Public Hearing on Home Equity Lending
0001 Volume I Pages 1 - 286 UNITED STATES OF AMERICA FEDERAL RESERVE BOARD HEARING RE: The Truth in Lending Act, The Home Ownership and Equity Protection Act of 1994, and Predatory Lending Practices in the Home-Equity Consumer Credit Market. BEFORE: Edward M. Gramlich, Board of Governors of the Federal Reserve System, Chairman of the Federal Reserve Board's Committee on Consumer and Community Affairs Dolores Smith, Director, Federal Reserve Board's Division of Consumer and Community Affairs Sandra Braunstein, Assistant Director, Federal Reserve Board's Division of Consumer and Community Affairs Adrienne Hurt, Assistant Director, Federal Reserve Board's Division of Community Affairs James Michaels, Managing Counsel, Federal Reserve Board's Division of Consumer and Community Affairs Richard Walker, Vice-President, Federal Reserve Board of Boston Held at: Federal Reserve Bank of Boston 600 Atlantic Avenue Boston, Massachusetts Friday, August 4, 2000 9:00 a.m. Carol H. Kusinitz Registered Professional Reporter 0002 1 I N D E X 2 SPEAKER: PAGE 3 INTRODUCTORY REMARKS 4 Dolores Smith 5 5 Edward M. Gramlich 8 6 OPENING STATEMENTS 7 Jennifer Davis Carey: Director, Consumer Affairs and Business Regulation, 8 Commonwealth of Massachusetts 13 9 Thomas J. Curry: Commissioner of Banks, Commonwealth of Massachusetts 16 10 Steve Nadon: Executive Vice-President and COO, 11 Option One Mortgage Corporation 19 12 Elizabeth Renuart: National Consumer Law Center 25 13 Howard Miselman: Chairman, Massachusetts Mortgage Association 27 14 William Gothorpe: America's Community Bankers 31 15 Bruce Marks: Ceo and Executive Director, 16 Neighborhood Assistance Corporation of America 34 17 Pam Kogut: Assistant Attorney General, Commonwealth of Massachusetts 37 18 Richard Gravino: President, 19 Provident Consumer Financial Services 40 20 Faith Schwartz: Freddie Mac 43 21 Dwight Golann: Professor of Law, Suffolk University Law School 45 22 Dennis Algiere: Vice-President of Compliance, 23 CRA Officer, Washington Trust Company 48 24 0003 1 I N D E X (Continued) 2 SPEAKER: PAGE 3 EXAMINING POSSIBLE CHANGES TO HOEPA'S SCOPE 4 Dolores Smith 51 5 Discussion 52 6 EXAMINING POSSIBLE ADDITIONAL RESTRICTIONS OR PROHIBITIONS FOR SPECIFIC ACTS AND PRACTICES 7 Dolores Smith 89 8 Discussion 91 9 James Michaels 133 10 Discussion 135 11 AFTERNOON SESSION 12 INTRODUCTORY REMARKS 13 Dolores Smith 192 14 OTHER INITIATIVES TO COMBAT PREDATORY LENDING 15 OPENING STATEMENTS 16 Norma Moseley: Director of Housing Programs, 17 Ecumenical Social Action Committee, Inc. 194 18 Nadine Cohen: Lawyers Committee for Civil Rights Under Law, Boston Bar Association 196 19 Leonard Raymond: Executive Director, 20 Homeowner Options for Massachusetts Elderly 198 21 Tom Callahan: Executive Director, Massachusetts Affordable Housing Alliance 201 22 Allen White: Supervising Attorney, 23 Community Legal Services 204 24 John C. Anderson: The Real Estate Analyst 207 0004 1 I N D E X (Continued) 2 SPEAKER: PAGE 3 CONSUMER OUTREACH EFFORTS, CONSUMER EDUCATION CAMPAIGNS 4 Dolores Smith 211 5 Sandy Braunstein 212 6 Discussion 212 7 PUBLIC PARTICIPATION 8 Tim Davis: City of Boston Department 9 of Neighborhood Development 264 10 Daniel Ramgeet: Massachusetts ACORN 266 11 Ed France 269 12 Leonard Alkins: Boston NAACP 271 13 Jim Campen: Associate Professor of Economics, U. Mass. Boston 273 14 Andrea Luquetta: Massachusetts Association of 15 Community Development Corporations 276 16 Bruce Fitzsimmons: Massachusetts Conveyancers Association 281 17 * * * * 18 19 20 21 22 23 24 0005 1 P R O C E E D I N G S 2 MODERATOR SMITH: Good morning. I think 3 we're about ready to start. My name is Dolores 4 Smith. I'm the Division Director for Consumer and 5 Community Affairs at the Federal Reserve Board, and 6 I will be the moderator for this hearing. 7 This is the second of four hearings that 8 the Board is holding this summer on home-equity 9 lending. Our first meeting was in Charlotte last 10 week, and we have two more scheduled, one in Chicago 11 on the 16th and the fourth one in San Francisco on 12 September the 7th. 13 We have invited panelists and then we also 14 have members of the public who, as in Charlotte, 15 will be offering a wide variety of views on the 16 possible ways to address predatory lending practices 17 in the home-equity consumer credit market. We look 18 forward to hearing about these issues here in 19 Boston. 20 As in Charlotte, we will be discussing the 21 potential use of the Board's rule-making authority 22 under the Home Ownership and Equity Protection Act, 23 which we refer to as HOEPA. Also, we will be 24 discussing alternatives to regulation, such as 0006 1 consumer outreach and consumer education. 2 First I want to start by introducing the 3 Board Panel. We have Ned Gramlich to my right, who 4 is a member of the Board of Governors of the Federal 5 Reserve System. He also is the chairman of our 6 Oversight Committee for Consumer and Community 7 Affairs of the Board. 8 To my left, we have Adrienne Hurt and Jim 9 Michaels. Adrienne is Assistant Director for our 10 regulations program, and Jim is Managing Counsel. 11 And the two of them are the people who are primarily 12 responsible for Truth in Lending matters at the 13 Board. 14 And then to my right we have Richard Walker 15 from the Reserve Bank, Federal Reserve Bank of 16 Boston. He is a Vice-President. 17 I'll start with a few introductory remarks 18 for the record about the Truth in Lending Act and 19 HOEPA. 20 The Truth in Lending Act requires creditors 21 to disclose the cost of credit for consumer 22 transactions generally, not just for mortgage 23 credit. But in 1994, the Congress enacted HOEPA, as 24 it is called, and HOEPA added special protections 0007 1 under Truth in Lending for consumers who use their 2 home as security for loans when the rates or the 3 fees on the loans are above a certain percentage or 4 amount. 5 HOEPA was a response to accounts of abusive 6 lending practices involving unscrupulous lenders who 7 made unaffordable home-secured loans to consumers 8 who were house rich but cash poor. These cases 9 involved elderly, sometimes unsophisticated 10 homeowners who were targeted for loans with high 11 rates or high closing fees and with repayment terms 12 that were difficult or impossible for the homeowners 13 to meet. 14 HOEPA requires creditors to provide 15 additional disclosures at least three days before 16 the consumer becomes obligated for the loan. It 17 prohibits lenders from including certain terms in 18 loan agreements; for example, balloon payments for 19 short-term loans. It prohibits creditors from 20 relying on a consumer's home as the source of 21 repayment of the debt without considering whether 22 the consumer's income, debt and employment status 23 would support repayment. 24 For the Board, it also requires that the 0008 1 Board hold hearings periodically to keep abreast of 2 the home-equity credit market targeted by HOEPA. 3 And we did hold hearings initially in 1997, about 4 two years after HOEPA became effective. 5 And for now we'll start with Governor 6 Gramlich, who is going to talk to us a little bit 7 about the purpose of these hearings. 8 GOVERNOR GRAMLICH: Thank you very much, 9 Dolores. We're all happy to be here in Boston, and 10 we had a successful hearing in Charlotte last week, 11 and we look forward to another one today. 12 Let me just say a few overall words about 13 the issue here. The last few years have seen a very 14 large growth in subprime lending. It's roughly 15 twice the rate of growth of other mortgage lending. 16 Most of us think that by and large this 17 growth was a good thing, that it generally brought 18 credit to low and moderate income families that 19 previously had been denied credit and opened up 20 credit markets and went along with a number of 21 things that we would put in the general category of 22 equalizing opportunities for groups of all income 23 levels. 24 But by all anecdotes there seem to have 0009 1 been some abuses that have come along at the same 2 time. There have been a series of anecdotes that 3 I'm sure you've all heard, maybe are the source of 4 many of them, and we're trying to track this down 5 now with quantitative data. But there does seem to 6 be some rise in foreclosures that would otherwise be 7 hard to explain. 8 It's this kind of puzzle that leads to the 9 quandaries up here. We would like to encourage the 10 continued growth of subprime lending, the continued 11 opening up of credit markets, but we also want to do 12 what we can within our authority to curb the abuses 13 that are cropping up. 14 The Fed has some authority in this area, as 15 Dolores mentioned. We have some authority under 16 HOEPA. We also have some authority under the Home 17 Mortgage Disclosure Act. And these hearings are 18 fundamentally about aspects within our authority; 19 that is, what the Fed can do. We are trying to keep 20 our focus analytical and to keep our eye on the 21 ball, if you will, and try to find measures that we 22 can take that have more benefits than costs, 23 recognizing that nothing will be perfect. 24 One thing I should mention and that you'll 0010 1 hear today is that our authority in the overall 2 scheme of things is a bit limited. We certainly 3 can't do it all. To make a broad-based assault on 4 predatory lending, it's going to take the combined 5 efforts of all financial regulators, of which there 6 turn out to be nine in Washington. It's going to 7 take a number of private sector efforts. It's going 8 to take a big push on consumer education, and that's 9 why the session this afternoon focuses on that 10 topic. 11 So a multifaceted approach will be 12 necessary. At the same time, the Fed can probably 13 do some good, and that's the kind of thing that we 14 are going to be focusing on. 15 These hearings build on others that we've 16 had in the past that Dolores mentioned. There have 17 also been some Treasury/HUD hearings earlier in the 18 year, and that led to a report that Treasury and HUD 19 made that had a number of suggestions for Federal 20 Reserve action. 21 So this is the more, if you will, the more 22 precise part of that. We're now getting down to 23 business on these recommendations and trying to look 24 at them one by one and see exactly what we should 0011 1 and shouldn't do. 2 So with that I will stop and turn it back 3 over to Dolores so we can continue with the agenda. 4 But, again, thank you for coming, and thank you for 5 helping us with this difficult problem. 6 MODERATOR SMITH: Thank you, Ned. I wanted 7 to talk a little bit about how our agenda is 8 structured. We're going to spend the morning 9 considering ways in which the Board might use its 10 rule-writing authority under Truth in Lending and 11 HOEPA to curb the predatory lending practices, as I 12 mentioned, while preserving access to credit for 13 homeowners who have less than perfect credit 14 records. And then this afternoon we'll turn our 15 attention to alternatives to regulation, such as 16 consumer outreach and consumer education, that also 17 might help address predatory practices. 18 At both sessions we hope to hear about 19 studies or research on subprime or equity lending 20 that would inform the Board in its deliberations. 21 And then we also this afternoon have set aside time 22 for members of the public. 23 For the morning session and the afternoon 24 panel, we have invited panelists. And then we will 0012 1 have, starting at about three o'clock, what we are 2 calling an open mike session, so that members of the 3 public who are interested in presenting their views 4 may sign up at the registration desk outside and be 5 prepared to give us, in about three minutes, their 6 views on the topics we are discussing today. 7 For this morning's session we have some 8 rules of procedure. We will start with opening 9 statements by the invited panelists. Each person 10 will have three minutes. We have a timekeeper in 11 the audience, if you will raise your hand. We have 12 two of them, and they will give you, I believe, a 13 one-minute warning, and then they will tell you when 14 your time is up by saying, "Please finish." So that 15 if you're in the middle of a sentence, perhaps you 16 can get to the end. 17 But it's important to try to keep an eye on 18 the timekeeper. I know that the inclination will be 19 to look toward the Panel, but if you will just kind 20 of be mindful. I will also say that because 21 sometimes the attention is focused over here, what I 22 plan to do, when I see the signal, is do this 23 (demonstrating). This is not time out; this is time 24 up. 0013 1 There will be an opportunity for you to 2 sort of extend your remarks in several ways, both in 3 the dialogue in the general discussion that will 4 follow our opening statements. Also, some of you, I 5 know, have prepared written statements. We will 6 include those in the record if you will give them to 7 us, please. 8 So with that, I think we are ready to 9 start, and we are going to -- oh, let me just 10 mention as far as the schedule generally, we expect 11 to take a ten-minute break sometime around 10:30, 12 and then we will reconvene. We will break for lunch 13 at one o'clock. 