Morning Session of Public Hearing on Home Equity Lending
July 27, 2000
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Morning Session of Public Hearing on Home Equity Lending |
FEDERAL RESERVE PUBLIC HEARING
JULY 27, 2000
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1 TABLE OF CONTENTS
2 MORNING SESSION
PAGE
3
OPENING REMARKS BY MODERATOR LONEY . . . . . . 6
4
OPENING REMARKS BY GOVERNOR GRAMLICH . . . . . 8
5
6 OPENING REMARKS BY PANELISTS:
7 BY MR. LEHMAN . . . . . . . . . . . . . . 15
8 BY MR. COUDRIET . . . . . . . . . . . . . . 18
9 BY MS. CRAWFORD . . . . . . . . . . . . . . 20
10 BY MR. MAYNARD . . . . . . . . . . . . . . 24
11 BY MR. CREEKMAN . . . . . . . . . . . . . . 27
12 BY MR. EAKES . . . . . . . . . . . . . . . 30
13 BY MS. EGGERS . . . . . . . . . . . . . . . 33
14 BY MR. BOST . . . . . . . . . . . . . . . . 38
15 BY MR. LAMPE . . . . . . . . . . . . . . . 41
16 BY MS. MARKS . . . . . . . . . . . . . . . 44
17 BY MR. BURFEIND . . . . . . . . . . . . . . 47
18 BY MR. STOCK . . . . . . . . . . . . . . . 50
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BOARD MEMBER AND PANELIST DISCUSSION . . . . . 55
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21
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25
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1 P R O C E E D I N G S
2
3 MR. LONEY: Thank you all for being so
4 responsive to my request to begin the session. Good
5 morning, my name is Glenn Loney and I'm the deputy
6 director of the division of consumer and community
7 affairs at the Federal Reserve Board in Washington,
8 and I'm going to act as the moderator for the
9 hearings today.
10 We're happy to be in Charlotte at the first
11 of four hearings the Board is holding this summer on
12 home equity lending. We will be in Boston on
13 August 4, Chicago on August 16, and we will hold the
14 fourth hearing in San Francisco on September 7.
15 Let me first start by introducing the panel
16 of participants from the Federal Reserve. To my
17 immediate right is Governor Edward M. Gramlich, who
18 is a member of the Board of Governors of the Federal
19 Reserve System, and he is chairman of the Board's
20 committee on consumer and community affairs and as
21 such has primary oversight responsibilities for the
22 matters we're discussing today.
23 To my immediate left is Jim Michaels, who is
24 the managing counsel in our division, and Adrienne
25 Hurt, who is an assistant director in our division,
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1 and they are responsible for truth in lending
2 matters among the Board's staff. On Governor
3 Gramlich's right is Jack Blanton, who is the vice
4 president and community affairs officer from the
5 Federal Reserve Bank of Richmond.
6 I would like to thank the Federal Reserve
7 Bank of Richmond for hosting this meeting today with
8 all the logistical and other care and feeding that
9 you've done for this exercise.
10 The Truth in Lending Act requires creditors
11 to disclose the cost of credit for consumer
12 transactions. In 1994 the Congress enacted the Home
13 Ownership Equity Protection Act, or HOEPA as it's
14 called and we'll probably call it for the rest of
15 the day, which added special protections to the
16 Truth in Lending Act for consumers who use their
17 homes as security for loans with rates or fees above
18 a certain percentage or amount.
19 The Congress acted in response to anecdotal
20 evidence about abusive lending practices whereby
21 unscrupulous lenders made unaffordable home-secured
22 loans to "house-rich but cash-poor" borrowers.
23 These cases often involved elderly and sometimes
24 unsophisticated homeowners who were targeted for
25 loans with high rates or high closing fees and with
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1 repayment terms that were difficult or impossible
2 for the homeowners to meet.
3 HOEPA requires creditors to provide
4 additional disclosures at least three days before
5 consumers become obligated for such loans. It
6 prohibits lenders from including certain terms in
7 their loan agreements; for example, balloon payments
8 for short-term loans and from relying on a
9 consumer's home as a source of repayment without
10 considering whether the consumer's income, debt, and
11 employment status would support repayment of the
12 debt.
13 HOEPA also requires that the Board is to
14 hold hearings periodically to keep abreast of the
15 home equity credit market targeted by HOEPA, which
16 is one of the reasons we're here today. We also
17 held hearings in 1997, about two years after HOEPA
18 became effective.
19 I would ask Governor Gramlich now if you
20 would care to make a few opening remarks.
21 GOVERNOR GRAMLICH: Thank you very much,
22 Glenn. It's a pleasure for all of us to be here in
23 Charlotte. This is the branch of the Richmond Fed
24 which is the one that encompasses Washington, and
25 North Carolina is also, as you know, the home of one
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1 of the most significant state laws in this general
2 area.
3 The last few years have seen enormous growth
4 in subprime lending. The statistics indicate that
5 the growth in subprime lending has been roughly
6 twice the rate of growth of normal mortgage
7 lending. This is mainly, surely, a good thing in
8 the sense that this growth in the subprime lending
9 market has brought credit to low and moderate income
10 households that, had the growth not occurred, they
11 probably would have been denied credit, so there are
12 some good things going on out there. But there are
13 also seemingly some abuses.
14 There have been a series of anecdotes, a
15 series of TV programs mentioning some of these
16 abuses, there has been a rise in the foreclosure
17 rate, and these adverse statistics have attracted
18 our attention. This mixed message symbolizes some
19 of the difficulties that we have today. We want to
20 encourage the growth in the subprime lending market,
21 but we also don't want to encourage the abuses;
22 indeed, we want to do what we can to stop these
23 abuses.
24 The Fed has some authority in this area,
25 mainly under HOEPA, the law that Glenn just referred
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1 to; there's also some authority under some other
2 statutes. These hearings are fundamentally about
3 whether we should use this authority or what parts
4 of the authority we should use. We want to keep a
5 relatively analytical focus and focus on specific
6 things that the Fed might do, trying to make sure
7 that, in technical talk, the benefits of what we do
8 outweigh the costs.
9 One thing that we should all keep in mind is
10 that the Federal Reserve can't do it all. If
11 predatory lending is as significant a problem as
12 some people are alleging, there will have to be a
13 lot of types of activities. Other regulators of
14 financial institutions may have to make some
15 changes. The private sector could play a role in
16 checking some of its own practices; say, in the
17 secondary mortgage market or other such aspects.
18 Consumer education is undoubtedly an
19 important facet here because a lot of what we're
20 going to be talking about are people who are taking
21 loans that they probably wouldn't have taken if they
22 had fully understood the implications of all of the
23 transactions. And so the Fed has already started on
24 an effort to improve financial literacy, consumer
25 education, and will keep doing that, as will other
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1 agencies. So a multifaceted approach will be
2 undoubtedly necessary. This should not distract
3 attention from the Fed because there are some things
4 we can do, but just so that nobody has the
5 impression that we can do it all. We certainly
6 can't.
7 As Glenn mentioned, these hearings build on
8 others the Board held back in '97. Those hearings
9 led to a report that we made to the Congress jointly
10 with HUD suggesting a number of legislative options,
11 some of which are still on the table, none of which
12 have been enacted, but some are still on the table.
13 This year both the Treasury and HUD had
14 other hearings and they culminated in a report that
15 was just made jointly by those agencies that had a
16 number of suggestions for the Federal Reserve. This
17 Treasury-HUD report had a lot of suggestions -- only
18 a minority of these were for the Federal Reserve but
19 there were some -- and these suggestions and others
20 that people raise will be the focus of these
21 hearings.
22 So at this point I will stop and again thank
23 you all for attending and for speaking and helping
24 us with what I think is a difficult problem and one
25 on which the Federal Reserve will try to use its
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1 authority wisely. Thank you.
2 MR. LONEY: Thank you, Governor Gramlich.
3 The morning, the way we set this up, is as follows.
4 The morning will be devoted to discussions of ways
5 the Board might use its rule-writing authority under
6 TILA and HOEPA to curb predatory lending practices
7 in home equity lending while preserving access to
8 credit for borrowers with less than perfect credit.
9 I want to emphasize that what we would like
10 to talk about at both this morning and this
11 afternoon at the other hearings that we're going to
12 hold is practical, useful, sensible ways that we can
13 use the Board's authority, as Governor Gramlich
14 said, to try to address this issue, and keep it as
15 constructive and useful as we can.
16 This afternoon, however, we're also going to
17 be discussing alternatives to regulation that might
18 address predatory lending, such as consumer outreach
19 and education, and hear about studies or research on
20 subprime or equity lending that would inform the
21 Board in its deliberations.
22 What we're going to do is, we're going to
23 start each session with brief opening remarks by the
24 participants and follow that with what we hope will
25 be a round table discussion of the various issues.
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1 We've also set aside time to hear from members of
2 the public, and anyone in the audience who wishes to
3 participate in the open-mike session later in the
4 afternoon and is not already signed up outside -- I
5 don't know if it's outside this room or downstairs,
6 there's a sign-up sheet out there -- should do so.
7 This list will be used to order the appearances and
8 will help us gauge the length of time the
9 participants may be asked to observe in expressing
10 their views.
11 Let me start by just pointing out a few
12 simple, I hope, rules of procedure for this
13 morning's session. We are asking -- because of the
14 fact that time will be very tight, we're asking that
15 the panelists confine their prepared remarks to
16 about three minutes, and so therefore you should be
17 thinking about really what's the important point you
18 want to make about this matter as you prepare to
19 speak. We are going to have a timekeeper, this
20 gentleman over here, and he's going to give you the
21 high sign at about one minute to go. I would ask
22 that you be considerate of the others who are
23 speaking and observe the time constraints as best we
24 can.
25 When I call on you, I would ask that you
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1 introduce yourselves and indicate the organization
2 that you represent. We do have a very varied panel;
3 I think it'll be a very useful discussion because of
4 the fact that it is so varied.
5 What we will do is we'll start with
6 Mr. Lehman over here when we get ready and proceed
7 to his left around the room, and each panelist will
8 present prepared remarks if they wish to do so.
9 There will be a few questions maybe for
10 clarification at the end of your individual
11 statement, but a general discussion, hopefully,
12 again, in the form of some kind of a round table,
13 will follow.
14 We'll discuss the possible changes to
15 HOEPA's scope from about the end of the panelists'
16 introductory remarks to about 10:30, then we'll
17 break for about ten minutes, and then reconvene to
18 discuss possible additional restrictions or
19 prohibitions for specific acts or practices under
20 HOEPA for the rest of the morning until lunch.
21 Again, let me emphasize that we're
22 particularly interested in concrete, practical
23 suggestions about how the Board can use its
24 authority under HOEPA and we would like for the
25 period after the prepared remarks to be in the
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1 nature of a give-and-take discussion, taking into
2 account time constraints. We do want to try to get
3 to as many of the questions the Board posed in the
4 notice of these hearings as possible.
5 I would also point out that the proceedings
6 are being recorded as we speak, and the young lady
7 has asked that everybody try to accommodate her by
8 speaking one at a time. Is that good enough? Okay.
9 So with that introduction, and assuming
10 there are no questions about the procedures,
11 Mr. Lehman, if you would begin.
12 MR. LEHMAN: Thank you. I'm Phil Lehman,
13 I'm an assistant attorney general in the consumer
14 protection section of the North Carolina Department
15 of Justice. I'm here because I participated
16 extensively in the drafting and legislative advocacy
17 for North Carolina's predatory lending law.
18 As Governor Gramlich noted, North Carolina
19 was the first, and I believe is still the only state
20 to have enacted comprehensive legislation dealing
21 with predatory lending. I would like to briefly
22 describe how we got to where we did and what model
23 we tried to follow to focus on this problem.
24 The process that we followed in ending up
25 with this legislation was one of consensus and
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1 negotiation and compromise among most of the players
2 in the lending marketplace, including banks,
3 mortgage bankers, mortgage brokers, consumer
4 advocates, and government regulators. It was a
5 long, involved process but we were focusing -- what
6 we were trying to do was to focus on specific
7 problems of predatory lending and to restrict those
8 specific practices so that responsible lenders would
9 not be affected or would not be unduly burdened by
10 the law and without restricting the flow of
11 reasonable credit to the subprime marketplace in
12 North Carolina.
13 I think the end result was a careful
14 balancing act and I think we succeeded in large
15 part. Most of the provisions of the law did not
16 take effect until July 1 of this year, so it is
17 really too soon to comment on what has happened and
18 what specific effects it has.
19 When we drafted the legislation one of the
20 first models that we looked at was HOEPA, and there
21 was some suggestion that North Carolina could simply
22 enact the provisions of HOEPA as state law and then
23 add some remedies to that. But on closer analysis
24 we found that HOEPA was seriously deficient in
25 several respects and I want to show how our law
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1 differed from HOEPA. Specifically, we felt that
2 HOEPA was primarily a disclosure statute and we
3 believe that disclosures in this sector of the
4 marketplace simply do not work, that more
5 substantive provisions are necessary, that the real
6 estate closing process is already document-heavy and
7 disclosure-intensive.
8 We added specific prohibitions such as a
9 prohibition on financing fees on high-cost loans, a
10 prohibition on all balloon payments in high-cost
11 loans, and a requirement that borrowers undergo
12 credit counseling before loans are closed.
13 We also believe that the fees threshold in
14 HOEPA was too high. We arrived at the figure of
15 5 percent of points and fees versus 8 percent in
16 HOEPA. We added a separate threshold for prepayment
17 penalties, for high prepayment penalties, because in
18 North Carolina law prepayment penalties have been
19 disfavored and we believe that it can be an abusive
20 practice for borrowers.
21 Finally, we added some general protections
22 that apply to all consumer home loans, including a
23 prohibition on the financing of prepaid lump-sum
24 credit insurance, which we feel is very, very
25 important and something the Board should look at.
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1 Thank you.
2 MR. LONEY: Thank you very much,
3 Mr. Lehman.
4 I'm afraid I would butcher your name, sir,
5 so if you'll introduce yourself.
6 MR. COUDRIET: I'm Charles Coudriet. I'm
7 president of the National Home Equity Mortgage
8 Association and I'm also chairman of Saxon Mortgage,
9 which is a lender in the subprime market.
10 The modern home equity industry is a
11 relatively new phenomenon fueled by capital market
12 innovation and entrepreneurship at many levels of
13 the delivery process. Subprime home equity loans
14 were previously made by private, totally unregulated
15 lenders, some of which still operate below the
16 surface of the economy. The legitimate market has
17 provided widespread access to credit to the people
18 who need it most. We need to be mindful of the
19 strides that have been made in favor of the consumer
20 as we seek solutions to the problem. There are
21 abusive lending practices occurring on an isolated
22 basis in the U.S. today. Some of these abuse
23 borrowers, others abuse lenders through fraud and
24 misrepresentation. The home equity industry
25 addresses a broad spectrum of borrowers, including
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1 lower and higher income families. The subprime
2 sector is similar and its clients share the
3 condition that they are credit-impaired in some
4 fashion. The largest percentage of these loans are
5 refinancing versus purchase. Care must be taken not
6 to disenfranchise a greater group of borrowers who
7 only in recent years have gained access to credit.
8 These families are the ones who need credit most to
9 restructure the family financial picture and avoid
10 catastrophe. Many solutions to the issue of
11 predatory lending involve tactics that sound good
12 initially from the consumer's point of view, but
13 upon further analysis work against the true
14 interests of a cash-strapped family. Not all
15 balloon mortgages are good for every consumer;
16 however, there are cases where balloon usage
17 perfectly fits the family's predicament as the best
18 way out of trouble. Prepayment penalties sound
19 terrible until you peel back the onion and you find
20 that lenders hope they never collect them and their
21 existence helps hold down mortgage rates to the
22 consumers. If HOEPA's triggers are left as is, we
23 would be fine with including prepayment penalties in
24 the refinance calculation. Prohibitions on
25 financing closing costs don't sound good to anyone
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1 who is in need of cash. If the borrower could come
2 up with out-of-pocket closing expenses, he probably
3 wouldn't need to refinance.
4 HOEPA is good law as written. It
5 establishes today a threshold which protects
6 consumers without restricting their access to
7 credit.
8 My company very rarely buys or originates
9 HOEPA loans today because we feel the necessity of
10 an expensive legal review to avoid inadvertently
11 transgressing its stipulations. This extra caution
12 usually makes these loans uneconomic for us.
13 Lowering HOEPA's triggers would
14 significantly decrease access to credit for most
15 lenders, including our company. Changing the
16 covered points and fees would have the same effect
17 on exclusion. Let's enforce HOEPA.
18 MR. LONEY: Thank you. Ms. Crawford?
19 MS. CRAWFORD: My name is Kate Crawford and
20 I am the legislative chairperson for the North
21 Carolina Association of Mortgage Professionals. I'm
22 a past president of the association and I am a
23 working mortgage broker with First Financial
24 Services, which is headquartered in Charlotte, and
25 my branch is in Burlington.
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1 I have been in the mortgage industry for
2 over 24 years and been a mortgage broker for over
3 20. The mortgage brokerage industry has enabled
4 Americans to purchase and remain in homes. Home
5 ownership is up. We originate over 60 percent of
6 all the home mortgages. Prospective borrowers call
7 our offices all the time shopping for the rate and
8 program that suits their needs. Mortgage brokers
9 offer extremely competitive rates, creative
10 programs, and great service.
11 The main question the borrower wants to know
12 is how much is it going to cost me. Mortgage
13 brokers who specialize in conventional and
14 government lending can consistently offer the
15 consumer lower rates than they receive at other
16 lending institutions. The wholesale lending market
17 has become a viable entity for most large lending
18 institutions.
19 This system allows for brokers to act as the
20 origination, processing, and closing department for
21 their mortgage products, without incurring the
22 expensive overheads of bricks and mortar, equipment,
23 employee salaries, benefits, workmen's compensation,
24 payroll taxes, et cetera. Wholesale lenders do not
25 have to incur as much overhead so competitive rates
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1 can be passed along through the wholesale mortgage
2 channels to the broker. All this has done to
3 agency, lender, and industry guidelines supplied by
4 our lenders, GFC, FHA, and VA.
5 All these goods and services clearly meet
6 the test provided by RESPA and the HUD policy
7 statement concerning yield spread premiums. This
8 subject has been studied for years. In 1999 HUD
9 issued a lengthy statement of policy stating that
10 yield spread premiums were not illegal per se.
11 With the advent of automated underwriting
12 engines more borrowers are becoming homeowners. The
13 mortgage brokerage industry is a consumer-oriented
14 industry. We help and counsel potential borrowers.
15 There have been statements that borrowers were
16 qualified for an agency loan but were given a
17 subprime loan. Being qualified and being approved
18 do not mean the same thing. If the applicant cannot
19 meet the conditions of the approval, then the loan
20 is not given a final approval. When this is the
21 case, the borrower has to look at other options for
22 home financing.
23 The subprime market arose from the emergence
24 of a stop-gap form of lending which allowed
25 consumers who do not meet the criteria of agency or
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1 government loans to fulfill their need for home
2 ownership.
3 Mortgage brokers have filled the void left
4 by banks and savings and loans. I believe that all
5 people should be treated fairly and equally;
6 however, all credit histories cannot be treated the
7 same. The mortgage market is built on the premise
8 that the borrower has the ability to repay their
9 loan. If an individual does not pay their bills,
10 they will not qualify for certain types of loans.
11 The subprime market is a definitive substitute for
12 people who have credit problems or who do not meet
13 the underwriting guidelines set forth by the
14 agencies.
15 Subprime and predatory are not
16 interchangeable terms. All types of businesses and
17 groups have bad and unscrupulous people. There is
18 no place for this in the mortgage market. The North
19 Carolina Association of Mortgage Professionals
20 supported the consensus approach taken in the
21 drafting of the North Carolina predatory lending
22 bill and the National Association of Mortgage
23 Brokers have been proactive in bringing to the House
24 of Representative the Consumer Mortgage Protection
25 Act. Thank you.
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1 MR. LONEY: Thank you very much.
2 Mr. Maynard?
3 MR. MAYNARD: Thank you. My name is Mal
4 Maynard, I'm an attorney in a small town in
5 southeastern North Carolina and I'm here today to
6 ask the Board for help on behalf of my clients.
7 We are facing an unprecedented rate of
8 foreclosures among moderate-income borrowers in
9 southeastern North Carolina. In most cases they
10 have very little access to any remedy, and in
11 instances where they do have access to lawyers, the
12 lawyers there find that they in many cases are
13 stripped of North Carolina consumer protections by
14 AMPTA preemption or that the HOEPA protections do
15 not reach enough of these transactions.
16 I want to take a minute to share with you
17 the experience that we've been through down in
18 southeastern North Carolina. In my hometown a
19 mortgage broker originated nearly $200 million worth
20 of loans over a three-and-a-half-year period through
21 approximately 4,000 loans. These fees ranged from
22 5 to 12 percent, nearly all of them were refinances,
23 they had very high percentage rates, and a very high
24 percentage of these loans were flipped within one
25 year. While holding itself out as a mortgage
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1 broker, it had a secret exclusive deal with a
2 subprime lender to whom more than 90 percent of the
3 loans were directed at rates typically in the range
4 of 14 percent.
5 At the sale of these mortgages, the lender
6 and the mortgage broker split the premiums that were
7 earned from the sale to the secondary market. At
8 one point in time the president of this mortgage
9 brokerage corporation was earning $200,000 to
10 $300,000 per month in the premiums that were
11 garnished from the sale at the secondary market.
12 All of the capital was extracted from the mortgage
13 brokerage corporation. They filed for bankruptcy
14 protection shortly after they were sued for these
15 abuses. The only recovery in sight is against the
16 assignees. They created the market for these
17 practices and there's no other remedy for our
18 clients.
