pages,  promising  that  they would fill  in  the  correct

numbers.   Estella  began to suspect a problem  last  year

when  Household  Finance took over her loan  and  payments

jumped  from  $1,200,  to  $1,800  per  month.   She  soon

realized  that  her interest rate was adjustable  and  had

risen to 14.5 percent.  Worse still, her original loan had

a  balloon  payment of $89,000 at the end of  the  15-year


          There's   another   one.    Eddie   Moore,    of


Sacramento, is another reason that predatory lending  must

be  stopped.  She got her loan with Beneficial to pay  off

some bills.  She had missed a house payment and needed  to

pay  her  house.  Her credit was not perfect  because  her

husband  had leukemia.  When she went to  Beneficial,  she

ended  up with a 25 percent interest rate on  the  $20,000

that  she originally borrowed.  The loan required  $76,000

to  get  it paid off.  This was as much  as  the  original

value of the house.  Since then, Mrs. Moore has refinanced

and  has  been flipped to American  Loan,  Ameriquest  and

Aurora.    Victims   of  predatory  lending   often   find

themselves  being flipped faster than can even keep  track


          And,  finally, I want to share just a few  words

with  you  about  Rodina Tucker, a  resident  of  Oakland.

Rodina's  original  loan was with Universal.   She  needed

$7,100  to pay off her taxes.  The agent convinced her  to

include $7,500 in debt consolidation, bringing the loan to

$15,000.   Then they insisted on $5,000 for  pocket  money

and  household  bills.   Rodina had  a  previous  loan  of

$15,000  from the city, and Universal wanted her  to  fold

this  into  her loan. Even though Rodina said,  "No,"  the

lender  contacted the city anyway and said they could  add

it  to  her loan and subordinate the loan  for  30  years.

Now,  several years and numerous flips later, Rodina  owes


more  than  ten times what she originally  borrowed.   Her

loan was with one company, for such a short time, that she

didn't  even get to make one payment on it before  it  was

sold to somebody else, and her payments went up again.

          These  are  just  a  few  of  the  reasons  that

predatory  lending  must be stopped.  ACORN calls  on  the

Federal  Reserve to make immediate action to  protect  our

neighborhoods.   There is no time to waste.  We must  take

action  before  even  one more victim falls  prey  to  the

dangerous  tactics  of these lenders.  And  we  must  take

action to protect the American dream of owning a home.

          And I thank you very much for listening.

          MS. SMITH:  Thank you very much for appearing.

          MS. COBB:  Thank you.

          MS. SMITH:  Mr. Beckerman.

                       STATEMENT OF

                     HOWARD BECKERMAN

          MR. BECKERMAN:  Good   afternoon,   ladies   and


          My  name is Howard Beckerman.  I am  a  mortgage

broker,  loan  originator  in California.   I'm  with  the

California Association of Mortgage Brokers.  I work in the

East  Bay,  although I do loans throughout the  state.   I

have been doing loans for about 8 years.

          I'm   also  a  consumer.   I  own  my  home   in


California.  I owned my first home in California 15  years

ago.   I needed a negative amortization loan to  get  that

home.   I  needed a prepayment penalty to bring  the  rate

down.   I was very happy to get it.  It was  disclosed  to

me, and it's worked out quite well.

          I'm  here  to  talk about what  we  perceive  as

predatory lending, what modifications in HOEPA can do  for

it  or  can  not  do for it, and what  we  can  do  as  an

industry.   What the Federal Reserve, as an industry,  can

do to help people get reasonable loans at terms that  they

can live with, that they can keep in their home.

          I've  got to tell you that my license is by  the

Department of Real Estate here in California.  That  means

I  have  a fiduciary responsibility to  my  client.   Many

originators,  many  banks, many finance companies  do  not

have that license.  They do not have the responsibility to

the client that I do.  Because of that, as part of my job,

I  provide  counseling.  If the client comes to  me  early

enough  in  the  process, we can get them  what  would  be

called  an  A-paper or prime loan.  If they come to  me  a

little  bit later in the process, unfortunately,  subprime

is the alternative.  And we get them the best loan that we


          As far as predatory lending, I've heard a lot of

different  examples,  and all the  examples  you've  heard


recently are examples of predatory lending.  But to define

it, it's tough.  I think there was a United States Supreme

Court Justice who, to paraphrase, said:  I'll know it when

I  see it.  And I have seen some very bad loans, and  I've

seen some loans that horrify me, both on the subprime  and

the  prime area, where clients were charged  higher  rates

then  they  needed  to be charged -- whether it  be  at  7

percent  or 15 percent. What had benefitted consumers  the

best is competition.

          HOEPA   itself  has  been  ineffective   in   my

experience.  In the years that I've been doing loans, I've

done  2 HOEPA loans.  The only thing that HOEPA  has  done

has  been  to  delay the process three  extra  days.   The

client  changed  no  terms.  HOEPA  does  not  attack  the

predatory  lenders.   They find ways to  commit  fraud  no

matter what the triggers are going to be.  So lowering the

triggers  will not prevent fraudulent predatory  loans  to

happen.   They will work either within the laws to  extend

clients  out too far, or they will simply  commit  crimes.

