Afternoon Session of Public Hearing on Home Equity Lending
FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 1 TABLE OF CONTENTS (Cont.) 2 AFTERNOON SESSION PAGE 3 OPENING REMARKS BY PANELISTS: 4 BY MR. SKILLERN . . . . . . . . . . . . . . 174 5 BY MS. LLOYD . . . . . . . . . . . . . . . 178 6 BY MS. MASSENBURG-BEASLEY . . . . . . . . . 182 7 BY MS. WARREN . . . . . . . . . . . . . . . 185 8 BY MS. MURRELL . . . . . . . . . . . . . . 187 9 10 BOARD MEMBER AND PANELIST DISCUSSION . . . . . 191 11 OPEN-MIKE SESSION . . . . . . . . . . . . . . 226 12 13 14 15 16 17 18 19 20 21 22 23 24 25 FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 7 (A lunch recess.) 8 MR. LONEY: For those of you who just have 9 joined us, I would like to welcome you. This 10 morning we heard very interesting and varied views 11 on the way the Board might use its rule-writing 12 authority under TILA and HOEPA. This afternoon we 13 will be discussing alternatives to regulation that 14 might address predatory practices, such as consumer 15 outreach and education and hear about studies or 16 research on subprime or equity lending that would 17 inform the Board in its deliberations. 18 By way of introduction for those of you who 19 weren't here this morning, my name is Glenn Loney; 20 I'm deputy director of the Board's division of 21 consumer and community affairs. Joining me this 22 afternoon on the panel are Adrienne Hurt on my far 23 left, who is assistant director of the division, and 24 Jim Michaels, who is managing counsel in the 25 division. They have responsibilities for truth in FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 173 1 lending matters in the division. 2 On my immediate right is Sandra Braunstein, 3 who is assistant director and community affairs 4 officer for the Board in Washington. To my far 5 right is Jack Blanton, who is the vice president and 6 community affairs officer at the Federal Reserve 7 Bank of Richmond, which is the bank for this area 8 and for which this is a branch, the Charlotte 9 branch. 10 I would like to go briefly over the rules of 11 procedure, if we want to call it that, for this 12 afternoon. Once again we would like to ask -- we're 13 going to have a tight time frame. We want to get as 14 many of the open-mike people in as we can and we'd 15 also like to hear from our panelists as much as we 16 can, and we'd also, frankly, like to catch our 17 planes back to Washington if we can. So I would ask 18 you all to do what you can to accommodate those 19 concerns. Therefore we ask that the panelists 20 confine their prepared remarks to the three minutes 21 that they find most important for us to hear about, 22 and then of course after that we would like to have 23 a discussion similar to the one we had this morning, 24 though not as long. 25 At the conclusion of the panel discussion we FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 174 1 will break, around 2:45 or 3:00 or so, and then 2 reconvene to hear from members of the public. And 3 again, anyone in the audience who wants to 4 participate in the open-mike session later this 5 afternoon that has not already signed up, you ought 6 to do so before the break and we'll use the list to 7 decide the order and help us gauge the length of 8 time that each person can have. 9 If it's all right with everybody, for 10 opening remarks I thought I would start with Peter 11 Skillern. I'd ask each of you to introduce 12 yourselves and tell who you are with as well as make 13 your opening remarks, so if you would start. 14 MR. SKILLERN: I'm Peter Skillern, 15 executive director of the Community Reinvestment 16 Association of North Carolina. Our mission is to 17 build and protect community wealth. As many of the 18 lending institutions in the room can tell you, we've 19 worked hard to try to increase the capital flowing 20 into minority and low-income communities across the 21 state of North Carolina. 22 When we became involved in predatory lending 23 it was realized that all credit is not good credit, 24 and that much of the credit was being used as a tool 25 to strip wealth and equity from our low-income FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 175 1 communities. We started out our research one person 2 at a time and started to put together our analysis. 3 Today we are the recipient of a fair housing 4 education and outreach grant. We have a subcontract 5 with the NAACP and El Pueblo, the Hispanic advocacy 6 organization, to do outreach to their member 7 constituencies to explain about fair housing and 8 predatory lending. 9 Here are some of the tools I'd like to 10 submit for the record. One is, Don't let the Grinch 11 steal your holiday; we've got the Grinch whipping -- 12 this is for Christmastime when subprime lenders like 13 to push products, and warning bells that you should 14 look out for. For someone who wants to study a 15 little bit harder about how to read a loan document, 16 this is probably appropriate for people just 17 learning, including college graduates, how to read a 18 loan document and what to watch out for of a 19 predatory nature, such as single-premium credit 20 insurance. 21 From that, as we expanded into understanding 22 the policy, we developed this introduction to 23 predatory lending policy, and I'll submit this and 24 give you all individual copies, to recommend how the 25 whole system puts together and how community groups FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 176 1 can be involved in the social change work. 2 I was asked to speak primarily around 3 research. I'd like to submit our article that was 4 published in Neighborhood Works exposing the hidden 5 problem of predatory lending, which discusses our 6 method of identifying borrowers from the deeds of 7 record at the courthouse and asking them to come in 8 so that we can interview them and look at their loan 9 documents and start to describe what's happening in 10 the subprime mortgage industry. 11 We've since evolved that to the community 12 guide to predatory lending research, and I'd like to 13 submit that also for the record, as a demonstration 14 of how community groups can identify borrowers from 15 a variety of sources and what to look for. 16 For all of that I really want to say that I 17 think my recommendations for the Federal Reserve 18 have to be put into context for research and action 19 around looking at how it can help provide greater 20 consumer protections in the age of financial 21 modernization. With the passage of the financial 22 modernization bill, it gave bank holding companies 23 the opportunity to provide credit and monetary 24 services through a wide spectrum, from payday 25 lending to finance companies to subprime lenders to FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 177 1 mortgage companies, banks, and indeed secondary 2 mortgage market opportunities; they're also now able 3 to offer insurance. 4 Along this spectrum of services that they're 5 able to dole credit out to the public, people then 6 enter into this system through different channels. 7 The question is, at what point where you enter into 8 that channel of credit often determines how you are 9 treated, rather than being treated upon your merits 10 or what your credit ability is. 11 What does that say? I'm not wearing my 12 glasses. 13 MR. LONEY: Just wrap it up, Pete. 14 MR. SKILLERN: I'll quickly conclude with 15 this one remark. I think the Federal Reserve could 16 do marvelous research that would be groundbreaking 17 around this issue. The Boston Federal Reserve study 18 of mortgage lending discrimination, 1991, was the 19 seminal research piece that changed regulation and 20 bank lending activities and really helped to expose 21 discrimination. 22 I urge the Federal Reserve to do a study, 23 just going and sampling -- you have access to the 24 loan files -- sampling what is happening in the 25 subprime market and then come back and describe to FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 178 1 the public what percent have prepayment penalties, 2 what percent pay yield spread premiums, which 3 percent had high fees, interest rates, what were the 4 credit scores that went along with that, were there 5 disparate impacts along rate-protected classes, and 6 from that type of study -- study that we will never 7 be able to get at from our community approach -- 8 you'll have the ability to better determine to what 9 extent predatory practices are being undertaken. 10 Thank you. 11 MR. LONEY: We'll have a little discussion 12 and you can embellish on some of those points. 13 MR. SKILLERN: Oh, thank you so much. 14 MR. LONEY: Ms. Lloyd? 15 MS. LLOYD: My name is Jan Lloyd; I'm a 16 family resource management specialist for the 17 cooperative extension service affiliated with North 18 Carolina State University. I'm here to talk about 19 the need for consumer education in a narrowly 20 defined way and to make sure you are aware, which 21 you perhaps already are, of the mechanism in place 22 ready to help with the homebuyer and homeowner 23 education throughout the entire country. 24 For those of you who don't know, cooperative 25 extension has been in existence since 1914. It has FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 179 1 three levels of partners; we are primarily tax 2 supported. The federal partner is the Department of 3 Agriculture. In addition to the Ag and the 4H and 4 the community and rural things, you may or may not 5 know that the new name for home economics, family 6 and consumer sciences, has a major program which of 7 course includes housing and family finance. I'm 8 here for the family finance area and I have a close 9 colleague who works with me in housing at the state 10 level. 11 Our national program leaders, both in family 12 economics and in housing, work very closely with 13 your division and with other appropriate partners on 14 all kinds of issues. They have in the past put 15 together a national building a homebuyer education 16 program, they have been partners to the most recent 17 homeowner education and counseling effort trying to 18 standardize and upgrade. The Fannie Mae former CEO 19 was the driving force behind this, and I'll share 20 with you if anybody wants to look. I think this is 21 something, if you weren't aware of, the attempt to 22 upgrade the content of homebuyer and home ownership 23 education and to provide training for the people who 24 deliver it out in the communities. So that's at the 25 federal level. FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 180 1 Those of us at the state level, at every 2 land grant university in the country, we aren't 3 professors; we are specialists in our subject area. 4 We collect, develop materials, we train the field 5 faculty for the university out in the counties. So 6 if you hear extension agent, you are hearing 7 somebody probably with a master's degree who is 8 field faculty. My agents, the ones with whom I 9 work, a hundred counties here plus the Cherokee 10 reservation, do all kinds of family finance issues. 11 And some of the same people, some of them it's two 12 agents in a county, carry on homebuyer education, 13 hopefully together. So you have all over the 14 country this mechanism already doing homebuyer 15 education to which the HOEPA things that you're 16 doing can be a supplement. 17 What I'm hoping is that you will see the 18 need for consumer education is enormous. Kate 19 Crawford this morning, I could have paid to say we 20 need basic consumer education on finance. If you 21 were not aware, there was a major study done, 22 released just a year ago, twelfth graders; there was 23 an overall score on personal finance of 57 percent. 24 And to illustrate to you how severe the challenge is 25 to all of us at the grass roots level trying to do FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 181 1 consumer education, they thought that the primary 2 best source of money, to earning income on that 3 money, was a checking account. That's the level of 4 ignorance we are talking about, the challenge to try 5 to help people understand what they're dealing with 6 when we get into homebuyer and refinancing 7 education. 8 Obviously we can help at each level; the 9 national, the state, and the local agents. I would 10 just like to say that we are already working with 11 the individual development accounts; that extension 12 is the recommended deliverer of the mandatory 13 education for individual development account people, 14 basic money management and the homebuyer folks, and 15 a number of other things; I won't take your time on 16 that now. 17 I'd just like to say what we need is we need 18 very brief items that capture the key components. 19 We need brief fact sheets in plain language that 20 refer them to more depth. We need background 21 information, visual materials -- you did a great 22 thing on car leasing -- and promotional materials, 23 and we need to be succinct without losing accuracy. 24 And we'll be happy to work with you. 25 MR. LONEY: Thank you very much. FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 182 1 Ms. Massenburg-Beasley? 2 MS. MASSENBURG-BEASLEY: Thank you. Good 3 afternoon, everyone. I'm Glyndola 4 Massenburg-Beasley, executive director for the 5 Consumer Credit Counseling Service of Durham. 6 The topic of combating predatory lending is 7 broad and my message this afternoon is, simply, 8 we've got work to do. I define predatory lending as 9 a roaring lion that walketh about seeking whom he 10 may devour. We've got work to do both statewide and 11 nationally in order to conquer the roaring lion. 12 CCCS of Durham is a nonprofit community 13 service organization. It is also the host agency 14 for the Hurricane Floyd initiative throughout the 15 state of North Carolina. A very large percentage of 16 the families that we're working with are 17 homeowners. To date, we've worked with in excess of 18 8,000 families. A very large percentage of those 19 families are victims of predatory and/or 20 unscrupulous lending practices. 21 For example, we have a father and mother who 22 are illiterate; the mortgage lender allowed the 15- 23 and 16-year-old son and daughter to consummate the 24 loan. The home was completely destroyed by 25 Hurricane Floyd. The insurance benefits were FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 183 1 received in the name of the family and the mortgage 2 lender. The mortgage lender of course received the 3 funds and paid down the mortgage loan, leaving the 4 family with no resources to replace the home. There 5 are no relatives living in the area and now there's 6 no place for the family to live. 7 After reviewing the loan documents we 8 discovered that at least $7,000 of the loan of 9 course was in the originating points, and today the 10 mortgage lender is pursuing foreclosure. We've got 11 work to do. 12 Consumer education and outreach should not 13 be an option. Consumer education should be a 14 requirement for any mortgage and/or consumer 15 lending. The lack of knowledge and understanding 16 eats away at the underpinning of our country, which 17 is education, economic stability, and building 18 wealth. Unscrupulous lending has no respect of 19 person. I have seen the elderly, the 20 hearing-impaired, the blind, and the illiterate 21 become victims of unscrupulous lending practices. 22 We must be as tenacious and as savvy as the 23 unscrupulous lender, because they're about equity 24 stripping, high-cost loans, prepayment penalties, 25 loan flipping, financing of credit insurance, and FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 184 1 the list goes on. Our people in the country are 2 perishing because of the lack of knowledge and 3 understanding. 4 A national consumer education and financial 5 education campaign is a must. We must increase our 6 partnering with high schools, junior high schools, 7 and the universities. At Consumer Credit Counseling 8 Service we often see seniors who are graduating that 9 are strapped with at least $20,000 to $30,000 worth 10 of debt and no employment. How am I going to pay 11 the bill; Mom and Dad is usually the alternative and 12 not always the answer. 13 We must also increase our partnering with 14 Fannie Mae and Freddie Mac and others who promote 15 products such as Credit Works that require a 16 structured program for counseling and education. We 17 must create additional tools that appeal to all and 18 fund local community education programs so that we 19 can prevent and stop the stripping of wealth that is 20 so prevalent in this nation. Our families are 21 hurting, they're living in a vacuum and have no idea 22 how to get out. Consumer education and counseling 23 is extremely important to the wealth and stability 24 of this country. 25 MR. LONEY: Thank you. Ms. Warren? FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 185 1 MS. WARREN: Good afternoon. Can everybody 2 hear me? I'm Debby Warren; I'm executive director 3 of the Southern Rural Development Initiative, and my 4 middle name is the Rural Nag. That's what I'm here 5 to do, to remind the Federal Reserve, the Board of 6 Governors, that predatory lending is very much a 7 rural issue. 8 We are a collaboration of 33 organizations 9 that work in the poorest counties of the rural 10 south. You can see the south here, you look at the 11 orange and red, there's the black belt that is the 12 Appalachia, it is a good part of the south; that's 13 where our 33 members work. They are both CDFI, 14 self-help, community development organizations, and 15 philanthropic organizations concerned about how 16 little public and private affordable capital there 17 is in these communities. 18 We did an analysis, a HMDA analysis, of four 19 states in the south -- Alabama, Arkansas, South 20 Carolina, and Georgia -- for 1998, and particularly 21 looked at subprime and manufactured housing 22 lending. What we found out was interesting. That 23 when you look at the national numbers for subprime 24 lending, nationally, in that year, about 11 percent 25 of the total market was subprime. If you look at FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 186 1 the state of South Carolina, 22 percent; Georgia, 2 15 percent; Alabama, 14 percent; Arkansas, 3 16 percent. It's just from a national perspective 4 we have a higher proportion of subprime lending 5 among the mortgage recipients. 6 African-American market, that 19 percent of 7 the national African-American market was subprime 8 loans. Georgia, 22 percent; Arkansas, 28 percent; 9 and South Carolina, which is a few miles from here, 10 42 percent. 42 percent of the African-American 11 market that originated mortgage loans in 1998 were 12 subprime loans. 