19 Only about half of these loans meet the
20 HOEPA guidelines. For those other borrowers there's
21 very little prospect of any recovery for these
22 borrowers. They are facing an economic disaster and
23 to a large extent there is no remedy.
24 Another phenomenon that we see growing daily
25 is the capacity of lenders to craft transactions
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1 that avoid applicable North Carolina laws because of
2 the AMPTA preemption. The balloon payment
3 provisions and the prepayment penalties that might
4 otherwise be prohibited by North Carolina law are
5 evaded by lenders who have learned how to qualify
6 for the AMPTA preemption. It's a very serious
7 problem in our area. We believe that there should
8 be concurrent application of these laws, not
9 preemptive rule by Washington that avoids North
10 Carolina law for these borrowers.
11 I look forward to seeing some help with
12 HOEPA with regard to the level of fees that would
13 invoke the HOEPA jurisdiction. Thank you.
14 MR. LONEY: You kept saying AMPTA
15 preemption. What is that?
16 MR. MAYNARD: The Alternative Mortgage
17 Parity Transaction Act is a piece of legislation
18 that the federal Congress passed which otherwise
19 avoids applicable state law. It primarily is
20 targeted toward mortgages that are structured with
21 balloon payments and in other creative financing
22 sorts of arrangements.
23 GOVERNOR GRAMLICH: I have a question as
24 well. I'd like to go back to Mr. Coudriet. You
25 ended by saying, let's enforce HOEPA, as if -- the
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1 implication was that it wasn't being properly
2 enforced. Is that your meaning, and if so, what do
3 you have in mind?
4 MR. COUDRIET: No, I don't think it's being
5 improperly enforced. What I'm saying is it's good
6 law as written. The triggers are in place and are
7 effective to discourage most lenders from even
8 writing a loan that comes under HOEPA. So I don't
9 think -- once you start changing that I think you're
10 going to bring about a situation where access will
11 be severely denied to people who really need the
12 money. And HOEPA itself -- any transgression of any
13 regulations, we find, is generally enforced by the
14 bar in particular jurisdictions that transgressions
15 are found.
16 GOVERNOR GRAMLICH: So when you say let's
17 enforce HOEPA, you're really saying that present law
18 is just fine?
19 MR. COUDRIET: Yes, sir.
20 MR. LONEY: Mr. Creekman?
21 MR. CREEKMAN: My name is Jim Creekman. I
22 serve as in-house counsel with First Citizens Bank,
23 a midsize bank which has operations -- which is a
24 multistate operation. Prior to that I was engaged
25 in the general practice of law as a small-town
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1 practitioner in a town in western North Carolina and
2 was principally a dirt and death lawyer. In that
3 capacity I handled literally thousands of consumer
4 residential mortgage loan transactions, so I come to
5 this table with two different perspectives.
6 I have two basic observations. First, we
7 need to start over. Second, we need to combat
8 predatory lending with precision and on a national
9 basis.
10 The history of Regulation Z, RESPA, and the
11 other regulations which govern residential lending
12 is one of layering. Over the years the regulations
13 have been revised, amended, and tweaked. Additional
14 layers of regulations have been added to address
15 each new concern. This is the approach that we're
16 being asked to endorse today. How do we add onto
17 the existing regulatory structure to curb predatory
18 lending practices. I urge us to resist this myopic
19 approach. The rules which govern residential
20 lending are already second in complexity only to the
21 federal tax code. There aren't four people in this
22 room today who truly understand the existing
23 regulations. They're all lawyers and they
24 disagree.
25 The purpose of the disclosures is to permit
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1 a consumer to make an informed decision.
2 Disclosures are now so numerous and so complex that
3 they no longer fulfill their purpose. Sophisticated
4 borrowers don't understand or rely on them. To an
5 unsophisticated borrower the disclosures are
6 meaningless, complex, and confusing. Lenders are
7 lost in the morass of regulations and have pleaded
8 for simplicity, objectivity, and safe harbors.
9 Adding another layer to the regulatory
10 structure to address predatory lending practices
11 will only further complicate an already intolerable
12 situation.
13 It's time to step back, take a new look at
14 residential lending, and start over; to develop
15 meaningful disclosure requirements for those few key
16 elements which will permit the average consumer to
17 make an informed decision, to ensure that the
18 regulatory burden is both comprehensive and
19 comprehensible. And it must be objective. Lenders
20 need safe harbors. In other words, we need to
21 reevaluate and simplify. And we can do this, still
22 addressing the issue of predatory lending.
23 My second observation deals specifically
24 with predatory lending. If a problem is pervasive,
25 it needs to be treated as a pervasive problem. If
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1 the problem is limited to a few key players, the
2 remedies need to be precisely targeted to those few
3 bad apples. We need to attack the problem with a
4 rifle, not with a shotgun. Consumers come in all
5 shapes and sizes; some are young, some are old, some
6 are credit worthy, some are less credit worthy.
7 Sometimes the economy is good, sometimes it's
8 chaotic. Whatever is done to combat predatory
9 lending should not limit the ability of a
10 responsible, market-driven lender to deal flexibly
11 with a wide range of consumers in different economic
12 circumstances.
13 The rules need to be on a national basis.
14 At this point we can't tell what rules apply. From
15 state to state multistate lenders are in a morass.
16 There needs to be a national standard which preempts
17 virtually all state laws on the subject.
18 MR. LONEY: Thank you, Mr. Creekman.
19 Mr. Eakes?
20 MR. EAKES: Good morning. My name is
21 Martin Eakes. I come to you as the CEO of
22 Self-Help, which is the largest community
23 development financial lending organization in the
24 country. With $550 million in assets, that makes us
25 about the size of one of Jim Creekman's branches, to
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1 put it in perspective.
2 I will also tell you that Self-Help is one
3 of the oldest and longest subprime mortgage lenders
4 in the nation. For the last 17 years we have been
5 making loans to credit-impaired individuals,
6 primarily minority families, and have provided about
7 $700 million of loans to 11,000 families. During
8 that time we have had virtually no defaults and no
9 foreclosures. So subprime lending can be done
10 responsibly, but often it is not.
11 I also was the spokesperson for the
12 Coalition of Responsible Lending in North Carolina
13 which helped, along with a lot of panelists here,
14 put together the bill in North Carolina.
15 The first point I want to make is to say
16 that predatory lending or loans that have abusive
17 characteristics are not anecdotal as the Federal
18 Reserve notice and your opening comments mentioned.
19 We've documented that in North Carolina there are at
20 least 10,000 borrowers per year who have
21 single-premium credit insurance financed into their
22 loan. Most people agree that that is -- I know Bill
23 doesn't but most people agree that that is predatory
24 per se to have credit insurance financed into the
25 loan. So 10,000 per year at a minimum in North
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1 Carolina.
2 Regarding HOEPA, there are really three
3 different components: There's what Congress passed,
4 there is what the Federal Reserve has the authority
5 to issue as regulation, and then there's the
6 enforcement, primarily by courts and by borrowers.
7 I believe there is no problem with either the first
8 or the third, that Congress passed sufficient
9 authority and that borrowers can enforce, that the
10 real problem has been that the Federal Reserve has
11 not acted to flesh out the regulations under HOEPA.
12 I cite the authority under HOEPA that says
13 the Board, by regulation or order, shall prohibit
14 acts or practices in connection with mortgage loans
15 the Board finds to be unfair, deceptive, or designed
16 to evade provisions of this section. It's not
17 discretionary, it's mandatory; it says you shall
18 come up with regulations for acts you find to be
19 unfair.
20 The fact that the Federal Reserve in 1997-98
21 recommended to Congress that we prohibit the
22 financing of credit insurance and recognized the
23 potential abuse there seems to me to put the duty on
24 the Federal Reserve to actually put in regulation
25 form the prohibition that Congress clearly granted
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1 authority for.
2 There are five areas we'd like for you to
3 look at. Credit insurance should be prohibited for
4 all home loans across the board in single-premium
5 format. Number two, prepayment penalties should be
6 prohibited, or at a very minimum, included in the
7 definition of points and fees for subprime loans.
8 Number three, yield spread premiums paid to brokers
9 should be included in the points and fees definition
10 under HOEPA. Number four, there should be a
11 prohibition against flipping of loans for all home
12 loans under the general discretionary authority that
13 I just mentioned. And number five, there should be
14 a provision that says the first purchaser of a loan
15 is held accountable for any abuses by the broker
16 that originated that loan. We agree with Kate that
17 most brokers are extremely honorable, but for the
18 ones that create loans that are not, the very first
19 lender who purchases those loans should be held
20 accountable for whatever abuses so that there can be
21 self-policing take place in the marketplace. Thank
22 you very much.
23 MR. LONEY: Thank you very much,
24 Mr. Eakes. Ms. Eggers?
25 MS. EGGERS: My name is Helen Eggers and I
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1 am the president of EquiCredit Corporation, which is
2 a subsidiary of Bank of America. EquiCredit is the
3 largest bank-owned subprime lender in the
4 marketplace today.
5 As a context for the discussion today, we
6 want to make one point as a starting point for our
7 thinking. And that is, it is critical to recognize
8 that responsible subprime lenders cannot and should
9 not be confused with predatory lending practices.
10 There are abuses in the home-equity lending
11 industry. We are committed to working with all of
12 you to find solutions that actually benefit the
13 consumer and maintain the availability of credit in
14 the marketplace.
15 We urge the Board to focus on three things
16 in particular: Enforcement of existing consumer
17 protection laws and regulations; secondly, the
18 simplification of disclosures, and finally, consumer
19 education and awareness.
20 A challenge that we share as we face these
21 priorities is that we are working in an environment
22 that is confusing and hampered with rash conclusions
23 and multiple labels. For example, predatory
24 lending, high-cost loans, subprime lending, and
25 threshold loans are all use synonymously when they
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1 are very different things. This kind of language
2 has led to an unfair indictment of the entire
3 subprime home-equity lending industry. Predatory
4 lending involving unfair or deceptive practices or
5 fraud of any kind is engaged in by a minority of
6 unscrupulous lenders and it should be stopped. But
7 why is subprime lending necessary in the marketplace
8 today? Until a decade ago consumers with credit
9 problems or those who wanted to finance
10 nonconventional properties faced little hope of
11 finding mortgage financing. Now responsible
12 subprime home-equity lending meets the needs of this
13 important consumer market. It legitimately serves
14 borrowers who otherwise would be unable to find
15 credit. This market, by the way, is estimated to be
16 about 20 percent of the mortgage market today.
17 EquiCredit is primarily a wholesale risk-base
18 subprime lender that sources for mortgage brokers
19 and correspondents. We are subject to the same
20 lending regulations and use substantially the same
21 documentation as the conforming industry.
22 Bank of America is the industry leader in
23 fair and responsible lending and we are committed to
24 serving the subprime lending market in a fair and
25 ethical manner. Our subsidiaries and Bank of
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1 America do not condone or engage in unfair or
2 deceptive practices. As a subsidiary of Bank of
3 America, EquiCredit has established standards of
4 operation to ensure that we maintain Bank of
5 America's highest standards of fair and equitable
6 lending. EquiCredit loans are originated to the
7 same high standards of agency loans with appraisals,
8 title insurance, income verification, and
9 debt-to-income ratio consideration. The loan
10 documents and disclosures provided to borrowers are
11 actually very similar to those used by Fannie Mae
12 and Freddie Mac.
13 This brings us to our first area of focus.
14 We strongly believe that existing laws and
15 regulations, if consistently enforced across the
16 entire industry, are sufficient to combat abusive
17 and deceptive lending practices. Increased
18 enforcement of existing laws and regulations is
19 needed for those in the industry who have not been
20 as highly regulated or supervised as banks. If
21 additional legislation is enacted we stand at risk
22 of containing credit availability in the market. As
23 an example, EquiCredit volumes are likely to
24 decrease by almost 30 percent due to the North
25 Carolina legislation. That translates to about
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1 $9 million in credit availability in a six-month
2 period of time, or think about 500 families that
3 need to find a new source of financing for their
4 credit needs. And in Chicago, where the city is
5 looking at its own ordinance, our preliminary
6 figures indicate that our business could be impacted
7 by as much as 60 percent. That's $125 million in
8 financing over a 12-month period of time. That's
9 1500 families that have to find a new source of
10 financing.
11 The demand for credit will not disappear.
12 The question is, without federally regulated
13 providers who will meet the consumer's need; who
14 will be there for them? We urge the Board to
15 spearhead an effort working with the Federal Trade
16 Commission and state attorneys general to increase
17 the enforcement of existing laws and regulations,
18 both state and federal, to ensure that those that
19 don't comply with the law are put out of business.
20 We agree --
21 MR. LONEY: Could I ask you to wrap up.
22 MS. EGGERS: Yes. We agree with the need to
23 simplify disclosures. We'd just like to reinforce
24 our commitment and participation to consumer
25 education. Thank you.
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1 MR. LONEY: Thank you. Mr. Bost?
2 MR. BOST: My name is Bill Bost and I'm a
3 member of the Ragsdale William law firm in Raleigh,
4 North Carolina, and I serve as general counsel to
5 the North Carolina Association of Mortgage
6 Professionals. In that role I participated as a
7 member of the working group of industry participants
8 who drafted the North Carolina Predatory Lending
9 Act. In my legal practice I also represent mortgage
10 brokers, mortgage bankers, and other financial
11 services providers.
12 As an initial matter, North Carolina
13 mortgage brokers and lenders agree with regulators
14 and consumer advocates that lending practices that
15 use deception to take advantage of a customer's
16 ignorance and circumstances are intolerable. The
17 North Carolina mortgage industry applauds the
18 efforts of the Board, legislators, and regulatory
19 agencies to eliminate predatory lending.
20 In their recent report, HUD and the
21 Department of Treasury identified four practices
22 they consider predatory: Loan flipping, excessive
23 fees, lending without regard to a borrower's ability
24 to repay, and fraud. North Carolina's law makers,
25 with assistance from an array of interested parties,
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1 addressed these issues with the passage in 1999 of
2 the North Carolina Predatory Lending Act, which,
3 among other things, made loan flipping unlawful,
4 placed significant restrictions on transactions in
5 which fees and interest rates exceed reasonable
6 levels, prohibited the financing of single-premium
7 credit insurance, and required lenders on certain
8 loans to examine borrowers' abilities to repay
9 them. These measures were accompanied by strict
10 penalties for violations.
11 While the provisions of the Predatory
12 Lending Act have been in effect for only a short
13 time, by all accounts the law has had the effect of
14 limiting the frequency of predatory practices and
15 has driven from the market lenders and brokers
16 notorious for them.
17 The Predatory Lending Act, however, also has
18 some undesirable consequences that should be
19 considered as potential rule changes are discussed.
20 Certain common loan products such as FHA loans and
21 loans involving mortgage insurance are difficult to
22 make profitably under the new laws and nonpredatory
23 lenders and brokers must either forego them or risk
24 the drastic remedies of the Predatory Lending Act.
25 Other nonpredatory lenders have decided that the
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1 risks of litigation under North Carolina's ambiguous
2 law are too great and have taken their capital to
3 more friendly states. Those that remain spend
4 heavily on compliance measures and have become
5 extremely cautious in their underwriting.
6 We have yet to determine the effect of the
7 new laws on the availability of credit to low- and
8 moderate-income borrowers.
9 HUD reports that home ownership is at an
10 all-time high in American history. The rapid rise
11 in the rate of home ownership can be attributed to
12 the change in the number and types of entities that
13 now deliver a wide variety of mortgage products in
14 an increasingly complex regulatory and economic
15 environment. Experts estimate that subprime loans
16 currently constitute approximately 15 percent of the
17 home mortgage market, and everyone agrees that not
18 all subprime lending is predatory.
19 Current regulations under Section 32 of
20 Regulation Z provide adequate protection in any of
21 these transactions. Stringent additional
22 regulations that address anecdotal ills in the
23 relatively small number of remaining loan
24 transactions can unnecessarily and adversely affect
25 a broad range of important mortgage activities and
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1 can stifle competition. Accordingly, the North
2 Carolina mortgage industry encourages the Board to
3 focus its efforts on identifying and limiting only
4 truly unfair practices occurring in the mortgage
5 industry, with an emphasis on educating customers as
6 to the availability of mortgage products, the
7 effects of credit history on their ability to
8 borrow, and the terms and consequences of the loan
9 transactions into which they enter. We strongly
10 discourage any changes to HOEPA's rates or fee
11 thresholds which could hinder competition and choice
12 in a very effective home equity market.
13 We look forward to participating in this
14 process and thank you for having us.
15 MR. LONEY: Thank you, Mr. Bost.
16 Mr. Lampe?
17 MR. LAMPE: My name is Don Lampe and I'm a
18 partner at the Smith, Helms, Mulliss & Moore law
19 firm here in North Carolina. I provided a technical
20 commentary to the predatory lending legislative
21 working group with our new law, and I also served as
22 a public member of the North Carolina general
23 assembly's credit insurance and mortgage credit
24 committee this past year where we looked at
25 reforming and amending certain aspects of North
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1 Carolina's new law.
2 I urge the Fed to move slowly and cautiously
3 into the expansion of HOEPA regulation. There are
4 several factors which show that caution and moving
5 slowly is warranted. No one really knows at this
6 time the effect of expanded HOEPA regulations on the
7 availability of credit. North Carolina now is in
8 effect a living laboratory for the Fed's
9 consideration, as well as New York with its new
10 Part 41 regulations. And of course there are other
11 states and municipalities that are considering
12 HOEPA-like high-cost home loan laws, and of course
13 data from these places will not be available at
14 least until months from now. In fact, in North
15 Carolina, the North Carolina general assembly
16 recognized the importance of measuring the effect of
17 our high-cost home loan statute on the availability
18 of credit by providing for a legislative study
19 committee to look into the issue and to report to
20 the general assembly's future sessions.
21 A related issue is the effect of expanded
22 high-cost home loan laws on the securitization of
23 home loans. It is well known that much of the
24 capital flowing into residential mortgage lending is
25 provided through securitization or secondary market
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1 transactions. Subjective legal standards such as
2 those contained in North Carolina's high-cost home
3 loan statute increase the due diligence burden and
4 magnify legal risk in securitization transactions,
5 again with the potential to adversely affect the
6 availability of loan funds to otherwise deserving
7 mortgage borrowers. An example of a troublesome
8 subjective standard would be, for example, to change
9 HOEPA's pattern and practice test for unaffordable
10 loans to North Carolina's case-by-case
11 determination.
12 Finally, caution is warranted because there
13 can be unintended consequences of even the best
14 intentioned consumer protection regulation which I
15 think everyone at this table would advocate. If
16 there is a rush to regulate in this area we may have
17 similar experiences nationally to the extent we use
18 the North Carolina law as a template. Examples of
19 unintended consequences -- Mr. Bost mentioned
20 broker-originated VA and FHA loans no longer being
21 available in North Carolina. Even though these
22 loans have been specifically designed to target
23 low-income borrowers, those loans probably won't be
24 made in North Carolina because of the broad and
25 ambiguous points and fees test in our law. Also,
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1 payments of closing related fees to affiliates are
2 being discouraged even in a time when the free
3 market and other federal initiatives such as
4 Gramm-Leach-Bliley point the other way.
5 And finally, the compliance burden and risk
6 of noncompliance have become so high in North
7 Carolina, a consequence of lenders leaving our
8 market, which final information on that of course is
9 not known.
10 I thank the Board for permitting me to speak
11 here today and look forward to participating in the
12 process.
13 MR. LONEY: Thank you, Mr. Lampe.
14 Ms. Marks?
15 MS. MARKS: Everybody knows who I am, I
16 hope. Well, I want to thank you for the opportunity
17 to express the views of my company; thank you so
18 much. Fannie Mae has long been concerned about this
19 problem of predatory lending and we commend the
20 Federal Reserve for calling this hearing and
21 gathering information.
22 As you mentioned my name is Fe Morales
23 Marks, and I'm a vice president in Fannie Mae and I
24 run a policy shop. I've submitted a full set of my
25 testimony which is available in the back, but I'd
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1 like to highlight a few things for you this
2 morning.
3 Today I'd like to reaffirm Fannie Mae's
4 determination to be a leader in the housing finance
5 industry and in efforts to stem predatory lending,
6 predatory practices which rob borrowers of
7 opportunity and hard-earned equity. We have
8 approached the issue of predatory lending from a
9 perspective of the consumer but cognizant of the
10 role that we play in the marketplace, being that
11 we're in the secondary market. Our approach aims to
12 bring value to consumers in eight ways.
13 First, we want to expand the application of
14 conventional conforming practices and standards to
15 more borrowers. Second, we seek to advance a
16 mortgage consumer's rights agenda. Third, we are
17 committed to provide innovation and flexibility
18 through new products and services. Fourth, we will
19 use technology to expand markets and reduce costs.
20 Fifth, we will continue to work very hard to keep
21 homeowners in their homes. Sixth, we will continue
22 support for our nonprofit partners in the home
23 counseling industry and in turn rely on their
24 efforts to increase homebuyer readiness. Seventh,
25 we will continue our strong support for the Fannie
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1 Mae Foundation, which is a national leader in
2 consumer outreach for home ownership. Eighth, we
3 are developing and advancing responsible policies
4 for serving consumers with blemished credit.
5 Let me highlight four things for you today.
6 First, we recently announced the DU 5.0, which is
7 the new version of our Desktop Underwriter which is
8 our automated underwriting system. Through this new
9 version, lenders will be able to receive much more
10 information, customize messages around a consumer's
11 profile, which will help inform a consumer as to why
12 they're having difficulty accessing credit and will
13 in turn help them to improve their own credit
14 standing.
15 Secondly, we also recently announced our
16 True Cost Calculator, which is a calculator that is
17 available on our Web site and we're also making it
18 available to lenders so they can use it on their own
19 Web sites. This is a tool that will allow consumers
20 to compare the cost of products that they have under
21 consideration and will also help them avoid
22 predators.