14 So with that we will start with Jennifer 15 Davis Carey, and if you will each just start with 16 your name and continue with your organization and 17 identify yourself. I can't see all the names from 18 here, so you just do your own thing. We're going to 19 go clockwise, so we'll just keep going. 20 MS. CAREY: Good morning, everyone. My 21 name is Jennifer Davis Carey, and I'm Director of 22 Consumer Affairs and Business Regulation for the 23 Commonwealth of Massachusetts. 24 Thank you for this opportunity to speak 0014 1 about predatory mortgage lending and how we can 2 further combat its attendant abuses. Let me begin 3 by assuring you that my office and the Division of 4 Banks, one of the nine consumer protection agencies 5 under my supervision, are deeply committed to 6 protecting Massachusetts residents against 7 unscrupulous rogue lenders who engage in abusive and 8 unconscionable lending practices. 9 Predatory lending has no place in this 10 Commonwealth. We pledge to do everything within our 11 existing authority to stop this form of white-collar 12 mugging that robs people of the equity in their 13 homes, places them on a cycle of debt, jeopardizes 14 the sustainability of home ownership, destabilizes 15 neighborhoods, and thwarts the transfer of the hard- 16 earned wealth of working people to succeeding 17 generations. 18 This unconscionable practice preys on the 19 elderly and virtually assures that financially 20 unsophisticated working people and the poor, whom 21 these lenders target, consign themselves to long- 22 term, if not permanent, financial distress. 23 I commend the Federal Reserve for 24 maintaining continued focus on the issue of 0015 1 predatory lending. As you consider this issue, I 2 urge you to consider its definitional, legal and 3 regulatory complexity. I also urge you to weigh 4 carefully how predatory lending, which is illegal 5 and clearly immoral, differs from other legitimate 6 forms of lending. 7 For example, flexible loan mortgage 8 programs under the Massachusetts and Federal 9 Community Reinvestment Acts and responsible forms of 10 subprime lending have resulted in the extension of 11 credit to countless numbers of creditworthy people 12 who in the past did not fit easily into conventional 13 loan underwriting standards. 14 Let me articulate what we believe to be 15 important governing positions. There must be clear 16 and meaningful disclosure. The extension of high- 17 cost credit should be only made to borrowers based 18 on the ability to repay and not on collateral 19 values. Financing of points or single-premium 20 payment insurance should be prohibited. Points that 21 deviate from industry-wide standards should be 22 prohibited. Loan modification and deferral fees 23 should be prohibited. And there are a number of 24 others, but in the interests of time, I will keep it 0016 1 short. 2 One of the things that we are doing is I 3 have asked our Commissioner of Banks to look at our 4 regulation, and we are also creating an advisory 5 committee in our Division of Consumer Affairs to 6 work with the industry and with the advisory and 7 watchdog groups on this matter. Thank you. 8 MODERATOR SMITH: Thank you very much. 9 Mr. Curry. 10 MR. CURRY: Good morning. For the record, 11 my name is Thomas J. Curry, and I am the 12 Massachusetts Commissioner of Banks. I do have a 13 written statement, which I believe has been 14 submitted for the record, but I would like to make 15 some brief oral remarks. 16 The Federal Reserve's reexamination of 17 Truth in Lending's HOEPA provisions is truly timely 18 and appropriate after six years. During this 19 period, we have observed the development and 20 marketing of new nonconventional mortgage products, 21 increased levels of consumer debt, and significant 22 appreciation of residential property values here in 23 Massachusetts, particularly in the Boston area. 24 From a regulatory perspective, my office 0017 1 has also gained significant additional practical 2 experience with these new mortgage products and this 3 segment of the mortgage lending industry. 4 As you may know, the Commonwealth also has 5 a State Truth in Lending law, which is enforced by 6 my office. We too have looked at whether the 7 Commonwealth's HOEPA or Section 32 requirements are 8 adequate. Many of these same questions that were 9 raised by the July Federal Register notice have been 10 considered at the state level here and in other 11 states such as North Carolina and New York. 12 Given our licensing and examination 13 experience with nonbank mortgage lenders and 14 brokers, we believe that many of the specific 15 questions referenced in the public hearing notice 16 should be actively considered and pursued by the 17 Federal Reserve. 18 For our part, we have recently proposed 19 comparable changes and amendments to our state 20 regulations governing high-cost mortgage lending. 21 After collaborating with Director Carey's office, we 22 are proposing, one, to expand the coverage of the 23 Commonwealth's HOEPA regulations; two, to strengthen 24 its existing disclosure, limitations and prohibited 0018 1 act provisions; three, to add a new provision 2 listing a series of high-cost loan unfair practices; 3 and four, to strengthen the penalties for high-rate 4 loan violations under the Commonwealth's mortgage 5 lending licensing and consumer protection rules. 6 The text of these proposed changes, 7 including an official summary, are found in our 8 proposed regulations which are attached to our 9 testimony. However, I would like to briefly 10 highlight some of the specific proposed changes. 11 We think existing HOEPA thresholds are too 12 low and underinclusive. We are proposing to reduce 13 the interest rate trigger from 10 to 8 percent, 9 14 percent for junior mortgages, and to reduce the fees 15 or points trigger from 8 to 5 percent, excluding 16 bona fide discount points. 17 The proposed regulations also govern junior 18 mortgage loans as well as first mortgages and 19 clarify the treatment of adjustable rate mortgage 20 products. 21 We also believe that our proposed new 22 section on unfair practices is significant. This 23 section addresses abusive high-cost mortgage loan 24 practices, such as the financing of excessive 0019 1 points, fees and third-party fees; loan flipping; 2 loan packing; improper encouragement of default; 3 deceptive advertising; unconscionable rates, fees 4 and third-party charges; oppressive arbitration 5 provisions; selective credit history reporting; and 6 a prohibition on single-premium credit insurance 7 sales, as well as arbitrary loan call provisions; 8 and credit counseling. 9 We hope that our proposed state regulations 10 will be a resource to the Federal Reserve as it 11 considers any future changes to its own Truth in 12 Lending regulations. Thank you. 13 MODERATOR SMITH: Mr. Nadon. 14 MR. NADON: My name is Steve Nadon. I'm 15 the Chief Operating Officer of Option One Mortgage 16 Corporation. Option One has been in the subprime 17 business since late 1992. Our core business was 18 then and remains today the underwriting, funding and 19 servicing of subprime loans. As one of the largest 20 subprime wholesale originators in the nation, we 21 appreciate the opportunity to be heard on this issue 22 of what action, if any, the Federal Reserve Board 23 should take on HOEPA reform. 24 We are submitting written comments to the 0020 1 Board which go into much more detail than I am going 2 to today, but for the purposes of this morning's 3 discussion, there are three important points we 4 would like to make. 5 The first is that subprime lending is not 6 the same thing as predatory lending. Second, we 7 need to take great care not to write new rules that 8 cause legitimate lenders to stop lending to 9 consumers in large parts of the subprime market. 10 Third, the best way to reduce predatory lending is 11 to create a better informed consumer. 12 First, again, subprime lending is not the 13 same thing as predatory lending. Option One is just 14 one of many responsible subprime lenders in the 15 industry today. We do not make high-cost loans. We 16 do not write credit insurance products onto our 17 loans. We do not solicit our servicing portfolio to 18 flip our customers into new refinances. 19 Our prepayment penalties are optional and 20 always come with reductions in rates and/or fees to 21 the borrower. We report loan performance to the 22 three major credit bureaus. We do not offer loan 23 products with short-term balloon payments. Our 24 loans have no negative amortization, nor do they 0021 1 include any arbitrary lender call provisions. 2 Second, we believe it is important to keep 3 our eyes on the big picture. While we certainly 4 agree that the business practices of a few in our 5 industry are intolerable, we should all be very 6 careful to avoid writing rules that limit how any 7 lender can make loans in the hope of protecting 8 borrowers from the true predators. A likely result 9 of such rules is that the nonpredators in the 10 subprime market today may decide to stop making 11 loans, subject to the new restrictions. 12 As an example, Option One made a decision 13 in 1994 that we would not make loans that exceeded 14 the HOEPA triggers and voluntarily extended that 15 prohibition to all loan submissions, not just those 16 covered by the letter of the law. We were not alone 17 in that decision, and it has resulted in a segment 18 of the market that companies like Option One will 19 not serve. 20 If the Board decides to lower the triggers, 21 it will cause those of us who have been trying to do 22 the right thing to make a very tough decision: Do 23 we stay with our current policy or give in and make 24 a statement to the market that we've changed our 0022 1 mind and being a high-cost lender is okay? 2 Going back to the big picture I spoke of, 3 if good, well-intentioned companies like Option One 4 further limit the loans that they will make, who 5 fills the void? These borrowers will still have 6 credit needs, but the only lenders that would be 7 left to help them may be the exact lenders that you 8 find to be the most aggressive and likely to engage 9 in predatory practices. 10 My sense is that the original intention of 11 HOEPA was not to drive more people into the hands of 12 predatory lenders, but rather to make an effort to 13 ensure that borrowers were provided good information 14 upon which to base a decision to borrow. 15 The third and final point I would like to 16 make again of the big picture. Why are we all in 17 these discussions about predatory lending in the 18 first place? It is not the result of whether we 19 classify borrowers as prime or subprime or whether 20 the loan is under or over the HOEPA triggers. I 21 have not heard any claim or seen any evidence that 22 indicates that predatory lending only takes place on 23 loans that fall below the HOEPA trigger. 24 If I am accurate on this, it begs the 0023 1 question, why would we believe that lowering HOEPA 2 triggers, thereby expanding the number of 3 transaction covered by HOEPA, would reduce predatory 4 lending? 5 MODERATOR SMITH: Thank you. 6 GOVERNOR GRAMLICH: Could I ask Mr. Nadon a 7 question. You indicated that you had taken a number 8 of what I'll call policing measures on your own, but 9 you more or less seemed to be cautioning us against 10 policing the whole market. 11 Are you concerned that you would lose 12 competitive advantage if you corrected some things 13 on your own and these practices weren't corrected in 14 the whole market? 15 MR. NADON: Well, we certainly did give 16 some business up when we elected, back six years ago 17 now, to not do anything that went over what were 18 going to be the established HOEPA triggers, which 19 was okay. The question becomes, at what point does 20 that competitive advantage begin to cost the company 21 too much? And it's a tough question. 22 As HOEPA triggers come down, we probably 23 will continue to take the stand that we are not 24 going to be making HOEPA loans, so the more that 0024 1 those triggers are reduced, the bigger the 2 population that we're just not going to be able to 3 serve. 4 And probably more than the competitive 5 concern that we have is that there are some good 6 lenders out there that do not do a lot of the things 7 that get talked about as being predatory practices, 8 and we do that for a reason, because we don't 9 believe in doing those things. If we are serving 10 less of the market, then the people that will serve 11 those people are the ones that we don't want to be 12 helping those people. That's probably our bigger 13 concern than the competitive piece. 14 MR. MARKS: Since we're asking questions -- 15 MODERATOR SMITH: I'm sorry, Mr. Marks, 16 we're not asking questions. Governor Gramlich has a 17 special status here, so he may ask questions. The 18 discussion will not start until after all the 19 opening statements have been completed. 20 MR. MARKS: Just on the record, we would 21 like to know what the rates that you charge are. 22 MODERATOR SMITH: We will discuss that 23 later, Mr. Marks. 24 Ms. Renuart. 