13 If you look at the low-income market, again, 14 South Carolina, 34 percent; national, 13 percent. 15 If you look at the rural market, we don't have 16 comparable national numbers but we looked at it for 17 the four states that we had information: Alabama, 18 20 percent of the rural market, subprime loans; 19 Georgia, 27 percent. So this is clearly an issue, 20 and we can only assume that some of the subprime 21 lending is predatory lending; how much, we don't 22 know. 23 What I have more are questions than 24 answers. There's enormous need for research. If 25 we're going to be clear about predatory lending FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 187 1 strategies we have to understand how these markets 2 work in rural areas. Questions like, How much of 3 this is due to manufactured housing lending, and how 4 much of our regulations, state and federal, are 5 covering those particular markets. 50 percent of 6 occupied manufactured housing units are in the 7 south; 70 percent nationally of manufactured housing 8 units are in rural communities. So we need to 9 understand the mechanisms and the dynamics of the 10 manufactured housing industry and how it relates to 11 the subprime markets in these states. 12 We also need to understand why does a state 13 like South Carolina have 46 percent of the 14 African-American market being served by subprime 15 lenders. Final sentence: Is it due to the fact 16 that there is very little consumer regulation in 17 this state? Is it due to the fact that there used 18 to be a Confederate flag hanging from the capitol? 19 Is it due to the fact that there's very little 20 housing, nonprofit infrastructure, and advocacy 21 resources in this state? What is the answer? But 22 we need to better understand that because I think 23 that's an unacceptable figure. Thank you. 24 MR. LONEY: Thank you. Ms. Murrell? 25 MS. MURRELL: Good afternoon. I'm Karen FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 188 1 Murrell, senior director of targeted outreach at the 2 Fannie Mae Foundation. I'd like to talk about the 3 importance of institutionalizing financial literacy 4 as an integral part of homebuyer education and 5 counseling. Fannie Mae Foundation has launched last 6 fall a major effort, it's one of our top priorities, 7 to address financial literacy needs. Last fall we 8 kicked off our financial literacy effort and I'd 9 just like to talk a little bit about some of the 10 things we're doing on that front, as well as some of 11 the things we're doing with predatory lending. 12 Our financial literacy effort really 13 includes a three-point program, and one of the main 14 things that we're doing is really having a strong 15 emphasis and focus on supporting education and 16 counseling programs that are helping consumers learn 17 more about financial issues before they get into the 18 home buying process. We're doing that through grant 19 relationships with nonprofit organizations that are 20 doing this work on the ground. 21 We're also doing this by developing 22 educational materials that are specific to 23 particular communities. One of the things we're 24 working on now is a financial literacy curriculum 25 for the Native American community. We've partnered FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 189 1 with First Nations Development Institute to develop 2 a curriculum that is based on native values that 3 will be implemented through a training of trainers 4 process. 5 We're also looking at ways to implement 6 financial literacy in other venues, like through IDA 7 programs. We're working with CFED, Corporation for 8 Enterprise Development, to make sure that there is a 9 national curriculum, financial literacy curriculum, 10 for IDA programs across the country. 11 Then we've developed our own consumer 12 materials, consumer materials on home buying as well 13 as credit. You're probably familiar with this 14 guide, it's promoted through National Network and 15 Advertising Cable, that discusses the home buying 16 process. We developed a new guide last fall that 17 has a focus on credit. Again, what we're trying to 18 get across with this guide is we're trying to raise 19 awareness of the importance of credit, help people 20 to understand what it means to have good credit, how 21 to maintain it, how to repair it if you've had 22 problems. 23 Later this month we're going to be unveiling 24 a new guide on predatory lending; again, it's going 25 to help in very easy-to-understand language explain FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 190 1 what predatory lending is and give some suggestions 2 on things to do to avoid it. 3 Through our consumer education we've reached 4 10 million people since the program started in 1994, 5 and one of the areas that we're focusing on now 6 which is a new area is outreach to youth. As we've 7 heard in the panel discussion earlier, it's 8 important for us to reach out earlier, so we're 9 looking at ways to reach students at the high school 10 and college levels and impart this information 11 earlier. 12 With predatory lending one of the things 13 that we're doing is really through a three-part 14 program. The first is looking at policy and 15 research initiatives. We've tried to generate a 16 dialogue to get a better understanding of the 17 causes, the behaviors, and the consequences of 18 predatory lending. We're also going to be 19 supporting consumer education efforts in local 20 communities. Again, through our grant relationships 21 we have supported consumer education programs in the 22 city of Chicago and also in Boston. 23 And lastly, one of the things we're doing 24 with predatory lending is supporting legal 25 education. We want to make sure that legal FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 191 1 advocates have the information that they need to 2 work on behalf of disenfranchised citizens. That is 3 the Foundation's predatory lending and financial 4 literacy efforts. 5 MR. LONEY: Thank you very much. What I'd 6 like to do now, as we did this morning, is to 7 comport this into more of a round table discussion 8 and people can embellish on what they've said before 9 in the context of either answering questions or just 10 jumping in. Sandy, in particular, has some 11 questions she'd like to ask, so we'll have Sandy 12 kick it off. 13 MS. BRAUNSTEIN: I'd like to start by 14 having -- something hit me during all the 15 presentation; in particular Peter, Jan, and Karen. 16 You all have prepared written materials on these 17 issues and Fannie Mae is getting ready to come out 18 with a guide on predatory lending, and I was just 19 wondering -- one of the things we've been struggling 20 with is how to reach the audiences that are preyed 21 upon, and one of the things that we have heard from 22 some folks is that written materials don't 23 necessarily cover that waterfront, and I was just 24 wondering how successful your written materials have 25 been in this effort. FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 192 1 MR. SKILLERN: I feel like our written 2 materials have been of limited success, in all 3 honesty. People need to be willing to read it, it 4 takes time, and we are battling for people's 5 attention. I would really look at -- they are 6 useful tools, though, when we have people in small 7 groups, in their churches, in their houses, in the 8 neighborhood meetings to give out. 9 The bigger effect has been -- I would point 10 to Mike Easley, the attorney general for North 11 Carolina, put I believe $180,000 into a media 12 campaign across the state. His advertisements were 13 simple, they were clear, there was identifiable 14 personality, and they generated hundreds of phone 15 calls to his office regarding the loans. That was 16 serious. That wasn't a small nonprofit using their 17 Xerox machine trying to fight the problem; those 18 were real resources with a professional media 19 strategy. 20 MS. BRAUNSTEIN: What media did he use, 21 Peter; radio, TV, what? 22 MR. SKILLERN: He used radio, TV, and 23 newspapers, and he targeted towards those 24 populations that are most often victimized, which 25 are the minority community. FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 193 1 MS. LLOYD: If I could just follow up, he 2 also does regular news releases. And the extension 3 agents in every county and anyone else who asks is 4 on that mailing list, so they get alerts each time 5 they come out. I commend -- he has followed suit 6 that was launched in Minnesota actually, a 7 partnership for consumer education. He has a group 8 of people coming together as a nonprofit; they've 9 done videos, they've done lessons to go with them, 10 so that in addition to the public audience there are 11 ways to reach out into the communities and make this 12 20 minutes instead of 30 seconds available to a 13 larger audience. It's been extremely helpful. 14 MR. LONEY: One element of Sandy's question 15 I'd like to embellish on is, what really works? 16 MS. LLOYD: Could I just say that I think 17 we really have to distinguish in this continuum of 18 getting people ready, there have to be materials for 19 awareness and those are the TV and the bookmarks and 20 the really succinct things; then there has to be 21 information targeted for different audiences, 22 different reading levels, different perceptions, 23 different languages, whatever. 24 Education is the narrow niche where I am, 25 where once you've got people's interest then you FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 194 1 have materials, which includes print, but it's not 2 enough. There have to be -- peer counselors is one 3 of the mechanisms that Cornell used especially 4 well. Then you help people be aware that they need 5 more information; self-study. We're being told 6 increasingly people will not come to meetings very 7 much anymore; you've got to have things through 8 existing organizations such as churches or 9 neighborhood groups. 10 You've got to find ways to reach them and 11 you're not asking them to add something to their 12 schedule, which is a challenge. But once you get 13 them aware that they can either through self-study 14 or through groups and get a better prepared -- you 15 tell them then that individual counseling is 16 available. We have to be prepared for that. And I 17 don't mean to insult you but I don't know what 18 people do and don't know under both bills for 19 bankruptcy reform. One of -- you know, the 20 compromise will eventually pass next year probably. 21 In both those bills there is mandatory 22 counseling required to determine whether or not 23 bankruptcy is actually necessary. We're going to be 24 putting an incredible load for what you are wanting 25 and what they will be wanting on the counselors in FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 195 1 this country, so we really need to look at how to 2 recruit and train more counselors for that effort. 3 MS. MURRELL: Two things I'd like to add to 4 your point, Sandra, about how do you reach the 5 audiences that really need the information. One of 6 the things that the Foundation does is, first of 7 all, we have information in nine different 8 languages, so we make sure the information that we 9 have is in languages and culturally appropriate for 10 the audience that we're trying to reach. 11 The second thing that we do is we develop 12 marketing strategies that are specific to the 13 audience that we're trying to reach. For instance, 14 we have a partnership with BET to reach the 15 African-American community. We advertise in five 16 different languages. So again, that's an excellent 17 way to get the information out and at least to raise 18 awareness, but I do agree that the information on 19 its own is not enough. 20 One of the things that we do as an 21 additional component is to connect people to local 22 programs in their community that can help them with 23 additional information. Whenever we send out the 24 guides we also send out a list of counselors in 25 their area that can help with one-on-one FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 196 1 counseling. When we do events like our home buying 2 fairs and we give out the guides, we also have 3 counselors on site that can walk people through the 4 credit report, answer any questions. So the guide 5 is the first step, I think, in raising awareness and 6 giving people kind of a base level of understanding, 7 but then working with nonprofit organizations is 8 really the way to give people detailed, individual 9 advice or recommendations about their own personal 10 situation. 11 MR. BLANTON: I'm interested in the 12 delivery mechanism from a practical standpoint for 13 what the Federal Reserve can do in this arena, 14 because all the Federal Reserves, the 12 reserve 15 banks, have some degree of consumer education 16 efforts and we're restudying that effort now to see 17 what should be done. 18 I'm personally convinced that a message like 19 this has got to be delivered by somebody that the 20 person you're trying to get the message to knows and 21 trusts. So from that standpoint, how do we get into 22 this mix? It can't be somebody from Washington or 23 Richmond talking; it's got to be the grass roots 24 effort. It can't be somebody from the Department of 25 Agriculture or the extension service per se. You've FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 197 1 got to be part of the chain to supply the 2 information, train the trainers, that sort of 3 thing. I'm really kind of interested in your views 4 on how that can take place. 5 MS. MASSENBURG-BEASLEY: I would agree with 6 your comments very much in the fact that it should 7 be a familiar face. What we're finding that's 8 working at the consumer credit agencies is 9 developing a relationship with the employee 10 assistance programs. We have in the past asked the 11 groups that come in to us for training and now we're 12 determining and have learned that our captive 13 audience means that we must go where the audience is 14 in existence and of course have an opportunity to 15 participate and partner with that particular 16 employer; for example, the state of North Carolina 17 and the employee state employees. We actually are 18 making the rounds to the various sites where state 19 employees are located and during the lunch hour we 20 actually provide a brown-bag presentation on 21 financial literacy, budgeting, money management, 22 credit, and the home buying process. 23 We also have developed relationships that 24 other organizations in Durham have with the local 25 churches. We go into the actual congregation where FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 198 1 they are accustomed to being in their comfort zone 2 and provide that information to them. 3 We're finding that the pipeline so far as 4 your realtors and other mortgage bankers, if we can 5 have a very, very strong pipeline of referrals then 6 of course we can work through that mechanism as 7 well. But I agree that it must be a familiar face 8 and we need to go to the captive audience rather 9 than requiring them to come to us. 10 MS. WARREN: I would just like to say one 11 thing, which is about money. Whenever we talk about 12 who can deliver and what the infrastructure is -- 13 and I'm very sensitive to what that looks like and 14 doesn't look like in the rural communities in the 15 south. 16 When we're talking about grass roots 17 organizations we have to talk about resources for 18 those grass roots organizations. We have very, very 19 limited resources available for home ownership 20 counseling. Because of leadership like Glynee -- in 21 this state, this is probably what we were just 22 talking about, it's the only state that probably has 23 an association of home ownership counselors. You 24 look at the other states in the south, perhaps 25 outside of Atlanta; there is almost nothing. FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 199 1 There's the extension service, but again, the 2 ability to reach the grass roots can only be as much 3 as the officers can do. So we have to talk about 4 resources for the grass roots organizations, which 5 are the best way to reach people at the local level, 6 if we're going to be serious about the literacy and 7 the counseling. 8 MR. BLANTON: One model might be -- the 9 Treasury, when it was promoting the electronic 10 transfer of government payments, put together 11 financial educational materials, offered those free 12 to those -- our office at the Federal Reserve in 13 Richmond, we contacted all the community 14 organizations in our data base and told them about 15 that, the availability of those materials, so they 16 could get the materials for free. So if there were 17 a mechanism infrastructure there that support 18 materials could be made to faith-based and other 19 community groups, would that be helpful? 20 MS. WARREN: I think that's always 21 helpful. But then you say, well, who's going to 22 take the materials and where are they going to take 23 them and what are they going to do with it. That 24 requires people and time, which means staffing 25 resources. To have any kind of real impact with FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 200 1 materials we need money that's helping to go to 2 these grass roots organizations. 3 I do just want to say one thing which maybe 4 will come up later: The CDFI mechanism is also an 5 important one. If you look, for example, at the 6 state of South Carolina -- and I think it's part of 7 the general atmosphere. South Carolina until very, 8 very recently had no certified CDFIs; none 9 whatsoever. South Carolina also has extraordinarily 10 high levels of subprime lending, particularly in the 11 African-American community. 12 CDFIs -- and I'm hoping some people in the 13 open line later will talk about how credit unions 14 and others are important alternative credit 15 mechanisms. We have to talk about if folks are not 16 going to go to predatory lenders, where are they 17 going to go. I think CDFIs are a source of both 18 alternative sources of credit and also some of this 19 education and counseling that can come. I think 20 upping the resources we have for CDFIs is one 21 critical strategy. 22 MS. LLOYD: Could I just go back to the EFT 23 99 materials you were talking about. Extension was 24 a party to developing the materials. Every single 25 county was given a copy of those and they partnered FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 201 1 with the other groups and just -- extension is a 2 grass roots organization. I think the people in the 3 counties are trusted, but they in turn do extensive 4 train the trainer, and I think that's what we need. 5 We need to partner in the communities so we aren't 6 competing with each other. 