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Morning Session of Public Hearing on Home Equity Lending
July 27, 2000

                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          1                         TABLE OF CONTENTS
          2                          MORNING SESSION
                  OPENING REMARKS BY MODERATOR LONEY  . . . . . .    6
                  OPENING REMARKS BY GOVERNOR GRAMLICH . . . .  .    8
          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
                  BOARD MEMBER AND PANELIST DISCUSSION  . . . . .   55
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          1                       P R O C E E D I N G S
          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,
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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.
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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.
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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.
                             FEDERAL RESERVE PUBLIC HEARING
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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.
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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.
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
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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?
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
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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.
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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.
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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.
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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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                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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.
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
                                      JULY 27, 2000

          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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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.
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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
                             FEDERAL RESERVE PUBLIC HEARING
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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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                                      JULY 27, 2000

          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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