23 Third, we've developed a new product, the
24 Timely Payment Rewards mortgage. This is an
25 alternative to products that are now available to
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1 consumers in the subprime market. It offers
2 consumers an alternative which generally will be
3 about two percentage points lower than the options
4 they now have available. It allows for an automatic
5 one percentage point reduction in rate automatically
6 after -- oops, time is up; let me not tell you the
7 details of my Timely Payment Rewards mortgage.
8 Let me go on and tell you that we do have a
9 lender letter that lays out our policies around the
10 business that we will buy. We speak to issues such
11 as steering, excessive fees, and prepayment
12 penalties, which are issues that are under
13 consideration here.
14 I will close by saying that we believe that
15 competition and good money drives out bad money and
16 we're prepared to help bring good money to drive out
17 the bad money and the predatory behavior.
18 MR. LONEY: Nicely wrapped up.
19 Mr. Burfeind?
20 MR. BURFEIND: Good morning and thank you
21 very much. I'm here on behalf of credit insurers.
22 The credit insurance issue is really just one small
23 aspect of the overall issue or issues that are
24 subject to your inquiry today, but I'm probably the
25 only one here best prepared to respond to those
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1 issues. I think the critical policy decision that's
2 already been laid out in one way or another for the
3 Board is whether or not to prohibit the financed
4 single-premium credit insurance in connection with
5 home loans.
6 I would like to first emphasize that credit
7 insurance is not a lending practice. Credit
8 insurance is a product like any other product, and
9 when financed out of loan proceeds or out of home
10 equity, it is financed no differently than any other
11 product. Consider one of the main products, I
12 guess, or forces for which home equity is borrowed
13 against: the consolidation of credit card loans.
14 Think of the things that you and I charge on credit
15 cards -- restaurant meals, oil changes, blue jeans
16 at the store -- all financed out of home equity.
17 Would we prohibit the consumer from financing those
18 products by utilizing their home equity?
19 We the credit insurance companies believe
20 that the availability of the financed single-premium
21 should be retained. Proponents for prohibition
22 point to some particularly egregious examples where
23 borrowers were victimized by a broker or lender that
24 included credit insurance premium financing in the
25 loan package. However, a conscientious examination
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1 compels a distinction between some fraudulent or
2 abusive lending examples and the whole universe of
3 good credit insurance product servicing.
4 Credit insurance is a valuable option that
5 protects home equity from the predators of time and
6 nature, predators like death and disability and
7 accident. The availability of premium financing
8 makes the product more affordable to many more
9 consumers. Mr. Eakes mentions 10,000 borrowers with
10 financed credit insurance premium on their loans.
11 Absent this financed credit insurance premium, many,
12 maybe all, but at least many of these borrowers
13 would have no or substantially no insurance
14 protecting that home equity.
15 Credit insurance critics allege that the
16 borrowers are coerced or otherwise tricked into
17 purchasing the coverage and that the coverage is of
18 little value. Let me just say in the short time
19 allotted here that there have been numerous studies
20 done with respect to credit insurance consumer
21 buying habits. Two of them were done by the Federal
22 Reserve Board, and I do have the findings available
23 to recite into the record at a later time. The most
24 recent one done by the Credit Research Center, and I
25 would just highlight the general conclusion, that
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1 consumer loans, including home equity, that the
2 purchase patterns for credit insurance are readily
3 explainable without reliance on seller coercion as a
4 factor.
5 There's also the allegation of low value.
6 Credit insurance critics embrace a 60 percent loss
7 ratio standard as the measure of value. Well,
8 credit life and disability insurance written in
9 connection with real estate secured loans do meet or
10 exceed that standard.
11 In summation, I would just say that the
12 financed single-premium is a valuable insurance
13 product to many consumers and its availability is to
14 be preserved.
15 MR. LONEY: Thank you. Mr. Stock?
16 MR. STOCK: Governor Gramlich, Mr. Loney,
17 distinguished members of the panel, my name is Paul
18 Stock. I'm executive vice president of the North
19 Carolina Bankers Association. Batting clean up, I
20 wish I had some precise, final, pointed comments
21 that would bring us all to a sharp focus before our
22 panel discussion.
23 MR. LONEY: Me too.
24 MR. STOCK: In lieu thereof, I would like
25 to submit a couple of observations from one of the
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1 participants in our drafting experience here in
2 North Carolina.
3 First, I'd like to say that from the
4 perspective of the banking industry there's been a
5 lot of discussion nationally about what was the
6 banking industry thinking about in North Carolina.
7 We discussed at a policy level with our leadership
8 extensively both the nature of the problem that had
9 been identified and the potential risks and rewards
10 of moving forcefully ahead into this arena. I think
11 that the thousands of person hours that went into
12 the drafting process are testimony to the complexity
13 of the problem with which you deal, which is only
14 magnified by the fact that you're dealing with a
15 tapestry of laws in the various states and the
16 preemptions that have already been mentioned of
17 federal law, and dealing within some pretty
18 meaningful restraints as to what you can do under
19 HOEPA.
20 I think that much like the problem with
21 defining obscenity, a lot of people think they know
22 a predatory loan when they see one, and they
23 identify certain characteristics. Yet these are all
24 very small puzzle pieces, and when put together
25 wrong those puzzle pieces, I think, can lead to a
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1 loan that maybe everybody in this room would say is
2 predatory. When put together in a different fashion
3 for a borrower of different circumstances, you may
4 have a loan that's creative and innovative and is
5 helping a family in a time of real need.
6 In my first 48 years of life I never heard
7 the word "anecdotal" but I've heard it a bunch for
8 the last two years. And I think the time has come,
9 given that we've gotten a law in North Carolina and
10 a regulation in New York, for there to be some
11 scientific analysis and see which of those puzzle
12 pieces at least most often occur in predatory loans
13 and to see if the Board, with its authority under
14 HOEPA, can address those particular pieces.
15 I think that we don't know what we've
16 wrought here yet. I think that we have certainly
17 dealt with some of the most common problems of
18 predatory lending as it's existed in the past. But
19 one thing we've learned is predatory lenders are
20 most creative, and if all we've accomplished in
21 doing this is forcing them to shift their modus
22 operandi and to take a different approach, maybe
23 unsecured loans that are reduced to judgments
24 against homeowners and still homeowners are going to
25 be losing their homes, then we've accomplished
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1 little despite the best intentions and a great deal
2 of effort. So I would encourage the Board as part
3 of this process of analyzing what steps can be taken
4 under HOEPA to analyze what's been done in the
5 jurisdictions that have acted and as scientifically
6 as possible analyze what those effects have been.
7 Thank you.
8 MR. LONEY: Thank you, Mr. Stock. That
9 concludes the prepared remarks, but I'd like to
10 emphasize to the panelists, first of all, our thanks
11 for going to the trouble to do this, and also that
12 if you want to embellish those remarks or give us
13 the complete prepared text, some already have, we'll
14 be glad to have them.
15 What I'd like to do now is start talking
16 about some of the specific issues that the Board
17 raised in the notice of these meetings, and the
18 first issue I wanted to raise with you -- and again,
19 I'd like to emphasize that people can chime in, ask
20 questions, fill in, whatever, as we talk -- but
21 HOEPA covers mortgage loans that meet one of the
22 act's two high-cost triggers. A loan is covered if
23 the APR exceeds the rate for Treasury securities
24 with a comparable maturity by more than ten
25 percentage points, the points and fees paid by the
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1 consumer exceed the greater of 8 percent of the loan
2 amount, or $400, or $451 or something this year.
3 The Board has the authority to expand
4 HOEPA's coverage under both triggers and I'd like to
5 discuss the possible expansion of the triggers
6 first, if we could, then discuss the possible
7 effects of expanded triggers on credit
8 availability.
9 Starting with the APR trigger, HOEPA
10 authorizes the Board to adjust the HOEPA trigger by
11 two percentage points from the current standard of
12 ten percentage points above the Treasury rate,
13 Treasury securities with comparable maturities.
14 Several of you, as you've mentioned, were active in
15 crafting the North Carolina statute which keys off
16 HOEPA's requirements, and under the North Carolina
17 law the points and fees trigger is lower than HOEPA
18 but the rate trigger is the same as HOEPA's. We
19 were wondering what the thinking was in keeping the
20 APR trigger at ten percentage points and whether
21 there was debate about that and was data offered in
22 support of the various positions.
23 One thing that is obvious to us is that the
24 Board must wrestle with the issue of, if it were to
25 adjust the rate trigger, what gives the Board the
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1 basis to peg it to a particular percentage point.
2 The Congress narrowed the range of possibilities to
3 two percentage points, but the question is why would
4 eight be the right number or why would nine or nine
5 and a half percentage points. So if we can start --
6 oh, and one issue that Mr. Stock mentioned that is
7 very relevant I think to this discussion is, does
8 anybody have any data? I think I was almost 48
9 before I heard the word "anecdotal", or knew what it
10 meant anyway, but one of the issues we face is
11 whether anybody can come up with data.
12 We've been looking and I suspect you have
13 too, so I'd like to hear about anything you have to
14 say about the availability of data, especially on
15 how many loans would be covered if we dropped the
16 rate to eight or nine or whatever the number may be;
17 how do we know what the impact would be of dropping
18 that rate on the number of covered loans.
19 I'd like to offer that as a suggested topic
20 for discussion for the next little while. Anybody
21 want to say something? Mr. Lehman, you look ready.
22 MR. LEHMAN: I'm sure everybody else is
23 too.
24 MR. BLANTON: Can I expand the question a
25 little bit? In effect changing the trigger, how
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1 would that change the availability of credit? I
2 know Ms. Eggers' remarks about the fact that it
3 would reduce the ability of her company to make --
4 if we went to eight how would that reduce your
5 ability to make credit available?
6 MR. LONEY: Mr. Lehman?
7 MR. LEHMAN: I'd just like to address the
8 question about why we ended up with what we did, why
9 the points and fees standard was lowered from what
10 HOEPA has and the APR was not.
11 We discussed these issues at some length and
12 it was I think our general conclusion that points
13 and fees, high points and fees, are more abusive by
14 far than high interest rates, the reason being is
15 that somebody with a high interest rate loan can
16 refinance out of the loan if his position improves,
17 if his credit position improves.
18 Fees, high fees, are earned when the loan is
19 closed. The money is gone, the equity in the
20 person's house is lost to that extent. We certainly
21 had evidence of lots of high-fee loans where the
22 loans had not appeared to be -- the fees did not
23 appear to be justified or fully earned, and I think
24 there was consensus that eight points was more than
25 enough and that five points provided enough room for
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1 reasonable origination costs and reasonable
2 compensation to mortgage brokers.
3 But we definitely focused on the fee
4 threshold more than the APR threshold because we
5 thought that's where the problems were.
6 MR. COUDRIET: I could address availability
7 impact. We at Saxon consider ourselves one of the
8 most highly ethical lenders in the subprime
9 business. We had to exit the state of North
10 Carolina for our refinance products because we were
11 concerned about the suitability standards and dear
12 friends at the bar being able to help us interpret
13 those. So to the extent that we were active, and we
14 are active, in our neighboring state in the
15 refinance business, we had to withdraw.
16 MS. EGGERS: I would add to the
17 availability concerns to address the question asked
18 earlier. Bank of America currently does not
19 participate in the Section 32 loan market for
20 several reasons: The additional liability issues,
21 the additional cost of supporting those loan
22 programs, and importantly the reputational risk
23 because of the unfortunate confusion of the
24 assumption that a high-cost loan is a predatory
25 loan, so we don't participate in that market. We
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1 would need to make a business decision about whether
2 we could participate in the Section 32 market if
3 those triggers were changed.
4 We've also looked at the numbers to get some
5 sense of impact to the marketplace, and when we
6 looked at our production for the first six months of
7 the year and we assumed that the APR trigger drops
8 from 10 to 8 percent, we've estimated an approximate
9 6.2 percent volume impact. In other words, if we
10 maintain our position of not participating in
11 Section 32 loans, that would reduce Bank of
12 America/EquiCredit's production by 6.2 percent.
13 Extrapolate that out, that's half a billion dollars
14 of mortgage availability in a year.
15 I think our key concern, and I think the
16 Board has to wrestle with this in some way, is that
17 the credit demand doesn't go away. So if your
18 supervised, federally regulated lenders are not
19 going to be the ones providing the credit, then who
20 will.
21 MR. LONEY: I just got a note that people
22 can't hear. Is that true, you can't hear where --
23 in the back? I'd ask the panel -- I'm not sure what
24 I can do about it technically myself but if anybody
25 can help me out back in the wall somewhere, but I
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1 ask the panelists to make sure they're speaking
2 clearly into the mike. Thank you.
3 MS. CRAWFORD: I have found that we are
4 losing lenders in North Carolina on a weekly basis.
5 Lenders that have been in our market for years are
6 exiting because they don't understand the law and
7 they're afraid of getting sued. In my family, my
8 husband is a compliance officer and they deal in 23
9 states, and he said this is the most complex of the
10 laws that he deals with.
11 I would just like to ditto what everybody
12 has said, that we need to go slow, we need to think
13 about what we're doing and maybe look at what is
14 going to happen in North Carolina instead of just
15 jumping on this bandwagon. Predatory lending is a
16 problem, it's a huge problem, but I think that
17 before we start denying credit to people and the
18 credit availability is diminished, we need to think
19 about them too. Because North Carolina is going
20 to -- the borrowers are going to have a problem
21 getting loans in North Carolina. I've already had
22 brokers say I'm not doing loans under $50,000, and
23 that excludes a lot of people in North Carolina from
24 getting houses or keeping their houses.
25 MR. LONEY: This law just went in effect
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1 what, a month ago?
2 MS. CRAWFORD: It's been in effect since --
3 part of it's been in effect since last October,
4 really.
5 GOVERNOR GRAMLICH: I wonder if I could ask
6 if those who are pulling out of North Carolina could
7 be a little more specific about what it is that is
8 forcing you to do that. Because we've already heard
9 that North Carolina didn't change the rate trigger,
10 it only changed the points trigger, and there were a
11 few -- Mr. Lehman mentioned a few things that were
12 prohibited. But is it those prohibitions that are
13 bothering you or is it the fact that the effect of
14 HOEPA's net is a little wider or is it something
15 else? Exactly what is it that is the problem?
16 MS. CRAWFORD: I think one of the problems
17 that we're hearing is, what is a net tangible
18 benefit. And that is, we have to prove net tangible
19 benefit and there's no definition of net tangible
20 benefit and the lenders are scared to death to make
21 a loan because of those three words.
22 MR. LONEY: Net tangible benefit to the
23 refinancing?
24 MS. CRAWFORD: To the borrower for a
25 refinance, yes.
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1 MR. LAMPE: The lenders that I have been
2 representing that have been pulling out of North
3 Carolina have explained to me that -- there's two
4 related reasons that I'm hearing. One is that the
5 high-cost home loan statute, coupled with the other
6 consumer protections in the predatory lending bill,
7 which includes the anti-flipping provision, are
8 highly subjective, and I cannot give them -- I
9 cannot design a compliance program for them that
10 they can follow objectively and know that if they
11 followed it they've complied with the law. And that
12 is -- I don't think that would have been a big
13 problem in North Carolina, but for the first time in
14 North Carolina we have unfair and deceptive trade
15 practice with treble damages and attorneys fee
16 shifting built into the new law, so the risk of
17 legal noncompliance has become so much higher in
18 North Carolina, because we didn't have that; we
19 didn't have unfair and deceptive trade practice,
20 treble damage and attorneys fees if a lender went
21 wrong in some way.
22 That's what I'm seeing out in the field. I
23 guess I must say that my experience is anecdotal and
24 I haven't done a scientific survey. I've yet to do
25 a top-to-bottom compliance program for a lender that
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1 wants to make high-cost home loans in North
2 Carolina, and I've been advising dozens of lenders
3 how to stay out of the net of the high-cost home
4 loan statute, which addresses the availability of
5 credit issue in some way.
6 MR. LONEY: What I'm hearing is that it's
7 not the rate trigger or the points and fee trigger,
8 it's these other elements of the North Carolina
9 law. The question that we posed was what about
10 changing the rates and fees. People have argued we
11 ought to change it to eight, the APR trigger. What
12 about that?
13 MR. CREEKMAN: I don't think your
14 understanding is accurate. I think that the rate
15 trigger is not the big issue, I agree with you
16 there. And that was not -- although that was an
17 initial issue that was debated in the ad hoc
18 drafting group, it was not one of the great sticking
19 points in the discussions.
20 I think the two principal problems for
21 lenders, and these include prime lenders as well as
22 subprime lenders, is, number one, the calculation of
23 the points and fees, particularly in the environment
24 that we now face where lenders have been given
25 greater authority under Gramm-Leach-Bliley to engage
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1 in insurance activities. So the issue is, what
2 comes into both the numerator and the denominator in
3 the calculation of the five percentage points. And
4 that is an extremely complex calculation and has to
5 be done on a loan-by-loan basis, and quite honestly,
6 there aren't a whole lot of us -- in fact, we have
7 not figured out yet how to systemize it, and if you
8 can't systemize it you can't engage in bulk lending,
9 as a practical matter.
10 MR. LONEY: That is one of the things
11 that's causing these lenders to leave North
12 Carolina?
13 MR. CREEKMAN: I can't tell you why they're
14 leaving because we're still here and we're staying.
15 I can tell you that that is the experience that
16 lenders are having in trying to deal with the new
17 North Carolina statute. The other is the very
18 nebulous nature of the flipping provision, and both
19 of those are very troublesome.
20 I think Don Lampe's comments as to his
21 discussions with lenders as to exactly why they are
22 leaving is probably the best indication we have as
23 to true reasons.
24 MR. STOCK: I might note that on the idea
25 of changing the triggers, if you change the HOEPA
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1 triggers it requires disclosure on a greater number
2 of loans. And I think -- and Phil and Martin will
3 certainly correct me if I'm wrong, they have been
4 for a long time -- but I think they would say that
5 the design of the consequences for tripping the
6 triggers in North Carolina was intended to be
7 sufficiently draconian that no one would make a
8 high-cost home loan in this state. That's very
9 different from the HOEPA approach. Martin is
10 shaking his head; I think I got a nod out of Phil.
11 But at the very least there are substantial
12 consequences beyond disclosure if you trip the
13 triggers in North Carolina.
14 And I know throughout the discussions --
15 because I would say that our initial perspective was
16 to try to better tailor disclosures to the subprime
17 market when we went into these negotiations and we
18 were told over and over and over again, I think Jim
19 Creekman made the point initially, that another
20 layer of disclosures on top of the huge stack that
21 are already overwhelming to the borrower was not
22 going to solve this problem. So if the result of
23 changing the triggers is just providing more
24 meaningless disclosures to a greater number of
25 people, I'm not sure how it's going to effect the
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1 problem.
2 GOVERNOR GRAMLICH: I wonder if I could ask
3 about that. You've mentioned it and several other
4 people mentioned the disclosures. There seems to be
5 a plea for simplifying the disclosures, and are
6 there -- I'm a novice to this area but are there
7 practical suggestions for how to do that, that
8 matter X really doesn't have to be disclosed, it's
9 just added print and doesn't do anything, or would
10 you want more safe harbors or -- what is the
11 practical guidance about that?
12 MR. STOCK: I think -- I mentioned the
13 Stock theorem, the five disclosures. I think that
14 perhaps what we ought to do is take every disclosure
15 that's currently required, and through groups like
16 this, attempt to prioritize them and then go down
17 the list and just using common sense say, you know,
18 if we have more than this number we've lost the
19 effect of all of them. And it's got to be a much
20 smaller number, in English, with a few numbers that
21 are the important numbers for the consumer to look
22 at to say this is a worse deal than that.
23 Of course that was the whole concept behind
24 the truth in lending when it was enacted. But with
25 the other laws that have been layered onto it and
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1 things like HOEPA, it's absolutely daunting to even
2 somebody that's reasonably proficient in the field.
3 You've got to stop, step back, and think about it
4 again before you even try to explain it to someone.
5 MS. EGGERS: We completely agree with his
6 point.
7 MR. EAKES: A couple of points. Some of the
8 disclosures are actually harmful; for example, APR,
9 which was set up to give you one rate. The fact
10 that APR takes eight or ten points of fees and
11 spreads it across 30 years in the calculation of an
12 APR actually could end up having a consumer think
13 when their rate on the loan was 10 percent and their
14 APR shows up at 11 percent, to misunderstand the
15 timing of when those fees really took effect. So
16 you could have ten points on the front end which
17 attach immediately and are gone, but the APR
18 actually gives you this false sense of security that
19 is misleading.
20 In response to Paul's point about what we
21 were intending to do with high-cost loans, we really
22 had two different categories of high-cost loans in
23 North Carolina just as you do under HOEPA. For a
24 high-cost loan that trips the fee triggers, we
25 essentially had very draconian consequences in the
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1 North Carolina bill. It basically said you can't
2 finance any fees. Well, really that comes out
3 essentially to meaning that you can't make a
4 high-cost loan a high-fee loan because most of the
5 borrowers would need to finance it if they were
6 going to have those high fees.
7 On the other hand, we had the specific
8 philosophy of saying we are not capping in any way
9 the amount of risk premium that can come to a
10 credit-impaired lender, to a lender -- to
11 credit-impaired individuals. So we were basically
12 encouraging lenders to put their pricing in the
13 interest rate. And the interest rate -- if you are
14 a high-cost loan through the interest rate, which
15 under current standards would be about 16 percent,
16 just as HOEPA -- HOEPA does not have anything that
17 is very onerous if you kick in the high cost except
18 for the pass-through liability, and that scares
19 lenders. And we think that that does what it was
20 intended to too, which was say there should be some
21 due diligence and self-policing. That certainly was
22 Congress's intent, and we think that ought to be
23 expanded.