0025 1 MS. RENUART: Thank you. I'm Elizabeth 2 Renuart. I'm with the National Consumer Law Center 3 here in Boston. We are an advocacy organization 4 that has a national perspective on the problems of 5 low-income consumers in this country. 6 The impact of predatory lending on the 7 human side has been great. We saw it in the 8 mid-1980s. It led Congress to have a series of 9 hearings in the early 1990s that led to the 10 enactment of HOEPA, which we're discussing today. 11 Since that time, there has been a series of 12 additional hearings that have illuminated and 13 highlighted this problem. Hopefully this afternoon 14 there will be actual homeowners and others present 15 from the community that can talk about the human 16 face of what has happened to them as a result of 17 predatory lending. 18 Senator Grassley held hearings in 1997. 19 HUD and Treasury held hearings around country 20 earlier this year. There is ample evidence at this 21 point that there is a serious and growing problem 22 that, while HOEPA has been helpful to address, it 23 has not sufficiently addressed this problem that's 24 been growing since 1980. 0026 1 The impact on minorities and the poor and 2 the elderly has been greatest. HUD came out with 3 studies earlier this year called "Unequal Burden" 4 from several cities showing the impact of predatory 5 and subprime lending, and the targeting of those 6 communities has been quite great in those large 7 cities, Atlanta, for example, Baltimore, New York, 8 Los Angeles and Chicago. 9 The Board is in a unique position at this 10 point. The Board has been delegated, although not 11 unlimited, certainly wide authority by Congress to 12 deal with this problem on its own and not have to 13 seek Congressional authority to go further. 14 It can, as we've heard, lower the annual 15 percentage rate trigger to at least 8 points. It 16 can add into the points and fees trigger any number 17 of points and fees that it chooses to do so, and 18 could in fact, under Congressional authority, adopt 19 an all-inclusive points and fees trigger, which we 20 would support. 21 In addition, Congress specifically 22 addressed refinancing, and as testimony in other 23 arenas have shown, it's the refinancing and the 24 inclusion of high points and fees which strips the 0027 1 equity out of people's homes. So later, during the 2 panel discussion, I know we will reach the issue of 3 refinancing, and I will be happy at that point to 4 address some specific proposals. 5 The most important problems that we see are 6 the refinancing and charging of points and fees that 7 suck the equity out of the home. We are going to 8 ask the Board to limit the amount of points and fees 9 that a lender can finance to no more than 3 percent, 10 and that the interest rate and fees triggered should 11 be reduced. 12 We have evidence that we will be submitting 13 in written testimony that will show that lenders 14 like Option One and others can make loans, still way 15 below a lower trigger, and cover any losses as a 16 result of foreclosure. And finally, HOEPA must 17 apply to open-ended credit. Thank you. 18 MODERATOR SMITH: Mr. Miselman. 19 MR. MISELMAN: Good morning, everyone. My 20 name is Howard Miselman, and I'm President of 21 Continental Funding Corporation, located in 22 Stoughton, Massachusetts. We're a full-service 23 mortgage brokerage company serving the community 24 since 1989. We handle all types of financing 0028 1 transactions, including conventional, government, 2 and the topic of today's discussion, subprime 3 lending. 4 Currently, I serve as Chairman of the 5 Massachusetts Mortgage Association, which is the 6 professional trade association representing mortgage 7 brokers, lenders and wholesalers throughout the 8 Commonwealth of Massachusetts. As professionals in 9 the mortgage industry, I can say confidently that we 10 are committed to ending abusive lending practices 11 throughout the country. 12 First of all, I would like to thank the 13 Board of Governors for extending me this invitation 14 to participate in the discussion on this very 15 important topic. I hope my comments and thoughts 16 help in the discussion. 17 The Massachusetts Mortgage Association 18 applauds the effort of the Board for convening this 19 discussion panel and scheduling similar public 20 hearings throughout the country. I welcome the 21 opportunity to discuss different ways to stop 22 abusive lending practices which target specific 23 consumer groups, including those with less than 24 perfect credit ratings. 0029 1 As a long-standing member of the mortgage 2 community, I have personally seen the chaos in 3 people's lives that resulted from predatory lending, 4 and I would like see them stopped. Myself and all 5 other reputable firms conducting business in the 6 subprime arena are also hurt by the small number of 7 firms practicing predatory lending. 8 Recent public hearings conducted by the 9 Massachusetts Joint Committee on Banks and Banking 10 on this subject point clearly to a solution that 11 will involve initiating tighter enforcement of 12 existing regulations, as well as considering 13 amendments to these regulations. 14 Such an approach has been advocated and is 15 being pursued in the Commonwealth by Commissioner 16 Curry of the Massachusetts Division of Banks, and a 17 draft of proposed amendments to regulations is 18 expected shortly to be available for public comment. 19 Effective responses to abuses, using regulation to 20 fight predatory lending, are better suited to the 21 urgent needs of consumers. 22 Like the Commissioner, we are also 23 concerned that any legislative or regulatory 24 measures clearly acknowledge the difference between 0030 1 abusive lending practices and appropriate lending 2 practices that serve the legitimate needs of 3 borrowers utilizing the services of subprime 4 lenders. 5 The subprime side of financing has come 6 about from a definite need by the public, and 7 consequently, any regulatory reform will need to 8 tread the line between stemming abusive lending 9 practices and keeping legitimate channels of credit 10 open to low-income borrowers and those with impaired 11 credit histories. 12 The most effective weapon against predatory 13 lending practices is a well-informed and educated 14 consumer. To that end, we will work with any group 15 or government body to establish a predatory-lending- 16 free environment so consumers can go out into the 17 marketplace and shop with confidence. 18 The Massachusetts Mortgage Association 19 maintains a proactive role on the issue of ending 20 predatory lending practices by engaging in specific 21 consumer outreach efforts. In 1999, for instance, 22 the Mass. Mortgage Association participated as a 23 contributor and active sponsor of the Massachusetts 24 Community Banking Council's "Don't Borrow Trouble" 0031 1 campaign. 2 This well-thought-out education campaign 3 put effective information in front of the homeowner 4 who may be looking for a home equity loan. Just as 5 a conforming or prime borrower shops for the best 6 possible deal and knows the right questions to ask, 7 with the proper information and guidance, a subprime 8 borrower can do the same. 9 We are united in support of the Board of 10 Governors' efforts to address the issue of predatory 11 lending and ending abusive lending practices. Thank 12 you very much. 13 MODERATOR SMITH: Mr. Gothorpe. 14 MR. GOTHORPE: Good morning. I'm Bill 15 Gothorpe, President and CEO of Dedham Institution 16 for Savings in Dedham, Mass. I appreciate the 17 opportunity to testify today on behalf of America's 18 Community Bankers. They are preparing a formal 19 comment letter in response to your request, so my 20 remarks today will just highlight some of the 21 points. 22 Let me start by giving you some perspective 23 about my bank and other ACB members. We work hard 24 to help the average American become and remain 0032 1 homeowners. We're permanent fixtures in our 2 communities. We have been in Dedham since 1831. I 3 would like to think that we will be there another 4 couple hundred years. And we depend on the economic 5 health of our borrowers for their success and for 6 ours. 7 Predatory lending that causes homeowners to 8 lose their homes and ruin their credit ratings 9 undermines our communities and damages potential 10 customers. So we want to help you and other 11 agencies eliminate predatory lending practices, 12 without damaging our ability to offer prime and 13 subprime loans to our customers. 14 Dedham Savings is not only not a predatory 15 lender, we don't do any subprime lending. We do 16 everything we can to make prime-rate borrowers out 17 of anybody who walks through the front door. As a 18 locally oriented community institution, we have the 19 flexibility to do that, but not everyone can operate 20 as we do. 21 There are many legitimate subprime lenders 22 that perform a valuable service by providing credit 23 to borrowers who cannot qualify for prime loans. At 24 the same time, we all know that predatory lenders 0033 1 are also active in this market. Unfortunately, it 2 has been stated, the information is anecdotal, and a 3 good reason for that is that many of the predatory 4 lenders don't come under the net of a lot of the 5 regulatory agencies. 6 I'm here to urge you to take steps to make 7 sure that unsupervised nonbank lenders undergo more 8 strict supervision. The Federal Trade Commission 9 and the states could play a key role here. Without 10 better supervision, regulations will be imposed only 11 on banks, leaving the door wide open to nonbank 12 predatory lenders. 13 Believe me, a bank like mine wouldn't dream 14 of engaging in predatory practices, because it is 15 totally contrary to our mission and philosophy. In 16 any case, our federal and state examiners clamp down 17 hard on violations of consumer protection laws and 18 ask tough questions about the quality of the loans 19 on our books. This is why everyone recognizes that 20 banks are not part of the predatory lending problem. 21 We know the Federal Reserve understands the 22 risk that overregulation can discourage responsible 23 lenders from making legitimate subprime loans. 24 Drawing the line between subprime and predatory 0034 1 lending has become increasingly difficult, 2 comparable to the problem faced by the Supreme Court 3 in a different context. Justice Potter Stewart 4 declined to define pornography but wrote, "I know it 5 when I see it." I think we all feel the same way 6 about predatory lending. 7 America's Community Bankers is recommending 8 the Federal Reserve lower the high-cost loan trigger 9 under HOEPA from the current 10 points over Treasury 10 to 8 points. We believe very few legitimate loans 11 would be adversely affected by this change and that 12 useful consumer protection will result. 13 I can see that my time is up. The rest of 14 the comments will have to be in written form. Thank 15 you. 16 MODERATOR SMITH: Thank you very much. 17 Mr. Marks. 18 MR. MARKS: I'll try to do it within three 19 minutes. My name is Bruce Marks, and I'm the CEO of 20 the Neighborhood Assistance Corporation of America, 21 NACA, and I'm also an ex-employee of Federal Reserve 22 Bank of New York. Let me try to summarize my 23 comments. 24 Let's go back in history to understand 0035 1 where the Home Equity Protection Act law came from, 2 where the legislation came from. We started in 3 Massachusetts with a campaign, a four and a half 4 year war against Fleet and its predatory lending 5 subsidiary Fleet Finance. 6 And when this organization, NACA, had over 7 500 people go to Washington and testify in the 8 Senate Banking Committee on May 17, 1993, when 9 Alphonse D'Amato, Senator from New York State, 10 sponsored the legislation, the HOEPA legislation, it 11 was opposed by the Federal Reserve Board. It's been 12 opposed by the Fed from day one. 13 So let's just listen to a few of the quotes 14 that were said by, let's see, Governor Lindsey. In 15 fact in a hearing on the legislation in the Senate 16 Committee on Banking, Housing and Urban Affairs on 17 May 19, 1993, Federal Reserve Governor Lindsey, 18 representing the Fed Board of Governors, criticized 19 HOEPA, claiming that it overly restricted credit 20 contract terms and "could create a risk that credit 21 could be shut off altogether to marginal borrowers 22 who happen to need credit due to special 23 circumstances." He went on to state, "I'm sure that 24 we want to avoid the unintended consequences of 0036 1 making loans more difficult to get, and we believe 2 the bill currently runs this risk." 3 He then recommended that the Congress raise 4 the threshold for each of the criteria for a high- 5 cost mortgage that would trigger the bill's 6 provisions. He further cited the widows who would 7 be deprived of the chance to do home improvement due 8 to HOEPA's income tests. He went on to claim that 9 an 8 percent limit on points or fees is, quote, 10 unduly restrictive. We're talking about a 17 11 percent, 18 percent trigger. That, by definition, 12 is predatory. 13 At NACA we do prime loans for subprime 14 borrowers. That means that someone who is B and C 15 credit can purchase or refinance a house with no 16 fees, no points, and an interest rate of 7.5 percent 17 fixed. So it's prime loans for subprime borrowers. 