7 MR. BLANTON: I was thinking of that as a 8 model. 9 MS. LLOYD: I think it's a very good 10 model. Just add some visuals to go with it. 11 MS. BRAUNSTEIN: Switching topics a little 12 bit, one of the things that we've heard about in 13 terms of any possible changes that we would make to 14 HOEPA would be about requiring that anyone who is 15 going to get one of these high-cost loans go to 16 counseling first before they sign the papers, for 17 assistance, and I'd like to hear from some of you 18 what you think about that. 19 MS. MASSENBURG-BEASLEY: I'd like to 20 respond to that. I understand that perhaps earlier 21 this morning the comment relative to disclosure was 22 mentioned, but that's where I'm going in response. 23 For example, I, as a first-time homeowner, 24 am coming in and you have the documents prepared and 25 before me and you're disclosing all of the correct FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 202 1 or even unscrupulous information. That means that I 2 understand it only to my degree or level of 3 understanding, so therefore disclosure is one thing 4 but understanding what's in front of me is another. 5 It's very, very important that there be 6 counseling and/or education as a part of the lending 7 element because of the fact what we're finding is 8 that a very, very large percentage, particularly 9 first-time home buyers, low wealth, very low wealth 10 families, are emotionalized by the fact that I am 11 purchasing a home, or a car. Whether or not the 12 interest rate is 29 percent or whether or not the 13 interest rate is 8 percent, I want the house or the 14 car and I'm going to sign on the dotted line. 15 There needs to be a third party involved so 16 that that person truly understands the cost of 17 credit. Understanding and knowing my credit 18 capacity is also very, very important, because we're 19 finding that the delinquency rate, the default rate, 20 will increase if there is a minimum or no 21 understanding as to what I've done other than 22 purchase the home. 23 MS. BRAUNSTEIN: I'll let anybody else 24 comment but I want to add to this a little bit based 25 on what you said. We've heard from some housing FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 203 1 counseling programs themselves that they have found 2 it often very frustrating because people will come 3 to them before signing on the dotted line for a 4 HOEPA loan or high-cost loan, and even though 5 they'll sit down in great detail and go over the 6 terms of the loan and explain to that person that 7 this is a bad deal, you shouldn't sign this loan, 8 the people still will sign because I need that 9 thousand dollars that I'm going to get. And I was 10 wondering if you've had any experience with that 11 issue and what success you've seen or heard about in 12 terms of having counseling actually stopping people 13 from making these loans. 14 MS. MASSENBURG-BEASLEY: Yes, we've had 15 some experience, and while I am not in a position to 16 give you the actual percentages of success, I'd like 17 to say that there is a model in existence called the 18 community mortgage loan program offered by one of 19 the local financial institutions. The reason the 20 program is so successful is because it is a very, 21 very structured program. Individuals who are 22 interested in home ownership, no one is denied, and 23 we know that's basically unheard of. But the reason 24 that it works is because there is a very thorough 25 understanding and a program service plan designed FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 204 1 for that particular family. Families oftentimes 2 participate with a counselor for at least three to 3 six to twelve months and they must come every 30 4 days in order to graduate from that program. So the 5 more structured programs -- and I realize that 6 appears to be a far more handholding type situation, 7 but it turns out to be a very, very successful piece 8 because of the fact that they are showing and 9 demonstrating their willingness to commit to their 10 education and to their future. 11 MS. LLOYD: Could I just add on the 12 education preceding the counseling, if they haven't 13 had adequate education they aren't going to 14 understand what you say in the counseling. They 15 aren't going to listen. 16 We find that some of our greatest success 17 stories, if you wish to call them that, are the 18 people who come to home buyer education, maybe 19 they're ready to buy right now or maybe they're just 20 trying to find out what they need to do in order to 21 get their credit cleaned up and buy down the road, 22 but there's a series of lessons so they have time to 23 go back and actually see what the family financial 24 situation is before they come back again, have time 25 to get a credit report so they have something FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 205 1 tangible to look at and see what they're 2 addressing. But what we need to see then and what 3 we have found is that they say I'm not ready yet, 4 but two, three, four years later they will come back 5 and say I am ready, I've gone through it and I have 6 done it successfully. 7 And the final thing I'd like to say on the 8 education, many of the curricula I have seen 9 elsewhere -- and there are many out there, as you 10 know -- talk just about how to get into the house. 11 Unless that initial home buyer education includes 12 what do you need to do to stay in it, and that would 13 include all these cautions, then we haven't done our 14 job. 15 MR. LONEY: The anecdotal evidence or what 16 you hear is that a lot of this happens in the 17 context of a charlatan who comes around to the 18 elderly person's house and offers to fix their front 19 stoop and in the context of that scenario becomes 20 this elderly person's best friend, trusted advisor, 21 you know. Is there anything -- I mean, I've heard 22 it too often to think that there's not something to 23 that. But is there anything that counseling, 24 education, other kinds of intervention, is going to 25 do to address that sort of the most horrible of FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 206 1 horribles in these anecdotes? 2 MR. SKILLERN: I think the education is 3 very important and I strongly support and helped to 4 found the North Carolina Association of Housing 5 Counselors and raise money for it, but it is a 6 limited approach. There is a real need to put this 7 educational work into the context of enforcement, 8 recognizing that it is not people's ignorance that 9 is the blame, is the cause for them being 10 victimized; the act or the cause of action is the 11 lender. 12 Again, education is very important. I would 13 really stress, you know, the Federal Reserve helping 14 to support full appropriations from Congress to help 15 pay for the housing counselors and legal services, 16 people to do this type of work. 17 So I guess to your question, no, I'm not 18 sure that we can -- I mean, hopefully this flier 19 will have them call. Hopefully Mike Easley's 20 announcement will have them call a friend and say 21 will you look at this loan document with me; that 22 there's a basic line of caution in the marketplace, 23 that people will be more careful. But let's also 24 put education in context of what can be done. 25 MS. MASSENBURG-BEASLEY: I think it's also FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 207 1 important to keep in mind that predatory lending has 2 several components, and certainly there are several 3 solutions, one of which is legislature which will 4 address the situation or the scenario that you just 5 described, and the other of course is education. It 6 must be in partnership one with the other, where we 7 control unscrupulous situations through legislature 8 and the other that we educate the consumer who 9 recognizes the transactions. 10 MS. LLOYD: I would just like to applaud 11 the Fannie Mae approach. I think the short takes 12 and periodic changes so it's not just the same 13 message over and over are helpful, and I look 14 forward to seeing what you're doing on the HOEPA 15 issues, the predatory lending in particular. 16 You do not oversimplify and turn it into 17 caricature, and I think that's important. And 18 there's a place to go, there's a place to get 19 information. The awareness is not great enough yet, 20 just as -- you know, after each of our hurricanes 21 that we have here in North Carolina, there has to be 22 another round because we've got new people coming in 23 or new people affected because of where they hit. 24 They need to be on the alert for the post-hurricane 25 attempts at fraud, and I think that's what we're FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 208 1 dealing with here. 2 MS. MURRELL: I think what I'm hearing is, 3 you know, there's no one solution to this problem, 4 that there really needs to be a comprehensive 5 approach to raise awareness so people are aware of 6 the issue early on, make sure that there's education 7 so that people are fully informed and make wise 8 decisions, that they know what they're getting into, 9 and then there's also legislation. So there's 10 several different things that I think need to be 11 addressed to get at this program and there's no one 12 solution that's going to be a cure-all for this. 13 MR. BLANTON: How do you get a combination 14 of awareness and intervention? 15 I can give Glenn another story that happened 16 to me. Somebody knocked on my door and wanted to 17 spray something on my slate roof to make it last 18 longer. Well, I told him where to go, but instead 19 of going there he went next door to where there were 20 three sisters in their eighties living on a fixed 21 income. I happened to see it so I called the 22 police. Well, they came and arrested him for not 23 having a business license. But I don't know whether 24 he was tied in with any lender that he was going to 25 give them a document to sign or not, but the whole FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 209 1 point is that's happenstance. Is there a way to 2 institutionalize some sort of awareness and 3 intervention? 4 MR. SKILLERN: I would point to our model 5 with CRA*NC in that we're working with other 6 community groups, local NAACP chapters, to do 7 outreach to their members, and to the churches. So 8 these fliers, beware, be cautioned, are getting out 9 through that informal network. And we have found 10 that probably our biggest bang for our buck has been 11 people talking with each other, the informal network 12 of you calling your neighbor and the minister 13 talking to his parishioners. 14 MS. LLOYD: We also have in North Carolina 15 under the consumer protection section, Phil Lehman's 16 group, a senior consumer fraud task force in which 17 extension and AARP are the primary outreach folks 18 and everybody else is law enforcement so that you 19 have people meeting regularly and sending out 20 materials, and it has to -- some things just have to 21 filter out. The money to do it on a public way and 22 the less expensive ways to do it -- oh. None of us 23 have mentioned Web sites. I think we do have to 24 acknowledge that more and more people have access to 25 the Internet. Not necessarily our end audience, but FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 210 1 people who can reach the end audience. 2 MR. SKILLERN: I'd like to move the 3 discussion a little bit towards other types of 4 strategies. I think education is important. This 5 the morning y'all focused on HOEPA regulations, but 6 you also have other tools existing under the Federal 7 Reserve that you could use. One is I think that the 8 HMDA data as a research tool could be strengthened. 9 I'd like to enter into the record that many of the 10 subprime lenders are not reporting race data, so 11 that the data itself becomes a poor tool or 12 ineffectual tool, or incomplete tool should I say, 13 to measure what's happening in the market. So 14 enforcement of the HMDA requirements would be very 15 helpful. 16 MR. BLANTON: Could you elaborate on that? 17 MR. LONEY: Why wouldn't they be in the HMDA 18 data? 19 MR. SKILLERN: They are reporting under the 20 HMDA data but race is not being reported, oftentimes 21 because brokers are collecting it or because these 22 are phone generated calls. But nonetheless, there's 23 just an increasing percentage of nonreporting of 24 race, particularly among subprime lenders. I'd be 25 glad to give you data to back that up. FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 211 1 MR. LONEY: If you assume that part of it 2 is because of the increase in the phone applications 3 and the Web applications, et cetera, where they 4 don't have to note race, then that makes sense; 5 right? Are you saying they're doing it improperly 6 or are you saying they're doing it properly? 7 MR. SKILLERN: I think there are probably 8 legitimate reasons why there is an increase in the 9 number of nonreported race. I also think that when 10 it starts to reach above a level of 50 percent, the 11 data itself, means we need to look at that tool to 12 be able to figure out how to make it more effective 13 to collect the information. 14 Race is just one issue under the existing 15 regulation. The other piece of this that is often 16 being asked for is, is credit being priced according 17 to risk and is there disparate impact and treatment 18 of protected classes. The office of thrift 19 supervision came out with an estimate of about 20 41 percent of subprime lending is being priced for 21 people who have credit scores of 620 and above. 22 Fannie Mae and Freddie Mac have both come out with 23 estimates of between 30 and 50 percent of the 24 subprime market are overpriced. So we think that if 25 the HMDA data was expanded to collect bar FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 212 1 characteristics such as credit score, we would then 2 be able to do correlations to better determine how 3 credit is being allocated. 4 The HMDA data is notorious, we've all 5 agreed, both lenders and advocates, that it's not 6 complete enough to know, particularly with the 7 evolution of the subprime market, whether a loan is 8 subprime or not and whether it's for manufactured, 9 and we need a better definition of that. We need a 10 type loan category for those. We also need to 11 expand the loan characteristics such as the interest 12 rate or prepayment penalties or financed credit life 13 insurance so there's a public data source for loans 14 that we think have predatory elements to them. So 15 HMDA data itself, the Federal Reserve we would ask 16 to look to both enforce it better as well as to 17 expand the categories and types of data collection. 18 The other thing as far as HMDA, a study that 19 would be helpful, I referenced it earlier, is that 20 we need to go into a large source of loan files of 21 subprime lenders and simply characterize what type 22 of loan terms, conditions, pricing, is happening so 23 that we can get a large enough sample to do that, 24 and I would again look to the Boston Federal Reserve 25 as a pivotal example of the power of the research. FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 213 1 I also want to talk about CRA, the Community 2 Reinvestment Act, on two fronts. 3 MR. BLANTON: Peter, before we leave HMDA 4 I'd like to ask a question, particularly from 5 Ms. Massenburg-Beasley, and that is, with respect to 6 the HMDA disclosures, the reasons for loan denial 7 are now voluntary, so -- it's voluntary, it's not a 8 mandatory disclosure? 9 MS. MASSENBURG-BEASLEY: It is mandatory. 10 MR. LONEY: It's mandatory for certain -- 11 the 0CC and I think -- we don't. 12 MS. BRAUNSTEIN: We don't. 13 MR. BLANTON: When we're looking at a 14 profile of the community and the HMDA lending we 15 don't get a complete picture of why the credit was 16 denied. We suspect it's credit history but we're 17 not too sure. Would it help with respect to credit 18 counseling activities to be able to target those 19 activities if you had a clearer picture of that? 20 MS. MASSENBURG-BEASLEY: Relative to 21 working with the person who has been denied? Yes, 22 it would help to be -- 23 MR. BLANTON: Developing your curriculum 24 and your materials and that sort of thing. 25 MS. MASSENBURG-BEASLEY: It would help to FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 214 1 know, yes, the trends for denial, and therefore in 2 developing the curriculum materials, yes, we could 3 tell that or target that to the direction of the 4 actual identified trends and problems. That would 5 be helpful. 6 MR. SKILLERN: I would hope that depository 7 institutions that are covered by CRA would not be 8 given credit for making subprime loans that have 9 practices that could be identified that seem to be 10 unfair that deplete wealth, not create wealth, and I 11 would look to the North Carolina model for better 12 determining what a good CRA loan is, such as not 13 having high fees. 14 I'd also like to urge you to look at the 15 fair housing law and we'll submit for the record the 16 Department of Justice's AMICUS briefing in the 17 Capital City case, which looked at whether predatory 18 lending is a fair housing issue. And to the extent 19 that the Federal Reserve and its examination 20 processes cover lenders who are doing subprime 21 lending, to examine the implications of whether 22 predatory lending or subprime lending is having a 23 disparate impact on minorities. It's a very 24 technical and well argued document. 25 You have the regulatory authority to examine FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 215 1 for fair housing through your examination process 2 and it is a tool that you could already use. 3 Another thing that I'd like to argue is that 4 you go ahead and change your current policy of not 5 examining affiliates of bank holding companies. I 6 think it very important that to the extent you have 7 regulatory jurisdiction that you choose to exercise 8 it in examining those loan files to determine that 9 they're in compliance with existing laws. We're 10 very concerned about the dual system of being able 11 to walk into a prime lender and get prime interest 12 rate, credit insurance if you want to buy it on a 13 monthly basis, and if you have a complaint be able 14 to go to the OCC that regulates and file a 15 complaint, versus walking into its affiliate just 16 next door, getting an interest rate that is higher 17 regardless of your creditworthiness, that has loan 18 terms and conditions that are not equal to the prime 19 loan, that may not be priced to your credit risk, 20 and that if you have a problem you really don't have 21 a regulator to go to except the FTC, which is 22 understaffed and does not commit regular, periodic 23 evaluations of the lender's performance. 