24 In North Carolina, we said if it's a
25 high-cost loan by interest rate, fine, but let's put
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1 everybody on the same playing field. Because what I
2 hear from lenders directly is that I can't eliminate
3 prepayment penalties for my loans unless all the
4 other lenders in my marketplace are eliminated at
5 the same time; if everyone is constrained then we
6 can compete on the same playing field and we will be
7 competing on interest rate.
8 So from the community advocate's point of
9 view, our view was that many of us got into this
10 lending business to help minority borrowers own
11 homes. We felt like that was the only way for many
12 people to enter the middle class, and probably for
13 many of the people who are sitting here who are part
14 of that community, the single most unacceptable
15 economic fact in American society for us is the
16 disparity in wealth between black and white
17 families. You probably know this number from 1990:
18 The median net wealth for black families was $4,000,
19 for white families it's $44,000. What we were
20 seeing that was not -- I guess it was anecdotal, but
21 there were hundreds and hundreds of cases that the
22 black borrowers that we had been helping to get home
23 loans to build family wealth over the last 17 years
24 were losing the entire amount of built-up wealth
25 they had because of the fees that were being charged
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1 and the prepayment penalties that were essentially
2 deferred fees. And so the focus in North Carolina
3 was specifically on trying to prevent the wealth
4 stripping, particularly as it impacted Latino and
5 African-American families.
6 MR. LONEY: Can I take one more shot at
7 trying to focus the question here on the question
8 of -- I'm going to take one more shot at trying to
9 focus the question on what is thought about the
10 Board dropping the trigger rate and why, what basis
11 would we have for choosing one lower number than
12 another, or is that -- I mean, because that is one
13 of the very live issues, we should drop the trigger
14 rate, and I'm not hearing --
15 MR. EAKES: One response: At the banking
16 committee hearings, Assistant Secretary Gensler
17 reported, and I don't know where his data came from,
18 that less than 1 percent of the subprime loans were
19 triggered by the 10 percent APR HOEPA trigger. So
20 the real question is, how many loans do you want in
21 the subprime arena to be subject to the pass-through
22 liability; that's really the significant issue. And
23 if EquiCredit says that for their lending it would
24 be an additional 6 percent in moving from 10 percent
25 above Treasury trigger to 8 percent above Treasury
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1 trigger, my guess is that you would want to drop
2 further than what Congress has enabled you to do,
3 that you really would want to cover, in the subprime
4 arena, 20 to 30 percent of loans under HOEPA.
5 Because it doesn't prohibit them, it simply says
6 that you have some scrutiny and some self-policing.
7 So maybe the question I would reflect back to you
8 is, what level of loans do you want to fall under
9 the HOEPA category.
10 Right now I think we have a chicken and egg
11 situation. Because it's such a small number, you
12 know, 1 percent or less, that fall into the HOEPA
13 trigger, you get the stigma attached to a Section 32
14 loan that wouldn't be there if it were 25 or
15 35 percent. So perversely it may be that the more
16 loans you cover the less cutoff of credit
17 availability that you have. I really believe that's
18 true. There is a stigma that we've had with lenders
19 that said we're not going to do any Section 32 loans
20 because we're afraid of the headline risk. If
21 that's the 1 percent highest cost loans, since
22 that's the only ones that get covered, they're
23 saying we're just going to stay out of it.
24 GOVERNOR GRAMLICH: Could I follow up? I
25 hear what you say, but then it strikes me that it
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1 would have made sense for North Carolina to lower
2 the rate trigger, if what you say is right. I mean,
3 you know, because you expressly didn't -- maybe not
4 you personally --
5 MR. EAKES: I can personally tell you what
6 I think, at least from the coalition, which had
7 three million members, is that we felt that the
8 Federal Reserve would be forced or would consider
9 and would end up lowering the rate to eight.
10 GOVERNOR GRAMLICH: So it's unnecessary for
11 North Carolina to --
12 MR. EAKES: In our early drafts of the
13 North Carolina legislation we had lower thresholds
14 on the interest rate test. In the negotiation and
15 compromise that went back and forth, the community
16 and civil rights folks ended up saying no, we are so
17 much more concerned about the fees that if we have
18 to give up we'd rather give up on the interest rate
19 threshold and tie it. This was -- also, a number of
20 the lenders' attorneys were saying to the extent
21 possible let's track the North Carolina bill to
22 HOEPA so that we only have one standard procedurally
23 to implement.
24 This was one of those places that we felt, I
25 felt, that eventually the standard would get lowered
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1 from ten to eight, and we didn't really want to
2 push. I mean, I have this disagreement with some of
3 my colleagues in Chicago who want to have an
4 interest rate threshold at 6 percent or 5 percent,
5 that's very, very low, lower to the Treasury. Well,
6 that's a simple standard, but what we believe here
7 in North Carolina was that we really need to focus
8 on the wealth stripping, that that is the key
9 problem, particularly for minority communities, that
10 is leading to such great foreclosure rates.
11 MR. CREEKMAN: Let me just add one aspect
12 to that which I think is important, and that is that
13 the North Carolina law is not like Section 32. The
14 North Carolina law is, in essence, a usury law
15 substitute. The decision was made very early on
16 that we could not regulate fees, points and fees, or
17 rates. We recognize that federal preemption would
18 then permit a lender to overcome those
19 restrictions. So the object was to design a
20 series -- a threshold above which a lender would be
21 required to do things or not do things which would
22 essentially strip the loan of its economic value to
23 the lender and make it virtually impossible for him
24 to comply and to comply with a profit. And so the
25 object of the North Carolina law is to prevent any
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1 high-cost home loan.
2 MR. EAKES: High cost by fees.
3 MR. CREEKMAN: No, it's high cost by fees
4 or rates. If you go over the 10 percent, the same
5 penalties apply.
6 MR. BOST: Threshold.
7 MR. CREEKMAN: If you exceed any one of the
8 three thresholds, the 10 percent being one of the
9 three thresholds, you're going to fall into that
10 category. Now, that means that -- the way the North
11 Carolina law is written now, because the rate
12 threshold parallels Section 32, it means in North
13 Carolina there are dire consequences for a lender
14 who makes a Section 32 loan by exceeding the
15 10 percent rate.
16 MR. EAKES: The reason I'm saying there's a
17 difference between interest rate and fees in terms
18 of the North Carolina bill is that you have multiple
19 pieces of pricing that you can attach to get the
20 risk return you need for a loan so that you don't
21 have credit rationing. If you put it into interest
22 rate and not into fees, the primary restricting
23 category in the consequences of a high-cost loan in
24 North Carolina is the inability to finance fees. So
25 if you put your risk return premium into interest
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1 rate rather than putting it into fees, which is what
2 basically the finance companies in North Carolina
3 have been restricted to doing for decades, then the
4 consequences are not -- certainly that very powerful
5 consequence doesn't become constraining. So if you
6 put your return into interest rate instead of fees,
7 the prohibition against financing fees is not a
8 binding constraint, that's my point.
9 MR. LAMPE: I think Mr. Creekman's point is
10 that there are three thresholds in the North
11 Carolina law. How you get there is your business,
12 but one of the ways you get there is through
13 interest rate, one of the ways you get there is
14 through fees, and there's an independent threshold
15 for prepayment penalties. And the market effect of
16 this, in my anecdotal experience, is that lenders do
17 not want to make these loans no matter how they get
18 there.
19 Mr. Eakes is also correct in saying that one
20 of the prohibitions is the financing of points and
21 fees in the law, but that's beside the point if one
22 way or another lenders say we don't want to be
23 within that net, whether it's by way of fees, by way
24 of interest rate, or by way of prepayment penalty.
25 So maybe that's cutting the bologna a little thin on
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1 the analytical side, but thresholds are thresholds
2 as far as lenders are concerned.
3 GOVERNOR GRAMLICH: Let me -- you're
4 disagreeing on a number of things but there does
5 seem to be one thing that everybody is at least
6 implicitly agreeing on, and that is that the point
7 of the North Carolina law was to make the provisions
8 so difficult that it really closes down the North
9 Carolina definition of the high-cost loan market.
10 Right?
11 MR. EAKES: For high fee loans.
12 GOVERNOR GRAMLICH: However it's defined,
13 there are different triggers, but the point is to
14 really close that market down, whereas the point of
15 HOEPA seems to be somewhat different, which is just
16 that you have added disclosures and whatnot in the
17 HOEPA segment but not to close the HOEPA segment
18 down. Is that something that you're all more or
19 less -- an idea that you all more or less hold?
20 MS. EGGERS: Governor, I think that is the
21 intent. I think one of the challenges -- so that
22 HOEPA is geared to more disclosures and North
23 Carolina wants to suggest that high-cost loans are
24 automatically predatory and therefore should not be
25 done. But I think the confusion that we're finding
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1 in the marketplace is, if you just went out and
2 polled people to describe the difference between a
3 high-cost loan and predatory loan or a threshold
4 loan, there isn't clarity around that. So we're
5 indicting a broader base of lending than I think we
6 intend. So I wouldn't assume that if you get more
7 loans in the arena of high-cost loans that that's
8 going to assuage all of the lenders' concerns and
9 that we are going to flow back into that
10 marketplace; I'm not certain about that, for all the
11 reasons the panel members have indicated.
12 MR. CREEKMAN: Let me make one more
13 observation. If the rate is lowered under Section
14 32 to 8 percent, it will automatically be lowered
15 under the North Carolina law to 8 percent. The
16 result of that will be -- the result of that will be
17 that in North Carolina loans won't be made over that
18 8 percent threshold. So it isn't a question of just
19 giving more disclosures to a greater number of
20 people. Because the North Carolina law is pegged to
21 Section 32, in North Carolina it's going to have the
22 effect of cutting off credit as to those loans that
23 are over 8 percent.
24 MR. MAYNARD: Because of the litigation
25 that I'm involved with, over the last six months
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1 I've looked at literally thousands of HUD statements
2 and promissory notes for loan transactions that
3 occurred in southeastern North Carolina. Rarely
4 have I ever seen a loan where the interest rate
5 pushed the T-bill rate plus 10 percent. I can't
6 imagine that a reduction in that 10 percent rate to
7 8 percent would force an exodus of lenders providing
8 capital here in North Carolina.
9 I hope the audience understands what we're
10 talking about is really a range of interest that's
11 16 to 18 percent. It's the T-bill rate plus the 8
12 to 10 percent that we've been discussing, so it's
13 not an 8 or 10 percent rate of interest but rather
14 the T-bill rate plus that.
15 I've looked at a lot of abusive loan
16 transactions and rarely have I seen the lenders even
17 in those transactions push the 18 percent or
18 16 percent limit as may be applicable, and I can't
19 imagine that would force the lender community to
20 leave North Carolina. The great harm has been the
21 abuse of fees and to -- it has afflicted the
22 minority community in a wildly disproportionate
23 number. It is something that has been exacerbated
24 by the practice of flipping. And when we heard
25 earlier about the problem with the statute -- I
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1 wasn't involved in drafting the statute, but what I
2 read was the net tangible benefit language in the
3 statute, I quite frankly was relieved. I have so
4 many clients who have been involved with the same
5 mortgage broker who have gone back time after time,
6 each transaction -- sometimes as many as two or
7 three within a single year, each transaction
8 extracting $5,000 to $6,000 in fees which get added
9 to their mortgage which increases their debt load
10 which gets them closer to foreclosure.
11 The flipping language that's in our statute,
12 if it is subjective to the extent that it must
13 relate to a net tangible benefit, so be it. If that
14 is the part of the North Carolina statute, and I
15 think it is, if that's the part that's causing
16 equity lenders to decide not to lend in North
17 Carolina, I would say respectfully it's serving a
18 good purpose to that extent and I don't think it
19 reflects to the issues that we're addressing in
20 HOEPA. I don't think the concern about the North
21 Carolina law should cause the Fed to say that we
22 should be more reserved with respect to these
23 triggers.
24 The issue of the triggers, the 5 percent
25 trigger in North Carolina or the 8 percent trigger
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1 in HOEPA, is so important to our clients, to North
2 Carolina homeowners, because of the fact that there
3 is nobody home when the litigation concerning these
4 loans starts with respect to the broker or the
5 lenders that originated these loans. Those entities
6 fold up day after day, they're gone, there's no
7 recourse against whoever it is who holds that loan.
8 There's no way for them to defend themselves from
9 the foreclosures they're facing unless we can go
10 against the assignees, the holders of that paper. I
11 think -- while I don't believe that reducing the APR
12 would materially affect the access of capital here
13 in North Carolina, I strongly believe that the
14 reduction of the HOEPA trigger with respect to fees
15 is a very important part of access to justice for
16 people here. Otherwise, there's just simply no
17 recourse on these loans.
18 MR. LONEY: Thank you. Let me just ask one
19 question for my own clarification. What I've heard
20 is that certain lenders are leaving and they're
21 leaving because of this net benefit test.
22 MS. CRAWFORD: That's one of the reasons.
23 MR. LONEY: One of the reasons, one of the
24 things that's scaring people I guess, but it is only
25 those lenders who exceed the triggers who have to
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1 worry about the net benefit test -- or not?
2 MS. CRAWFORD: No.
3 MR. MAYNARD: It's only the lenders who
4 engage in flipping.
5 MR. LONEY: In any refinancing, whether it
6 exceeds the HOEPA triggers or not.
7 MR. EAKES: The classic case that we use --
8 I mean, the Federal Reserve needs to have -- whether
9 you like our standard for flipping or not, you need
10 to address that problem. That is clearly one of the
11 abuses in the refinance market.
12 We tried six or seven different formulations
13 and ended up with what is clearly a subjective
14 standard. Like due process, like free speech, there
15 are lots of things that we revere that are
16 standards, and when you have a standard that is less
17 bright line, what it says is you've got to stop
18 short of a cliff, you cannot get too close to it.
19 In North Carolina that standard really was
20 motivated as much as anything else by the number of
21 Habitat for Humanity borrowers that we had seen
22 flipped. And it was not just repeated, it was with
23 a single refinance transaction. Hundreds of people
24 who had zero percent, $40,000 Habitat for Humanity
25 mortgages ended up in 14 percent finance company
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1 mortgages that had large fees attached to them. And
2 so what that net tangible benefit -- we had the
3 discussion should it be just that every loan must
4 have a tangible benefit to the borrower. In every
5 one of these Habitat for Humanity loans, if there
6 was an advance of $200, even though the fees were
7 $10,000 added, you would have a tangible benefit.
8 So somehow there has to be this weighing -- and
9 honestly, I think our definition of flipping is like
10 that old definition, you know the definition of
11 democracy, that it's the worst possible definition
12 you could possibly come up with except that all the
13 other ones we tried to come up with were worse than
14 that. So we ended up with a standard that said
15 don't get very close to the cliff.
16 MR. LONEY: But the point is, for my feeble
17 brain, is that it doesn't turn on the rate triggers.
18 MR. CREEKMAN: That's correct, applicable
19 across the boards.
20 MS. HURT: Can I just ask that the
21 creditors, notwithstanding North Carolina law,
22 notwithstanding North Carolina law and assuming
23 nothing else was done except the lowering of the
24 rate trigger for HOEPA, what would be the impact of
25 that in your opinion on access to credit?
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1 MR. BOST: I just have a couple of points
2 if I can make them. Firstly, I think when you talk
3 about a smaller loan, and that's kind of -- when you
4 talk about a smaller loan, which is what we're
5 talking about, we're talking about the APR, and the
6 moderate fee on a small loan can really affect the
7 APR. So if you drop the APR threshold down, then
8 it's going to be difficult for lenders and brokers
9 to charge a reasonable fee without going over the
10 APR threshold and receiving a risk premium for the
11 credit that they're extending. That's one point
12 that we need to bear in mind is the APR, and
13 included in the calculation of APR are the fees.
14 And secondly, to answer your other question,
15 another reason that lenders are leaving is that
16 calculating these points and fees and interest rates
17 is incredibly complex, and the risk that lenders
18 take making loans that violate these standards is
19 great, so you have a lot of lenders who are standing
20 on the sidelines waiting to see how these provisions
21 are going to be construed. That's another reason
22 that they're leaving and it relates to both the
23 Section 32 type loans and to the rates and fees test
24 that we have in North Carolina.
25 MS. HURT: The current APR test doesn't
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1 typically throw you into HOEPA, but you're saying
2 lowering the triggers either one percentage point or
3 two would throw a lot more loans into HOEPA?
4 MR. BOST: I think so.
5 MR. EAKES: There is data about interest
6 rate profiles. It's less than 10 percent of the
7 subprime market that currently have interest rates
8 greater than 14 percent, so it's a small amount
9 but --
10 MR. BOST: But we're not talking about
11 interest rate, we're talking about APR, I guess is
12 my point.
13 MR. EAKES: On a 30-year loan the APR
14 doesn't change much based on one or two points; it's
15 a quarter point on APR because you're spreading it
16 over such a long period.
17 MR. CREEKMAN: I think I'm one of the few
18 that actually represents as part of a lender; Helen
19 is the other -- and Martin, excuse me. My bank, I
20 don't believe that my bank engages significantly in
21 any subprime lending, but I can tell you that -- and
22 I'm just trying to think it through, where would the
23 pressure point be. Two issues. First of all, if
24 you reduce the APR threshold from ten to eight are
25 you really helping to solve the predatory lending
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1 problem, if the predatory lending problem is not in
2 fact driven by the APR? So there may not be a
3 reason to do it.
4 The second point is, okay, where would I be
5 exposed, where would I have to start raising my
6 radar antenna to see whether or not I'm coming close
7 to that threshold. I think the answer is going to
8 be, for us, it is going to be in the relatively
9 short term financing of mobile homes for borrowers,
10 because those are not -- they are frequently not 15-
11 and 30-year traditional home loans. They're shorter
12 term, they are somewhat higher -- they're handled as
13 consumer loans, they're not handled as traditional
14 mortgage loans, but they're going to be swept into
15 the residential mortgage loan pool for purposes of
16 the HOEPA calculations. There, I think, would be
17 our greatest risk of approaching that threshold.
18 MS. EGGERS: And just to follow up on
19 Mr. Creekman's comment, I think we've stated our
20 position thus far; if we continue not to participate
21 in the Section 32 marketplace for all the reasons
22 that have been discussed today, it would impact
23 volumes by 6.2 percent, which may not sound like a
24 lot percentage-wise but think about a half a billion
25 dollars in credit.
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1 And I think one thing we haven't really
2 discussed on the panel and someone brought it up
3 earlier, these credit needs are not going away.
4 They are just not being served by companies like
5 EquiCredit. So the question is, how are these needs
6 being served and what credit alternatives are people
7 taking advantage of? I think someone raised concern
8 about options that consumers might see, and I don't
9 have any insight on that but I think that's
10 something the Board would want to understand if
11 Section 32 is so prohibitive that supervised lenders
12 choose to leave the marketplace.
13 MR. EAKES: I wanted to say that we
14 intended, when we passed the North Carolina law, to
15 eliminate ten to -- we intended to have folks exit
16 certain pieces of the market. If they could not
17 make these loans with fees less than 5 percent, we
18 wanted you to exit this market. And so if that's
19 the basis on which EquiCredit will see a 30 percent
20 reduction, that's precisely what we wanted to see
21 happen. With other lenders where they were across
22 the board high-fee, wealth stripping, we wanted them
23 to leave the state of North Carolina. We welcome
24 that announcement.
25 MS. EGGERS: Mr. Eakes, do you have any
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1 insight on how those credit needs are currently
2 being filled in North Carolina?
3 MR. EAKES: I know on the secondary market
4 we've got two players, two conventional, Fannie and
5 Freddie, and there's plenty of competition even
6 between the two of them.
7 The fact that you stop making those loans
8 does not tell me that they will not be served. I
9 see folks from Household Finance, that there are a
10 number of different channels that mortgage credit
11 gets delivered through, and really what I think
12 we're going to have to look at, and I'll look at the
13 data, is a year from now to see whether we have a
14 reduction that's greater than 20 percent in the
15 subprime market. If we have a reduction that is
16 huge, then yes, I will agree with you that we should
17 go back and look at the North Carolina bill. If you
18 lose some loans, 30 percent, and they're picked up
19 by someone else who says we don't need to charge
20 those fees, then I think that's a good thing for the
21 marketplace.
22 MS. EGGERS: I think one clarification and
23 then we've got a lot of other people that have some
24 things to say, but one clarification is it's not
25 necessarily being picked up by individuals who
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1 aren't charging a fee. It may be being picked up by
2 individuals who are willing to assume the risk of
3 Section 32 loans or by alternative financing, which
4 perhaps might be a greater concern. I don't know
5 the answer but I think it's worthy of exploration.
6 MS. CRAWFORD: They've made a comment about
7 home equity lenders leaving North Carolina and that
8 was the intent, but there are conventional lenders
9 leaving North Carolina, not just home equity
10 lenders. And you're talking about people with good
11 credit, that we are curtailing them from the
12 availability of credit too, so we need to think
13 about this really strongly.
14 MR. BLANTON: I want to make sure I
15 understand something with the chain of events.
16 Martin talks about the social impact of wealth
17 stripping and it sounds like that happened when you
18 get the flipping and the flipping is what scares the
19 lenders with the net tangible benefits test, so I'm
20 not sure if it weren't the high fees and the
21 up-front costs that got financed into -- this sort
22 of speaks to the fee test rather than the rate
23 test -- but if you didn't have all of these in there
24 and then that happening on multiple occasions that
25 stripped the equity from the homeowner, then that's
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1 what the social cost is, that the wealth is stripped
2 away from low-income and low-wealth families. But
3 it sounds also like another problem in that is that
4 once the lender sells the loan then the homeowner
5 has recourse against no one because the assignee
6 does not have the burden, is that correct, in North
7 Carolina?
8 MR. EAKES: We talk about enforcing
9 existing rules, but really that's hard to do because
10 you've got first a broker where you say -- and I
11 think for the few bad brokers who are out there, if
12 they do misrepresented loans and then it is
13 originated let's say by First Citizens, they have
14 this independent contractor status so that the
15 lender who evolved that loan is normally under state
16 law in most states not held responsible for abuses
17 by that bad broker. Then if there was an abuse by a
18 lender who did it directly and sold the loan, you
19 have the holder in due course doctrine which says
20 that the assignee cannot be held responsible for the
21 claims against the original originator.