18 Brenda Williams, who is in the audience, 19 she had an 18 percent GMAC loan. She lost her home, 20 and yet now she was able to get a new home through 21 NACA, as did her brother, her three nieces, and many 22 of her friends. 23 So let's call it what it is. If any lender 24 here is saying that somehow a 17 percent trigger is 0037 1 somehow a subprime loan and not a predatory loan, 2 that is outrageous on the face of it. And no one in 3 this audience would agree that that makes any kind 4 of sense and that's not predatory. That's not 5 subprime. So we should have it. 6 (Applause) 7 MODERATOR SMITH: Thank you. Ms. Kogut. 8 MS. KOGUT: I'm Pam Kogut. I'm an 9 Assistant Attorney General in the Attorney General's 10 Office in Massachusetts, and I want to thank you for 11 inviting our office to be here today. We've 12 historically been interested in protecting consumers 13 where they have experienced problem mortgage loans. 14 We receive a fair number of consumer complaints 15 every year from consumers who are experiencing 16 problems with their mortgage loans. 17 And I wanted to just highlight one case our 18 office has been working on for a bit of time to 19 highlight problems that a law enforcement office 20 like ours sees in an area where the laws aren't 21 necessarily as tight as they could be. 22 Our office filed a lawsuit against First 23 Alliance Mortgage Company a couple of years ago 24 after Commissioner Curry's office referred the 0038 1 matter to us. Their examiners were in the field, 2 saw that borrowers were paying more than 20 points 3 on a routine or consistent basis, and referred the 4 matter to our office. 5 Now, when we heard about the facts of this 6 case, we thought that it would be -- it was 7 obviously an important case to bring, there wasn't 8 any question that we were going to file the lawsuit, 9 but we also thought that it would be, you know, a 10 fairly easy, quick case, that we would get a result 11 in short order. 12 And that has turned out to be the farthest 13 thing from the truth. We are still in litigation 14 with the company now, and they've filed for 15 bankruptcy, and the end is not in sight. 16 But let me just highlight a couple of the 17 things that we learned from the case. We, in 18 discovery, obtained the 300 loan files of every 19 single Massachusetts borrower. Of the 300 loans 20 made, in 36 percent of the cases borrowers paid 21 points in excess of 20, and in two cases paid more 22 than 30 points. 23 We believe that the industry-wide standard 24 for point charges in Massachusetts is that borrowers 0039 1 shouldn't be paying more than 5 points for these 2 kinds of loans, and in 96 percent of the loans the 3 First Alliance borrowers paid more than 5 percent. 4 Of the 300 consumers, 20 percent of them were 5 actually rated A or A- and could have gotten 6 conventional loans from other lenders, and their 7 credit rating didn't define the number of points 8 that they paid. 9 In every single one of the loan files there 10 was a mandatory arbitration agreement, and in every 11 single one of the loan files there was a prepayment 12 penalty, and borrowers were assessed prepayment 13 penalties every time they tried to refinance in 14 cases where First Alliance had the documentation to 15 support their ability to do so. So this is a lender 16 charging more than 20 points and charging prepayment 17 penalty. 18 From our point of view -- I'm just going to 19 wrap up, because the time people are telling me to 20 do that -- we really think that the more definite 21 the laws are in the area, the easier our job. As I 22 said, we thought this would be a simple case to wrap 23 up, and we are still in litigation with the company. 24 We would urge points to be limited. We 0040 1 would urge the trigger to be lowered. We would urge 2 any laws that would eliminate flipping. 28 of our 3 borrowers, also their loans were flipped. So this 4 is a significant problem. And we would urge any 5 regulation to prohibit mandatory arbitration 6 agreements. And I could go on and on, but I won't. 7 MODERATOR SMITH: Mr. Gravino. 8 MR. GRAVINO: I'm really going to try to do 9 this in three minutes. Good morning. My name is 10 Dick Gravino. I'm President of PCFS, which is a 11 division of Provident Bank in Cincinnati. 12 I appreciate the opportunity to speak, be 13 here, and also to demonstrate our opposition to 14 predatory lending and loan-sharking. As part of my 15 comments, I want to address a concern of both myself 16 and from our colleagues over tinkering with the 17 HOEPA laws as currently written until we can answer 18 some questions: 19 What have been the real results of HOEPA 20 legislation? What are the meaningful by-products of 21 the law? What changes have taken place in the 22 consumer marketplace? Has HOEPA accomplished its 23 mission? Has the at-risk consumer's behavior -- 24 what has been the behavior of at-risk consumers 0041 1 resulting from this legislation? 2 Many legitimate lenders will not make or 3 purchase loans considered to fall under the HOEPA 4 guidelines, PCFS included. But where have those 5 consumers gone that would have been serviced? Their 6 choices certainly have been limited. They can't 7 shop around. Who has picked up the slack and filled 8 up the void? We all know that, when legitimate 9 businesses exit, the need still exists, the void is 10 filled. 11 Compliance with HOEPA today is difficult. 12 As currently written, there is room for a lot of 13 subjectivity. For instance, a $5,000 miscalculation 14 and a one cent miscalculation have the same penalty. 15 No legitimate subprime lender will endorse 16 practices which are predatory. We believe there are 17 many positives that are going to result with the 18 recent public awareness of predatory issues, but we 19 also believe the correct way to approach the problem 20 is through continuing education programs. We need 21 real education, education directed at the consumer 22 in advance, so that she can make a choice prior to 23 committing to a particular lender. 24 We also need enforcement of current 0042 1 legislation. Very few of the predatory practices 2 you see in the paper here and on TV are legal. 3 We're for new legislation where needed, but only 4 after a rational analysis of the problem is 5 determined and we clearly understand what is 6 predatory, and we act only after a clear, well- 7 thought-out, rational solution is obtained, one that 8 creates a win-win environment. 9 Many legitimate subprime companies are no 10 longer in business today, and they're falling by the 11 wayside very fast. New entrants are few. The risks 12 are too great. 13 I think Mr. Marks mentioned the law of 14 unintended consequences. You could have unintended 15 consequences as a result of tinkering. You could 16 have the virtual elimination of loans under $60,000, 17 elimination of second mortgages as a borrower 18 choice, and also, believe it or not, having to send 19 a customer to two different lenders to get what they 20 need. 21 We all know that changes in business 22 products come after sufficient analysis, research 23 and testing and consumer focus groups have taken 24 place. These processes normally are void of emotion 0043 1 and political content. We should treat the change 2 to HOEPA in the same way. Thank you. 3 MODERATOR SMITH: Ms. Schwartz. 4 MS. SCHWARTZ: Thank you. Good morning. 5 My name is Faith Schwartz, and I'm here representing 6 Freddie Mac today. I'll be very focused on my three 7 minutes. 8 The focus for us to be here is to update 9 the Board of Governors of the Federal Reserve System 10 of our efforts to expand the range of low-cost 11 financing into the subprime segment of the mortgage 12 market and in particular our efforts to combat 13 predatory lending. 14 From the overview from the secondary 15 mortgage market, please note we are not an 16 originator in this marketplace, but we do create a 17 secondary mortgage market by offering and packaging 18 loans in the low-rate environment and having them 19 sold into investors through securities. 20 The secondary mortgage market rates, of 21 course, in the conforming mortgage market have 22 improved substantially with our type of involvement 23 in the secondary market. We are looking forward to 24 bringing those efficiencies into the subprime 0044 1 segment of the mortgage market. One of the ways to 2 do that is by combatting this predatory lending 3 issue. 4 We have a three-pronged approach. One is a 5 public education initiative. We have raised the bar 6 and increased standards on what we will invest in as 7 a corporation. And finally, we have introduced new 8 products to add competition and borrower choice, all 9 of which we believe will bring down rates and add 10 value to this segment of the mortgage market. 11 From a public education initiative, we 12 think informed decision-making is one of the most 13 important tools for a consumer to use to avoid 14 predatory practices. We are proud to have 15 collaborated with Mayor Menino in the City of Boston 16 in the "Don't Borrow Trouble" campaign. That is a 17 series of ads that will be run on billboards, Web 18 sites, and public service announcements in English 19 and Spanish for those consumers to educate them 20 about predatory lending. That's one of the many 21 actions we've taken in the public arena. 22 The standards we've added are these: We 23 have required full-file credit reporting from any 24 institution we do business with on the borrower's 0045 1 credit to the three repositories on a monthly basis. 2 We have banned HOEPA loans. We will not purchase or 3 add liquidity to the current version of the HOEPA 4 loan. We all know what that is; I won't describe 5 it. 6 What was our objective? We wanted to send 7 a strong signal that we do not like high rate and 8 fee lending. So we do urge caution when reviewing 9 what will go into the HOEPA limits, because it is 10 our job to keep liquidity in the secondary mortgage 11 markets, so this will be a good analysis. 12 Finally, we did ban credit insurance 13 front-end premium where it's attached to the 14 mortgage loan and financed over the life of the 15 loan. The objective there was strong signaling 16 regarding front-end practices. It is our interest 17 that financing should be a wealth-building tool, not 18 a wealth-stripping tool. We have done many other 19 things. I'll finish. Thanks. 20 MODERATOR SMITH: Mr. Golann. 21 MR. GOLANN: I'm Dwight Golann, and in 22 addition to teaching consumer law, as the bio notes, 23 I've been chief of the Consumer Protection Division. 24 I've also, I should say, counseled and represented 0046 1 lenders, both regulated and unregulated, some of 2 whom were accused of some of the practices involved 3 here. 4 I have some thoughts, particularly about 5 education and better enforcement as alternatives to 6 regulation and why I think regulation is required. 7 Better education is a response. Since this 8 is Boston, let's remember that the average target of 9 predatory lending is inevitably, being credit 10 impaired by having built up equity, going to be 11 middle-aged or elderly. That means they went to 12 school in Boston before 1970. 13 Before 1970, as the Federal Courts have 14 found, Boston ran an intentionally segregated school 15 system. Minority students had no decent chance for 16 a decent education. Even the white student didn't 17 have much of a chance, because those who have been 18 here a long time will remember at least one member, 19 maybe more, of the School Committee was indicted for 20 larceny, and many of them seemed more interested in 21 serving themselves than the school system. 22 I think there is something to be said for 23 warning people against predatory lending, but anyone 24 who really wants to replace what people lost in the 0047 1 school system of the '50s and '60s has a major job 2 in front of them. 3 Better law enforcement. I read Governor 4 Gramlich's testimony, and some of you confirmed that 5 predatory lending -- not predatory lending, but 6 subprime lending has mushroomed in the past five 7 years. I have seen no mushrooming in the staffs of 8 the Federal Trade Commission or the State Attorney 9 General's Office or anybody who's going to be doing 10 the enforcement in this area, and I am personally 11 not terribly optimistic that Congress is going to do 12 so in the next couple of years. 13 Private litigation, the record is somewhat 14 mixed. I guess I would like to say one thing in 15 particular. I think you can help enforcement 16 greatly by having clearer rules. My personal 17 experience counseling lenders, enforcing rules, and 18 lawyers for regulated institutions who have come 19 into my class and talked to my students have made it 20 clear that, if the rules are unclear, a couple of 21 things happen. 