24 You have that jurisdiction and we would 25 really urge you to go ahead and exercise it to FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 216 1 broaden the field of evaluation for fair housing and 2 consumer compliance. I would do that as a safety 3 and soundness issue as much as an economic justice 4 issue. 5 MR. LONEY: Just to clarify, you mean the 6 non-bank subsidiaries of bank holding companies; is 7 that right? 8 MR. SKILLERN: Yes, sir. 9 MR. LONEY: You don't have to call me sir, 10 Peter. 11 MR. SKILLERN: That was the last five 12 minutes of my three-minute speech. 13 MR. LONEY: I know, and I think you just 14 cheated. Somebody else have any questions? 15 One thing that we came here for is to get 16 somebody to tell us; we've been looking for data. 17 When the Board engages in rule-making one of the 18 things it likes to have at its fingertips is data. 19 We've looked, and so far I'm not sure that I can 20 tell you that we've been remarkably successful in 21 finding data that will inform us about any of the 22 aspects we've been talking about either this morning 23 or this afternoon or any of the brief litany you 24 just gave as to the prevalence of this or the 25 implications of changing parts of this to something FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 217 1 else and what would happen. 2 Then I think we even have some debates about 3 the adequacy of the data that has been put out, that 4 whether in fact what we're talking about with HOEPA 5 lending is only 1 percent of the market and it would 6 go up to 5 percent of the market and people take 7 issue with whether the data that that assertion is 8 based on has any validity. 9 If there's anything that anybody knows of, 10 we'd certainly like to hear about it, by way of data 11 the Board can use in making the judgments it's going 12 to have to make in addressing whether and how to 13 change HOEPA, which is really what we're talking 14 about sort of as a first matter. 15 MS. WARREN: I don't know of anything 16 better than you've already heard. I think it points 17 to Peter's recommendation that the Fed is going to 18 need to take some leadership in generating its own 19 data. That's going to be far better than anything 20 else that's provided, and this data is essential to 21 answering the questions that you've raised and we've 22 all raised. There's a real research need out there. 23 MR. SKILLERN: I think that you also might 24 find sources for different types of practices but 25 not necessarily how they are all put together in a FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 218 1 loan. 2 For example, if you agree that high 3 prepayment penalties are an unfair consumer 4 practice, then the industry admits that there is 5 about 80 percent of that on subprime loans and only 6 about 2 percent on prime loans. If you wanted to 7 get an estimate for single-premium credit insurance, 8 over $5 billion a year is sold in our country. If 9 you wanted to get an estimate for how loans are 10 priced above credit risk, then I would refer you to 11 the OTS report or the Fannie Mae or Freddie Mac 12 evaluation. By that you start to pick up different 13 types of it, even though you've not been able to say 14 the high interest rates of the 30 to 50 percent are 15 then locked in by the prepayment penalties for 16 80 percent of the loans, so you could make that 17 correlation. That's one recommendation I would make 18 to you is to look for a published research on 19 aspects of it even though, until we do a broader 20 study, we can't see how they're all put together. 21 MR. LONEY: Certainly we've done some 22 research on some aspects of it but you butt up 23 against the problem of not having data that's 24 reliable, and it's not always as easy as just saying 25 we want it, to get it. I mean, sometimes we want it FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 219 1 and nobody has it even to get. That's always been a 2 challenge what to do then. Or if we have wanted to 3 go and try to collect it, everybody that we had to 4 get it from as a source collected it, you know, in a 5 myriad different ways, so that even if you get the 6 information it's not comparable one institution to 7 the next. 8 I don't want to tell you my sob stories but 9 I will tell you those kinds of efforts have come a 10 cropper no matter what we wanted, even if it was we 11 who was doing it in the past. We were hoping maybe 12 somebody could send us down a better path than we've 13 used so far. 14 MS. HURT: May I ask in terms of consumer 15 education, I guess the basic question I'm asking is, 16 what can the Board do? For example, is there 17 enough -- well, you talked a bit about written 18 materials and that's sometimes useful and sometimes 19 they're not, dependent upon how complicated, but do 20 you get a sense that on a national basis there is 21 enough materials out there and it's an issue of 22 dissemination, or there may be materials for your 23 constituents but the Board -- is there a role for 24 the Board to create something along the lines of the 25 car leasing initiative? Would that be useful? Do FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 220 1 you know what I mean? That if the Board came out 2 with a package of brochures, a video, something that 3 could go on the Web site, would that be useful, or 4 is there enough information out there already and 5 it's just a matter that it's not reaching the right 6 people? 7 MS. LLOYD: From my personal perspective 8 with my organization there's not enough on HOEPA 9 itself, and that we need the train-the-trainer type 10 background material to make sure they're dealing 11 with objective -- in my organization it must be 12 objective, it must be research based, factual based; 13 it can't be advocacy. So we need more -- we have 14 the general homeowner; I'm saying we need this 15 supplement for it. 16 I think that we always partner with other 17 organizations and I'm assuming that they share, that 18 they would like to have short-take information and 19 background for whoever is going to actually be 20 delivering the information. But using the Web, 21 we've got half a dozen I could name right away, 22 professional organizations that share information. 23 We need to get it out as soon as there is something 24 available to update whatever they're already using. 25 I'm seeing what you need especially is supplemental FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 221 1 to what we have. Yes, we very much need it, and 2 just to keep coordinating the groups that need to be 3 talking to each other so that we aren't having a 4 waste of resources by producing comparable things 5 for the same audience. 6 If we divvy up and say we'll do something 7 for this audience and we'll do it for this, and then 8 everybody use it all, that would be the ideal. 9 MS. MASSENBURG-BEASLEY: I'd like to 10 magnify that and say that I believe there's a 11 tremendous amount of information that's presently 12 available and that will work extremely well. The 13 difficulty of the problem is the distribution 14 system, and therefore there should be some capacity 15 building for the distribution of the current 16 information. I'd like to think that the Federal 17 Reserve could look at the information that is 18 available, pull it together, and then of course 19 support the local agencies and local initiatives 20 through capacity building to get that information 21 out. 22 MS. MURRELL: I'd like to echo that point. 23 We talked a little bit about the whole issue of 24 trust and that that's why it's so important to make 25 sure that information is distributed through the FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 222 1 local organizations. And in some cases these local 2 organizations might be organizations that are not 3 involved in financial literacy or credit, if you're 4 talking about like the faith-based communities for 5 example, so it is particularly important not only to 6 have information but to make sure that there is the 7 technical assistance piece that goes along with it. 8 MS. MASSENBURG-BEASLEY: I'd like to add to 9 that also a model, an excellent model to take a look 10 at, the housing council association group here in 11 the state of North Carolina and to make contact with 12 that particular organization. There are at least -- 13 I want to say at least approximately 30 or more 14 local counseling agencies who are members of that 15 particular organization. It would be a concerted 16 effort and a very, very easy mechanism to work with 17 that particular group to get the information out 18 statewide. 19 MR. LONEY: Does anybody else have any 20 questions or comments? 21 MS. WARREN: I just wanted to bring up the 22 rural issue again because none of the questions 23 dealt with that, and wonder if you have any 24 questions about that or any interest or concerns. 25 I'm not sure you're going to hear about it in the FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 223 1 other three hearings. I hope you will, particularly 2 in the midwest, but you can't count on it. 3 MS. LLOYD: We would certainly echo that, 4 extension. This is our toughest nut to crack is 5 there aren't services, there aren't people to 6 deliver it. 7 MS. WARREN: And the problems are more 8 prevalent -- 9 MS. BRAUNSTEIN: The questions I asked 10 before about the consumer education, I also wanted 11 to hear from you in terms of the specific issues 12 that pertain to the rural areas. 13 MS. LLOYD: And our elder poverty is 14 obviously the greatest there. 15 MS. BRAUNSTEIN: Seems what I'm hearing is 16 a lack of resources and delivery systems. 17 MS. WARREN: In the south, North Carolina 18 is exceptional in the kinds of delivery mechanisms 19 it has. We work in all the other states and are 20 just trying to work with partners there to build up 21 what we have here in North Carolina. It's a very 22 different place. 23 MR. BLANTON: We have some dealings that 24 we're doing with the Appalachian Regional 25 Commission, but how does that attack those out west, FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 224 1 for example? As I would get it, the problem there 2 you're talking about is in the delivery system; the 3 infrastructure is not there. So maybe you need to 4 identify through the extension service and/or 5 faith-based organizations something that would get 6 to the consumers in the rural areas. 7 MS. WARREN: As Peter says, it's also 8 looking at the bigger picture, that clearly 9 manufactured housing is a major player in rural 10 housing, quote, affordable housing, and the 11 financing vehicles and mechanisms that go along with 12 manufactured housing have to be, I think, looked at 13 in this research and in any kind of regulatory 14 structures. So it's not only a supply of housing 15 counseling in rural communities; it's also where are 16 the rural banks, where are the conventional 17 mechanisms for getting credit. There are less even 18 than in the inner cities. 19 MS. BRAUNSTEIN: I know at the Dallas Fed 20 they're looking very closely at issues around 21 manufactured housing because that's been a big 22 concern in that area, and I can put you in touch 23 with somebody. 24 MR. LONEY: Anything else you want to say 25 about that? All right. Well, if not, I will thank FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 225 1 the panelists; thank you very much. It was very 2 interesting and I think it will ultimately prove to 3 be very useful. 4 Let's take about, I don't know, 15 minutes, 5 and we'll check out the list of people who signed up 6 for the open-mike, and we will begin the open-mike 7 session at five minutes after 3:00. 8 (A recess.) 9 MR. LONEY: It's time for us to open the 10 open-mike session. This is going to be tight, 11 folks, getting it all in. We'd like to get as many 12 people in as we can and still allow those of us who 13 have to leave to catch our plane, so I'd ask once 14 again that we keep what we have to say down to three 15 minutes. And for those of you who have come as 16 groups, I would very much appreciate it if you could 17 orchestrate it to keep the time that you use down to 18 something more reasonable than multiplying the 19 number of people you have by three, because that 20 sort of stacks the deck. So, anyway, if you can 21 accommodate me on that I would very much appreciate 22 it. 23 The first person who's on my list is Dick 24 Boisky of Azalea Coast Mortgage, if you want to come 25 up. The timekeeper is this gentleman over here and FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 226 1 he will give you the one-minute signal and then 2 he'll give you time-is-up signal, and if you will do 3 what you can to accommodate us with that. Before 4 you start, Jane, do I have the final list? Okay, 5 Mr. Boisky. 6 MR. BOISKY: My name is Dick Boisky and I'm 7 a mortgage broker. I am president of a small 8 business employing six people in Wilmington, North 9 Carolina. On previous trips to the Fed here while 10 working at Brinks part-time going to NC State, I 11 started working in the basement, delivering currency 12 with Brinks down there. Later as a national bank 13 examiner I attended numerous consumer compliance 14 seminars at the Fed here, and now I have this 15 appearance. I hope that on my next visit I'll be 16 able to get to that executive level. 17 A couple of the issues we're talking about 18 here, truth in lending Regulation Z. As a former 19 national bank examiner while doing consumer 20 compliance exams, I was really trying to recall -- I 21 can't ever recall a violation related to APR on the 22 mortgage side. Retail side, car loans, we had them 23 all the time, but the mortgage side. It simply was 24 because we weren't comfortable enough to go head to 25 head with the banker who could stare us down. We FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 227 1 just didn't feel confident enough. I still don't 2 feel that confident about it. 3 The concept of APR and comparative shopping 4 is a very good one. However, even experienced real 5 estate attorneys hold their breath when asked to 6 explain how the APR is calculated. No matter how 7 well intended, for the average consumer this concept 8 is very broad and nebulous, probably to the point of 9 being lost. 10 HOEPA applies to closed-end installment 11 loans. In placing additional disclosure 12 requirements based on profit margins on these types 13 of loans, please keep in mind the relatively small 14 amount of the loan we're talking about and thus the 15 small amount of profit to be earned. By placing 16 these additional disclosure requirements, you are in 17 effect capping the loan, which could lead to 18 disinterest in providing this service. That 19 ultimately deprives the consumer of a means of 20 accessing their appreciation and equity. 21 Balloon payments. Balloon payments are not 22 necessarily bad things. For a person who expects to 23 be relocated by their company or expects to buy a 24 larger or smaller house in a few years, a mortgage 25 with a balloon payment may be just the ticket. FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 228 1 Prepayment penalties. Most homeowners stay 2 in their house or mortgage an average of three to 3 five to seven years, so for many borrowers even a 4 three-year prepayment is not an issue. North 5 Carolina does not allow mortgages with a prepayment 6 penalty. Valid points could be made on either 7 position; however, the bottom line is this: Our own 8 Charlotte-based Bank of America offers every state 9 except North Carolina a one-year adjustable mortgage 10 with a prepayment penalty currently at around 11 7 percent. Without that prepayment penalty, the 12 rate would be 8 percent. It amounts to $34,000 13 additional expense over 30 years. 14 A prepayment penalty is not de facto bad. 15 It is merely one mortgage tool that, when used 16 wisely with the advice and experience of a 17 professional, can be used to a consumer's 18 advantage. 19 One last thing, registration or licensing. 20 Every group or organization has a few bad apples 21 that taint the entire group. The mortgage industry 22 is no different. We readily admit to having some 23 overzealous members, some might even say 24 unscrupulous, but not all brokers operate that way. 25 The majority don't operate that way. I think we FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 229 1 could use some refinement of present laws -- I'm 2 finished -- present laws or regulations that may be 3 archaic, but I think also that if mortgage brokers 4 are accounting for over 63 percent of mortgage 5 transactions, as we are, we must be doing something 6 right. 7 Our trade association stresses continuing ed 8 but not a major overhaul. Maybe part of the 9 solution is to have brokers licensed or registered 10 similar to a stockbroker, insurance broker, and real 11 estate brokers. Thank you. 12 MR. LONEY: Thank you. Let me just give 13 you a bit of a list of who's coming up; I'll give 14 you the next five, let's say. Hayes Hyman, Jane 15 Estes, Mark Lawrence, Tom Estes, and Mike Miciek, 16 that's the next five. So Hayes Hyman, if you want 17 to come up. 18 MR. HYMAN: I'm not as prepared as 19 Mr. Boisky was in terms of a written text to read 20 from, but my name is Hayes Hyman, I work with First 21 Financial Services in Carey, North Carolina. I am a 22 past president of the North Carolina Association of 23 Mortgage Professionals and I currently am the 24 cochair with Kate Crawford of the legislative 25 committee, so as such I keep my finger on the pulse FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 230 1 of the regulatory and legislative goings-on in the 2 mortgage related industry. 3 But the main thing that I wanted to comment 4 on is that I'm a loan officer first and foremost; I 5 have been for 14 years. Every day I meet with 6 consumers just like those of us in this room to take 7 loan applications, to counsel them about their 8 credit, about the type of loan programs that are 9 appropriate for their particular needs, because 10 there's so many loan programs and everybody's needs 11 are unique to them. And the one thing that I've 12 learned over the years of doing this is that, as 13 Governor Gramlich commented on, the simplicity needs 14 for the disclosures is that people, all people, want 15 to know something very simple: What does cost for 16 me to do business with you. And the costs are quite 17 simple. It's fees that they pay at closing and it's 18 interest that they pay over the course of the loan, 19 of course, the interest rate. And as good as the 20 intentions are of the Truth in Lending Act, that 21 cost, simplicity, gets quite complicated with the 22 level of disclosures, and so I urge the Board to 23 look at simplicity ways of meeting those needs. 