22 MR. BLANTON: Are there any data to
23 indicate to what agree these loans are automatically
24 sold to avoid that?
25 MR. EAKES: I don't think -- you're really
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1 looking at an issue of intent. The only place you
2 will get evidence of that would be in litigation. I
3 would say Mal would probably have a better view of
4 whether that's the intent or not.
5 MR. COUDRIET: There's a body of litigation
6 that is very to the point on the related subject of
7 yield spread premium, most of which has been settled
8 or found in favor of the lenders. But for the most
9 part, the plaintiffs went after the lenders, not the
10 brokers.
11 MR. CREEKMAN: I think there's some
12 misunderstanding as to what the North Carolina law
13 says about flipping, and perhaps it might be good to
14 focus on that for just a moment.
15 We think of flipping collectively as a
16 lender who repeatedly lends to the same borrower and
17 strips the borrower of equity, but that's not what
18 the North Carolina law actually deals with. The
19 North Carolina law is not tied -- the North Carolina
20 flipping rule is not tied to the predatory lending
21 rule with the thresholds. It's a standalone rule
22 and it says basically that any lender that makes a
23 consumer loan to a borrower which refinances an
24 existing consumer loan when the new loan does not
25 have reasonable tangible net benefit to the
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1 borrower, considering all of the circumstances, is
2 engaged in flipping. That means when my bank, First
3 Citizens Bank, refinances any loan, regardless of
4 who loans that loan, when a borrower comes in and
5 says I want to refinance my loan, whether it's with
6 NationsBank -- Bank of America, excuse me -- First
7 Union, Wachovia, whoever, when he comes in we have
8 to make that analysis to determine whether our
9 making that first loan with our first contact with
10 that borrower constitutes a flipping arrangement.
11 And that's what has scared lenders coming in from
12 the outside and lenders in North Carolina, because
13 this rule is so nebulous. And because it applies at
14 the first contact for a lender with a borrower, it
15 really is a difficult one for us to get our hands
16 around.
17 MR. BLANTON: Would it be helpful if the
18 mechanism required due diligence with respect to the
19 ability to pay, the income test, to the exclusion of
20 making a loan based on the asset value?
21 MR. CREEKMAN: Yes and no. One of the
22 difficulties that you face with an income test is
23 that frequently you're dealing with a retiree who
24 may have an asset that is going to be liquidated in
25 the future and has very little -- and I'm not
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1 talking about land, he may have stocks or bonds that
2 are going to be liquidated in the future or a piece
3 of property that's going to be sold, and they are
4 truly income-poor at that point but they've got the
5 assets readily available to pay and the plan to pay
6 it.
7 When you have strictly a means test, it's
8 only a part of the picture and it doesn't apply to
9 everybody. The wealthy may be the ones that are
10 most affected because the wealthy may be the ones
11 that do not have the need for this great cash flow
12 in relation to their debt coverage because they have
13 other assets that they can liquidate when they need
14 to to satisfy it.
15 MR. LONEY: Can I just suggest that we take
16 a few minutes? Maybe we can take a quick break, ten
17 minutes, be back here at five after 11:00 by that
18 clock, and we'll pick up where we left off.
19 (A recess.)
20 MR. LONEY: Thank you for your patience.
21 Despite my best efforts we are behind and I suspect
22 that was expectable. One thing I would like to say
23 before -- we can't seem to make it not buzz if I get
24 close to it, okay.
25 One thing I wanted to mention is that at
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1 about five minutes to 12:00 a group of folks that
2 are in the audience right now are going to get up
3 and leave and go downstairs and have an exercise
4 event, is that what it is, Peter -- something out in
5 front of the Federal Reserve Bank, and we will
6 proceed. Don't be alarmed, it's not a fire drill;
7 we'll just keep on going and maybe they'll come back
8 and join us later. I just wanted to let everybody
9 know that.
10 I do want to talk -- I know we're in North
11 Carolina, just barely in North Carolina, right, and
12 it's been interesting to hear a lot about what's
13 going on here. And I'm sure that will be very
14 germane to what we have to do going forward
15 ourselves, but we have a job to do that we have to
16 worry about, what to too about HOEPA, changing
17 triggers and other sorts of things, and I'd like to
18 try to get the conversation focused a little on what
19 we should do.
20 We've talked about flipping, we've talked
21 about the rate triggers. One thing we didn't talk
22 about in much detail is the issue of points and
23 fees, the points and fees test under HOEPA. I
24 thought we might talk a little bit about that. In
25 the Board's notice about these hearings we
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1 identified three possible fees that could be added
2 possibly to the fee trigger calculation. Those
3 things were credit life insurance, certain
4 prepayment penalties, and points on refinanced
5 loans, and I was wondering if we could talk a little
6 bit, spend a little time talking about whether the
7 Board should in fact do those, make changes to
8 include those fees and why or why not. So to
9 reiterate, credit life insurance, prepayment
10 penalties, and points on refinanced loans, if I
11 could just direct the conversation in that
12 direction. Yes, sir?
13 MR. COUDRIET: I'd like to address
14 prepayment penalties and clarify that. I can't
15 really address credit life, but prepayment
16 penalties, once again, are fees that lenders hope
17 they never collect. They're there for the purpose
18 of stabilizing the secondary market, they have a
19 limited life; they allow the lender to recoup the
20 costs of making the loan before it's paid off.
21 Lenders that securitize hate flipping more than
22 anybody else in the world because it robs us of our
23 profit, believe me. So if you're talking about
24 including prepayment penalties on a previous loan in
25 the points for a high-cost loan, I think we would be
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1 in favor of that. If you're talking about including
2 an unpaid prepayment penalty for the future loan, we
3 don't see how that makes sense and how that helps
4 the situation in any way.
5 MR. LONEY: I think that's a good
6 clarification.
7 MR. EAKES: Lehman Brothers issued a report
8 last Friday about prepayment penalties. In that
9 report they state for 130,000 loans that roughly
10 50 percent of the borrowers who have prepayment
11 penalties using the California prepayment, which is
12 basically half a year's interest above 20 -- half a
13 year's interest, that 50 percent of the borrowers
14 actually end up paying the prepayment penalty. That
15 if you had no prepayment penalty, it would slow the
16 rate of prepayment by 15; you would have another
17 15 percent that would prepay. So the statement that
18 Mr. Coudriet had that lenders hope they never
19 receive a prepayment penalty, that is simply
20 inaccurate with regard to securitization of
21 mortgages.
22 The Lehman and Greenwich and other
23 securitizers actually have a class of security that
24 is specifically aimed at receiving the cash flow
25 from prepayment penalties.
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1 To the extent that prepayment penalties
2 represent a protection of origination costs, they
3 are identical to an up-front origination fee and a
4 point, so to the extent that that's what it's
5 helping to cover, which is the up-front origination
6 costs, the prepayment penalty on the existing loan
7 should be included in points and fees. Not the old
8 loan, because that's really cumbersome to figure
9 out, you know. If you don't include the prepayment
10 penalty on the existing loan that -- on the loan
11 that you are currently making, then you allow an
12 ability to circumvent the fee threshold wherever you
13 set it.
14 MR. LONEY: That would be a fee that may or
15 may not be paid.
16 MR. EAKES: Okay, let's take that. The
17 intuitive sense is saying this is a fee that may be
18 contingent and never recovered. Well, in this
19 market the reason a prepayment penalty is valuable
20 is to protect an excess servicing or an excess
21 premium in that loan, excess -- or a piece of yield
22 in that loan from being able to refinance out of it;
23 that's what it's there for.
24 So one of two things happens: Under the
25 Lehman statistics 50 percent will pay that
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1 5 percent, they will actually pay it; another 13 to
2 15 percent will default and be foreclosed on. So
3 only 35 percent of the borrowers under existing
4 subprime securitization, which are not the worst
5 ones, the ones that get securitized, the majority of
6 those borrowers will actually pay that fee. The
7 ones that didn't pay that fee meant that they paid
8 an interest rate, the extra amount, higher than what
9 they could have gotten if they had refinanced,
10 assuming that they wanted to refinance.
11 So you get it one of either way: Either
12 you're paying an interest yield in the subprime
13 arena for a longer period of time, which is meant to
14 recover your origination costs, or you actually
15 pay. And what I think would be really a problem is,
16 if you have a fee standard, whether it's 5 percent
17 or 8 percent, whatever you choose, if you allow a
18 calculated statistic known incidence of that fee to
19 not count, then you simply shift the pricing from
20 the front end to the back end. And it's just
21 inaccurate to say, I think, for the majority of
22 securitizations that no one hopes to ever recover
23 this prepayment penalty, because it makes very
24 little difference in the prepayment speed.
25 MS. EGGERS: Just a couple of comments on
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1 the philosophy of prepayment penalties. We would
2 not see them adding any real value in preventing
3 flipping by being added into the points and fees
4 calculation. A couple of reasons: First of all, I
5 think we're missing a real opportunity in terms of
6 defining what flipping really is, because we've
7 heard with Jim earlier how it's defined in the North
8 Carolina legislation, or is it really just a
9 transaction that occurs within an affiliate or
10 same-party lender. We need to be clear about that.
11 We really need to educate the consumer so they are
12 in a position to make the best decision for
13 themselves.
14 Every refinance that occurs within, pick a
15 time period, 18 months, isn't automatically the
16 predatory flipping action, so a couple of things
17 that we have done which we'll just identify as
18 things to address from our perspective of flipping,
19 we don't include -- we do not charge or collect
20 prepayment penalties on loans that we refinance
21 within a year or any of our affiliates, and
22 prepayment penalties are always optional. Our
23 products are available with or without a prepayment
24 penalty, because for us it is a pricing dynamic,
25 it's part of the economics of this business.
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1 MR. EAKES: What percentage of the loans
2 that refinance to another company do you actually
3 end up collecting for one year's origination of
4 loans at EquiCredit? What percent do you actually
5 over the five-year period that you have prepayment
6 penalties, what percent of them actually end up
7 paying a prepayment penalty?
8 MS. EGGERS: I would need to get that
9 percentage, Martin, but I will tell you it's not a
10 flat-out number. It depends on -- it's a situation
11 that's relative to the economy. We've had a slowing
12 in prepayment curves as rates have slowed down and,
13 you know, the percentage you see now would be
14 different than in a declining rate environment. So
15 I don't have that number; I could track that down.
16 MR. EAKES: What do you track as your
17 annual prepayment rate for loans that have a
18 prepayment penalty; what is your CPR?
19 MS. EGGERS: It depends again on the
20 particular type of loan and the particular
21 situation, because one of the dangers we've got is
22 trying to put a rule in place that works for all the
23 different consumer situations. I think we need to
24 be very cautious about that. We can identify -- you
25 know, we can tell stories about situations that seem
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1 to not make sense for the consumer; there are an
2 equal number of stories of situations where the
3 consumer was the true benefit by merit of the
4 refinance.
5 I just would suggest caution about simple
6 rules as the solution to these issues.
7 MR. COUDRIET: I'd just like to clarify
8 something that Mr. Eakes said about defaulted loans
9 or loans that had to be taken into asset recovery,
10 assuming that those with prepayment penalty that the
11 penalty was actually collected. We rarely collect
12 principal or any interest on foreclosed loans so the
13 chances of us collecting the prepayment penalty are
14 two: slim and none.
15 MR. BURFEIND: Regarding the credit
16 insurance premium charge, if we're ready to move to
17 that, it would be our position that these not be
18 included within the fees and points of fees subject
19 to the trigger calculation. The credit insurance
20 product and premium is, as I said earlier, a
21 voluntary purchase, not a required purchase. It's
22 an option that is presented to the borrower for
23 consideration by the lender. If you include the
24 premium charge in the points and fees, it's likely
25 to reach the trigger along with the other required
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1 charges that are customarily assessed. Since
2 lenders don't want to be in that category subject to
3 the requirements of HOEPA, the credit insurance
4 option -- the expectation would be that it simply
5 would not be presented to the borrower as an
6 option. Some borrowers, many borrowers, without
7 adequate insurance protection, other insurance
8 protection, would be denied the opportunity to at
9 least consider the credit insurance as a way to
10 protect the equity in their home.
11 MR. BLANTON: Can I ask a question on that.
12 It's my understanding that the credit insurance is
13 to protect the lender, not the borrower, so why
14 would it be an option for the borrower?
15 MR. BURFEIND: The law requires that it be
16 an option for the borrower, for one thing, but it is
17 the borrower's -- well, the proceeds will go to pay
18 off the loan in the event of death or maintain the
19 repayment schedule in the event of disability. The
20 benefit inures to the borrower, he -- or his estate
21 in the event of death -- is relieved of the
22 obligation to pay off that loan or maintain those
23 payments. The equity in the home is preserved for
24 the benefit of the borrower and/or the estate.
25 MR. BLANTON: So this is distinguished from
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1 PMI?
2 MR. BURFEIND: Oh, yes, very much so. If
3 there's some confusion we too need to distinguish
4 those products, yes.
5 MR. MICHAELS: Can I follow up on something
6 just to clarify a point I think you made. In the
7 report that the HUD and Treasury issued in June, one
8 of the recommendations they made was that the sale
9 of credit insurance be delayed until after the loan
10 closing. Would the effect of adding the credit
11 insurance into the points and fees test under HOEPA,
12 would that essentially result in that happening?
13 MR. BURFEIND: I don't think the proposal
14 is a reasonable proposal in the practical sense.
15 The single-premium financed credit insurance is sold
16 in connection with a closed-end transaction, when
17 the loan is closed. To sell it after the fact would
18 require the reopening of the loan and the reclosing
19 of the loan, which means you then couldn't present
20 the insurance again until after you've closed the
21 loan again. So you first of all get into that
22 pattern. If you're going to -- if you have to
23 present it after the closing but you have to reopen
24 a loan in order to sell it, you're back into a
25 closing environment again.
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1 You do have to reopen the loan on the
2 single-premium approach. It wouldn't be any
3 different than if the individual came back after the
4 loan was closed and said, you know, I need another
5 thousand dollars for something or other; can you
6 loan me another thousand dollars. Well, they'd
7 reopen the loan to handle the transaction.
8 I think we get into a difficult situation if
9 you've got to do it after the closing but you can't
10 do it until you're at the closing.
11 MR. EAKES: Your point is a good one. It
12 shows why it needs to be a prohibition, not simply
13 included in the points and fees. I mean, a couple
14 of data points: On a 16 percent 30-year loan, let's
15 say $100,000 with $10,000 of credit insurance
16 financed up front, at the end of five years, which
17 is almost the whole amount of the portfolio, it
18 would refinance within five years. That's a pretty
19 good outward frame. Only 1 percent or $104 of the
20 $10,000 of up-front credit insurance would have been
21 paid off in principal balance by the end of the life
22 of that loan. So virtually all of the payments --
23 does that make sense? So virtually all of the
24 payments that the borrower was making on a monthly
25 basis for the financed credit insurance, almost all
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1 of that was going for interest only, and
2 essentially, then, that $10,000 gets paid directly
3 out of the equity.
4 That's one of the reasons in North Carolina
5 we were so adamant, not about preventing credit
6 insurance -- we really believe that poor people are
7 underinsured and that credit insurance, though it
8 may be expensive on a monthly basis, is something we
9 think should be a choice the consumers have. What
10 we really objected to was saying that you finance
11 it. The industry data showed that 40 to 50 percent
12 of the up-front premium was the commission to the
13 lender for selling it, that that is sort of a
14 standard, and the financing of it adds no benefit to
15 the borrower whatsoever.
16 So what it meant was, if I gave you the
17 option of paying your electric bills every month on
18 a monthly basis for the next five years and then I
19 came to you and I said, well, I'm going to give you
20 a better deal and I want it to be a consumer option
21 for you; that we're going to lump all of your
22 monthly utility bills together and let you pay for
23 them up front and we're going to charge you
24 13 percent interest on it for the next five years.
25 There is no real debate, I don't think, on
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1 this issue once you really understand the
2 economics. That we want people to continue to
3 purchase monthly credit insurance if they want it,
4 but don't allow for any loan the financing of an
5 up-front premium when you could have paid for it on
6 a monthly basis.
7 MR. BURFEIND: Thank you very much. First
8 of all, again, credit insurance is a product like
9 any other product. Anything that they have borrowed
10 from that equity to pay for and financed over 25
11 years, at the end of five years you've got less than
12 5 percent of the principal that's been repaid. The
13 argument Martin makes would apply to the blue jeans
14 example, to an automobile, to any other product or
15 service that was paid for out of loan proceeds.
16 Secondly, with regard to the cost, monthly
17 cost versus the financed single premium, the
18 advantage of the financed single premium to many
19 consumers lies in the fact that the payments are in
20 fact amortized for a longer period of time. It
21 keeps the monthly payment within their manageable
22 budget. A pure monthly outstanding balance premium
23 program, that premium charge in the first month for
24 credit insurance is more than the incremental cost
25 in the monthly payment of the single-premium finance
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1 charge. The financing is what makes the coverage
2 available to so many people who do not have other
3 coverage to protect that equity.
4 MR. EAKES: But that's precisely why HOEPA
5 was passed. HOEPA said if you can't afford credit
6 without looking solely to the equity of the home,
7 then we don't want that practice, whether it's a
8 choice or not a practice. What HOEPA said in 1994
9 was, we do not want you in determining affordability
10 or availability or anything else to look exclusively
11 at the equity. And for single-premium financed
12 insurance 99 percent of the payment of the premium
13 comes out of the equity, not out of the monthly
14 payment.
15 MR. BURFEIND: Congress didn't want the
16 lender to look at that. We're talking about an
17 election that the borrower is making, how the
18 borrower wants to spend his funds, his equity.
19 MR. LEHMAN: The issue of credit insurance
20 is very important to us as a matter of public
21 policy. This is another one of those issues where
22 disclosures don't work, as borrowers do have to sign
23 a disclosure saying the credit insurance is
24 voluntary and they elect to have the coverage. We
25 have seen many cases where borrowers were not aware
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1 that they had purchased the insurance, were not
2 aware that they had the coverage. Even more than
3 that, borrowers are not aware that they are paying
4 for this insurance up-front and financing it over a
5 period of years at a very high interest rate. It
6 does not make sense to any reasonable, well-informed
7 borrower to buy that much insurance and have it
8 financed the way it is.
9 We have seen some outrageous examples:
10 $19,000 of insurance added on to a $66,000 home loan
11 so the amount financed becomes $85,000 and that much
12 equity is out of the person's home at that time.
13 $9,000 in insurance premiums on a $30,000 home
14 loan. These are very, very high amounts. So the
15 problem is, if you put it into the trigger term it
16 would effectively prohibit the sale of at least that
17 much credit insurance, so to that extent I would say
18 fine. But I think the approach to take is to look
19 at it head-on and determine whether or not the sale
20 of prepaid single-premium credit insurance is a
21 reasonable product that ought to be available.
22 It was our opinion that, on the whole, the
23 way in which the product is sold and financed it is
24 basically an unfair practice and ought to be
25 prohibited up-front.
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1 MR. BURFEIND: There's no doubt that there
2 have been some egregious examples. I think it's the
3 handful of egregious examples that drove the North
4 Carolina determination. But consider the whole
5 environment of subprime lending. You've got a huge
6 environment out there, and how many of those loans
7 get into foreclosure? Relatively speaking, a small
8 percentage, and that small percentage was the focus
9 of Mr. Martin Eakes and others in North Carolina.
10 They were troubled by what was happening in a small
11 segment of the market.
12 Now look at that small segment even further
13 of those foreclosures. How many of those loans even
14 had credit insurance on them? I've ask -- I don't
15 know and I've asked the question not of Martin but
16 in Chicago in a similar forum and environment in an
17 organization that tracked the Cook County
18 foreclosures, the nearly 3,000 foreclosures in Cook
19 County. I asked them how many of those loans had
20 credit insurance on them; well, we don't know. I
21 would maintain that not very many did.
22 Out of that broader universe of subprime
23 lending how many of those loans were paid off by the
24 proceeds of credit insurance? How many of those
25 payment schedules were maintained by the credit
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1 disability coverage and how much of that equity in
2 those home mortgages were preserved?
3 Now, HUD estimates that 46 percent, I think
4 I recall the number correctly, 46 percent of
5 foreclosures result from disability. I think that's
6 a conventional market figure but I'm not certain.
7 But the point is, the distress and the stress that
8 causes a loan to go into foreclosure is not related
9 to the credit insurance. It's an inability to make
10 the monthly payment for some cause or another. In
11 46 percent of the cases perhaps that cause is
12 disability. In some of those 46 percent of the
13 cases perhaps there's credit insurance that has
14 saved that homeowner and that equity in that home.
15 MR. MICHAELS: Let me ask one question.
16 I'm sitting here wondering, as a lawyer, and maybe
17 this is naive because I don't understand the
18 economics of it; maybe you can explain it. If PMI
19 is affordable on a monthly basis what's the
20 economics that makes credit life insurance not
21 affordable on a monthly basis?
22 MR. BURFEIND: For some people it may be
23 affordable on a monthly basis; for others, they need
24 to finance it. Just why is it that some people buy
25 a car and finance it over two years where others buy
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1 a car and finance it over five years, you know, or
2 seven in some cases. They've got to manage that
3 monthly payment.
4 MR. MICHAELS: Is credit life insurance
5 that much more expensive than PMI?
6 MR. BURFEIND: I think we're comparing
7 apples and oranges there, and I don't have any
8 particular expertise in the PMI area; I don't even
9 know what it costs. But that is a totally different
10 risk assessment and a totally different insurance
11 product.