22 The Option Ones, the Dedham Savings may not 23 lend at all, and other people push the envelope to 24 its limits. Some of them in fact ask the question, 0048 1 "How likely am I to get caught, and what are the 2 penalties if I get caught?", rather than where the 3 limit is. It is also, in my experience, much more 4 expensive to enforce the law. 5 The implication is, it's best to have a 6 clear rule, even if it doesn't work perfectly, it 7 doesn't fit the situation perfectly. You have some 8 false positives, some uncovered negatives. I would 9 encourage you to establish clear rules for the 10 benefit of both sides. Thank you. 11 MR. ALGIERE: Thank you. My name is Dennis 12 Algiere. I am Vice-President of Compliance and CRA 13 Officer at the Washington Trust Company, a midsize 14 community bank located in southern Rhode Island. 15 We've been in business since 1800. I would like to 16 thank the Board of Governors for inviting me to 17 participate in this very, very important discussion. 18 We all understand the importance of 19 reasonable, responsible and prudent subprime lending 20 and the dangers of unethical, uncaring predatory 21 lending. Subprime lending is a practice which 22 largely benefits consumers with less than perfect 23 credit history, but the financial damage wrought by 24 unscrupulous, fraudulent lenders has raised serious 0049 1 concerns. 2 I am pleased to see that the attention 3 being focused today is on this issue. These 4 hearings have the potential to identify reasoned, 5 balanced actions that may greatly benefit consumers, 6 bankers, lenders in our communities. 7 As a banker, I am troubled that there are 8 consumers being victimized by dishonest, fraudulent 9 lenders. This situation begs an important question: 10 Why do consumers with less than stellar credit 11 histories choose predatory lenders rather than 12 legitimate lenders? This answer is critical in 13 finding a solution. I believe serious research and 14 not simple anecdotal-based hunches is required. 15 I suspect there are more than one or two 16 answers or reasons. Certainly some assume they will 17 not qualify for traditional loans. Some seem more 18 comfortable seeking the services of other lenders, 19 despite the fact that there are banks offering loan 20 products which could meet their needs. Is it a 21 matter of better educating the public on financial 22 issues? Is it a matter of marketing? Why are 23 consumers overlooking banks and risking their assets 24 with lenders who aren't reputable? 0050 1 I believe that if the banking industry 2 joins with the Federal Government and consumer 3 advocates to address this issue, we will find a 4 multifaceted workable solution. New restrictions 5 and additional disclosures are being proposed. 6 Deceptive lenders will always find new ways to 7 victimize vulnerable consumers. Term-specific laws 8 simply cannot anticipate every scheme of the 9 imaginative unscrupulous lender. 10 I would first suggest that the unregulated 11 lenders be required to be licensed and examined as 12 depository institutions are. In many cases 13 reported, there are clear violations of existing 14 laws. Licensing and examination will augment 15 enforcement of existing laws. 16 However, laws, even when aggressively 17 enforced, cannot alone prevent predatory behavior. 18 Only knowledge and a minimum level of financial 19 savvy can truly protect consumers from deceptive, 20 unfair lending practices. 21 Private industry, community groups and the 22 government can serve an important role in education 23 and outreach counseling programs. The industry, 24 community representatives and government can help 0051 1 consumers learn to protect themselves. This, I 2 believe, will be the most effective weapon. 3 However, such efforts will require imagination and 4 new ideas to get the message out. 5 I look forward to a productive meeting 6 today and thank you once again for the opportunity 7 to contribute to this discussion. 8 MODERATOR SMITH: Thank you very much. 9 With that, we will move on into the discussion 10 phase, and we're going to start by examining 11 possible changes to HOEPA's scope of coverage. 12 First, HOEPA covers mortgage loans that 13 meet one of the two high-cost triggers. A loan is 14 covered if the APR exceeds the rate for Treasury 15 securities with a comparable maturity by more than 16 10 percentage points, or if the points and fees paid 17 by the consumer exceed the greater of 8 percent of 18 the loan amount or $400 indexed, which now is $451, 19 I believe. 20 HOEPA authorizes the Board to adjust these 21 triggers, to adjust the rate trigger by 2 percentage 22 points. So for the Board, the question is, what 23 basis should we use for pegging a change in that 24 rate? Is 8 percent the right number? Are there any 0052 1 data that suggest how many loans are in fact covered 2 by HOEPA and how many more would be covered if the 3 APR trigger were lowered to, say, 8 percentage 4 points? 5 On points and fees, the test is, as I 6 mentioned, the $400 or 8 percent. For this purpose, 7 the points and fees include all items that are 8 included in the finance charge and the annual 9 percentage rate, except interest, and all 10 compensation paid to mortgage brokers. 11 The act specifically excludes reasonable 12 closing costs that are paid to unaffiliated third 13 parties. The act also authorizes the Board to add 14 such other -- to add other charges to the points and 15 fees test as the Board deems appropriate. 16 In the notice that the Board published 17 about these hearings, we identified three possible 18 fees that could be added: credit life insurance 19 premiums, certain prepayment penalties, and points 20 on refinanced loans. 21 So with that, I would like to have the 22 discussion start, and ask either Ms. Carey or Mr. 23 Curry to start us off on this discussion, if you 24 would, please. 0053 1 MR. CURRY: Thank you. As you know, we are 2 proposing a lowering of the thresholds under our 3 State Truth in Lending regulations. I think what 4 we're relying on in terms of the economic impact of 5 lowering is really the public hearing and comment 6 process. We would be very interested in hearing 7 from the industry themselves. I think that's the 8 best barometer. 9 My concern -- this is really from practical 10 experience, and Ms. Kogut mentioned this -- on the 11 fees, given the existence of an APR system, the true 12 cost of credit, it amazes -- I question the economic 13 or risk-pricing practices of having excessive number 14 of fees, other than to confuse the consumer in the 15 marketing of what the real interest rate is. 16 My suspicion is that since my examiners 17 can't be there when loans are being marketed or 18 closed, that there is an overemphasis on contract 19 rate costs, rather than APRs. So I'm most 20 interested in seeing a lower fee threshold. 21 MODERATOR SMITH: Thank you. Any questions 22 from the Panel first before I open it to other 23 discussion? 24 MR. MARKS: It would be nice to hear from 0054 1 the industry about what is so unconscionable about a 2 trigger of 17 percent. I would like to hear the 3 argument of why 17 percent is such an unreasonable 4 rate and why that shouldn't be lowered. 5 MS. RENUART: Can I add right here, as some 6 data that we're submitting in our written report, 7 there was a study done by Cathy Lesser-Mansfield, a 8 professor at Drake University, being published in 9 the South Carolina Law Review, and she examined, 10 since there is no collection of data about subprime 11 lenders in any uniform way, she examined 12 prospectuses and filings with the SEC. 13 And her data, over looking at several 14 subprime lenders, shows that only about 25 percent 15 of the loans made generally by subprime lenders are 16 over 15 percent. And she also collected information 17 showing the loss rates, and we've collected some and 18 put it into our written testimony as well, showing 19 the loss rates of similar subprime lenders. And 20 their loss rate over their portfolio, either on an 21 annual basis or projected over the entire life of 22 the loan, was about 3 percent. 23 So there is no reason why, first of all, 24 you can't lower the interest rates and still not -- 0055 1 you're not going to affect very many loans that are 2 being made, less than 25 percent. 3 And we should make the point from the 4 consumer's perspective that some loans ought not to 5 be made, that it is a good thing to cut off bad 6 credit, because it only leads to foreclosure. 7 That's not a positive result from the idea of saying 8 everyone should get credit all of the time. That's 9 thrown out there as a mantra, but it has resulted in 10 devastation in neighborhoods. 11 So given that information that is more 12 fully spelled out in our written testimony, it shows 13 that you can lower the trigger and only affect a 14 small portion of the loans, and those loans are 15 being made at such high rates anyway, there is no 16 justification for the risk level of that borrower. 17 MR. NADON: I'll try to answer, but it's 18 probably coming from a little different perspective, 19 because we don't have anywhere near that kind of 20 percentage of our loans that are in that kind of a 21 price range. 22 For us, the 8 percent trigger would affect 23 about 3 1/2 percent of the business that's booked, 24 so it wouldn't affect us, the 8 percent trigger 0056 1 wouldn't really affect us. 2 My question on lowering the trigger is 3 only, is that really going to get to the root cause 4 of the problem? And I'm not convinced that it is, 5 because I haven't seen any data other than anecdotal 6 stories; I haven't seen any data that says that 7 since HOEPA was put into effect that it has had a 8 positive effect on reducing predatory lending 9 practices, which would then help build an argument 10 that further lowering it would have an even greater 11 impact on reducing it. So I'm not sure that's the 12 answer. 13 Our answer, from an Option One standpoint, 14 is that probably the biggest thing that can be done 15 is to improve what's done to educate the consumer so 16 that they know what kind of a loan they're getting 17 into and they know what the right questions are. 18 One quick way to get there is to change the 19 way we have all of the documentation and all the 20 disclosures done, which, as you all know, are a 21 rather thick pile of documents. They're written in 22 a certain way that the average person is not going 23 to be able to understand exactly what is there, so 24 it can be intimidating. And if you walk into a 0057 1 closing and the average person is intimidated by 2 what they see, they tend not to ask questions in the 3 first place. 4 So we would like to try to find a way that 5 we can make that process much, much easier for the 6 average person to understand, with very easy-to- 7 understand documents, fewer documents, so that when 8 they walk in there, they can see very clearly what 9 kind of a loan am I getting, what are the 10 consequences of this loan. And they can take that 11 kind of information and shop around themselves to 12 see if they can get something better somewhere else 13 in the marketplace. 14 MR. MARKS: We will agree with you that 15 absolutely HOEPA has not done what the intent of 16 HOEPA was to do; it has not stopped predatory 17 lending. But we should -- so you're right. But 18 we're here to talk about what the Federal Reserve 19 can do. But we shouldn't be talking about just to 20 reduce the trigger, not to prevent it, the trigger 21 for disclosure from 17 to 15 percent or the trigger 22 of at how many fees does a disclosure kick in, not a 23 prohibition. 24 So we should be looking at what the Federal 0058 1 Reserve -- the Federal Reserve is the problem. They 2 have been, as the GEO study says, AWOL, and the 3 result has been that tens of thousands of people 4 have lost their livelihoods and have not had the 5 American dream of home ownership. 6 But the Federal Reserve can do a lot of 7 things. With Fleet, let's take Fleet as an example. 8 Fleet Finance was the predatory subsidiary of the 9 holding company. The Federal Reserve refused to 10 investigate the subsidiary, the predatory lending 11 subsidiary of Fleet. They could have done that. 12 They tried to prevent the other regulators from 13 doing any kind of investigation. So even without 14 HOEPA, there could be a lot of work that could be 15 done. 16 But let's get past this issue of saying, 17 "Oh, should it be 15 percent?" I mean, how could 18 anybody say that someone should get a loan for 17 19 percent? How could anybody afford that over the 20 long run? How is it that you are buying loans 21 from -- you're buying loans from, let's say, real 22 estate brokers, right? 23 MR. NADON: From mortgage brokers. 24 MR. MARKS: Right. You are buying loans 0059 1 from mortgage brokers. Do you pay a yield spread 2 premium to those mortgage brokers? 3 MR. NADON: No. 4 MR. MARKS: Are you against any lender 5 paying a yield spread premium to those mortgage 6 brokers? 7 MR. NADON: Not per se, no. We just have 8 not been doing that for years. 9 MR. MARKS: Sir, is that true in your case? 10 Are you buying loans -- are you paying yield spread 11 premium to mortgage brokers? 12 MR. GRAVINO: There are a couple of things 13 on the table at once. If you don't mind, I would 14 like to stick with the original question, and then 15 I'll come back to your statement. 16 MR. MARKS: But let's talk about not just 17 lowering the rate to 15 percent or 8 points. 18 MR. WALKER: Excuse me. I just want to 19 make a comment to set the record straight on a 20 comment that Bruce made. It is not true that the 21 Federal Reserve kept any of the federal regulators 22 from going into Fleet Finance, and in fact we did 23 investigate Fleet Finance. 