Then it's up to enforcement to find them.

          The  solutions to the problems that we've  heard

is:   I advocate registration and licensing of every  loan

originator  in  the country.  If we all have  a  fiduciary

responsibility,  then, when we sign a loan application  as

the originator, we are putting our license, we are putting


our  livelihood  on  the  line.   That  will  make  a  big


          I'd   also   like  to  see   credit   counselors

certified.  There are a lot of good credit counselors  out

here today.  But I have met some who, even though they are

trying   to  do  good,  give  inaccurate  information   to

customers, and wind up causing them to pay higher rates.

          The  second  most important thing  would  be  to

simplify  disclosures.  The gentleman, who was  here  this

morning  from Washington State, had a two-page form  which

goes a long way to simplifying disclosures to consumers so

they understand what their rate is, what their payment  is

going to be.  TILA and APR, which were very good 30  years

ago, are antiquated in today's mortgage market.  They  are

difficult  to understand, compute and really do  not  help


          I'd also ban any form of credit life  insurance,

especially  the single pay, from being packaged  with  the

mortgage.   In  fact, if you wanted to do  it  right,  you

would ban any ancillary service from being packaged with a

mortgage, whether it be a free credit card, whether it  be

any kind of home-improvement possible. Leave the  mortgage

as it is.  Let the consumer make the decision about  other

items after the loan has closed.

          I  see  my time is up.  I  will  submit  written


discussions  on other things.  I'd like to thank  you  for


          MS. SMITH:  Thank you very much.

          Mr. Bliesner?

          (No response.)

          Ms. Coleman.

                       STATEMENT OF

                     SHANELLE COLEMAN

          MS. COLEMAN:  Good   afternoon.   My   name   is

Shanelle  Coleman,  and I'm a member of  ACORN,  community


          We   are  fighting  against  predatory   lending

because  we've  seen what it's done to the people  in  our

neighborhoods, to the families who've been ripped off  for

tens of thousands of dollars, and to others who have  lost

their  homes.  We're pushing our campaign in the Bay  Area

and across the country to rid our communities of predatory

lenders.   We're targeting problem lenders  with  actions,

pushing  them to improve their practices, and urging  Wall

Street  to  show some  responsibility.   We're  supporting

legislation  at local, state and national levels to  crack

down on predatory lending.

          We're here today because our neighborhoods  need

the  Federal  Reserve  to do its  part  against  predatory

lending.  It's been six years, since HOEPA passed, and The


Fed is only starting to look at using its authority  under

the  law.   But this is definitely a case of  better  late

than never.

          We   call  on  The  Fed  to  live  up   to   the

responsibilities  to our community and take the  following


          First:   Change  the  fee  threshold  to  better

reflect the subprime industry works.  The Fed should count

yield  spread premiums and excessive prepayment  penalties

as fees.

          Second:  To lower the APR threshold to  Treasury

plus 8 to cover more high-cost loans.

          Third:  To provide a strong definition of unfair

and  deceptive practices.  The Fed should outlaw  enormous

rip  offs of single-premium credit insurance.   It  should

prevent  loan flipping, and prohibit lenders  from  making

any loans that they know borrowers cannot repay.

          These  changes  will  strengthen  the   consumer

protections  of  HOEPA, and provide those  protections  to

more  borrowers in higher coat loans.  We are counting  on

The  Federal Reserve to help protect more home owners  and

the neighborhoods from abusive loans.

          We  also need The Fed to push banks to  be  more

active in our community so that people have more  choices.

We  will continue to organize and take action in order  to


protect our communities and provide our neighborhoods with

decent loan so that all families can have a chance to  buy

a home and the ability to keep it.

          Thank you.

          MS. SMITH:  Thank you very much.

          That is -- that's the end of the list that I was

given  of people who had signed up previously.   Is  there

anyone in the audience who has not signed up but who would

like  to take advantage of our open-mic session?   If  so,

would you raise your hands?

          (No response.)

          If  not,  I  thank very much  everyone  who  has

participated  in our open-mic session.  Again,  thanks  to

everyone else who came to listen.

          The  comment period on our  proposal  officially

closed  on  September 1. But if any of you  have  comments

that  you would like to submit for consideration, then  we

invite  you  to do so as soon as possible.   The  comments

will be considered to the extent that we can.

          So,  with  that, we are  adjourned  and,  again,

thank you very much.

          (Whereupon,  at  3:45  p.m.,  the  hearing   was



                  C E R T I F I C A T E

      I hereby certify that this is the transcript of  the

proceedings held before the


on   Thursday,  September  7,  2000,  at  San   Francisco,

California,   and  that  this  is  a  full   and   correct

transcription of the proceedings.

                             JAMES W. HIGGINS, CV
September 7 hearing on home equity lending | Morning session | Afternoon session

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