12 MR. LONEY: Clarify for me, what did North
13 Carolina do? Is it outlawed?
14 MR. EAKES: North Carolina said that
15 monthly premium credit insurance is legal and okay
16 but that you cannot finance any insurance premiums
17 into a home loan in North Carolina for all home
18 loans, regardless -- not just for high-cost home
19 loans.
20 We looked earlier, in the earlier
21 negotiations, at including the cost of credit in the
22 single premium as part of the points and fees test,
23 and basically it was the sort of initiative from the
24 lenders that we needed to go ahead and be clear and
25 the judgment was that in every case credit insurance
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1 would most likely kick you above the 5 percent fee
2 limits so we may as well go ahead and prohibit it,
3 and be clearer.
4 MR. CREEKMAN: It's not limited, that's not
5 limited to high-cost home loans. That is an
6 absolute bar across the board for home loans.
7 MR. LONEY: If we could just go back to
8 prepayment penalties for a second, one of the
9 questions I guess I've had is, is there a difference
10 in how we would treat them if it's a prepayment
11 caused by a refinance by a different lender or the
12 same lender; would you treat those two differently?
13 MR. EAKES: I don't think you're going to
14 find that it's administratively easy -- let's take
15 the case where you have a different lender, and it
16 had a prepayment penalty of 5 percent. So now --
17 and let's say that it charged 7.99 up-front fees on
18 that loan so it managed to not hit the high-cost
19 trigger for the first loan.
20 Now you have a situation where you would
21 like to refinance out of that loan, and even if it
22 is -- so the borrower has a new lender who says I'm
23 willing to refinance, it's going to cost me
24 3 percent to originate, and I have to include the
25 5 percent prepayment penalty from the previous
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1 loan. You basically are penalizing the new lender
2 and the borrower in a new, improved circumstance for
3 basically compensation that all went to the old
4 lender. What you need to do is include the
5 prepayment penalty on the new loan and so this
6 confusion about whether or not it's prepayment
7 penalty of the old loan or the new loan -- the old
8 loan makes no sense. You really do help lock in a
9 borrower even worse.
10 MR. LONEY: If it's the same lender you
11 wouldn't say that; right?
12 MR. EAKES: I think even under HOEPA now,
13 if it's the same lender, that they're prohibited
14 from charging prepayment penalties. So that's
15 not --
16 MR. LONEY: That's true in North Carolina?
17 MR. EAKES: North Carolina has a general
18 prohibition against prepayment penalties across all
19 loans up to $150,000, but we recognize that there
20 are federal preemption statutes that would allow
21 some lenders to override that, so then we had a
22 separate door or threshold in the high-cost that
23 said prepayment penalties would actually count
24 towards the fees and towards its own threshold.
25 MR. STOCK: Over a certain amount. Don't
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1 we have -- isn't it 2 percent to up to 30 months?
2 MS. CRAWFORD: One in, one out.
3 MR. CREEKMAN: Can I clarify on that? You
4 have to start with what the North Carolina law used
5 to be. The North Carolina law in a home loan used
6 to prohibit prepayment penalties if the loan was
7 $100,000 or less. That rule was in large measure
8 preempted by almost every lender in sight so it was
9 a meaningless rule. So the decision was made to try
10 to address the prepayment penalty issue in the
11 high-cost home loan statute, and it was done in two
12 ways.
13 The first is that prepayment penalties
14 regardless of what they are in the new loan are
15 included in the calculation of points and fees.
16 Secondly, prepayment penalties are an
17 independent threshold to determine whether or not a
18 loan is a high-cost home loan, if the loan has more
19 than a certain number of prepayment points and
20 fees. Then in the calculation of points and fees
21 there is a very complex formula for determining when
22 you can exclude points and fees for the
23 calculation -- correction -- prepayment penalties
24 from the calculation of points and fees, and that
25 was a result of, quite frankly, a political
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1 compromise.
2 So right now prepayment penalties are
3 probably the most complex issue, but the real bottom
4 line is that if you've got more than two prepayment
5 penalty points built into the loan you're a
6 high-cost home loan.
7 MR. EAKES: Two.
8 MR. CREEKMAN: If you charge a prepayment
9 penalty for more than 30 months or you have more
10 than one prepayment penalty as a practical matter,
11 it's going to be included, the excess is going to be
12 included in the calculation of points and fees. So
13 it's a very complex formula.
14 MR. EAKES: I think prepayment penalties
15 are analytically the most complicated of all issues
16 that we've looked at.
17 Under HOEPA you have the option to say we're
18 going to count prepayment penalties as part of the
19 trigger; then you have the option of saying we're
20 going to have it be a consequence of passing the
21 trigger. And that's what HOEPA currently says, that
22 if you pass the trigger there are limitations that's
23 relatively complicated even in HOEPA. But we chose
24 in North Carolina to not have that be circular. We
25 felt like it needed to be included in the trigger
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1 and hence there are no prohibitions against
2 prepayment penalties as a consequence of being a
3 high-cost loan. It's included in the trigger
4 because the lenders articulated to us that
5 prepayment is basically tied to the origination cost
6 function, the same as points and origination fee
7 is.
8 MR. LONEY: Could I ask in the interest of
9 time if we could change the topic. We've talked a
10 little about flipping, I don't know that we need to
11 go back there, but one issue that we have a great
12 deal of interest in is the issue of unaffordable
13 lending.
14 MR. EAKES: Before you leave points and
15 fees, there's one more item that we think was
16 mandated by Congress to be included in points and
17 fees when it said that all broker compensation was
18 in the definition of points and fees under HOEPA.
19 It says it tracks a lot of truth in lending
20 categories but then it separately said all
21 compensation to mortgage brokers, and we believe
22 that Congress's intent and I think from the
23 committee reports was to include both the direct
24 payment by the borrower and also the yield spread
25 premium that is paid by the lender in that
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1 definition of points and fees, that that was
2 something explicit that Congress looked at. And we
3 agree, certainly recognize that RESPA and HUD made a
4 statement that yield spread premiums are not illegal
5 per se, but neither are discount points and
6 origination fees and they are still included in the
7 points and fees definition. So we think that is
8 really quite critical.
9 MR. LONEY: I can't imagine that you have
10 something to say about that, Ms. Crawford.
11 MS. CRAWFORD: We disagree. And because
12 you do have different tests for HOEPA, one of the
13 tests is rate, so you already have that trigger and
14 the yield spread premium is included in the rate.
15 So you would be basically double dipping, and we
16 don't feel that -- and it has already been taken out
17 and we don't feel it needs to be put back in.
18 GOVERNOR GRAMLICH: I have a question about
19 that. Is it double dipping if there's alternative
20 tests? You put something in one test, whether it
21 ought to be in or not I leave aside, but let's say
22 we decide it ought to be in; it's in the rate test,
23 but the point fee test is an alternative. So just
24 because it's in the rate test doesn't mean
25 logically, I don't think, that it should not be in
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1 the points and fees test.
2 MS. CRAWFORD: Yield spread premium is a
3 pricing issue just like prepayment penalty, and it
4 would be -- we're the only lending entity that has
5 to disclose our profit, period, and we have to put
6 it on the HUD-1 settlement statement. The banks
7 don't have to disclose their profit, the credit
8 unions don't have to disclose their profit, the
9 savings and loans don't have to disclose their
10 profit. So we are in an uneven playing field right
11 from the beginning.
12 We can go in -- you can shop our rates on
13 conventional rates, go up against any bank in this
14 room, and we probably will have a lower rate that
15 day, any day. We still might be -- but the way we
16 look -- the way we receive our rate sheets and the
17 way the lenders give us our price, there is a
18 premium on that price, and a lot of times there is
19 no par pricing. You either have an 8 percent and it
20 costs an eighth to the customer or we might have
21 eight and a eighth and we might get an eighth. So
22 it's in the rate.
23 GOVERNOR GRAMLICH: I know it's in the
24 rate, yeah.
25 MR. EAKES: I just wanted to comment that
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1 the double dipping argument goes too far, because if
2 you take just points and fees -- I mean discount
3 points and origination fee, which everyone would
4 agree should go in points and fees, that also gets
5 calculated into the APR. So the double dipping
6 argument goes too far because everything that's in
7 the points and fees test now also gets calculated to
8 a much --
9 GOVERNOR GRAMLICH: They're alternative
10 tests. They don't add onto each other, there's one
11 test or another test.
12 MR. EAKES: All the components of the
13 points and fees already do what I think Kate was
14 worried about.
15 MR. COUDRIET: I think the theory behind the
16 lenders covering broker compensation is, at least at
17 the point of closing, to have the lender defray part
18 of the cost of originating the loan and not the
19 borrower up-front. Then to scoop up more people
20 into HOEPA by changing that rule will have the
21 effect, I believe, of limiting availability to a
22 whole new class of people that we've worked hard to
23 enfranchise.
24 MS. CRAWFORD: You also are going to bring
25 in FHA and VA loans into HOEPA, and I don't know if
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1 you want to do that because you are going to be --
2 as Mr. Coudriet said, we are going to be denying
3 credit to people that don't need to have credit
4 denied to them.
5 MR. EAKES: FHA and VA premiums are already
6 counted in HOEPA.
7 MS. CRAWFORD: If there's yield spread
8 premium, you put that in there. If you have points
9 and fees triggers, it probably will go over the
10 points and fees triggers that I've read that some of
11 the people want.
12 GOVERNOR GRAMLICH: Let me make my position
13 clear. I'm not taking a position on whether this
14 ought to be in either test, but the fact that it's
15 in one test strikes me as not saying anything about
16 whether it should be in the other test. Right? I
17 mean, it's just a technical point on how these tests
18 work.
19 MR. CREEKMAN: I think the practical
20 consequence is going to be this: The issues from
21 our perspective are, number one, what is going to go
22 into the calculation of enumerator; that's what are
23 the points and fees. Number two, what is going to
24 be the total loan definition for determining the
25 denominator in making this fraction.
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1 It really doesn't matter to us what you say
2 is in that pot that we have; for me, it doesn't
3 matter. Because what we're going to do then is look
4 at the loan and see whether or not we're in
5 violation of that rule, and if it throws us over the
6 5 percent or the 8 percent, we're not going to be
7 able to make the loan. So really it doesn't matter
8 how you bunch them together. Whatever the rule is,
9 we're going to have to live with it.
10 If you decide that yield spread premiums are
11 going to be included in the calculation, then what
12 that's going to do is drive yield spread premiums
13 out of the marketplace in large measure if there are
14 other points and fees that are included in that
15 calculation that are of greater importance to the
16 lender. It's really a prioritization issue with us.
17 GOVERNOR GRAMLICH: Earlier Glenn raised
18 the issue of whether if you changed the HOEPA
19 trigger however it would drive lenders out of the
20 HOEPA market, and so you seem to be answering that
21 question yes; right?
22 MR. EAKES: If they're a conventional
23 lender.
24 MR. CREEKMAN: We're a conventional
25 lender. Let me give you a simple example. Let's
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1 assume that a conventional mortgage loan with one
2 point loan origination fee, and let's assume that
3 what you're doing is financing an executive moving
4 from point A to point B whose company reimburses him
5 for two discount points up-front in order to reduce
6 the interest rate to what he had in the city that he
7 left, okay. All three of those points are already
8 included in the calculation.
9 MR. EAKES: If the lender paid it directly
10 it's not included either in HOEPA or North Carolina.
11 MR. CREEKMAN: Wait a minute; I'm not
12 talking about North Carolina calculation. If that
13 discount point is paid by the borrower to the lender
14 and if you have a one-point loan origination fee,
15 you're up to three points already in the
16 calculation. If you throw a mortgage broker into
17 that transaction, then the mortgage broker is going
18 to push us up to the -- potentially he's going to
19 push us up to the limit. So the presence of a
20 mortgage broker in the transaction is enough of a
21 red flag for us to beware of the transaction,
22 regardless of whether that broker is compensated
23 directly by the borrower or through a yield spread
24 premium arrangement, if the yield spread premium
25 arrangement is going to be included in the
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1 calculation of points and fees.
2 We just need to know what the rule is and
3 then we'll do those calculations. But we may not be
4 able to give those loan discount points to that
5 executive who moves into the area and we may not be
6 able to compensate the broker what the broker is
7 charging based upon his agreement with the
8 borrower. It becomes a very simple mathematical
9 test for us.
10 Our greatest difficulty at this point is the
11 calculation, trying to systemize the calculation of
12 the denominator. And this is just an aside, but we
13 struggle with the total loan definition; that's just
14 a nightmare for us. If you can simplify that it
15 would be great.
16 MR. MICHAELS: You're saying that's true
17 under HOEPA, North Carolina law, or both?
18 MR. CREEKMAN: Everybody. It's the same
19 definition. But trying to figure that total loan
20 based upon the commentary is real difficult for us.
21 MR. LAMPE: I would echo that by saying
22 from strictly a compliance viewpoint, regardless of
23 what your politics are, which I think is what Jim is
24 saying, if there's an opportunity to have HOEPA
25 points and fees calculation clarification in this
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1 exercise, I think there would be universal
2 acceptance of the correction of the math. What goes
3 into the math or what factors go into the math is
4 one reason why we're here today to discuss and
5 debate, but HOEPA calculations simplification would
6 be welcomed.
7 MS. EGGERS: I would just add that I think
8 even this discussion is pointing out that we need to
9 have clarity on whether we want HOEPA loans to be
10 considered those that we absolutely don't really
11 want to have happen, or whether they are loans that
12 we think exceptional consumer protection needs to be
13 provided for. Because one of the things, and I
14 think it's been said; we talk about expanding the
15 scope but half of the conversation is about that we
16 shouldn't be doing that lending at all, and I think
17 we put some of the numbers on the table about the
18 implications of that. I find that very concerning
19 in terms of pulling that credit out of the market.
20 GOVERNOR GRAMLICH: I wonder if I could --
21 this gets away from Glenn's list here and I
22 apologize, but there does seem to be at least a few
23 people saying that the point of the North Carolina
24 law was to shut down the high-cost market. I have
25 never heard that said about HOEPA. Does anybody
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1 here think that's the intent of the HOEPA law?
2 MS. CRAWFORD: There's some people that do,
3 there's some brokers that do.
4 MR. LONEY: But the intent --
5 MS. EGGERS: I would respond to that by
6 saying that I think the original intent was never
7 portrayed that way. I think, given all the
8 confusion that exists in the market today -- the
9 North Carolina legislation, discussions in Chicago,
10 discussions in New York -- I think it is becoming
11 very confusing about what HOEPA's forward intentions
12 should be, need to be. And it calls into question
13 how much discretion we want the consumer to have in
14 making their own financial decisions and how much we
15 think the legislature should decide or lenders
16 should decide or brokers should decide.
17 Our proposal is really focused on getting
18 the consumer educated, the consumer prepared, and
19 the consumer enabled with simplified disclosures to
20 make their own decisions. We don't want to be
21 making all their decisions. We are not sure the
22 Board wants to either.
23 MR. EAKES: When I was in graduate school
24 in economics, if we had a perfectly working market
25 we wouldn't -- Congress would never have passed
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1 HOEPA. If we had information where borrowers had
2 equal knowledge, perfect knowledge, and rational
3 decision-making, we wouldn't need any of this. So
4 the very fact that we have a bill passed says that
5 we know we've got inequality of bargaining power and
6 we know that we have information gaps for
7 borrowers. That's just an assumption of the real
8 world that we know we have by looking at HOEPA. And
9 when I hear people, particularly on prepayment
10 penalties, tell me, well, let's look at making this
11 an option for borrowers, I come back to them and
12 say, well, let's look at the place where the market
13 works the best, which are conventional mortgages,
14 and we have less than 1 to 2 percent of borrowers
15 who actually choose or get prepayment penalties.
16 So in the context where we have the best
17 working market and where we have the most
18 information and the most sophisticated players, only
19 1 to 2 percent choose it. So why all of a sudden do
20 people, when they get to subprime, do 80 percent?
21 I think the rhetoric of consumer choice
22 takes you too far, because we wouldn't be discussing
23 this if we didn't think there were market
24 imperfections.
25 MR. COUDRIET: Once again, because there are
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1 differences between the A market and the subprime
2 market and those differences lie in the cost of
3 underwriting and the cost of servicing, which must
4 be covered if you're going to provide that
5 service -- let me answer the Governor's question.
6 Yes, we have avoided HOEPA loans because we
7 thought that was backhanded advice from Congress,
8 that they really didn't want these loans made. Now,
9 we might have been wrong about their intent but
10 that's what we took it for. Because of the
11 complexity of the law, because of that complexity we
12 have so much up-front diligence to do we have
13 effectively assumed that we can't make those loans
14 profitably and we stay away from them. So yes, the
15 effect was to limit the participation.
16 MS. CRAWFORD: Mr. Eakes said something
17 valid about 1 percent of -- I'm not sure what his
18 statistic was. But in the conventional market --
19 and I am a conventional broker -- we do have on
20 almost all my ARM products, my adjustable rate
21 mortgage products, prepayment penalties.
22 Bank of America offers two different
23 products -- give you an ad here. They have a
24 prepayment penalty ARM and they have a
25 non-prepayment penalty ARM. The prepayment penalty
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1 ARM was at six and a half last week, with the --
2 without it it was at seven and a half. So a
3 borrower in North Carolina would choose the
4 prepayment penalty ARM on a purchase. And that's
5 his option to do that, and they know the
6 consequences going in.
7 MR. EAKES: But only 1 percent actually
8 choose that nationwide, actually choose to have a
9 prepayment penalty.
10 MS. CRAWFORD: Who gave you those
11 statistics?
12 MR. EAKES: Freddie Mac, Fannie --
13 MS. CRAWFORD: Freddie doesn't have --
14 MR. EAKES: I can get you the data. I'm
15 really confident of that number, 1 to 2 percent.
16 MS. CRAWFORD: I don't think that's true.
17 MR. EAKES: Very confident.
18 MR. LONEY: Okay. Can we now switch -- I
19 guess we've heard everybody's views on the yield
20 spread premium. What I wanted to talk about was
21 affordability and the question of what the Board
22 should do, if anything, with respect to the issue of
23 affordable loans or prohibiting or somehow
24 restricting, under HOEPA, making loans that the
25 creditors should know can't be paid back based on
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1 the income, et cetera, that the borrower has.
2 Should there be, for example, additional
3 documentation requirements regarding whether or not
4 a particular customer can afford the loans. There's
5 a number of issues that come up with respect to
6 that, and I thought it might be useful to talk about
7 that a little bit. Anybody want to start us off?
8 Ms. Eggers?
9 MS. EGGERS: On pattern and practice we
10 don't see any real need for any additional
11 guidelines to be offered along that direction.
12 What we would advocate and suggest the Board
13 to consider is the development of a safe harbor,
14 that we would be more than happy to work with you on
15 in the definition of it as guidelines, including
16 debt to income, loan to value, medium income, other
17 credit characteristics. I think what that enables
18 is it encourages the lending market to continue to
19 stretch and afford credit that is reasonable and
20 sort of covers all the issues that we've heard
21 discussed about what has pulled a lot of lenders out
22 of the marketplace in terms of the lack of safe
23 harbors. So that's our perspective on those
24 issues.
25 MR. LAMPE: Just as a point of information,
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1 the North Carolina statute adopts -- while providing
2 for a case-by-case determination rather than pattern
3 or practice, it does adopt a certain safe harbor. I
4 think the New York part regulation more or less
5 follows, the last time I looked, verbatim what we've
6 done in North Carolina. So there's precedent in the
7 law books right now for that sort of approach.
8 MS. HURT: Just so that I understand, where
9 you have a case-by-case basis I can understand the
10 need for a safe harbor, but where you have the
11 varying general standards in HOEPA and you have to
12 prove pattern or practice -- and maybe Mr. Maynard
13 would want to weigh in on this -- why would you need
14 safe harbors from the Board? Within pattern or
15 practice, why would you need a safe harbor? I can
16 see the case-by-case.
17 MS. EGGERS: We prefer pattern or practice,
18 but what we're suggesting is, because of the nature
19 of the marketplace being what it is in terms of the
20 energy around finding the exception and making it an
21 example versus dealing with what Mr. Creekman said
22 early on, let's regulate to support providing credit
23 into the marketplace and deal with the exceptions.
24 The safe harbor just encourages lenders to take on
25 the additional challenges of the marketplace that
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1 we're operating in, that's all. I don't think it's
2 a requirement. We'd be supportive of it.
3 MR. LONEY: Did you have something?
4 MR. MAYNARD: No.
5 MR. LEHMAN: Talking about the pattern and
6 practice issue, I think that term creates a very
7 high barrier for anybody who's seeking to enforce
8 the prohibition on lending without regard to payment
9 ability, and certainly restricts private enforcement
10 for those like Mr. Maynard who defend people in
11 foreclosure situations.
12 I don't think there's any lender -- no
13 lender I've ever talked to has acknowledged, and I
14 don't think they do, make loans to somebody who's
15 not going to repay them or make loans purely based
16 on the assets. So this is not something, if
17 properly worded, that should cause any heartburn to
18 any responsible lender, prime or subprime.
19 MS. EGGERS: I think the one challenge that
20 connects into this issue, and I'll be brief with it,
21 is just when you try to determine and who's going to
22 determine what the value is to the customer. You've
23 heard some discussion around that. That is a huge
24 issue, and I think you've heard the lenders say
25 that's a very difficult proposition for us, to be in
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1 the place of judge and jury, and I think that factor
2 needs to be considered when you look at the ability
3 to deal with issues about affordable loans.
4 MR. LONEY: What about the documentation
5 issue? Anybody want to weigh in on that?
6 MR. COUDRIET: Only that it's one more piece
7 of paper to put in the mortgage file and we've got a
8 lot of them right now.