24 MR. MARKS: Richard, you should talk to the 0060 1 OCC about that. 2 MODERATOR SMITH: The OCC is not here 3 today, so we're not going to get off into that. 4 And, Mr. Gravino, did you have a comment? 5 MR. GRAVINO: Yes. Frankly, as I said in 6 my opening comments, and to go along with what Steve 7 said and part of what Bruce said here, the problem 8 with the HOEPA laws as currently written is it 9 captures the law of unintended consequences. The 10 fee and percentages, by using percentages, you 11 affect the smaller loan more than the customer -- or 12 as much as the customer who actually should be 13 impacted by HOEPA. 14 When you start getting into loans, like in 15 North Carolina, you get into loans under $60,000, 16 all of a sudden the economics of the deal start to 17 become in question, so you start making decisions on 18 the economics rather than the needs of the consumers 19 in that state. 20 PCFS, yes, we do pay yield spread premiums. 21 What do they average? I don't know, 1 1/2 to 2. 22 And do we find them conscionable? We also find them 23 a cost of not having a branch network out that there 24 would cost us about the same if we were to originate 0061 1 the loans through our branch network. 2 MR. MARKS: Then how can you -- I mean, I 3 would like to hear a discussion about, if you pay a 4 yield spread premium, you're paying for a higher 5 rate or for more points, right? 6 MR. GRAVINO: We're paying for the cost of 7 originating the loan. 8 MR. MARKS: But you are required to only 9 pay for services that are provided? 10 MR. GRAVINO: That's right. 11 MR. MARKS: So that's what you're paying 12 for. So if you've got a $100,000 loan -- and you 13 pay a percentage, right? 14 MR. GRAVINO: Right. 15 MR. MARKS: So let's take percentage. What 16 percentage do you think on average you would pay to 17 a mortgage broker for a loan? 18 MR. GRAVINO: On a $100,000 loan, probably 19 1 percent. 20 MR. MARKS: So you pay 1 percent, so you 21 pay them $1,000. Certainly we know that the 22 industry is much higher than that. 23 But let's say you pay $1,000. Now someone 24 comes to you with a $200,000 loan; you pay $2,000. 0062 1 Are they doing twice as much services for a mortgage 2 of $200,000 versus $100,000? 3 MR. GRAVINO: First of all, you would find 4 that a $200,000 loan would not get you 1 point. 5 MODERATOR SMITH: I would like to take a 6 little bit of control over this and recognize Mr. 7 Golann. 8 MR. GOLANN: Trying to address the first 9 issue that you posed, I have some conceptual 10 difficulty understanding the disclosure statute, 11 particularly such complex disclosures for people who 12 have, by definition, as much difficulty with complex 13 financial transaction as the group we're trying to 14 serve. So I find myself wondering what the HOEPA 15 disclosures actually do. 16 That said, though, on the question of fees 17 or interest rates, my tendency would be to focus on 18 fees, because that is where I hear more of the abuse 19 has been and more of the uncertainty is. I would 20 tend to favor an all-inclusive definition in the 21 interests of a clear rule, even if that means that 22 the actual level doesn't go down. 23 Actually, I would also favor, if it were 24 possible, some kind of tolerance, because I have no 0063 1 great interest in trapping people who missed the 2 limit by 50 cents or a dollar. 3 We can argue about what should be included. 4 Certainly single-premium credit insurance, if you 5 want to get into that, is something that I would 6 like to see included, even if it's voluntary. 7 I've seen notes in your hearing notice 8 about the possibilities for statutory change. That 9 would be wonderful if it occurred. I don't think 10 that the possibility of a statutory change sometime 11 in the future is a reason not to take action now. 12 MS. CAREY: I have a question for the 13 lenders. I've heard a number of people mention the 14 need for consumer education and the need for full 15 and clear disclosure. I would like to know what the 16 lenders are doing now in that area. 17 MR. NADON: Well, in a session like this, 18 we're asking that consideration be given to make the 19 disclosures a lot simpler than they are today. So 20 that's the first part. 21 The second part would be we're trying to 22 develop a document which is almost finished. We do 23 not do this today, but we have been working on a 24 document, through a lending committee internally, 0064 1 that we would give, in addition to all of the other 2 advanced disclosures that the borrower gives at the 3 time of application, which tells them that credit 4 counseling is real smart thing and that they should 5 take advantage of it. It gives them direction on 6 where they can go with an 800 number or to a Web 7 site so that they can call and get any kind of 8 information they want from an independent third 9 party. 10 The concern that comes out of that is -- we 11 believe that's the right thing to do. The concern 12 that we have is that most of the credit counseling 13 agencies that we're familiar with are good at giving 14 information on purchase money loans. They are not 15 as skilled at giving information on cash-out 16 refinance loans. And cash-out refinance loans are 17 primarily what the subprime lending business does. 18 We are not really a purchase money market. 19 So we are concerned that there is, in 20 today's world, there is probably not consistency 21 among the credit counseling agencies. So if a 22 borrower were to go to one in Irvine, California, 23 where we're based, or went to one in Norwalk, 24 California, about 25 minutes away, I'm not sure they 0065 1 would get the same answers. And I'm not sure if 2 there is a licensing that needs to be done to make 3 sure that all people that are in that practice have 4 been trained properly to give the right information. 5 But those are two things that we think 6 would help a lot to try to give people better 7 information before they commit themselves to any 8 kind of a loan. 9 MR. MARKS: Look, the idea around 10 disclosures and this idea around education, it gets 11 away from the crux of the matter. It's the 12 economics. Let's get down to the economics. If you 13 can push someone from a prime loan into a subprime 14 loan, if you could get someone from 8 percent to 12 15 percent or higher, you're going to do that. 16 Subprime lenders or predatory lenders are 17 not interested in education, and if someone is 18 targeted and someone is desperate to save their 19 home, you know, they're going to be -- they're 20 vulnerable. 21 So the fact of the matter is that just 22 because you have a stack of papers, as you said, 23 that is this thick, and I don't know anybody, 24 whether they make $1 million a year or they make 0066 1 $10,000 a year, who has ever read every document at 2 a closing. It just doesn't happen. That's what you 3 hire lawyers for, and I'm willing to bet lawyers 4 have never read every document in that closing. 5 So let's get past the fact of disclosure; 6 let's get past the fact of consumer education. 7 Let's talk about the economics. 8 The economics say, if you're a mortgage 9 broker, you shop around for a lender, not because 10 they are going to give you the best interest rate, 11 but because they're going to get you the most fees. 12 That's the reality that is out there. That's what 13 you have to focus on. 14 So that's what you have to look at: What 15 are the economics? We've been hearing about all of 16 these subprime lenders that have gone out of 17 business, right? Why have they gone out of 18 business? Because the fact of the matter is you 19 cannot -- these loans are going to go bad at some 20 point. 21 Liz is right that some loans shouldn't be 22 made. This idea that if you don't do this stuff, 23 somehow someone else is going to come in -- those 24 loans are wrong. A loan at 17 percent should not be 0067 1 made, should be illegal. There should be usury laws 2 in this country that say it's not reasonable. Who 3 can afford a 17 percent or 18 percent loan over a 4 reasonable period of time, for a long period of 5 time? It just doesn't make any sense. 6 So this idea that you're going to take the 7 conventional people out of this -- these predatory 8 loans shouldn't happen. 9 MR. ALGIERE: I think the discussion -- and 10 I agree with you, education alone and lowering 11 triggering fees, adding more disclosures, I think 12 the solution is multifaceted, and you have to look 13 at the economics. We're not going to come up with 14 one answer to a question, and we're not going to 15 come up with one solution, but let me ask a 16 question. Making changes that are proposed, is that 17 in itself going to solve the problem? 18 MR. MARKS: No. 19 MR. ALGIERE: Are you still going to get 20 that 17 percent loan being made by a fraud? Sure. 21 MR. MARKS: But it's a safety and soundness 22 issue. Let's look at it not just from the consumer 23 point of view, but it is outrageous and it is 24 predatory. And we can have a discussion about what 0068 1 is a subprime and what is a predatory loan, but if 2 you define a predatory loan as a loan that someone 3 cannot afford over the term of the loan, that is 4 straightforward, that is a predatory loan. 5 But let's look at the safety and soundness 6 issue that's out there. You have got institutions 7 who have these loans. The key is, when you're a 8 lender, and the lenders know very well, the key is 9 you want to be the second-to-last entity holding 10 that loan. You don't want to hold that loan, 11 because you know that that loan is going bad. It's 12 only a matter of time that that loan goes bad, 13 because no one can afford that over the term of the 14 loan. 15 So it's safety and soundness. When we say 16 about the Federal Reserve, we say -- let's take this 17 real cynical argument; let's take the cynical point 18 of view that says the Federal Reserve does not care 19 about consumers, they care about -- let me just 20 finish this point, Dolores -- that what they care 21 about is the safety and soundness of the 22 institutions that they regulate. 23 Even on that point, they have got to take 24 action to say these institutions are vulnerable with 0069 1 the predatory lending operations or subprime that is 2 going on. 3 MS. RENUART: To add to that, what we've 4 seen recently is, you know, Wall Street drying up 5 its money in terms of securitizations of subprime 6 lenders whose loans have been found to be faulty, 7 who are going into bankruptcy. 8 And to the extent that that is happening, 9 there is a recognition of that, that Lehman 10 Brothers, who securitized First Alliance's 11 mortgages, is being sued in the First Alliance 12 bankruptcy itself, that consumers are going to go up 13 the food chain to get restitution for what's been 14 done to them, that sounds a big bell on Wall Street 15 that helps to dry up the money. 16 Freddie Mac taking recognition of it so 17 they won't purchase loans under the APR and points 18 and fees triggers, if we lower these triggers, then 19 they will purchase loans that have even lower 20 triggers, and that sounds the bell to the industry 21 that you've got to shape up. 22 We have seen and our testimony provides 23 examples of loans where predatory lenders with the 24 predatory features that we will talk about later in 0070 1 this discussion, balloons, prepayments, et cetera, 2 are making them just under the triggers. So the 3 benefit of lowering the triggers is you're going to 4 capture these predatory loans that, by all 5 definition in this room, are going to be looked at 6 as predatory. 7 MODERATOR SMITH: Thank you. And with that 8 I'll recognize Mr. Walker. 9 MR. WALKER: Ms. Kogut, you mentioned the 10 litigation that you are involved with against First 11 Alliance and made a statement about an 12 identification of part of the portfolio of A and A- 13 people who were in the loans that were in the 14 portfolio. Was there any -- were you able to do any 15 analysis vis-a-vis who those folks were or how they 16 ended up with First Alliance versus a Washington or 17 a Dedham or any of the other more reputable 18 institutions? 19 MS. KOGUT: Yes, it's interesting. These 20 consumers were probably not themselves looking to 21 borrow money; they were solicited like crazy. In 22 fact, the only consumer complaints that our office 23 had on file against First Alliance, at the time when 24 the case was referred to us, were from consumers who 0071 1 were saying, "Get these telemarketers to stop 2 calling me at night. I don't want to hear from them 3 anymore." 4 So these consumers, it didn't occur to them 5 naturally to even think to borrow money. They got 6 these solicitations pouring into their mailbox, and 7 they got telemarketing phone calls at night, and the 8 solicitations were deceptive. They said no 9 out-of-pocket expenses, low monthly payments. They 10 had a variety of very deceptive statements in them. 11 But consumers after a bit apparently did 12 take the bait and made a phone call and arranged to 13 meet with First Alliance. And it didn't mater what 14 their credit backgrounds were, it just absolutely 15 didn't matter. The amount of points that they paid 16 just had nothing to do with their credit histories 17 whatsoever. 