24 I don't do Section 32 loans, high-cost 25 loans, I don't do the North Carolina -- as described FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 231 1 under the new North Carolina Predatory Lending Act 2 types of loans, and the majority of our members 3 don't do that type of loan as well. So we are proud 4 to say that we support and supported the process and 5 the final outcome of the Predatory Lending Act and 6 we want to work with the Board and others in 7 achieving the solutions to many of the problems that 8 were discussed in this room. 9 The one thing that I do want to say, 10 however, is that it was great to hear some of the 11 comments from Ms. Massenburg-Beasley and Ms. Murrell 12 in terms of outreach and education and consumer 13 credit counseling. Every borrower I meet with, 14 whether they're a first-time home buyer or they've 15 done it many times, there's a counseling process 16 that takes place. And I think they would be willing 17 to -- in fact, to perhaps even suggest a forum among 18 industry and some of the counseling groups so that 19 we can develop counseling at the point of sale; that 20 is, the loan officer. 21 With the ethical and scrupulous rather than 22 the unscrupulous I think that most of the solutions 23 could be achieved at the point of sale. Thank you. 24 MR. LONEY: Thank you. Ms. Estes? 25 MS. ESTES: My name is Jane Estes. I am a FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 232 1 mortgage broker; I'm also a small business owner 2 here in Charlotte. My company has four people. 3 We're part of the economy, we keep it going. I 4 think most of the mortgage brokers in this country 5 range from two people to ten people, the majority of 6 them. We provide a valuable service. We take time 7 and we do a lot of education, take time to do loans. 8 MS. BRAUNSTEIN: They can't hear you in the 9 back. 10 MS. ESTES: As a mortgage broker we can take 11 time, because our overhead is not as high, to do 12 loans that traditional lenders cannot. I've had 13 loans that have taken four and five months to close 14 because of the process I've had to go through with 15 the consumer to either correct something, help him 16 get everything in order. So that's a value that we 17 provide. 18 I hope we've established that not all 19 brokers are predatory lenders and not all subprime 20 is predatory lending. Even though somebody may 21 qualify for a conforming type loan, having a credit 22 score over 620 does not necessarily mean that they 23 are going to qualify document-wise for a conforming 24 loan or that that is the product they want to choose 25 that will meet their needs. They may want a FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 233 1 nonconforming type of product. 2 Everybody has heard the horror stories, but 3 for all of those horror stories there's hundreds of 4 success stories and we just don't get advertised as 5 much because people are happy. The squeaky wheel 6 gets the oil. 7 I do what I do because I get so much 8 satisfaction out of helping people get into homes 9 and also possibly getting back on the road to 10 recovery if they have had a disaster in their 11 family. 12 Already in North Carolina I've seen the 13 availability of credit begin to shrink, particularly 14 to the credit-impaired, but also the conforming 15 customers out there due to our new predatory lending 16 law. What I've heard from lenders is that the 17 uncertainty of the law, particularly the reasonable 18 net tangible benefit statement -- the ambiguity of 19 this section is that it's not tried, there's no case 20 law, and all the risks are very unknown. Also, by 21 limiting the prepayment penalties severely there is 22 no certainty that a lender is either going to break 23 even or make a profit. These provisions have 24 increased the cost of credit through interest rates, 25 which affects each borrower's affordability and FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 234 1 buying power. 2 Because of these issues that we're facing in 3 North Carolina, I urge you to slowly take steps to 4 make changes to HOEPA and consider the ramifications 5 by getting input from the people that sit across the 6 desk from these consumers. One step would be a very 7 simple disclosure form; if you can streamline that 8 it would be great. I have to make jokes in front of 9 my customers because there is such a volume of 10 paperwork that needs to be done. If you can 11 simplify that, it would be much easier. 12 If the cost of credit increases nationwide 13 as it has started to in North Carolina, I would 14 think that it would hinder the percentage of home 15 ownership that we're at right now. Thank you. 16 MR. LONEY: Thank you. Mr. Lawrence? 17 MR. LAWRENCE: Good afternoon. Thank you 18 for the opportunity and the forum in which to 19 speak. I have many more pages and a lot to say but 20 I'll watch out for Pepper. 21 MR. LONEY: Why don't I interrupt for a 22 second and say if you do, and for any of you who 23 speak, you can submit those for the record. So if 24 you can just summarize, but you can send us what you 25 like or give it to us. FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 235 1 MR. LAWRENCE: The main thing that I wanted 2 to try to relay to you as a board is what we do 3 every day at our company and it's basically 4 mandatory for our loan officers, and that is to 5 explain the whole process of credit and to educate 6 their customers. 7 About 60 percent of our customers are 8 refinances. We have conforming and conforming and 9 this happens in both segments. They come in and 10 they have this sickening sense every day when they 11 wake up before their feet even hit the floor, 12 they're tense and they're upset. They're worried 13 about the phone calls they might receive before work 14 or at work. They're afraid of having company over 15 to their house for a get-together because somebody 16 might come by their house. They've made some bad 17 decisions somehow, maybe bought a car that was too 18 expensive or helped somebody else or maybe they're 19 helping with the convalescence of an elder parent, 20 but for whatever reason, not being judgmental, a lot 21 of people in America have gotten themselves into 22 circumstances in which they have bad credit. 23 And what we do, when we do the loan for 24 them -- hopefully we can do a loan for them. If we 25 can't, we tell them, but in the process we talk to FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 236 1 them about their credit reports, how to correct 2 them. We talk to them about what credit scoring 3 means. We talk to them that they need to have 4 cancelled checks. The whole process is to -- if 5 they're going to be on a nonconforming loan in the 6 very beginning we let them know the end result is to 7 be in a conforming situation, that this is a 8 transitional thing for them. We talk to them about 9 savings accounts, we talk to them about the 10 ramifications of cosigning for somebody and not 11 having them pay the check. We talk to them about 12 reading the publications of their industry. 13 In the whole process that we do in the whole 14 time we're doing the loan is to educate them and let 15 them know that this is a temporary thing, that they 16 can get from here and they can get over to the 17 conforming side so 27 out of 30 years they are in a 18 very good situation. I thank you for your time. 19 MR. LONEY: Thank you. Mr. Tom Estes? 20 MR. ESTES: I'm Tom Estes. I am a board 21 member of the North Carolina Association of Mortgage 22 Professionals. I also represent a wholesale 23 mortgage lender that does subprime loans. 24 There are two or three things that I wanted 25 to say to you today. First of all, with the Fed's FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 237 1 authority in what they can do, if this is exercised 2 to its fullest extent it will be severely damaging 3 to our business. And business -- the nature of 4 business is to make a fair profit, a fair and 5 reasonable profit, not to take advantage of 6 consumers. But it will hurt if that happened. 7 I would urge -- I would reiterate some of 8 the things that have been said up here before. I'd 9 go very slowly, I urge you to go very slowly. 10 You're asking for data; part of the data I think you 11 need is going to be to take a look at what happens 12 in North Carolina. We don't know yet, we don't know 13 the effect of what's happened here. You've been 14 urged today to go beyond that. It's a very scary 15 thought that we don't know yet what's happening and 16 yet to go beyond it. 17 While saying that, let me say that I've 18 heard and I've read some of the horror stories that 19 exist. I don't doubt that those things happen. 20 I've seen the proof that some of those things 21 happen. I rep 175 mortgage brokers in North 22 Carolina and the brokers that I know are hardworking 23 individuals that do just like people who have stood 24 up here in front of me and told you, they work with 25 their customers. They have an end result in mind; FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 238 1 that end result is to help somebody who's in 2 trouble. Fortunately they're able to make a living 3 by doing that, and that's a good thing. I don't 4 know any brokers who make $200,000 a month. Most of 5 my brokers I'd say are doing good to make $30,000 a 6 year. 7 While you're aiming at a market here that 8 has been called the American dream, part of that 9 American dream is not just wealth-building for the 10 individual. It has existed -- it's home ownership 11 itself, to have something invested in myself. But 12 part of that investment in myself is 13 self-responsibility. One of the speakers earlier 14 said that the problem was not the ignorance of the 15 borrowers but lenders themselves. There may be bad 16 lenders in the market but I'm not aware of it; I'm 17 not aware of a lot of it. I've seen some of those 18 things and I can't deny they happen. But I don't 19 know how you're going to go cautiously and keep the 20 opportunity for people to do self-investment -- the 21 ideas are there, and by self-investment I mean home 22 ownership -- and still keep a healthy housing market 23 out here and healthy opportunity for people to have 24 access to their credit and cut out all of the abuses 25 that are there; I don't know how that's going to be FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 239 1 done. I don't envy you your task. 2 But I would say, again, urge you to go 3 slowly, look at the data from North Carolina, try to 4 gather that. And I would support what was said 5 earlier about the HMDA data, that that does need to 6 be more inclusive and more specific so that we have 7 more facts. Thank you. 8 MR. LONEY: Thank you, Mr. Estes. 9 Mr. Miciek, did I get that right that time? 10 MR. MICIEK close enough. 11 MR. LONEY: I do admire your tie. 12 MR. MICIEK: Thank you. My name is Mike 13 Miciek. I've probably been in the business longer 14 than you have, I'm not sure. I started off in 15 Detroit for an S&L, and in Detroit we had a guy 16 called Friendly Bob Adams. Bob Adams was a local 17 finance company. Everybody in blue collar went to 18 Friendly Bob Adams because he'd smile at them, say 19 hi to them, give them a 22 percent interest rate 20 loan for whatever it was they wanted to buy. They 21 didn't go to the banks or the S&Ls because they were 22 afraid, they were intimidated by the marble columns 23 and the walnut desks and everything else, so they 24 were willing to pay that higher interest rate. 25 That market still exists out there, and that FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 240 1 market is what is being served by some of the 2 predatory people that are doing it; not the banks 3 and the other ones that are there. 4 In 1973 I thought we got rid of the 5 prepayment penalties when the Supreme Court decided 6 you either have the prepayment penalty or the 7 assumability; you can't have both. Somehow the 8 prepayment penalty has crept back into the equation 9 and into our loans again, but in those days your 10 loans were assumable or you had the prepayment 11 penalty, one or the other, and that's the way the 12 court ruled. You might want to take a look at that 13 again. 14 You can't have a predatory lender unless you 15 have prey. No predator can survive without prey. 16 That prey is either a buyer, a no-cash refi, or a 17 cash-out refi. All of them seem to have some kind 18 of a desperate need in their background that causes 19 them to be treated substandard. They're financially 20 disadvantaged and so they become prey, they're 21 susceptible to the predators that are out there. 22 Predators also often refuse to pay the people who 23 work for them when they do it. 24 Part of the reason these people are driven 25 like sheep into the predator's fold is the fact that FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 241 1 they have FICA scores, and a FICA score, which you 2 guys have some control over, and the reporting of 3 credit report agencies. I have files and files and 4 files of credit reports that are just wrought with 5 errors in them. The CRAs refuse to correct any of 6 those errors, each one of the credit report agencies 7 refuses to correct any of the errors and deal with 8 the lenders in those situations, and those all 9 affect the FICA score that they will not respond 10 to. And when you get your 620 score cut, how many 11 might have been 650s instead of a 600 cut; how many 12 of them would have been able to get a normal loan 13 and not have to go to a B or a C category. 14 I'm really big on that, those credit report 15 errors. I mean stupid things likes dates being out 16 of line. I had a lady who had a bankruptcy in 1994, 17 Chapter 13; she paid it off, and because she pulled 18 her credit report it shows up in 1999. It took me 19 four months to get that off of her credit report 20 because nobody wanted to be responsible and the 21 agency says differently. Thank you. 22 MR. LONEY: Incidently, I remember Friendly 23 Bob Adams. I spent a fair amount of my youth in 24 Michigan. 25 MR. MICIEK: Did you really? FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 242 1 MR. LONEY: Oh, yeah. I heard those 2 advertisements. Next we have a couple of folks from 3 the Coalition for Responsible Lending, and I spoke 4 to Mr. Corbett I guess it was about you folks kind 5 of getting your act together so we don't have four 6 in a row. Can we accommodate that? 7 MR. STEIN: I'll be the only one. 8 MR. LONEY: Who are you? 9 MR. STEIN: Eric Stein. 10 MR. LONEY: Thank you very much, I 11 appreciate it. 12 MR. STEIN: Sure. Anything we can do to 13 help. 14 MR. LONEY: I was counting on it. 15 MR. STEIN: I'd like to just focus on the 16 issue of prepayment penalties for subprime loans, 17 because for subprime loans and not for conventional 18 loans like they were talking about with the ARM, 19 Bank of America loan. For subprime loans, they're 20 really, for two main reasons, a lose-lose 21 proposition. Either you're stuck in an interest 22 rate that's too high or you have the equity stripped 23 from your house by having to pay out the penalty. 24 On the first point with being stuck, if your 25 interest rate is too high and you're stuck in a FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 243 1 higher interest rate loan that you can't get out of, 2 that's what often leads to foreclosure. What 3 subprime lending at its best should be is a bridge 4 to conventional financing. It's for people who have 5 credit blemishes. Things could happen to them, but 6 at some point they get their act together and it's 7 time to get a better loan. It's time to pay less of 8 their monthly income out because their credit 9 history is fixed. Prepayment penalties are designed 10 exactly to stop that from helping. In the subprime 11 arena it's not allowed to provide its real function, 12 which is being a bridge. If you're paying a real 13 market rate, you shouldn't need a prepayment penalty 14 because the person should be happy with the loan. 15 Secondly, with the equity being stripped, 16 what prepayment penalties really are in subprime 17 loans is a hidden, deferred fee. A common 18 prepayment penalty now is 5 percent for five years; 19 that's very common these days. On $150,000 loan, 20 that's $7,500 that you have to pay, and that is 21 greater than the median net worth for the 22 African-American family in the United States, that 23 one prepayment penalty, as of the 1990 census. It 24 will be higher in the -- 25 MR. LONEY: Would you repeat that? FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 244 1 MR. STEIN: Sure. A 5 percent prepayment 2 penalty, which is very common these days, in 3 existence for five years, the 5 percent of a 4 $150,000 loan size, reasonably average size loan of 5 $150,000, is $7,500. The median net worth for the 6 African-American -- the average net worth for the 7 median African-American family in the U.S. as of the 8 1990 census is $4,400. So you're talking about that 9 one event of paying that prepayment penalty because 10 your credit improves and you do what you're supposed 11 to do, takes more than the total wealth than the 12 median family, my goodness, has built up over their 13 entire life. That's extreme. How many pay these? 14 Greater than half. Lehman Brothers' own data shows 15 that greater than half of subprime borrowers pay 16 that prepayment penalty of that size. I mean, 17 that's a lot of wealth that's being stripped. 18 The two other reasons against it, first, 19 it's the glue that enables racial steering. 20 Minority neighborhoods have prepayment penalties 21 five times more often than white neighborhoods. 22 There's one example in the Coalition for Responsible 23 Lending's data in our testimony that shows a 24 Greentree borrower, she got an 11.5 percent loan; 25 one month later through the help of a counseling FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 245 1 agency she got a 7.5 percent loan. Would she have 2 been able to get that if she had a prepayment 3 penalty? No. She was steered into a loan probably 4 because of where she lived, but she got out because 5 there was not a prepayment penalty, because it was 6 1998 when they were less common. 7 And finally, borrower choice does not 8 explain it. 2 percent of conventional borrowers 9 have prepayment penalties; 80 percent, according to 10 Duff & Phelps, have them in the subprime area. 11 That's not because that market is not competitive. 