9 I think, getting back to the suitability
10 standard, yeah, it's nice to have a bright line in
11 the law. On the other hand, you are also looking at
12 the potential of, once again, disenfranchising
13 certain people. You have an underwriter in a
14 mortgage company whose job it is to protect the
15 company on the one hand, and he's pressured on the
16 other hand to make that exception, include another
17 person, give them a chance.
18 Now, from the standpoint of the mortgage
19 company, we're going to lose money if he includes
20 too many people, and we have our own guidelines that
21 we like to adhere to so that we don't have too many
22 foreclosures. On the other side, if we take away
23 that underwriter's discretion when he uses it, we're
24 disenfranchising that many more people who can't
25 live within the box.
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1 MR. BOST: I just was going to offer -- I
2 think what you do on this issue depends on how you
3 view Section 32, whether you view it as a rule that
4 provides guidance or whether it's a rule that
5 anything that goes above its threshold is
6 undesirable and you want to see prohibited. Because
7 a change to this rule, this rule right here, would
8 put people in a position where they either could
9 make those loans safely or they would be scared to
10 death to make them. So I think any change you make
11 to that provision depends on how you view Section 32
12 loans.
13 MR. CREEKMAN: In dealing with the specific
14 question that you raised about repayment ability,
15 the way the current Section 32 reads, it's a matter
16 of considering the consumer's current and expected
17 income, current obligations, and employment status.
18 I think it would be appropriate to include in that
19 laundry list the other assets of the borrower
20 exclusive of the property which will secure
21 repayment of the loan. I think that would be a very
22 reasonable thing to include in there. And the
23 reason for that is -- I'll give you a very clear-cut
24 example.
25 Yesterday I had a customer complaint on my
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1 desk. We denied a loan to a customer who had a
2 74 percent debt-to-income ratio and she was
3 protesting and she said, look at what I've got. And
4 what she had was a million dollar-plus net worth
5 with heavy debt, with relatively low income, but the
6 nature of the business that she was engaged in was
7 fixing up and selling properties and she's been
8 doing it successfully for 20 years, and the
9 loan-to-value ratio for the particular piece of
10 property that we would be taking as collateral would
11 be 34 percent. It didn't make sense to deny that
12 loan and we're reconsidering it for that reason.
13 There are situations where simply the
14 earnings of the borrower are not a good indication
15 of the borrower's ability to repay the loan.
16 MR. LONEY: Anybody?
17 MS. HURT: Just to clarify, would that have
18 been a HOEPA-covered loan?
19 MR. CREEKMAN: In this instance it was not,
20 it was a request for home equity line of credit, but
21 it could just as easily have been the refinancing of
22 that 34 percent loan to value, her primary
23 residence; we would have had the same result.
24 MR. LONEY: Anybody else? Okay. There
25 were a couple of items that the Board included in
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1 its notice and I just wanted to throw it open for
2 the group to talk about.
3 The Board asked for comments on a number of
4 disclosures concerning, for example, credit
5 insurance and similar products, referrals to
6 counseling services, and I'm not talking here
7 about -- we're going to be talking about counseling
8 service issues this afternoon, but just the issue of
9 whether we ought to require a disclosure of the
10 availability of counseling services. Balloon
11 payments, improvements to the HOEPA disclosures and
12 foreclosure notices, those are a few things that the
13 Board specifically asked for views on.
14 We're particularly interested in your views
15 on a federal standard for foreclosure notices, but
16 we'd like your comments on any of the items that I
17 talked about. Just to reiterate: Credit insurance
18 and similar products, referrals to counseling
19 service, balloon payments, improvement to the HOEPA
20 disclosures, and foreclosure notices. Anybody want
21 to pick one and say something?
22 MR. BURFEIND: The disclosure with regard
23 to credit insurance as provided in Regulation Z, we
24 think is pretty plain, pretty straightforward, and
25 the studies indicate that it has had an impact in
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1 the marketplace. Right on the front of the
2 document, you know, the notice that the credit
3 insurance is optional, it's not a condition of
4 credit, this is the cost; if you want it, sign
5 here.
6 The comment was made that consumers aren't
7 aware of it; the studies suggest otherwise. Without
8 going through a lot of detail, in the most recent
9 one by the Credit Research Center one of the
10 interesting points was that -- two interesting
11 points. One, that the borrower's awareness of the
12 insurance purchase appears to rise with the size of
13 the loan to be insured. Clearly the mortgage loans
14 and equity loans would fall into the larger
15 category.
16 And as far as -- they studied recall errors
17 in that study; you know, did you or didn't you buy
18 it. Some people thought they bought and didn't,
19 others bought and thought they didn't, you know, the
20 small percentage. But one of the interesting
21 findings was that it was not the older borrowers or
22 those with the lower income and less education that
23 had these errors. It was the older borrowers and
24 the ones with the less education that had the better
25 recall and awareness of the purchase. And this is
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1 the market segment that people of good will promoted
2 and subscribed to the kinds of disclosures that are
3 evident in Regulation Z right now.
4 MR. LONEY: One of the concerns that's been
5 raised -- you mentioned one, that they're not
6 aware. The other concern is that the sales tactics
7 have been --
8 MR. BURFEIND: I think somebody else said
9 they were not aware. My point is there is a high
10 level of awareness.
11 MR. LONEY: I understand, but you addressed
12 the issue that they weren't aware. The other issue
13 that has been raised is that sales tactics have led
14 consumers to believe the insurance is required. Do
15 we have any comment --
16 MR. BURFEIND: That same study that I said,
17 the Consumer Research Center study, I know a copy is
18 with the staff of the Board; I don't know who all
19 has had a chance to look at it yet. But one of the
20 other findings was that of the purchasers of credit
21 insurance only 1 percent indicated they believed it
22 was required.
23 MR. MAYNARD: One of the things that my
24 clients express surprise at when they are discussing
25 credit insurance purchases with me is that often the
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1 credit insurance that they purchased was purchased
2 from a wholly-owned affiliate of the lender. So
3 when they look back at this transaction they realize
4 that this suggestion by the loan officer to purchase
5 credit insurance actually resulted in the purchase
6 of a credit insurance product from a wholly-owned
7 subsidiary of the lender.
8 When Mr. Eakes was mentioning a 40 percent
9 commission that's often a part of these premiums,
10 you wind up with the scenario where you've got a
11 lender who is making interest on this premium and an
12 insurance company that's making money, rightfully so
13 of course, on a product. But here you've got what I
14 think is largely unknown by consumers, the fact that
15 in a greater number of these transactions the
16 product is being sold to a wholly-owned subsidiary
17 of the lender itself. The insurance company is
18 actually owned by the lender.
19 Now, I know in Regulation X there is a
20 requirement that affiliate relationships be
21 disclosed. In the disclosure that Mr. Burfeind was
22 speaking of there, that is not clearly disclosed to
23 consumers; that if they buy this product that
24 they're, you know, apprised of the fact that it is
25 in fact an affiliate of the lender. I think that
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1 might give rise to a bit more inquiry by the
2 purchaser as to whether or not there's an arm's
3 length transaction involved, as to whether or not
4 this is fair pricing for the product that's being
5 sold, and I don't think that's clearly disclosed in
6 the current disclosures.
7 MR. BURFEIND: Two points of
8 clarification. First, there's only a hundred
9 pennies in a dollar and --
10 MR. LONEY: Are you sure?
11 MR. BURFEIND: In my dollar there's only a
12 hundred pennies. In the real estate secured market,
13 as I indicated in my opening remarks, the experience
14 is that the claims cost is at or above 60 percent;
15 60 cents out of these hundred pennies is being paid
16 out in benefits.
17 Since there are expenses associated with the
18 program as well, it's very unlikely that in this
19 market segment anybody is paying 40 percent
20 commissions.
21 Secondly, in the captive environment, if I
22 understood Mr. Maynard correctly, my understanding
23 is that usually there aren't commissions paid in
24 that environment, that ultimately whatever profit
25 might enure from the credit insurance transaction
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1 would simply be moved upstream as a dividend at some
2 time in the future and not paid out as a commission
3 between the parent and the subsidiary or between the
4 loan officer and the parent or subsidiary. That's
5 my understanding.
6 Now, there's a number of ways which
7 compensation can be arranged, but before we simply
8 accept that statement at face value let's just
9 indicate -- if it's a matter of real interest to the
10 Board, we ought to look at it a lot more closely.
11 MR. EAKES: It doesn't matter whether it's
12 an implicit commission or explicit, it's still the
13 same 40 to 50 percent.
14 MR. BURFEIND: Maybe your dollar has more
15 pennies than mine, Mr. Eakes.
16 MR. EAKES: I don't understand.
17 MR. BURFEIND: I just said you can't -- if
18 you're paying 60 percent out in claims you can't be
19 paying 40 percent in commission.
20 MR. EAKES: In North Carolina the credit
21 insurance claims payment is under 40 percent, right;
22 40, 41?
23 MR. BURFEIND: Not for the real estate
24 secured. If you look at the real estate secured
25 segment, which we've begun to -- and the data that's
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1 publicly available for the most part -- in fact, I
2 think exclusively -- doesn't carve out the real
3 estate secured. The credit insurance reporting had
4 never been required to differentiate between
5 unsecured and secured, so the only reference numbers
6 you've got for North Carolina generally have to do
7 with the aggregate, unsecured and secured.
8 MR. EAKES: Does that mean that if the real
9 estate which is roughly half is 60 percent payout
10 and our average is 40, that for consumer loans the
11 payout is 20 percent?
12 MR. BURFEIND: I don't know where you come
13 up with half.
14 MR. EAKES: You must have it broken out
15 between real estate and non-real estate. What's the
16 number you've got?
17 MR. BURFEIND: I don't think we have that
18 kind of penetration, or that our industry has that
19 kind of penetration in the real estate secured
20 marketplace.
21 MR. MICHAELS: Can I ask a question?
22 MR. BURFEIND: I'm really not in a position
23 to venture an allocation at this point.
24 MR. MICHAELS: I have a question about the
25 consumer's understanding of credit insurance and the
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1 disclosure issues that we can deal directly with
2 under HOEPA, and that is, usually when is the
3 consumer first asked about credit insurance or asked
4 to agree to credit insurance? What is the timing on
5 that? At application, at loan closing, in between?
6 MR. BURFEIND: Perhaps some of the lender
7 representatives might indicate what their individual
8 practice is, but my understanding of the general
9 practice is that it is presented as an option at the
10 closing. And this is largely as a result of being
11 responsive to concerns expressed by consumers in the
12 past that consumers are led to believe that it's a
13 requirement of the loan. We say no. You don't show
14 up until the loan closing, you know your loan is
15 approved by the time you get to the loan closing; it
16 can't be a requirement of credit. So that's the
17 time that generally, by my understanding, the option
18 is presented.
19 MR. MICHAELS: Anybody else have a view on
20 that?
21 MR. EAKES: I just wanted to cite -- in the
22 written testimony that I submitted, I think it may
23 be the same industry study or an earlier one from
24 the Credit Research Center study, Purdue, 1994; it
25 cited that 40 percent of the borrowers of who have
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1 prepaid credit insurance either didn't know they had
2 it or thought that it was required. This is an
3 industry study -- 40 percent.
4 I would argue the other 60 percent can't
5 have known that they were paying -- is that '94?
6 The other 60 percent can't have known that they were
7 paying 99 percent of that premium out of the equity
8 in their home. The Federal Reserve's rules in truth
9 in lending only require an initialization at
10 closing; that's the only requirement for it to be
11 excluded from the finance charge, which is --
12 MR. BURFEIND: I handed Mr. Eakes the study
13 so that maybe he could thumb through and identify
14 the page where that figure presents itself. When I
15 reviewed the study last night the only reference I
16 found to anything close to 40 percent was related to
17 some finding, a questionable finding by the way, in
18 a 1976 study, not a finding of the current survey
19 results.
20 MR. LONEY: While you're doing that, would
21 some of the other lenders try to answer Jim's
22 question?
23 MR. BOST: I would like to say what doesn't
24 happen. Generally the brokered loan transaction in
25 North Carolina that's a conforming loan -- our
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1 brokers generally don't sell credit insurance. I
2 mean, it's not common across the mortgage market,
3 especially in the broker loan market. It's only
4 common in certain kinds of transactions. And if I
5 could offer this question, I'd like to know what
6 kinds of transactions it is offered in, because I
7 deal with a lot of lenders and most of my lenders
8 don't offer it and most of my brokers don't offer
9 it. So maybe Martin or --
10 MR. MAYNARD: Do you want names of
11 lenders?
12 MR. BOST: I guess my question is -- the
13 point I want to make is, credit insurance is not
14 from the bottom to the top, it's somewhere --
15 MR. MICHAELS: Where it is offered, when is
16 the consumer usually asked to make a designation?
17 MR. EAKES: At closing.
18 MR. CREEKMAN: In our case, our mortgage
19 department, the conventional 15- and 30-year loans,
20 we actually don't have the ability to be able to
21 offer credit insurance at closing. It's offered by
22 letter to the customer after closing.
23 In the case of consumer loans, we have a
24 loan documentation preparation system which you have
25 to tell up-front do credit insurance or don't do
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1 credit insurance, so before the loan documents are
2 prepared the customer normally makes that choice.
3 However, it is not our practice to charge
4 single-premium insurance in any case. And in North
5 Carolina, the credit insurance rates are set by
6 statute, so it really doesn't matter whether you're
7 dealing with a subsidiary or nonsubsidiary; the
8 rates are the same. It's plain vanilla.
9 MS. CRAWFORD: When I first started out in
10 lending I worked for a finance company -- well, I
11 worked for three finance companies; I thought they
12 would get better as I went along. But the main
13 problem that I had was, we were trained to not
14 disclose until closing that the customer had credit
15 life insurance on their loan. We were told, just
16 tell them sign here, sign here, sign here. That was
17 back in the mid-seventies, and I know since then
18 disclosure is a lot better, I would hope, but back
19 then we were just -- we just told the customer to
20 sign here, sign here, sign here. And we were told
21 that we had to tell them it was required.
22 MR. LONEY: What are you doing now? You
23 don't sell it?
24 MS. CRAWFORD: I'm a broker, I just
25 don't -- my lenders do not offer it and I would not
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1 sell it because of what I have been through in those
2 first four years.
3 MS. EGGERS: I'd like to answer the
4 question from EquiCredit and Bank of America's
5 perspective. We have an approach that's a hundred
6 percent offer, offer the product to everyone, but
7 obviously we are either not doing that or the
8 consumer has other ideas because our penetration of
9 product is exceptionally low for EquiCredit.
10 MR. EAKES: 15 percent?
11 MS. EGGERS: No, actually, Martin, it's a
12 little short of 9 percent penetration. And as we
13 have worked through it there's a couple of points
14 where we would engage the consumer; one is actually
15 prior to closing, which is the preferred situation
16 because then all of our documentation is better set
17 up at the closing table. And when we are closing
18 open items on the credit, you know, we haven't
19 gotten this form, haven't gotten that form, then our
20 account officer is in the position to offer the
21 product to the consumer. And again, it's a
22 situation where it's a hundred percent offer, but
23 our penetration is exceptionally low.
24 MR. MICHAELS: Let me tell you why I ask
25 the question. I think there's a compliance issue
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1 under HOEPA that doesn't necessarily arise under
2 non-HOEPA loans, and that's under HOEPA the consumer
3 is supposed to get a disclosure three days before
4 closing that has the monthly payment in it, and the
5 monthly payment in that disclosure is not supposed
6 to include credit insurance as part of the payment
7 if the consumer has not already asked for credit
8 insurance. So it seems to us that if the consumer
9 is presented with the insurance option at closing
10 and chooses it, the monthly payment will change and
11 then you're back into a situation where you have to
12 give the HOEPA disclosures all over again, wait
13 three more days. Either that's happening or HOEPA
14 isn't being complied with. That's what we're trying
15 to figure out.
16 MS. EGGERS: This gets back to the whole
17 idea of simplifying disclosures. One point I put on
18 the table, whether you like credit insurance or not,
19 one way to think about that is that's not completely
20 a Section 32 HOEPA issue as much as it's a Reg Z
21 issue, because credit insurance is regulated under
22 Reg Z.
23 One perspective we've got is yes, it needs
24 to be regulated and disclosures need to be a lot
25 clearer. If this is a key focus, when we take Jim's
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1 idea of redoing all the disclosures and making them
2 simpler and starting from beginning to end, we might
3 want to consider putting more emphasis on the
4 insurance disclosures in the process, if that's a
5 heightened area of consumer concern. We would be in
6 complete support of that.
7 MR. MICHAELS: We're just trying to figure
8 out how credit insurance can be sold with HOEPA
9 loans and brought up only in closing and still be
10 compliant with HOEPA.
11 MS. EGGERS: Just to clarify too, we don't
12 do HOEPA loans.
13 MR. BURFEIND: Let me make some independent
14 inquiries on that and respond to that in written
15 testimony that I'll submit prior to September 1.
16 MR. MICHAELS: I'd appreciate that. If
17 anybody else has a view on it --
18 MR. LONEY: Another issue that we've talked
19 about is balloon payments and whether we should do
20 anything in connection with our review of HOEPA.
21 Would it be, for example, helpful if we had
22 additional disclosures or -- can you elucidate on
23 when borrowers learn their payment schedule includes
24 a balloon payment so that we can kind of understand
25 the process. Is it typically at or near application
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1 or is it the case that consumers might first learn
2 about the balloon payment feature at closing, and if
3 it's the latter, is there a class of home-secured
4 loans that should receive information about the
5 balloon payment earlier than closing.
6 These are some questions that we've been
7 sort of kicking around in thinking about what we
8 ought to do next, and anything you can do to help us
9 think through some of this would be useful.
10 MS. CRAWFORD: Balloon payments -- any kind
11 of terms of the loan are supposed to be disclosed
12 within three business days and that is taken care
13 of -- they have a balloon disclosure, and they also
14 have -- it's also reflected in the truth in lending
15 statement. So if they are following truth in
16 lending, they are giving a truth in lending
17 statement within three business days of application
18 and they are being disclosed, three business days of
19 application.
20 MR. EAKES: I just wanted to respond to
21 Bill's point since --
22 MR. LONEY: You haven't been paying
23 attention for the last three minutes?
24 MR. EAKES: I've been listening to every
25 word. In Chapter 6, Page 12, it has a chart and it
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1 says 19.3 percent of folks that got credit insurance
2 were never told that the insurance was optional; an
3 additional 27 percent felt pressured to purchase or
4 felt buying the insurance would improve their
5 ability to get the loan. So a total of like
6 46 percent --
7 MR. BURFEIND: What's the page on that so I
8 can look at it.
9 MR. EAKES: Chapter 6, Page 12.
10 MR. LEHMAN: On balloon payments, it's been
11 our experience -- we had a case with a North
12 Carolina very high-rate lender, probably half of its
13 loans were balloon payment loans; we interviewed a
14 number of the borrowers who had balloon payments and
15 a surprising number of them, not all but a very
16 large percentage were not aware that there was a
17 balloon payment. It was almost embarrassing to talk
18 to an elderly borrower who had a balloon payment
19 provision after 15 years and give her the bad news
20 that after paying on it for 15 years she still owes
21 almost what she started with.
22 There were disclosures, it was disclosed --
23 Kate indicated it was disclosed on the good faith
24 estimate. As I recall the only disclosure was a
25 figure of 30/15 up in the corner, which to a lender
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1 means a 30-year amortization with a 15-year balloon,
2 but it means nothing to the average borrower. It
3 was disclosed at closing and there would be a
4 separate statement in this lender's file indicating
5 that there was a balloon payment and the consumer
6 signed off on it, as the consumer signed off on
7 about 30 other pieces of paper.
8 MR. LONEY: What kind of a loan was this?
9 A straight-up purchase money mortgage or --
10 MR. LEHMAN: Refinanced first mortgage. You
11 know, the disclosure provision in this case and in
12 other cases is sort of the last refuge of
13 scoundrels. You've got your client or your consumer
14 who says I had no idea about it and you try and take
15 that to court and the lender's got these disclosure
16 documents; well, you signed here, you signed here;
17 that fully disclosed that there was a balloon
18 payment.
19 MR. LONEY: Then what does one do about
20 it? I mean, if disclosure doesn't work --
21 MR. LEHMAN: What we did about it on
22 high-cost home loans was to prohibit balloon
23 payments. We thought that was the way to go.
24 MR. MAYNARD: North Carolina has a
25 particular piece of legislation known as RISA that a
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1 lot of other states have, the Retail Installment
2 Sales Act. It applies particularly in other
3 instances to -- among other instances, it applies to
4 mobile homes, and North Carolina, under the Retail
5 Installment Sales Act, prohibits balloon payments
6 with the sale of financing of mobile homes.
7 A sector of the lending industry has
8 penetrated this by avoiding the North Carolina
9 statute through the AMPTA legislation that I
10 mentioned earlier. This may not be within the
11 purview of the Board's HOEPA's powers, but the idea
12 now is that a lender who packs a balloon payment
13 into a mortgage may avoid applicable state law by
14 virtue of the preemptions that, in our view --
15 especially with mobile home loans where quite
16 frequently the land is secured and maybe there's
17 some slight appreciation in the land value over time
18 but quite frequently there's no appreciation in the
19 value of the unit itself, it depreciates over time,
20 toward the end of that loan you've got a balloon and
21 it's very difficult at that point with an older
22 mobile home unit to come up with the same value that
23 was there at the time the loan was originally
24 closed, so you wind up with very difficult
25 circumstances.
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1 Aside from these balloon payments being
2 prohibited in high-cost loans, I think with
3 manufactured housing it is something of great
4 concern, to eastern North Carolina in particular
5 right now with the events of Hurricane Floyd. There
6 are just, you know -- every county has got very
7 extensive efforts underway to replace housing with
8 manufactured units. First Citizens, one of the
9 conventional lenders that extends credit on
10 manufactured housing, is greatly appreciated. They
11 generally play by the rules, to my knowledge; always
12 play by the rules to my knowledge.