18 MR. WALKER: So they were using -- 19 consumers then were using these for home improvement 20 loans -- 21 MS. KOGUT: Right. 22 MR. WALKER: -- primarily? 23 MS. KOGUT: Right. These consumers, these 24 were typically older borrowers who had been in their 0072 1 homes for a long time -- First Alliance had 2 obviously bought a mailing list -- where the 3 original mortgage loan had almost been paid off, so 4 there was a fair amount of equity left in the home. 5 And consumers had perhaps a lot of credit card debt. 6 That was a typical profile. 7 But otherwise their credit histories 8 weren't -- they weren't terrible. They might have 9 had more indebtedness than would have permitted them 10 to get a prime loan. But as I say, there were some 11 that were A rated. 12 And, I mean, the problem with First 13 Alliance is that they had an extremely deceptive 14 program from start to finish, so when consumers went 15 and met with the loan originator, the loan 16 originator would completely deflect from the actual 17 costs. 18 And, you know, it's interesting, I think 19 consumers are pretty savvy about interest rates. 20 You know, partly because of the credit card 21 solicitations that are pouring out of their mailbox, 22 they know what competitive interest rates are. But 23 they don't know what a point is, they don't know 24 what an origination fee is, and they don't 0073 1 understand, actually, the way the APRs work. 2 So in this case, probably two thirds of our 3 300 borrowers had variable rate loans as opposed to 4 fixed rate loans, and the riser was -- the index was 5 a LIBOR plus a very large margin, so that the 6 interest rates went up, you know, really quickly, 7 really fast, in ways that consumers didn't 8 understand. 9 So we started hearing from consumers when 10 their interest rates were going up. Actually, the 11 Minnesota AG's Office called these exploding ARMs, 12 because the increases went up so fast and so 13 crazily. 14 MODERATOR SMITH: Mr. Algiere. 15 MR. ALGIERE: Yes, thank you. A point was 16 made earlier by Dwight regarding FTC and enforcement 17 efforts. Here is a good example of existing laws 18 that were violated, deceptive advertisements. You 19 know, with the Internet now being used by more and 20 more companies and financial institutions, and more 21 bait and switch is being used, we have existing laws 22 right now that perhaps aren't being enforced. 23 And perhaps, you know, FTC's budget needs 24 to be beefed up a bit to go after some of these 0074 1 deceptive advertising and deceptive techniques being 2 used, bait and switch, let's face it. 3 So I guess the point I'm trying to make is 4 there are existing laws on the books now that 5 perhaps need to be looked at more closely, and if 6 enforcement efforts need to be beefed up, perhaps 7 they should. 8 MR. MARKS: But one of the laws -- 9 MODERATOR SMITH: Thank you. I recognize 10 Mr. Miselman next. 11 MR. MISELMAN: I concur also with those 12 thoughts. There are a lot of laws on the books 13 currently, rules and regulations. We're very a 14 heavily regulated industry, and perhaps enforcement 15 -- as was mentioned, there is now a much larger 16 volume of subprime loans, where it's exploded. I 17 don't think the staff to handle regulation on that 18 has exploded with that. 19 But I've been a mortgage broker for the 20 last 11 years. I've seen the mortgage industry 21 change where brokers are now doing upwards of 60 22 percent of the loans in the country. And for the 23 most part, the Mass. Mortgage Association and the 24 people I come in contact with, they do not take the 0075 1 opinion that if they can sell an 8 percent loan and 2 make a certain percentage or get a 12 percent loan 3 and get a certain percentage, that they will 4 automatically go to the 12 percent. 5 They don't find that in the long run that's 6 going to be beneficial, because many of them do 7 referral business. If you give someone a 12 percent 8 loan that can get an 8 percent loan and you're a 9 reputable company, you know that person is never 10 going to come back to you, because they will find 11 out about it. 12 In the mortgage brokerage industry what we 13 do, we've been notified a lot lately from 14 wholesalers, and a lot of it is coming from the top 15 down, they are now telling us what their definition 16 of predatory lending is. It has been a vague 17 concept for a lot of years. Right now it's starting 18 to come down. 19 What I do in my shop is we hold meetings 20 and we educate the loan officers of what to tell 21 people to look for, because we get shopped around to 22 various other companies. And when people call us up 23 on the phone and we give them, you know, a real 24 interest rate and someone else gives them something 0076 1 different, you know, they might think something is 2 up. 3 So we educate the loan officers on how to 4 educate the consumer on a one-on-one basis. And 5 we're not interested in giving someone a 12 percent 6 loan who is eligible for an 8 percent loan, because 7 there is enough profit doing a prime loan from the 8 start. 9 MODERATOR SMITH: I'd like to -- 10 MR. MARKS: If I could make one point. 11 There is a regulation that actually has worked very 12 well in Massachusetts, and that is the regulation 13 that mortgage brokers cannot -- that home 14 improvement companies cannot pass and cannot try to 15 be mortgage brokers at the same time. 16 If you look back to the second mortgage 17 scam and that four years that that was in the paper 18 virtually every day, that was one of the biggest 19 abuses out there, where you had contractors going 20 out there saying, "I will do the work. And by the 21 way, here are the papers, and I'm a mortgage broker, 22 and I'll get the financing," and the homeowner never 23 saw the money and the work never got done properly. 24 That has been in effect in Massachusetts 0077 1 and has worked extraordinarily well. You don't hear 2 those abuses here in Massachusetts, and that's a 3 model that can be replicated and should be 4 replicated around the country on the mortgage 5 brokers. 6 There are going to be abusive mortgage 7 brokers out there. We're never going to regulate 8 all the abusive mortgage brokers out of existence, 9 as long as the lenders are willing to pay a fee for 10 that deal. When you talk to lenders, what they will 11 say is, "If I want the business, I've got to be 12 competitive in what I pay the mortgage brokers." 13 And so they are subject to -- because the mortgage 14 brokers shop it around, they shop the deal around. 15 So the fact of the matter is, you have to 16 regulate and prohibit these fees that lenders are 17 paying mortgage brokers, because that's an industry 18 now. We're getting more and more -- Howard is 19 right, we're getting more and more to the fact that 20 mortgage brokers are the way that lenders get their 21 loans. And as long as those mortgage brokers can 22 shop around, not for, you know, the best rate, but 23 for the best kickbacks, you're always going to have 24 this problem out there. 0078 1 MODERATOR SMITH: All right. I would like 2 to turn the discussion a little bit to the points 3 and fees question. We had mentioned three types of 4 fees that could be included in the fee test, credit 5 life insurance premium, certain prepayment 6 penalties, and points on refinanced loans. Do we 7 have views from our invited panelists on any of 8 these particular items? 9 MR. GOLANN: Credit life insurance has been 10 a problem for at least the 30 years that I'm 11 available that I know of and probably for 30 before 12 that. I don't think it's going to go away without 13 regulation. I don't think more or different 14 disclosures are going to help very much. They 15 haven't helped so far. 16 One core of the problem is the payment and 17 the financing of lump-sum premiums. To the extent 18 you can forbid lump-sum premiums or you can require 19 that credit insurance be sold after the closing, so 20 anyone who wants to buy it can buy it, but it isn't 21 shoved down their throat in the pile of papers 22 that's been referred to, I think that would be 23 enormously helpful. 24 I understand that no regulation or 0079 1 substantive prohibition is perfect and that there 2 will be somebody who would have liked to have it who 3 can't get it, but there will be many more that are 4 helped. And the Federal Trade Commission in the 5 unfairness standards adopted a cost/benefit test, 6 recognizing that regulation has costs and that the 7 issue is whether the benefits exceed the costs, not 8 whether there are no costs, and I think you should 9 apply that standard here. So I would first take aim 10 at credit insurance. 11 MODERATOR SMITH: Mr. Michaels. 12 MR. MICHAELS: Let me follow up with a 13 question, Dwight. I've heard the argument that the 14 sale of credit insurance with the lump-sum premium 15 ought to be banned, I've heard the argument that the 16 sale should be delayed, and I've heard the argument 17 that you should just prevent the financing of the 18 insurance, let them sell it, but just don't let them 19 finance it, which some would argue is just 20 effectively banning the sale. 21 What would be the effect, do you think, of 22 adding the cost of the credit insurance premiums 23 paid at closing to the points and fees trigger under 24 HOEPA? Would that in fact have the effect of either 0080 1 delaying the sale, stopping the sale, or just 2 developing a product where the premiums would be 3 paid monthly? 4 MR. GOLANN: That's a more complex 5 question, and I don't have the empirical data to 6 tell you how many loans would become HOEPA loans if 7 credit insurance were added. For example, when I 8 last knew about this, there was a very low 9 penetration rate in Massachusetts and a much higher 10 penetration rate in other states, so I don't think 11 you are going to find much of that data here. 12 And of course, when you make it a HOEPA 13 loan, you might for Freddie Mac, for Option One, be 14 banning it, but for others you are simply adding a 15 layer of disclosure. 16 MR. MICHAELS: The question I guess I'm 17 raising is, by adding the credit insurance fees to 18 the HOEPA trigger, in effect you might be making 19 more loans covered by HOEPA; but on the other hand, 20 you might be encouraging people to move away from 21 the product where the premiums are paid at closing 22 and would be in the trigger to a product where the 23 premiums would be pay as you go. Is that -- 24 MR. GOLANN: That seems like one of the 0081 1 plausible results for a percentage of the market. 2 MS. SCHWARTZ: On the credit life issue, if 3 you look at the way the monthly programs work versus 4 the front premium financed programs for the 5 consumer, there is much lower cost. You can cancel 6 it at any time, and then you are very clear on what 7 the cost to the consumer is. So, in a sense, your 8 question is such that you will know your costs more 9 definitively for that consumer, and if that effect 10 is going monthly, then you've just moved the product 11 into a more attractive product, if that's your 12 question. 13 MR. MICHAELS: Has Freddie seen a lot of 14 loans where the premiums are paid monthly? 15 MS. SCHWARTZ: Frankly, that's an old 16 standard in the mortgage business, that you can 17 solicit credit- and life-related products, any 18 insurance product after the loan is closed, through 19 the servicing portfolio. That's a very standard 20 product in the prime business, less standard in the 21 subprime segment. And I would just urge you to 22 understand both segments of that market before you 23 make any decisions. 24 We have chosen not to buy any assets or any 0082 1 bonds with any front premium credit life, because we 2 were uncomfortable with that product. 3 MR. MICHAELS: Do you have a speculation or 4 do you know why it might be less standard in the 5 prime versus subprime? 6 MS. SCHWARTZ: I don't have a speculation, 7 but what I would share with you is, there is some 8 front premium credit life in the prime market, so 9 don't think it's just a subprime product. So we did 10 affect the base when we announced that. 11 MODERATOR SMITH: Mr. Miselman. 12 MR. MISELMAN: That was kind of the point 13 that I was going to say, that the market, when you 14 are in the prime market, prime borrowers have the 15 option, if they have private mortgage insurance, 16 which is another insurance product that a borrower 17 has to pay when they put less than 20 percent down 18 generally, they do have the option of single-premium 19 up-front at closing. 20 Many of them choose, because they may not 21 be in the house or the loan that long, to take a 22 monthly premium, but they do have the choice. And 23 how you make sure that people in the subprime have 24 all the same educated decision-making process, you 0083 1 know, could be disclosure, but, again, the consumer 2 has a choice in that case, even in the prime market. 3 MODERATOR SMITH: Any other comments, or 4 are we ready for our break? 