12 Thank you very much. 13 MR. LONEY: Thank you, and thank you for 14 accommodating me on the schedule. If you would like 15 to submit your statement or anything -- let's see. 16 Where were we. We have Pauline -- well, Pauline 17 Simuel, is she with the CHOPS group? Jane Burts, 18 Dorothy Gaines, Pauline Simuel, and Rosemary Hubbard 19 I think were to come speak as a group. And again, I 20 appreciate your accommodating me on the timing and 21 scheduling. 22 MS. BURTS: I'm Jane Burts. I'm the 23 director of CHOPS, Charlotte Organizing Project. 24 You all have heard from us over times in the past. 25 As part of our work we have participated with CRA*NC FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 246 1 in its surveys of persons -- can you -- 2 MR. LONEY: I was just wondering if they 3 ought to be seeing that. 4 MS. BURTS: Well, we'll do both. Last 5 summer we did a survey of people in this county 6 whose names came off the real estate rolls and we 7 got 20 who came in for interviews and one more came 8 to see me day before yesterday. Out of those 9 interviews, 76 percent were African-American, 10 61 percent were women. The most surprising is that 11 71 percent of them had attended some college, which 12 shows you how well the subprime lenders do their 13 job. The four companies that showed up the most 14 often, UC Lending, which is now bankrupt; Nations 15 Credit and EquiCredit, subsidiaries of Bank of 16 America; the Associates, which seems to end up as 17 the catchall when other companies don't want 18 something; and the Money Store, recently closed by 19 First Union. 20 Now, the woman who came to see me day before 21 yesterday was too ashamed to come here because she's 22 just lost her house to the Associates. This 23 happened because she and her husband got a flier on 24 the front porch one day about home repairs and they 25 wanted some siding, so they took out a loan to get FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 247 1 siding and the Associates ended up with that loan, 2 and Rosemary is going to read you this woman's 3 statement. After that Dorothy is going to tell you 4 what happened to her, Dorothy is feeling very 5 nervous, and we're going to pass out into your hands 6 a copy of her HUD loan document, and then Pauline 7 will finish. 8 MS. HUBBARD: Thank you. This is dated 9 March 6, 2000, and the people wish to remain 10 anonymous but I would be glad to show it to you. 11 It's just that they are so ashamed; they felt they 12 were taken in this situation. 13 To whom it may concern: My wife and I have 14 lived at 2610 Springway Drive, Charlotte, for the 15 last 12 years. Except for some minor medical 16 collections we always paid our bills as agreed. 17 Until mid-1998 we have had a perfect mortgage 18 history. I have included a copy of my credit report 19 to verify this. 20 In December of 1995 we took out a second 21 mortgage through Plaza Builders for siding and 22 windows. This, combined with our current first 23 mortgage, gave us a total payment of $770. We paid 24 as agreed and were fine with that. The loan was 25 purchased by Associates and the servicing was FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 248 1 transferred to Associates Financial Services of 2 Woodlawn Road, Charlotte. We made our payments 3 there in person monthly. 4 We were solicited by this branch for a new 5 mortgage to consolidate our first and second 6 mortgage. We thought this was a good idea as they 7 were going to pay off all our outstanding debt and 8 leave us with a total payment of $838. They took us 9 out of our VA loan which was at a good rate of 10 10 percent and moved us to a rate of 13.99 percent. 11 At closing we were told again that the second 12 mortgage was included in the new payment, even 13 though we did not see it listed anywhere. Since we 14 were told this was a new first mortgage we believed 15 him. 16 Associates did not pay off the second 17 mortgage. It moved into first position when our 18 previous mortgage was paid. That made our new first 19 mortgage a second mortgage and that is not what we 20 wanted or thought we had. We feel that since the 21 Associates held both loans out of the Woodlawn 22 office this should not have happened. The result 23 was that we now had a total of $88,754 in liens 24 against a home worth $70,000. In addition, we found 25 out they charged us over $6,700 in insurance FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 249 1 premiums for credit life insurance. We feel we 2 would have been better served with that money paying 3 off the second mortgage. 4 We understand we have an amount of 5 responsibility here but we are not bankers or 6 financial experts. That is why we put our trust in 7 the group at Associates, as they were 8 professionals. 9 Finally, to wrap up our story, the payment 10 on our house to Associates each month totaled 11 $1,058. Remember, this is on a home of $70,000. As 12 you can see by the credit report, this coincides 13 with the decline in our credit situation. Finally 14 the payment became too much to bear and forced us 15 into declaring bankruptcy. Associates has served us 16 with a notice to vacate the property. Our credit is 17 now damaged to the point that we cannot get 18 financing for another home. Please advise us as to 19 the best course of action. 20 These people are unable to buy a home, their 21 credit is ruined. I would like to leave you with a 22 short verse from the Psalms: The Lord hears the cry 23 of the poor. 24 MR. LONEY: Thank you. Is it Ms. Gaines? 25 Don't be nervous now. FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 250 1 MS. GAINES: I am. I just wanted to give a 2 few facts from my loan with the UC Lending Company. 3 The originating fee equals to approximately 4 10 percent of the loan amount. I got credit 5 insurance of $3,000, which I didn't realize I had 6 until two years ago when a friend was looking over 7 my papers. Also I have $33,000 in broker's fees. 8 Total settlement agreement of $16,000, which is 9 close to 20 percent of the loan amount, which is 10 $76,500. All because I was trying to redecorate my 11 house also. 12 MR. LONEY: Thank you. Is it Ms. Simuel? 13 MS. SIMUEL: Yes. Thank you for allowing me 14 to speak. I am Pauline Simuel. I too went into a 15 loan to make my house look better. I had a loan 16 with UC Lending but I received phone calls for about 17 a month from a company called Emerald Green. I did 18 not know who it was that kept coming up on my ID 19 box, so I decided to return the call. 20 When I returned the call a young man named 21 William answered the phone and said that they had 22 been downtown to the courthouse and saw that I had a 23 high interest rate on my loan with UC Lending and 24 they could make it smaller. I thought, oh, really? 25 Well, interest loans and things like this, I never FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 251 1 look at, I don't know what it's about. And I didn't 2 know what the interest was and I still don't know 3 what the interest is, but they were going to make it 4 smaller for me and I thought that was wonderful. 5 At the time I was paying UC Lending $525 a 6 month to pay off the loan. I owed $37,000 on my 7 house. When Emerald Green came out, they told me 8 that they could pay off that loan and also help fix 9 my house. I needed a roof, my roof was leaking; I 10 wanted some storm doors and some gutters. I wanted 11 to make my house beautiful for me to live in. I was 12 15 years in my house and I felt like by the time I 13 retired that would last me on up and I wouldn't have 14 to do anything else to it. 15 I went out to sign papers for this loan, I 16 did not read over the material as I should have, and 17 I had this lady to come out and make me such a 18 wonderful deal. On the deal she made I was supposed 19 to borrow $65,000 to pay off the loan and to get my 20 house remodeled and to do some extra things that I 21 needed to do for my daughter. I had no idea that 22 when I finished doing the loan that I had come into 23 a loan for $165,000 that I had no idea what it was 24 about. 25 He had two papers there he said that I could FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 252 1 sign, it was nothing significant, that he would fill 2 it in later; at the top of the papers was blank. 3 But when I received the papers and did not look at 4 them -- I should have looked at them but it probably 5 wouldn't have been in there. This is where the 6 balloon deal came in. I heard someone else speak 7 about balloon deal; that's the second time I've 8 heard about a balloon deal. I didn't know what a 9 balloon deal was until I got in it. 10 Now, for a house that's $65,000, I'm in a 11 debt of $165,000. At the end of 15 years they want 12 me to pay $50,000 cash money because all I'm paying 13 now is interest, which is $625 a month. 14 I was taken. I was made a fool of. I feel 15 bad about it, I don't appreciate it, and I think 16 something should be done about it. Thank you very 17 much. 18 MR. LONEY: Thank you. Next up is Dan 19 Schline. Let me ask before you speak, 20 Mr. Schline -- is Linda Williams here? You'll be 21 after him, and Bert Green -- is Bert Green here? 22 Okay, so you'll be after her. 23 MR. SCHLINE: Good afternoon. My name is 24 Dan Schline. I'm assistant vice president of 25 governmental affairs with the North Carolina Credit FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 253 1 Union League. The North Carolina Credit Union 2 League is the state trade association representing 3 175 credit unions that serve over 2 million 4 consumers in North Carolina. North Carolina credit 5 unions became involved in the predatory lending 6 fight here at the state level as part of the 7 Coalition for Responsible Lending in December of 8 1998. We were proud to be part of the effort that 9 resulted in the passage of the nation's first 10 predatory lending law. In North Carolina credit 11 unions have remained active and vocal on this issue 12 now that the fight has progressed to the national 13 level because such involvement is consistent with 14 our people helping people philosophy. 15 Credit unions are committed to providing our 16 members with access to affordable financial 17 services. We are committed to ensuring that all 18 consumers are treated fairly in the lending process, 19 and we are committed to empowering our members by 20 helping them build wealth and navigate the 21 complexities of financial lending. 22 Predatory mortgage lending flies in the face 23 of the credit union philosophy. Predatory lenders 24 exploit financially vulnerable individuals for 25 profit, and ultimately weaken our communities. As FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 254 1 institutions designed to build and strengthen our 2 communities, North Carolina credit unions remain 3 committed to ensuring that consumers, regardless of 4 age, race, or income, are treated fairly in the 5 lending process. 6 We thank the Federal Reserve Board for 7 holding this hearing today and we believe that 8 you're in a unique position to take positive steps 9 to rein in predatory lenders and to protect 10 homeowners who are increasingly at risk of losing 11 their homes and their financial security. So on 12 behalf of North Carolina credit unions, we offer our 13 support and we urge you to exercise your power as 14 soon as possible. Thank you for your time. 15 MR. LONEY: Thank you. Linda Williams? 16 MS. WILLIAMS: My name is Linda Williams and 17 I am a resident and president of the Optimist Park 18 Community Association. Optimist Park is the first 19 neighborhood where Habitat for Humanity began 20 building homes in 1986. Those homes have certainly 21 increased in value and the homeowners certainly have 22 a lot of equity. 23 I do agree with the remark that was made 24 earlier by the gentleman: Predators cannot prey if 25 there is not prey to be preyed upon. Charlotte is FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 255 1 one of the banking capitals of the world. If that 2 statement is true, why are there predatory lenders? 3 Why is the banks not doing their job in providing 4 loans for low-income families? 5 If the banks launched an aggressive campaign 6 as the predatory lenders, then I'm sure that 7 hardworking people like myself and a lot of other 8 people in my community that work hard for their 9 poverty would more so be glad to go to a banking 10 institution that is highly recognized than go to 11 those predatory lenders. Even not understanding the 12 full financial outlook on all these financial 13 questions and all the problems, we still know that 14 we want to go to someone that is recognized and 15 somewhat respectable. 16 The Queen City must begin to treat all its 17 citizens with respect, including those that are low 18 income and work hard for their poverty. 19 I'd like to leave you knowing that I 20 attended a meeting last week and at the end of that 21 meeting I was assured, Linda, all you have to have 22 is an application and $50 and you too can be a 23 mortgage broker. Anyone in this room, regardless of 24 your education, all you have to have is an 25 application and $50 and you too can become a FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 256 1 predatory lender. 2 MR. LONEY: Thank you. Bert Green, 3 please. 4 MR. GREEN: Good afternoon. My name is Bert 5 Green, I'm the executive director of Habitat for 6 Humanity here in Charlotte. I'm going to abbreviate 7 some of my remarks in light of some of the other 8 testimony that you've had. 9 Why is this of interest to our 10 organization? Because in addition to being 11 homebuilders, we are lenders also. Just like every 12 other lender here, we perform background checks on 13 our prospective homeowners, we perform routine 14 credit checks, conduct pre-ownership financial 15 counseling sessions. We use many of the same ratios 16 of evaluating the creditworthiness of our homeowners 17 as would any banking institution in this state. We 18 sell our homes to our homeowners and we want to give 19 them the financial education to be good stewards of 20 the money that has been donated to us and in turn 21 loaned to them. We provide post-ownership financial 22 counseling as required. 23 Our homeowners are most vulnerable as they 24 begin to accumulate equity almost immediately due to 25 the sale of our homes at no profit and the financing FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 257 1 of our mortgages at zero percent interest. The 2 combination of assured equity agreement and a 3 recently enacted second mortgage provision have 4 given us the ability to counsel some of our 5 homeowners regarding alternate financing options 6 that protect their zero percent mortgages. 7 With a recent increase in the number of 8 lenders marketing subprime mortgages, we have seen 9 very abusive lending practices, some of which you've 10 already heard about. In fact, the one I was going 11 to share with you is not as bad as Pauline's, a 12 Habitat homeowner, so I'll pass on sharing that with 13 you. 14 I applaud the work done by our general 15 assembly because it sets the limits on fees charged, 16 it sets a top mortgage rate for the loans of this 17 type, and it limits financing of insurance premiums 18 and it limits balloon features common to so many of 19 these mortgages. 20 We need to be able to demonstrate to 21 borrowers there is a net tangible benefit to any 22 loan they are considering. We explain to our 23 homeowners that are considering refinancing their 24 zero percent mortgage that should we counsel against 25 a specific loan we're doing so against the financial FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 258 1 benefit and interest of our organization. When one 2 is loaning money at zero percent interest, we would 3 much rather get our money back now than in 15 or 20 4 years, but not, and I repeat not, at the expense of 5 our homeowners. 6 Our donors' contributions to this 7 organization are always protected and we feel that 8 the legislation passed in North Carolina helps 9 protect our homeowners' equity. We thank you for 10 including Charlotte in your road trip and pray that 11 your work will bear fruit for all low-income 12 borrowers throughout this country. I'm going to 13 paraphrase from a quote we probably all know and 14 that is, that government governs best which governs 15 justly. And I pray that your work here will 16 reinforce that. Thank you. 17 MR. LONEY: Thank you. I would have to say 18 you probably wouldn't call this a road trip. But 19 let me ask you a question. We've heard a number of 20 horror stories, some of them I think coming out of 21 North Carolina, about the refinancing of Habitat 22 mortgages, zero percent mortgages, at 15, 16, 23 20 percent or something. How much of that have you 24 actually seen? 25 MR. GREEN: My example that I would read and FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 259 1 that I will leave here is one refinanced at 2 13.62 percent. 3 MR. LONEY: But how often does that 4 happen? 5 MR. GREEN: Frequently. 6 MR. LONEY: Is that an isolated event? 7 MR. GREEN: No, it's not isolated. In fact, 8 I will be happen to share the data that we have 9 regarding all the refinances we have here in 10 Charlotte. 11 MR. LONEY: We'd like to hear about it. 12 MS. HURT: I would ask in your 13 post-ownership counseling, is it after someone has 14 taken that sort of loan or before? 15 MR. GREEN: Post-ownership counseling can 16 occur at different times. If a family is falling 17 behind or consistently delinquent with mortgage 18 payments, we will institute that counseling. It may 19 or may not be in association with a refinance. 20 MR. LONEY: Thank you very much. Scott 21 Schneider, are you here? 22 MR. SCHNEIDER: Thank you for having this 23 public forum; I appreciate the chance for the 24 divergent views to be aired. I believe that when we 25 look at some of the views we'll find that we're FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 260 1 probably not that far apart. We probably all agree 2 upon the objective, but it's the means to get 3 there. 4 I think that we all would like for borrowers 5 to get credit they deserve at fair terms, to have 6 the education and understanding of what exactly it 7 is they are borrowing. I think we can also 8 acknowledge that there are people who for some 9 reason or another fall behind on their payments and 10 damage their credit and are no longer able to get 11 the loan at the best interest rates. It's those 12 people that I'm concerned about today. 