13 Unfortunately, the out-of-state lenders that
14 come in here don't do that and they will use AMPTA
15 to avoid those specific prohibitions.
16 MR. LONEY: So you would say what, for
17 manufactured housing loans we ought to consider
18 outlawing balloon payments?
19 MR. MAYNARD: I think that that's a sector
20 of the market that deserves particular protection.
21 I don't purport to know exactly the remedy or the
22 approach as how it may within HOEPA and within
23 purview of the Board's jurisdictions, but I would
24 treat manufactured housing very similar to the way I
25 would treat high-cost loans with respect to
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1 protection for consumers.
2 MR. LONEY: The Board has some authority
3 for non-HOEPA loans to take action. I mean, as you
4 in North Carolina have outlawed balloon payments in
5 HOEPA loans, that's one thing, but what do you do in
6 non-HOEPA loans. That's sort of one of the
7 questions here. Yes, Mr. Creekman?
8 MR. CREEKMAN: Carrying on a little bit
9 more about the mobile home issue, because a little
10 history is worthwhile, North Carolina used to have a
11 statute, a usury statute, which prohibited a lender
12 from making a variable rate loan secured by a mobile
13 home except under very limited circumstances which
14 were almost impossible to meet. That was repealed
15 several years ago.
16 The Retail Installment Sales Act that he is
17 mentioning actually applies only to the seller of
18 the mobile home, not to a third-party lender. So
19 when he's talking about the restriction on balloon
20 payments, that applies for seller financing; a
21 mobile home dealer, for example. It does not
22 apply -- and for the bank that would purchase that
23 if it is dealer paper, but it does not apply to a
24 third-party lender making a loan secured by a mobile
25 home.
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1 Here's where we get into a little bit more
2 of a difficult issue. When you look at the issue of
3 balloon payments outside the context of predatory
4 lending practices, whether it be a mobile home or
5 not, there are a lot of situations, particularly in
6 consumer loans -- I'm not talking about the 15- and
7 30-year mortgages -- but particularly in consumer
8 loans secured by real property or the borrower's
9 residence where a balloon payment is not only
10 anticipated, it's the plan. The idea is that you're
11 going to amortize a loan over a 30-year period in
12 order to keep the loan payments as low as possible,
13 but you're going to balloon it in three to five
14 years with the intention that at that point there's
15 going to be an economic change on the borrower's
16 part where he's going to repay the loan.
17 It is a substitute for an interest-only
18 loan, because it does amortize. And it has a very
19 real place in the economy. So when you start
20 thinking in terms of what do we do with balloon
21 payments, keep in mind that you're dealing with a
22 universe of loans that is much greater than the 15-
23 and 30-year traditional conventional loans.
24 And this applies -- I'll give you another
25 very simple reason for having a balloon loan. If
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1 it's a portfolio loan and it's not going to be sold
2 in the secondary market, then we're not willing to
3 accept the interest rate risk associated with a
4 fixed rate loan for 30 years. We're going to either
5 have a balloon on that fixed rate loan or it's going
6 to be a variable rate loan, in order to address the
7 interest rate risk issue.
8 So there are legitimate business reasons,
9 both from the consumer's perspective and from the
10 lender's perspective, to keep the balloon payment as
11 a viable tool to meet the credit needs of the
12 customer and to meet the concerns of the bank for
13 safety and soundness issues.
14 MR. LONEY: Does that get us into some of
15 the same issues, though, about something akin to net
16 tangible benefit; that is, you make some judgment
17 whether this balloon payment is good for the
18 consumer in one case and isn't good for the consumer
19 in another case?
20 MR. CREEKMAN: Yes, it does. But I'll tell
21 you that the result of that is that -- where the
22 challenge will come is after default, and so all
23 you're doing is inviting litigation on whether or
24 not the bank or the lender should have made the loan
25 in the first instance, and that challenge will only
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1 come when there has been a default down the pike.
2 And it's a setup for litigation, it invites
3 litigation.
4 MR. EAKES: I wanted to add that I actually
5 agree with Jim on there may be some situations
6 where -- I agree with him a lot. He's smarter than
7 me so I have to. But just to point out it is an
8 area where we've had abuses, where we've had loans
9 that were originated that have a balloon feature and
10 then was used as a rationale to flip the loan; I'm
11 sure many of you have seen these news reports. So
12 it's people who have a lower payment but are
13 basically not paying anything off on the loan, it
14 ends up being a rationale for flipping, and it's one
15 of those difficult, tricky places that there can be
16 situations where it's valuable and there can be
17 situations where it's abused.
18 MR. BLANTON: What is the solution?
19 MR. LONEY: What would you do?
20 MR. EAKES: I think you would probably
21 prohibit them for high-cost loans, for balloon
22 payments. Honestly, I don't think you have the
23 authority to prohibit -- I think you have a lot of
24 authority, but with AMPTA there, the parity act, I
25 doubt that you have authority to prohibit balloon
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1 payments for all home loans.
2 MR. MICHAELS: Do you think earlier
3 disclosure would help at all?
4 MR. EAKES: The one thing I think that --
5 among this group, they may or may not accept me as a
6 lender after today, but the advocates and the
7 lenders pretty much agreed in our North Carolina
8 process that disclosure will not solve much of
9 anything, that there was agreement that we have so
10 much disclosure now, whether it's the Stock theorem
11 or somebody else, that disclosure is ultimately,
12 with the level we have now, useless, and it adds
13 paperwork and cost to us lenders that's just as
14 unnecessary.
15 MR. MICHAELS: I didn't mean to close it; I
16 meant much earlier. If somebody had to be told at
17 application or within a certain period of time after
18 application that this was going to be a balloon
19 loan, would that help?
20 MR. EAKES: I don't think that the balloon
21 feature -- if you had to prioritize, I gave you my
22 five: prepayment penalty, credit life, yield spread
23 premium in the fees, making sure that the first
24 purchase, the broker actions are accountable to the
25 first lender -- something else I left out --
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1 flipping. So if you're going to waste or use one of
2 Paul Stock's five possible disclosures, I probably
3 wouldn't do it on the balloon feature. In the world
4 of abuses I think that that one is not in the top;
5 it's not on Letterman's top ten list, or top five
6 list, anyway.
7 MR. LONEY: It sounds like, though,
8 Mr. Maynard's clients might not agree with that.
9 MR. MAYNARD: I agree with both of these
10 gentlemen in almost every respect. I think that
11 there is a particular need for protection with
12 respect to manufactured housing because of the
13 tendency for manufactured housing to depreciate over
14 time.
15 MR. COUDRIET: I also find myself,
16 shockingly, agreeing with Mr. Eakes this time. The
17 one proviso would be that we don't change the
18 triggers. Because, once again, if you take the
19 triggers down and scoop up a lot more transactions
20 into high-cost loans, you're once again taking away
21 from the flexibility that a lender has to solve a
22 family's restructuring needs.
23 MR. LONEY: Let me ask just one more item
24 in the Board's notice, and that has to do with
25 whether the Board ought to do something by way of
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1 requiring a notice of the availability of credit
2 counseling services. Would that be of any use,
3 would it be -- no?
4 MR. EAKES: It's a sham. It's one more
5 piece of paper. All it is --
6 MR. LONEY: Are you objecting to the notice
7 or to credit counseling?
8 MR. EAKES: I'm just saying that putting --
9 if it's not required credit counseling, it's not a
10 substantive provision, it's simply a disclosure
11 notice, then I think it's one more piece of paper
12 out of 30. It makes no difference, not worth -- it
13 makes it appear that we've done something when we
14 really haven't.
15 MR. LAMPE: It seems like the answer to the
16 question may come in the afternoon, that Mr. Eakes
17 might agree that community outreach and education
18 may be better on a macro basis anyway than another
19 piece of paper disclosure that can be ignored in
20 connection with a particular transaction.
21 MS. CRAWFORD: I thought about this for a
22 long time, but I think that one of the reasons that
23 HOEPA and the subprime market is in existence
24 naturally is because people have impaired credit,
25 and we are not teaching our children in the school
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1 systems about credit. We teach them about
2 everything else in the school systems and I think
3 there should be -- if they still have social studies
4 class, I think this should be a required course on
5 how to handle credit and what credit does for you.
6 I think that we wouldn't be here today talking about
7 HOEPA if we took more care with our children from
8 day one and talk about credit. It's not necessarily
9 the parents' responsibility to do that but we need
10 to bring it into the school system. They need to be
11 educated, and the earlier they learn the less
12 problems they will have later on in life.
13 MR. LONEY: Would you have the same view
14 about the usefulness or lack thereof of a disclosure
15 about foreclosure rates? That was another issue
16 that was raised about whether we ought to have a
17 federal foreclosure rate notice dealing with the
18 procedures and the legal rights the customer has,
19 the specific amount that if paid will terminate the
20 foreclosure -- or is that just another piece of
21 paper stuck in there?
22 MR. BOST: Personally I think that a lot --
23 and Ms. Morales can probably answer this, but I
24 think under Fannie Mae loan documents that's
25 required as a condition of foreclosure on a lot of
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1 transactions anyway. And secondly, I think we need
2 to be careful -- foreclosing on a loan, especially
3 now in North Carolina, is a very cumbersome process
4 to start with. If this disclosure is in lieu of a
5 state disclosure or state notice, that's one thing,
6 but in addition to a state notice might create road
7 blocks to foreclosure that are undesirable.
8 MR. MICHAELS: I think we were saying it's
9 also a potential set of standards, minimum
10 standards, for the state-required notice, so there
11 wouldn't be necessarily an additional notice.
12 MR. BOST: I think that it's always
13 important to provide borrowers at least one last
14 chance. It helps the foreclosure process go a
15 little bit quicker, so I don't object to that.
16 MR. LONEY: That's a disclosure probably
17 that would take place, I don't know, maybe at
18 closing.
19 MR. BOST: You're talking about at
20 closing. I thought you meant before you actually
21 went into foreclosure. That's what I wanted to
22 address.
23 MR. LONEY: Could be. Anybody over here
24 have any -- Mr. Creekman?
25 MR. CREEKMAN: I'm sorry, but I think
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1 that's just another useless disclosure. A closing
2 attorney isn't going to spend a whole lot of time
3 telling a person what happens and the procedures
4 that are going to be followed when they don't pay.
5 I tell you when I was in private practice I handed
6 the note to the customer and I said, This is the
7 promise to pay. Then I handed the deed of trust and
8 I said, That's the "or else", and they got the idea.
9 MR. LONEY: I'll bet they did.
10 MR. COUDRIET: I think after closing and at
11 the time where foreclosure might have to be
12 contemplated that the responsible servicer -- and
13 that's what we're talking about, people who service
14 loans; there's only a couple or three of us in the
15 room -- always will make a series of contacts or
16 attempted contacts and then return receipt requested
17 certified mail to send a disclosure. That's in our
18 own interest. It would be easy for us to comply
19 with any legislation. We actually send out a video
20 to those folks that explains the problem to them in
21 case they don't want to read something.
22 As a part of our attempt to participate in
23 mortgage reform, several of the associations in
24 Washington came up with a draft bill called the Home
25 Equity Recovery Act that dealt with foreclosure.
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1 We'll be glad to provide you with that to let you
2 see what those stipulations were, because, you know,
3 it's the kind of things that a responsible servicer
4 already does and we feel ought to be a part of the
5 process.
6 MR. LONEY: I think we'd like to see that,
7 yes. Mr. Lampe?
8 MR. LAMPE: I believe from a disclosure
9 viewpoint, at least at closing, I think the standard
10 Fannie Mae, Freddie Mac uniform instruments do a
11 pretty good job at closing if the consumer wishes to
12 read them they're in bold print; I won't say they're
13 in plain English. But I would not want to take the
14 borrower's responsibility away from them completely
15 to understand what they're getting into. Back when
16 I used to do residential closings, which has been
17 years ago -- this is a takeoff on what Mr. Creekman
18 said -- perhaps a suggested form of disclosure, but
19 I would say, If you pay, you stay; if you don't, you
20 won't. And if the Board wishes to promulgate a
21 plain English standard I would suggest that as a
22 starting point.
23 MR. LONEY: I can just about guarantee you
24 the Board won't do that.
25 MR. MICHAELS: This comes up because we've
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1 heard legal aid attorneys tell us that in some
2 states it's still a practice to have foreclosure by
3 publication rather than foreclosure by actual
4 notice. So the question would be, is there any harm
5 in having a HOEPA rule that says it is deemed to be
6 an unfair practice not to meet these minimum
7 standards and one of the minimum standards is
8 foreclosure by actual notice and here's the contents
9 of that minimum notice; is there any downside to
10 that?
11 MR. CREEKMAN: Absent the guy who's bolted.
12 MR. MICHAELS: I think we're talking about
13 the duty on the lender to send the notice. If the
14 person has bolted -- I assume under even state laws
15 that requires actual notice --
16 MR. CREEKMAN: North Carolina requires
17 actual notice. In the absence of actual notice, you
18 post and you publish. And you're right, in some
19 states it's just publish in the newspaper and
20 foreclose. But is that -- I guess my question is --
21 what we're concerned about is making sure folks get
22 credit. Are you really aiming at the consequences
23 of default?
24 MR. MICHAELS: Here's how the issue has
25 come up. It's been presented to us in situations
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1 where consumers have been abused or subject to
2 predatory practices and it results in foreclosure,
3 they need at least ample opportunity to prevent that
4 foreclosure on that ground so they have a chance to
5 present --
6 MR. CREEKMAN: Then treat that as a
7 consequence of having a high-cost home loan. Don't
8 make that a standard which is applicable across the
9 board. Make that, again, one of the criteria that
10 must be satisfied if you have a high-cost home
11 loan.
12 MS. EGGERS: In this instance we would not
13 be looking for the Board's involvement in all of the
14 state foreclosure regulations that we already deal
15 with. We've really addressed the problem and the
16 issue in connection with the consumer earlier in the
17 process in the creation of a lost mitigation effort,
18 which is very contact-intensive with the customer;
19 it's solution-oriented. We don't want to go to
20 foreclosure; it's a lose-lose proposition.
21 So, you know, I think it's how big is that
22 problem you're hearing about versus just more paper,
23 more process, and starting to put the Board into the
24 state foreclosure process. Those would be the
25 trade-offs.
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1 MR. EAKES: The point I would make is, if
2 you really want to help borrowers who are in the
3 foreclosure process, have more loans covered by
4 HOEPA. Because then at least if there was abusive
5 actions at the time of origination they at least
6 will have some defense that normally they don't have
7 now because they don't have pass-through liability.
8 MS. HURT: I'd like to ask one question,
9 and it moves away from disclosure; it's back to the
10 Board's use of its 129 authority under HOEPA.
11 Suggestions have been made that the Board declare as
12 unfair and deceptive acts that are already illegal
13 under certain laws, so, for example, the Board would
14 say that it's unfair and deceptive to falsify
15 application or to create income -- well, that's
16 fraud. Is there any benefit, do you see, to
17 consumers in trying to get out of predatory loans in
18 having that type of provision in the federal law, or
19 are the current laws dealing with fraud and
20 misrepresentation good enough? Would that help?
21 MR. MAYNARD: Speaking from I guess the
22 viewpoint of private enforcement, if you look at
23 that in the context of individuals looking for
24 attorneys in the midst of foreclosure, what happens
25 in North Carolina, for instance, there are only four
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1 issues that can be raised in a foreclosure: Whether
2 there's a debt, whether it's past due, whether
3 there's been notice, and whether there's a power of
4 sale. It doesn't matter what wrongful conduct has
5 occurred; a borrower is not allowed to raise in a
6 foreclosure proceeding any defense that doesn't
7 relate to those four issues.
8 If they want to raise those defenses, they
9 have got to go to an attorney and file a separate
10 lawsuit. In order to do that, they're probably
11 going to need -- in the area where I practice,
12 they're going to need $5,000 to $10,000 to hire an
13 attorney who's going to file suit asking for
14 injunctive relief to stop the foreclosure, alleging
15 sufficient causes of action to support that
16 injunctive relief. And most people of course who
17 are in the midst of foreclosure, the last thing they
18 have is money to go pay an attorney.
19 The fact that HOEPA might characterize
20 certain practices as unfair and deceptive trade
21 practices might in fact leverage potential attorneys
22 fees so that a borrower could talk to an attorney
23 who, in the face of egregious misconduct by an
24 originator, would in fact see a potential recovery
25 of an attorneys fee if it was characterized as an
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1 unfair and deceptive trade practice.
2 There are many practices that violate
3 contracts, there are many practices that violate law
4 that are not in that heightened category of course
5 of unfair and deceptive trade practices. If in fact
6 the unfair and deceptive trade practices were tied
7 to attorneys fees, it might actually allow some
8 people who were unable to access an attorney and
9 therefore access justice to have access to the
10 courts. So to that extent I would support it.
11 MS. EGGERS: I'm not sure we've come across
12 anyone who has not had access to attorneys in the
13 scheme of things. But I think when we look at this
14 issue -- you know, the first thing that crossed my
15 mind as you were going through the list is those are
16 things that happen to us, the lender, too. So I'm
17 not sure what benefit comes from putting it, you
18 know, in the HOEPA regulation.
19 I think we've absolutely got to enforce the
20 regulation that's out there and, you know, we are
21 working actively not to have to deal with fraudulent
22 issues and problems that exist out in the
23 marketplace as a whole, so we're all for enforcement
24 of everything that reduces those issues. Because
25 we, as a lender, bear the burden of those and we are
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1 committed to making things right for our customers
2 if we unwittingly have been involved in any
3 situation that's of a difficult nature for them,
4 unwittingly.
5 MR. MAYNARD: Your experience with respect
6 to attorneys is different than mine. I worked in a
7 legal aid office in North Carolina for ten years and
8 one of the things that we did not generally have
9 funding to do was foreclosure defense. We had
10 dozens of clients contact us each month asking for
11 legal assistance with respect to foreclosure defense
12 and there were no attorneys available. We would try
13 very hard to induce attorneys through pro bono
14 efforts to do that, volunteer efforts. It's an area
15 of expertise -- we always wind up with very, very
16 formidable counsel as those who are sitting around
17 this table here as our adversaries when we're suing
18 a bank.
19 MS. EGGERS: We need to invest in the front
20 end of the process though, because we don't want
21 things to go to foreclosure. So the education Kate
22 talks about, the process that gets us into not
23 landing in those kinds of situations --
24 MR. MAYNARD: That's a good, wholesome
25 approach and I certainly agree with that too, but
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1 the question had to do with the tail end at
2 foreclosure and whether or not HOEPA might address
3 the unfair and deceptive trade practice issues. To
4 that extent --
5 MR. LONEY: I'm going to have to give you
6 the very last words because we're going to have a
7 break.
8 MR. EAKES: I was going to ask a question
9 as we were starting to run out of time. HOEPA, one
10 of its main goals was to induce self-policing so
11 that the industry would do due diligence itself.
12 Are there ways to use HOEPA regulations so that we
13 don't have other intrusions, that we induce self-due
14 diligence searches?
15 I mean, I heard the attorney general for New
16 York speak at the Leach hearing, very, very
17 eloquently, saying that the very small minority of
18 bad brokers creates a whole lot of the problem
19 that's out there, and yet the lender who takes that
20 first loan can say that was an independent
21 contractor, I don't have any responsibility, nor
22 does this loan, for the bad actions.
23 I think one of the things I saw in North
24 Carolina that was very encouraging is that the
25 brokers association and representatives and the
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1 lenders were really very responsible in helping us
2 work through. Yes, we fought, and yes, we got a
3 compromised bill that none of us really liked by the
4 time it was over, but they stepped forward in a way
5 that no other state -- I think Paul Stock, the
6 bankers association and other folks who said we want
7 to stop the bad guys, how can you help us with that
8 minority of bad guys, make the self-policing -- the
9 same way Fannie Mae and Freddie Mac when they're
10 selecting seller services, they do an extensive due
11 diligence and know that they're not going to get a
12 bad actor; at least not many. How do we induce that
13 same self-policing of the very bad actors?
14 And I think -- you know, I just want to
15 encourage you to think about some way, through the
16 discretionary authority that the Federal Reserve has
17 under HOEPA, to make the first lender unable to deny
18 it. No see, no tell, no liability.
19 MR. BURFEIND: You wanted a response, I
20 think; 30 seconds. I had asked Mr. Eakes to
21 identify the source of his data, and I thought he
22 had to aggregate some data to get there. The part
23 that he's aggregating doesn't go to the question of
24 consumer awareness of the purchase, it goes to the
25 question of the perception of marketing practices.
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1 To get to the number that he gets to he has
2 to aggregate responses from those who did not
3 purchase. Obviously the sales pressure couldn't
4 have been all that persuasive. I would look to the
5 overriding conclusion which they cite, which is, We
6 estimate that marketing/coercion alone accounts for
7 a maximum of 3.4 percent of credit life insurance
8 sales.
9 MR. LONEY: Well, we're going to have to
10 settle that at lunch.
11 First of all, I'd like to thank the members
12 of the panel. This has worked out so much better
13 even than we could have guessed. I appreciate your
14 cooperation and your initial statements, and in your
15 participation in this discussion. It's been
16 largely, I know for me, very informative and very
17 useful.
18 We are going to have to break now; we're
19 going to break for about a half-hour. I have been
20 told to tell the folks in the audience that there
21 are places around here that you can go to eat;
22 someplace called Showmar's, which is behind the
23 bank, there's miscellaneous restaurants uptown.
24 There's a Burger King, Bojangle's, Subway,
25 et cetera, in the food court a block west in the bus
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1 terminal. So you may be consigned to that, I
2 apologize, but given the constraints on time we're
3 not going to have a lot of time to take this break.
4 So we're going to shoot for about 1:30 to
5 start up again, and again, thank you very much to
6 all the panelists. It was very helpful.
|
July 27 hearing on home equity lending |
Afternoon session |
Complete transcript
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