13 My company specializes in making loans to 14 people who have damaged their credit. Many people 15 are three, four, five payments past due on their 16 mortgage, facing foreclosure; many of them are even 17 served papers in foreclosure. In the new North 18 Carolina law that we have, while it does set limits 19 that on the surface look reasonable, I want to talk 20 about maybe the person who wants a $21,000 mortgage, 21 a very small loan. By the time that you take 22 5 percent of that $21,000, and there's a lender who 23 maybe charges a $400 or $500 commitment fee, maybe 24 an attorney, now we've put in maybe the old 25 mortgage's prepayment penalty, we're looking at very FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 261 1 little money left over for the broker to get. And I 2 think we all agree that everyone has a right to make 3 a fair and disclosed profit, and that's -- otherwise 4 these people would have no access to the credit from 5 the brokers. 6 I'd also like to address the idea of 7 flipping. Like the idea of predatory lending, it's 8 jargon that sometimes can be confused. In the 9 history of mortgages since I've been a broker for 10 ten years, originally -- if we had this meeting 20 11 years ago the meeting would probably be about the 12 banks who are not offering credit to consumers, and 13 now we're having a meeting about the people who are 14 getting credit as the problem. Perhaps we need to 15 find a happy medium for that. 16 But ten years ago when I got into this 17 business I frequently found people who had first 18 mortgages at 15, 16, and 18 percent from the finance 19 companies. The brokers then came into business and 20 started looking in the courthouse for these 21 expensive loans and refinancing them at cheaper 22 rates. That's why you don't see that many 23 16 percent interest rates anymore for first 24 mortgages. So I think that the way we should work 25 towards lowering loan costs and making housing FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 262 1 affordable is through competition. I wish that I 2 could bring some of the people here that I've bailed 3 out of foreclosure. 4 My concern about what we call flipping is, 5 as you can imagine, the interest rate for someone in 6 foreclosure is ugly. The risk is bad and the banks 7 who make loans to those people need to have 8 compensation to justify the risk. Now, having put 9 someone at 13-1/2 or 14 percent interest to bail 10 them out of foreclosure, I think that I have an 11 obligation or someone else has an obligation at the 12 end of a year when that person qualifies for a 13 better rate to get him one. And so I just want to 14 make sure we don't confuse refinancing for a better 15 loan to be an abusive practice. I appreciate your 16 time today. 17 MR. LONEY: Thank you very much. Next is 18 Bethany Chaney. 19 MS. CHANEY: Good afternoon. My name is 20 Bethany Chaney and I am vice president of the North 21 Carolina Minority Support Center, a nonprofit 22 intermediary that provides technical assistance and 23 financial assistance to community development credit 24 unions in North Carolina. 25 There are 16 such institutions in this FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 263 1 state, all of which were founded by and for 2 residents of low-income, African-American, and 3 Hispanic communities. Combined, these institutions 4 serve 25,000 members, have $120 million in assets, 5 and offer a broad range of financial services. 6 I'm here representing these CDCUs and to 7 urge the Board to act now and to act firmly to 8 protect our communities from the unconscionable 9 greed, deception, and race-based green-lining of the 10 predatory lending industry. I am also here to ask 11 the Board to find ways to support the growth and 12 breadth of the community development financial 13 institution industry. CDFIs are viable alternative 14 sources of credit for underserved and hard-to-serve 15 individuals who need it. 16 It used to be that in CDCU communities there 17 wasn't a whole lot of competition in the lending 18 business because there weren't a bank or other 19 institution in the neighborhood to begin with. That 20 has changed dramatically in the past ten years, even 21 in the past five, as now each CDCU I work with can 22 count half a dozen to a dozen regulated and 23 unregulated lenders which have moved into their 24 areas, from payday loan shops to pawn shops, title 25 loan companies, and general finance companies and FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 264 1 banks. 2 The good news is that these lenders, or 3 whatever you call them, have discovered a market. 4 The bad news is that they are abusing this market. 5 They have deliberately green-lined African-American, 6 Hispanic, low-income, and fixed-income communities 7 to prey on less sophisticated borrowers, 8 credit-challenged borrowers, and in the case of home 9 equity lenders, the only asset many in these 10 communities have, which is their home. 11 Not all CDCUs can compete against these 12 lenders because, as regulated financial 13 institutions, there are a series of capital 14 requirements, liquidity issues, and even mortgage 15 lending caps to address, which can limit small or 16 rapidly growing institutions in their quest to 17 provide home equity and mortgage services to credit 18 union members. About half of North Carolina CDCUs 19 are providing some sort of equity lending to their 20 members and the other half could do it but need your 21 help. 22 The Federal Reserve can do a better job of 23 endorsing and promoting policies and incentive 24 programs which help bring investments of capital and 25 other resources to CDFIs and low-income FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 265 1 communities. The result will be greater access to 2 the kinds of fair, affordable lending which protect 3 assets in vulnerable communities. 4 In the context of predatory lending it is 5 important that we at once restrict unfair lending 6 practices and provide tools and investment that will 7 bolster and expand a promising community-based 8 financial industry. For example, the CRA act, the 9 Community Reinvestment Act, is a proven tool for 10 delivering affordable capital to low-income 11 communities. It must be protected and 12 strengthened. Specifically, it should be extended 13 to bank subsidiaries and affiliates. 14 Our CDCUs currently benefit from grants and 15 deposits provided by the banking industry, and CRA 16 helps make those investments happen. Similarly, the 17 CDFI Fund of the U.S. Department of the Treasury has 18 several programs which provide incentives for 19 investments in CDFIs, and it could be more greatly 20 and permanently capitalized. 21 Thank you for your time and thank you for 22 having us here today. 23 MR. LONEY: Thank you. Incidently, you 24 know that if there's going to be an expansion of CRA 25 Congress is going to have to do that. FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 266 1 MS. CHANEY: But you can be supportive. 2 MR. LONEY: She got me on that one. 3 El Pueblo, is there somebody representing 4 El Pueblo? I don't have a name connected, I'm 5 sorry. 6 MS. POMERANS: The name is Katie Pomerans. 7 I don't know how it got lost but I did sign up. 8 MR. LONEY: I know you're signed up but 9 there's no name, it just says El Pueblo, so 10 introduce yourself. 11 MS. POMERANS: My name is Katie Pomerans. 12 I'm a member of the Latino community and also on the 13 board of El Pueblo, a Latino advocacy and public 14 policy organization. I want to say that we're new 15 to housing issues as an organization. We recently 16 entered a partnership with CRA*NC and the NAACP to 17 work on educating our community as far as housing 18 issues because we feel it's of such importance to 19 our community. I don't have statistics to give you 20 as you want to hear, but we do hear a lot of horror 21 stories, and I hear them from friends, from people 22 that I see the first time. I hear them from people 23 in rural communities and from people living in the 24 neighborhoods in the cities. 25 We realize we have to help and educate our FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 267 1 community. At the same time, when you have people 2 that have come to the United States with a dream, 3 usually the centerpiece of the dream is owning their 4 own home, and unfortunately, they don't have that 5 many options. People who come with no credit 6 history -- and I know because I've been there. It's 7 like you just dropped in from Mars. Your 8 possibilities of getting a good loan, of somebody 9 believing you, of treating you decently when you go 10 with your request, are not that many when you have 11 low income and you come from another country and 12 have an accent and, you know, all things that stack 13 up against an individual. 14 So I'm here to ask you for the things that 15 you can do for the community and for so many other 16 communities that need your assistance. I would like 17 for you to extend reasonable protections and to stop 18 predatory lending practices so that home ownership 19 will be a reality. If people cannot build equity in 20 their homes, they don't have a home. 21 I would like you to strengthen enforcement 22 actions where you can do it. Federal housing laws 23 must address racial and ethnic steering into higher 24 cost loans with different terms and conditions. 25 And this is practically all I wanted to FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 268 1 say. I will leave my notes for the things that I 2 did not mention, and thank you for this time. 3 MR. LONEY: Thank you very much. Next is 4 Reverend Allison. Is there a Reverend Allison 5 here? 6 AUDIENCE: He's not here. 7 MR. LONEY: He's not. Uh-oh. Even the 8 person that typed this has "SP" next to the name so 9 I'll get this wrong. Elizabeth Ouzts? 10 AUDIENCE: She's not here either. 11 MR. LONEY: Okay. Octavia Raing? 12 MS. RAINEY: It's Rainey. 13 MR. LONEY: Say again? 14 MS. RAINEY: It's Rainey, R-A-I-N-E-Y. 15 MR. LONEY: That's my wife's maiden name, I 16 should have got that right. They had an "SP" next 17 to your name too so they suspected they didn't have 18 it right either. 19 MS. RAINEY: Tell them that's all right. My 20 name is Octavia Rainey and I'm president of the 21 College Park-Idlewild Community Watch and I'm also 22 employed with CRA*NC. 23 I know you're wondering why a community 24 watch is here talking about predatory lending. The 25 College Park-Idlewild community is a community that FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 269 1 was born out of slavery, so as you know, during this 2 period of time African-Americans bought their homes 3 at a higher interest rate as compared to whites. 4 In our community watch neighborhood, we 5 watch our neighbors, and one of the things that 6 really bothers us now is predatory lending. We call 7 it economic violence, because you do strip the 8 equity from their homes. And we are concerned that 9 the Federal Reserve is not doing their job in 10 working in minority neighborhoods to stop predatory 11 lending. 12 One of the things that we would like to ask 13 the Federal Reserve to do is to prohibit the 14 practices that strip equity from homes; number two, 15 increase consumer protection in the Home Ownership 16 Equity Protection Act; number three, strengthen 17 enforcement actions. We are very concerned because 18 everyone wants a piece of the American dream. With 19 predatory lending, it's the American nightmare, 20 because you do end up losing your home. I would 21 like to say in closing to the Federal Reserve that 22 if you're not part of the solution then you're part 23 of the problem. Please enforce what I've just 24 recommended and be a part of the solution. Thank 25 you. FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 270 1 MR. LONEY: Thank you. Next is, let me 2 give a few names, Marshall Schendk, then Jennifer 3 Kilburn, then Melody White, then Bill Lynch. Do we 4 have Marshall Schendk? Am I saying that right, 5 S-C-H-E-N-D-K? 6 MR. SCHENDK: That's right. Good evening. 7 My name is Marshall Schendk, I represent Egypt the 8 Temple of Christ Jesus Ministry in Shelby, North 9 Carolina. I've come up here today to voice my 10 opinion about the matter of lending practices in the 11 Carolinas. 12 But I first must say that over the years our 13 government has supported the administration of our 14 presidents: Under President Nixon we supported 15 detente; under Reagan we supported perestroika, and 16 under Bush we supported glasnost, and in all 17 instances Russia failed, and now the government of 18 Russia is in turmoil economically. 19 Here I am standing before your Federal 20 Reserve Board, asking for simply one thing: To be 21 able to forgive minorities for their debts. If 22 their debts are under $50,000 for two-parent 23 families, they should be forgiven. If we can 24 forgive the country of Russia, surely we can give 25 the citizens of this country, those minorities who FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 271 1 served in our armed forces since the American 2 Revolution even to this day and serve in our armed 3 services, cannot find decent housing. That is a 4 shame, and I'm ashamed sometimes, and being a 5 veteran and a retired military person myself, for 6 Americans not to be able to find decent housing 7 without being stripped by these lenders or taking 8 advantage of these minorities people. Whether 9 they're black, white, Hispanic, it doesn't matter. 10 We have to set a new tone in the year 2000 and on, 11 because it's bad business to practice financial 12 slavery. Thank you. 13 MR. LONEY: Thank you. Jennifer Kilburn? 14 MS. KILBURN: I'd just like to say I'm 15 delighted to be in the room with so many 16 knowledgeable people, first of all. I got this 17 notice in my local newspaper on July 11th notifying 18 me about the hearing today, and I left Rochester, 19 New York, Monday, 12:30 in the afternoon, and I was 20 the lone driver with a car full of children and I 21 made it here 8:45 this morning. My name is Jennifer 22 Kilburn -- I'm tired so I'm going to talk fast. 23 Here it said I have five minutes, but anyway, I was 24 a consumer and a victim. 25 MR. LONEY: We may give you some latitude, FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 272 1 given what you've just done. 2 MS. KILBURN: Okay. I was a consumer and a 3 victim in the state of Georgia of what I believe to 4 be a predatory lender, Long Beach, later Ameriquest, 5 a mortgage company out of California. At that time 6 I was a low-wealth college graduate, had impaired 7 credit, but I had a 20 percent down payment, okay. 8 I was a well-informed borrower within my purview 9 prior to the purchase; I bought and read many books 10 to prepare for this huge responsibility. However, 11 nothing prepared me for the acts done to me by my 12 lending company. 13 April '96 is when I closed. Up until May 14 of '97, April '96 to May of '97, I was working at 15 NationsBank in Georgia. I only got paid twice a 16 month. At the beginning of the month I paid my 17 water, my car note, all those bills. After the 15th 18 was when I paid my mortgage. I always paid late 19 fees included. That was fine per Long Beach 20 Mortgage Company, Nicholas Soza, who was the guy I 21 always dealt with; that was the way it was, no 22 problem. 23 May of '97 -- and the jargon "flipping", I 24 was confused, because I thought that flipping was 25 what happened with me. May of '97 Long Beach FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 273 1 Mortgage Company sold or -- I really don't know how 2 it happened, but part of their accounts became 3 handled or they became -- they were handled now by 4 Ameriquest. So Long Beach Mortgage Company handled 5 all their accounts that were dated prior to '96 6 or '95, something like that, and then Ameriquest 7 took on the new accounts. Same address, same phone 8 number. They never let me talk to Nicholas Soza 9 ever again. Okay. 10 June of '97 was when the harassment 11 started. The woman -- names, I got everyone's 12 names -- she insisted that I send them a postdated 13 check, even though I explained from the time I 14 closed on my house I always paid after the 15th, 15 late fees included. She's like, Send me a postdated 16 check. 17 Against my better judgment I did it. They 18 tried to cash it; I incurred $200 in bounced check 19 fees. Fine. Right after that I started getting 20 foreclosure notices. We made arrangements over the 21 phone, I'm constantly talking to them, I pay half of 22 June with July, the other half of June with August. 23 I send them my NSF charges and whatever from the 24 bank for them to reimburse me my $200 bounced check 25 fees. FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 274 1 So July, I send them half of June with 2 July. The end of August rolls around -- mind you, 3 I'm always paying at the end of the month -- half of 4 June with August. However, I minus the $200 bounced 5 check fees because I felt it may have been an 6 oversight on their part, because the month prior I 7 sent them all the banking statements. Okay. 8 September rolls around, they send me back my check 9 for half of June with August, saying they're not 10 going to accept partial payments, send them that 11 money. Okay, so I chalk that up as a loss, my 12 bounced check fees, fine. 13 So September, I send them half of June with 14 August, September payment; they said they weren't 15 going to accept any of my checks, it had to be a 16 money order. Fine, I did that. Constant harassment 17 still. Okay. 18 October rolls around, I'm relieved, finally, 19 okay. I send them a check, October, end of October, 20 late fees included as usual. Relieved, finally. 21 Okay. November, I get -- you know, I was getting 22 foreclosure letters but I'm always constantly on the 23 phone with them so I'm discarding that. November I 24 get a letter in the mail, I decided to open that 25 one. Good thing I did. It was my money order with FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 275 1 half of June, August, September, because that was 2 one money order; then my check for October. They 3 said now they're not accepting any payments without 4 foreclosure fees included. 5 I call my realtor, I'm like, Toni, are they 6 kidding? She was like, Jennifer, if they sent you 7 your money back, your house is going into 8 foreclosure. 9 Okay, here I am, I'm pregnant, got a 10 ten-month-old, my daughter was probably like six 11 then at the time, okay; oh, my God, what am I going 12 to do, my house is going to be on the market the 13 second Tuesday of December. This is the first week 14 of November. Okay. These are my options per my 15 realtor: We can try to sell my home. That was one, 16 which we tried to do in that few weeks of time. 17 Then I gave her $300 for her to try to fill out 18 applications for her to try to purchase my home. 19 That failed; the trying to purchase my home, that 20 failed. 21 Basically what I was faced with on 22 Thanksgiving Day, to pack all my stuff up, put all 23 my family in a car, I drove the U-Haul, I ended up 24 being married, my husband drove my car, my mom came 25 in town, my friend worked at Delta Airlines, my mom FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 276 1 flew my ten-month-old home. On Thanksgiving Day we 2 were all driving my stuff back to Rochester, New 3 York, eating at the Waffle House Thanksgiving night, 4 because they were telling me that my house was going 5 to be at the courthouse, whatever, the second 6 Tuesday of December. 7 So basically why I came all the way here is 8 because I felt that was a crime, and a crime against 9 the voiceless is not a crime at all. So that's why 10 I came down here, for you guys to hear that, and 11 then I just wanted to know if my lack of knowledge 12 contributed to the loss of my home then maybe 13 someone here could tell me how to teach another how 14 to learn from my mistake, and if someone can tell me 15 about the laws that are out here to protect the 16 borrowers. Because I just did not think that that 17 was fair and that was right. 18 And my father-in-law was going to pay the 19 foreclosure fees. I refused, I said they forced my 20 house into foreclosure, there was no way I was going 21 to pay them a nickel when they put my house into 22 foreclosure. I was not going to file bankruptcy, it 23 didn't make sense to me, plus people were telling me 24 that still wasn't a protection against them 25 foreclosing on my house. FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 277 1 It just wasn't right. That's my story. 2 MR. LONEY: Thank you very much. Have a 3 good trip back. Melody White? Not here? Bill 4 Lynch? You'll have to wait until she changes her 5 tape. 6 MR. LYNCH: My name is Bill Lynch. I'm here 7 because it seems to me that trust is at the heart of 8 the lending process, and abuse of trust is at the 9 heart of predatory lending. That's what we've heard 10 here. When people aren't generally trusted, when 11 they find somebody who listens to them, who seems to 12 be listening to them, they'll trust that person. If 13 the person they trust is an unscrupulous loan 14 representative, they're set up for trouble. 15 The unscrupulous loan representative will 16 lie to them about the terms of their loan. He will 17 produce a set of documents, loan documents, that 18 look like they got all the disclosures they needed. 19 He will backdate the disclosures, he will forge 20 their signatures. And I'm sure that in the HUD 21 hearings and the previous Fed hearings you've seen 22 enough evidence that unscrupulous loan 23 representatives will do exactly that. 24 The Federal Reserve Board bears some of the 25 responsibility for making trust so necessary in the FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 278 1 lending process. These rules are so obscure and so 2 full of jargon that someone might think that they 3 were written by an agency run by economists. If a 4 word appears in a regulation there's an assumption 5 that it must be clear enough to provide people 6 notice of what the law is that they have to obey, 7 and therefore it must be clear enough to put in a 8 loan document, so you get words like "negative 9 amortization". Why can't we say, what you owe can 10 grow? 11 If the people who are here in the consumer 12 education group are still here, I hope that the 13 Board will consider working with them to simplify 14 the disclosures. It should be possible to come up 15 with a one- or two-page disclosure of fees and costs 16 and to discard concepts that are artificial, like 17 annual percentage rate; instead to look for words 18 that people actually use and think how can we pour 19 meaning into those words and not come up with jargon 20 instead. 21 If you have a short disclosure, then you can 22 have things that focus attention on the disclosure, 23 and you can give that disclosure perhaps at the time 24 of the HUD-1 statement, before the closing, when it 25 may enable comparison shopping. You can provide it FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 279 1 with a 20-minute video on how to understand the 2 statement and you can make the lender or the loan 3 brokerage pay for the video. Find a sports star who 4 will be willing to talk to people in that video, 5 because subprime lenders frequently use sports stars 6 and all-stars in their videos and their television 7 commercials. But above all, admit that what you've 8 done in the past has contributed to the problem and 9 simplify, please. Thank you. 10 MR. LONEY: Thank you, Mr. Lynch. Next is 11 Sandy McCurty. 12 MS. McCURTY: My name is Sandy McCurty and 13 I'm owner of All Mortgage Connections, which is a 14 broker, and I also sit on the board of directors of 15 the North Carolina Manufactured Housing Institute. 16 Unfortunately, we're not all made the same. 17 So it requires different housing, and manufactured 18 housing is one, and I would like to talk about that 19 if I could, please. 20 When you're talking about manufactured 21 housing there is studies that have been done for the 22 Manufactured Housing Institute for North Carolina as 23 well as national that does state that manufactured 24 housing, when set up on property as real property 25 and brick underpinned, that it does appreciate as FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 280 1 does a stick-built home. There was some comments 2 made here today about the fact that manufactured 3 housing did depreciate. When you are taking these 4 into account, the type of loans, you need to also 5 consider that there are two types of manufactured 6 housing loans. There are what you call the chattel, 7 the home-only loans, and there are the real estate. 8 Please, I ask that you do take this into account. 9 Also, North Carolina manufactured housing 10 has many studies on the life of manufactured 11 housing. Manufactured housing, a recent study -- 12 these studies, by the way, have been done by ECU; I 13 will be glad to give them to you if you would like, 14 or I'm sure any of the institutes will be glad to 15 furnish them for you. But currently manufactured 16 homes, and I'm talking about HUD homes -- and I 17 suppose you do know the difference. There is 18 modulars and there are HUD homes. The HUD homes, 19 which are the true manufactured housing, the 20 double-wides, previously known as trailers, do have 21 a life of 55 to 60 years, which is exactly what I 22 think you'll find the stick-built homes are. So 23 when you're considering the type of financing that 24 is available for the manufactured housing, I would 25 ask that you please take a look at the studies that FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 281 1 have been done. 2 Also, unfortunately -- as a broker, I would 3 like to have everyone that walks into my shop be 4 able to buy that half-a-million-dollar house and be 5 able to go Fannie Mae. Well, we live in a real 6 world and that's not possible. So when you are 7 looking at your studies please remember that 8 everyone is not able to do like their neighbor or 9 everyone doesn't make the money that the person down 10 the street makes. Please keep in mind that you do 11 hold the future of public housing in your hands. 12 Thank you. 13 MR. LONEY: Thank you. Next is David Toy. 14 MR. FOY: My last name is Foy, F-O-Y. 15 MR. LONEY: F-O-Y, I'm sorry. 16 MR. FOY: Good afternoon to you. I am a 17 minister, and there is a national church called the 18 United Church of Christ that has a commission that's 19 called the economic and racial commission, and it's 20 a national church in eastern North Carolina and 21 Virginia; they have 127 churches. I'm already doing 22 some work with Peter Skillern of Durham, North 23 Carolina. 24 I think that the outreach to inform 25 communities is best done through existing FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 282 1 organizations of churches, as it's been pointed out 2 previously, and we extend ourselves. If you would 3 like the address, the national office of this 4 church, the commission on racial justice is in 5 Cleveland, Ohio, and we have -- through director 6 William Land, who would be more than willing to 7 connect with you to try to serve the communities, 8 not only in eastern North Carolina but across the 9 country in more effective ways to help with this 10 predatory lending practice. Thank you. 11 MR. LONEY: Thank you, Mr. Foy, and I 12 apologize for getting your name wrong. 13 Next is Jaqmohan Chadha. Not here? Irvin 14 Henderson? 15 MR. HENDERSON: Good afternoon. I see many 16 people that I've met with before and I would like to 17 extend wishes from the board of directors of the 18 National Community Reinvestment Coalition, and I am 19 also president of the Community Reinvestment 20 Association of North Carolina for which Peter 21 Skillern is our executive director. 22 We're concerned about a couple of things but 23 I want to make sure right up front that we say that 24 we realize that there's got to be increased 25 regulation and that there will be the need for some FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 283 1 legislation as well, so we'll speak to both. 2 We certainly feel that the HOEPA triggers 3 should be revised to define a high-cost loan as one 4 with an annual percentage rate of 8 percent above 5 current Treasury bill rates. In addition, the 6 definition of points and fees should be revised to 7 include all the costs the borrower is required to 8 pay in order to get the loan. 9 Ultimately legislation should lower the 10 interest rate trigger to four to five percentage 11 points above Treasury bill rates. As the recently 12 released HUD-Treasury report on predatory lending 13 documents, lowering the trigger to 8 percent from 14 10 percent would increase coverage from 1 to 15 5 percent. We estimate that our recommended 16 trigger, however, would cover 71 percent of subprime 17 loans. Now, this is important and a robust standard 18 because approximately 70 percent of all subprime 19 loans contain prepayment penalties, according to the 20 HUD-Treasury report. 21 We recommend that the Board investigate the 22 correlation between high interest rates and 23 prepayment penalties. 24 The Federal Reserve Board can also conduct 25 examinations, including fair lending examinations, FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 284 1 of any bank holding company subsidiary, including 2 the subprime lenders. In fact, late last year the 3 GAO, general accounting office, released a report 4 that urged the Board to begin doing such exams of 5 bank holding companies' subprime lenders. The Board 6 to date has not acted on that recommendation. 7 Another important way the Board has 8 jurisdiction over the portion of the subprime market 9 that is abusive and/or predatory is through its 10 supervision of companies which underwrite, purchase, 11 and service mortgage-backed securities based on 12 subprime loans by nonbank lenders. Clearly the 13 Board can and should promulgate standards as a 14 matter of fair lending and CRA compliance, but also 15 as a safety and soundness matter for bank holding 16 companies' involvement with subprime and predatory 17 lenders. 18 Finally, HMDA data should contain the annual 19 percentage rate of loans made. Disclosure of APRs 20 would be vital for fair lending enforcement to 21 ensure that minorities and/or women of similar 22 income levels and buying homes of similar values are 23 not charged significantly higher amounts than whites 24 and/or males. 25 HMDA data should also include the credit FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 285 1 scores of the borrowers, as well as information on 2 loan pricing and terms, including discount points, 3 origination fees, financing of lump-sum insurance 4 premium payments, balloon payments, and prepayment 5 penalties. Financial institutions should also be 6 required under HMDA to disclose the number and 7 dollar amount of loans that were subprime and loans 8 that were not subprime. 9 Two years ago the Fed issued an advance 10 request for comment on contemplated changes to 11 Regulation C, implementing the Home Mortgage 12 Disclosure Act. Part of the request for comments 13 solicited views on enhancing HMDA data, including 14 increasing the accuracy of refinance reporting and 15 of the reporting of appraised home values. The 16 report of annual percentage rates in HMDA data was 17 also raised and supported by many community-based 18 organizations. 19 Also, HMDA data reporting for applications 20 taken over the phone and other nonpersonal means 21 such as the Internet must include the race, income, 22 and gender of borrowers. 23 The last comment I would say is that if the 24 concerns you've heard from the mortgage industry are 25 valid, perhaps they can pay for the consumer FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 286 1 education that's needed. Thank you. 2 MR. LONEY: Thank you, Mr. Henderson. Next 3 is Robert Ipock. 4 MR. IPOCK: I'm Bob Ipock. I'm from 5 Gastonia, North Carolina, and I'm a North Carolina 6 certified real estate appraiser and North Carolina 7 certified real estate appraisal instructor. I am 8 not a public speaker at all but I've just -- 9 MR. LONEY: I'm not either so don't worry 10 about it. 11 MR. IPOCK: Part of the problem is, it's 12 hard to police something when nobody is 13 complaining. I see an awful lot of cases where the 14 homeowner is not going to complain because they're 15 getting their loan, the mortgage broker is not going 16 to complain because he's getting his commission, so 17 everybody is happy. The appraiser is not going to 18 complain because he's getting his fee. It's two or 19 three years down the road when the problem comes in 20 when people go to sell their home and they discover 21 that they owe more on the home than it's worth. 22 I have two appraisals here. This one was 23 done -- this house sold on 7/1 of '98 for $76,000. 24 It sold the same day for $114,200 with nothing being 25 done to it. This was a flip. The FBI is FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 287 1 investigating this now, the state attorney general's 2 office is aware of it. This house was set on fire 3 twice in the last 60 days; arson, both cases. 4 I have another one here that sold for 5 $61,000 on 11/5 of '98, sold the same day for 6 $104,000 with nothing being done to it; same house, 7 same day. Both of these cases involve the same 8 mortgage lender, the same appraiser, the same 9 mortgage broker, and the same closing attorney. I 10 turned all this over to the state attorney general's 11 office some months ago and they have definitely 12 looked into it. 13 These are kind of random comments. A lot of 14 the loans that are being made would not have been 15 made some years ago because a personal loan was 16 made. When somebody went in to the Associates or 17 wherever and they needed $5,000, they got a personal 18 loan at 18 percent or whatever and that was it. Now 19 they're not making a lot of those loans, they're 20 making real estate loans. If you've got real estate 21 you're going to get a real estate loan, even if it's 22 just for a few thousand dollars. 23 I go back every year and appraise some of 24 the houses again and again and again because they 25 need $2,000 to go on vacation or they need a FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 288 1 thousand dollars to get their car repaired, and a 2 lot of times they'll owe more money than they walk 3 out the door with; their fees and charges will 4 exceed what they're actually getting. 5 I would suggest that no real estate loan be 6 allowed to be made for less than $10,000, or $5,000 7 or whatever; put some kind of minimum on it. If 8 it's less than that, it needs to be a personal 9 loan. If their credit won't allow it, then don't 10 make the loan. 11 There's too much of a rush being made. A 12 lot of times the closing is set before the appraisal 13 is even done, because they know they can find an 14 appraiser that will make it happen. Thank you. 15 MR. LONEY: Thank you, Mr. Ipock. Next is 16 Hubert Jones. Mr. Jones, Hubert Jones? 17 Next is Patrick, is it -- I don't know if 18 it's Tarren -- 19 MR. TURNER: Turner. My name is Patrick 20 Turner and I'm going to raise an issue today that 21 possibly you haven't looked at. When banks buy out 22 banks, they buy mortgages, and they're predatory and 23 they don't always assume what deals or what 24 agreements were made with the first mortgage company 25 as valid on another. I have run into that problem FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 289 1 with a local bank. 2 My suggestion to you, instead of having a 3 one-person contract, that the Federal Reserve 4 require when banks sell mortgages to different 5 institutions or other banks that a two-party 6 contract exist. The way it is now, it's a single 7 party contract. They dictatorially tell you what 8 you're going to do, what you're going to pay, and 9 the whole nine yards, and they don't keep the 10 previous agreements. That's point one. 11 Point two is another thing that I think is 12 terribly, terribly wrong. There are billions of 13 dollars held in escrow funds throughout this country 14 with no interest being paid on them. This is 15 abhorrent to anyone in the real estate and in the 16 lending institutions. They need to be strapped with 17 paying interest on escrow funds. Most banks require 18 them but the Federal Reserve Bank hasn't taken any 19 action on this and they really need to study this 20 issue thoroughly. I recommend that any escrow fund 21 that is withheld for payments such as taxes or other 22 revenue should be interest applied to them to the 23 consumer of no less than the prime rate. This will 24 stop some of these uncalled-for escrow funds. 25 And that's all the comment I have. Thank FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000 290 1 you very much for hearing me. 2 MR. LONEY: Thank you. Next is Darin 3 Ayers. Mr. Ayers? He spoke to me and said he 4 wouldn't get called, so he must have left. 5 It seems to me this is the end of the list. 6 If I've missed anybody that you think you've signed 7 up, let me know. Otherwise I would like to thank 8 everybody for coming and for your patient and quiet 9 attentiveness, and I want to thank the panelists 10 once again who participated. 11 We will continue this next in Boston, 12 August 4th. If anybody needs to send anything, you 13 can send it in to Jennifer Johnson at 14 email@example.com, or to Jennifer 15 Johnson, who is secretary of the Board, at 16 20th Street and Constitution Avenue, Northwest, 17 Washington, D.C. 20551. That is in the 18 announcement of the hearings if you need to do it. 19 We're done. 20 END OF PROCEEDINGS 21 22 23 24 25 FEDERAL RESERVE PUBLIC HEARING JULY 27, 2000
July 27 hearing on home equity lending |
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