5 MS. RENUART: One comment. Our position is 6 that you should include all points and fees, as Mr. 7 Golann had mentioned earlier, because that is a 8 bright line test. It's easy for compliance; it's 9 easy for a creditor to know to add them all up and 10 that's it. And so we would suggest that. Also, the 11 effect of that, of course, is going to bring in more 12 loans to HOEPA coverage. We think that's a good 13 thing. 14 In terms of the question about what's the 15 effect of including the single-premium credit 16 insurance into the points and fees trigger, just 17 like we've seen many lenders now bumping up against 18 the triggers that are just below them in order to 19 avoid HOEPA coverage, the same thing will occur. I 20 think that it will have an effect on reducing the 21 sale of that product in the subprime market. 22 And then finally because of the HUD studies 23 on unequal burdens that show that subprime loans are 24 made primarily -- the refinances, I should say, are 0084 1 made primarily in low and moderate income 2 neighborhoods and minority neighborhood, that again 3 the sale of credit life insurance, single-premium 4 credit life insurance, again is sold mostly to those 5 same people. So there is a disparate impact in 6 terms of the sale of that product, which, if it's 7 reduced or eliminated, would be a good thing. 8 MODERATOR SMITH: One more comment? 9 MS. SCHWARTZ: Yes. Just I would offer 10 some thoughtfulness on this issue. If you add 11 prepayment penalties, if you add credit life, I 12 mean, in a sense all of this is making some sense, 13 but we should know the impact on how many loans 14 would become HOEPA loans. 60 percent of the market 15 has prepayment penalties that are legal. That is in 16 this market today. 17 So if you add all of this in, you will 18 create a huge segment of a $100 billion market that 19 will become a HOEPA loan market. I would just 20 suggest we certainly will have to reanalyze our 21 position, which has been largely saying high rates 22 and fees out, but be careful to not mix that with 23 any legitimacy that's in the market, because we all 24 believe there is some legitimacy to this market. 0085 1 So I think it is very important, all points 2 and fee, plus credit life, prepayment penalties, we 3 should all be very thoughtful about what this means 4 to this segment. Maybe it's okay that 60 percent 5 will now become HOEPA loans, or maybe it's not. 6 MR. NADON: I certainly echo that comment, 7 because in today's environment there really is a 8 stigma attached to being a Section 32 lender, and it 9 is not a good stigma, which is a positive thing; we 10 don't want to be that. And so depending on what 11 adjustments were made, we would probably stay with 12 it, but if adjustments are made like that, credit 13 insurance doesn't affect us because we don't believe 14 in that product anyway, so we don't sell it. 15 But on prepayment penalties, which are an 16 integral part of the economics of the subprime 17 business -- they are not in the conventional world, 18 but they are in the subprime world -- we would have 19 to then ask ourselves the question, do we now want 20 to change our story, do we want to go into the 21 marketplace and say being a high-cost lender is 22 okay? 23 And the risk to that is possibly that once 24 people are forced into that decision and they become 0086 1 that, there is almost no barrier at that point, 2 because if you are going to be a high-cost lender, 3 what difference does it make if you're charging 5 4 points or 6 points or 8 points? You are already 5 nailed with the stigma of being a bad guy. 6 So we're still, going back to the big 7 picture here, we're still not convinced that just 8 classifying more people as a HOEPA borrower or HOEPA 9 loan solves the problem. In some respects I have a 10 lot of agreement with what Mr. Marks is saying, 11 because I think he is trying to focus on the broader 12 and the bigger picture. 13 Well, that bigger picture says that that 14 isn't really going to do it, because there isn't any 15 evidence still that we've seen that says that the 16 HOEPA laws as they are today had any effect on 17 predatory lending practices. Simply to be 18 classifying more people to be that is not 19 necessarily going to get you the answer that you 20 want. 21 MR. MARKS: But the point that you said 22 which I think is very important is the economics. 23 You said, if you deal with the prepayment penalties, 24 you're dealing with the economics of the industry. 0087 1 That's absolutely correct, because if a lender is 2 paying a mortgage broker a fee, they don't want that 3 loan refinanced until they can recoup that fee that 4 they paid. 5 So if that's an outrageous fee -- so if 6 you're paying a mortgage broker, if a lender is 7 paying a mortgage broker 5 percent on a $100,000 8 loan, that $5,000, if that person was to refinance 9 in six months, you are losing money. So you want to 10 make it as difficult for that person to refinance as 11 possible. 12 So absolutely, that is exactly why, if you 13 eliminated the prepayment penalties, if you put much 14 more restrictions on the credit issues -- because 15 you're right, that kind of insurance, it's 16 outrageous. I mean, people can go out and get the 17 standard credit life insurance; it's much more 18 affordable. 19 But getting back to the economics, the 20 prepayment, you prevent that, that allows people to 21 say, "Geez, I've got a high-rate loan now, but if I 22 make my mortgage payments on time for three, six, 23 twelve months, I would have the option to go out." 24 Let me just make this one point. Let's 0088 1 just put this in perspective. The subprime and 2 predatory lending area came out of loan-sharking. 3 And the loan sharks, that issue was, if I had a 4 financial difficulty, I'd go to the loan shark on 5 the corner, and I would say, "I need a high-rate 6 loan." And you get it for a short period of time, 7 you bust your butt to make that payment, because the 8 consequences were pretty severe, but you can get out 9 from under it. 10 This whole subprime and predatory lending 11 issue has been corrupted that says, yes, sometimes 12 you have to get a higher rate loan to get past a 13 personal or severe financial difficulty, but you 14 should have the option, when making those payments 15 on time, to get out from under. 16 Prepayment penalties, balloon payments, all 17 those issues prevent you from getting out from 18 under. Once you get that loan, you're on the road 19 to losing your home. It's only a matter of time. 20 You're right. Let's deal with the 21 economics of it. 22 (Applause) 23 MODERATOR SMITH: With that, we're going 24 to take a ten-minute break, and I won't say from 0089 1 when. Just look at your watches, because I'm sure 2 we all have a different time. 3 (Recess) 4 MODERATOR SMITH: We're ready to start with 5 the next segment, which will go from 30 to 40 6 minutes. We're turning our attention to examining 7 possible additional restrictions or prohibitions for 8 specific acts and practices. 9 Under HOEPA, the Board is authorized to 10 prohibit acts and practices, 1, in connection with 11 mortgage loans, if the Board finds the practice to 12 be unfair, deceptive, or designed to evade HOEPA; 13 and, 2, in connection with refinancing of mortgage 14 loans, if the Board finds that the practice is 15 associated with abusive lending practices or 16 otherwise not in the interests of the borrower. 17 The Board's notice raises several topics 18 for discussion. Because of the limited time, we 19 would like to focus on four of them: 1, loan 20 flipping; 2, unaffordable lending; 3, regulating 21 credit insurance, which we've talked a bit about 22 already; and 4, improving disclosures. 23 Now, flipping, as we are using the term 24 here, refers to the frequent refinancing of home- 0090 1 secured loans, where the consumer derives little 2 economic benefit and the lender receives significant 3 income through fees. The fees are typically added 4 to the loan amount, thus reducing the homeowner's 5 equity in the property. 6 Among the questions that we might address 7 is what regulatory approach would effectively curb 8 refinancings that do not benefit borrowers, without 9 impairing transactions that help borrowers. 10 The recent report submitted to the Congress 11 by the Department of the Treasury and HUD suggested 12 that the Board should prohibit refinancings, such as 13 within a specified time period, unless there is a 14 tangible net benefit. 15 So among the questions that that particular 16 recommendation raises is, what would give the Board 17 the basis for deciding a particular period of time 18 in which to ban refinancings, 12 months, 18 months? 19 And then there is the question of how to measure 20 benefit to the consumer. For example, lowering the 21 payment amounts and extending the number of 22 payments, is that a benefit? Yes, some times? No, 23 other times? 24 Balloon payments in the context of 0091 1 flipping. We understand that to avoid HOEPA, to 2 avoid HOEPA's restriction on balloon payments, some 3 lenders may include payable-on-demand clauses in 4 HOEPA loans. So we're interested in learning from 5 you, if we can, whether this practice is prevalent 6 where flipping occurs. 7 Should the Board consider restricting 8 payable-on-demand clauses in HOEPA loans to the same 9 extent that balloon payments are restricted, which 10 is to say that balloon payments generally are not 11 permissible unless the loan term is five years or 12 longer? 13 We'll have about 40 minutes for this 14 discussion, but before we start, I would like to 15 just remind the audience that if there are some 16 among you who have not registered for the open mike 17 session, and you are interested in presenting your 18 views, be sure and sign up at the first opportunity. 19 So, with that, do we have people ready to 20 comment? Ms. Renuart? 21 MS. RENUART: I'm always ready to talk, so 22 just give me an opportunity, and I'll be glad to. 23 Thank you. 24 Let me address the flipping issue first. 0092 1 The problem is that the way loans are structured 2 with high points and fees, not only in the flipping 3 context, but just making a loan in that way in the 4 first place with high points and fees, it takes a 5 borrower a very long time to pay down those points 6 and fees before they ever start paying off their 7 principal. 8 So in our written testimony we have an 9 example showing the difference between a loan with 10 about $8,000 in points and fees and a loan with only 11 3 percent of the loan amount in points and fees, and 12 how much faster it is for that borrower to pay down 13 their principal. 14 So one of our recommendations to the Board 15 is to prohibit the financing, the outright 16 financing, as an unfair and deceptive trade practice 17 if more than 3 percent of the points and fees are 18 financed as part of the transaction. So that also 19 affects the flipping side, because the effect of 20 points and fees being charged on a regular and 21 constant basis just aggravates the problem 22 dramatically, and it sucks the equity out of the 23 home even faster. 24 So that's one way to eliminate the 0093 1 incentive to flip and gouge the borrower by charging 2 high points and fees on a regular basis. 3 In addition, on the points, you know, what 4 points and fees ought to be included in the points 5 and fees trigger, another way to look at the 6 flipping issue is to say if, upon refinancing, there 7 is no rebate of the unearned portion of the points 8 and fees that were charged on the earlier loan, then 9 that portion that could have been rebated under the 10 actuarial method ought to be included as a point and 11 fee towards the HOEPA trigger in the first place. 12 That's another way of looking at the flipping issue. 13 On credit insurance, we've already talked 14 about that, so I won't address that again, and 15 that's also addressed at length in our written 16 testimony. 17 On the repayment issue, the ability to 18 repay, what we have proposed is that the Board adopt 19 some guidelines or create a safe harbor for lenders 20 who use the VA, the Veterans Administration, 21 guidelines for determining ability to repay. 22 VA has very clear rules. They're set out 23 in regulatory form. The VA and the FHA together 24 have been for years making loans to what now 0094 1 everyone calls subprime borrowers, but those folks 2 haven't been called subprime borrowers in the past. 3 But because those two administrations reach 4 out to folks who, you know, haven't been homeowners 5 and are trying to create more home ownership for 6 people in this country, they have been dealing with 7 people who have had credit problems for a long 8 number of years. 9 So the VA has established a very reasonable 10 way of looking at that, where the debt-to-income 11 ratio is 41 percent, but they apply, against the 12 monthly income, certain deductions in addition to 13 what the proposed mortgage amount is. And whatever 14 the remainder is left over, they call that the 15 residual income that that family would have to live 16 on for their other expenses. 17 And they just have a chart, and every year 18 they update what the residual amount is. So if a 19 proposed loan would end up generating a residual 20 income below the chart amount that the VA has 21 established, that loan would not be made, because 22 there wouldn't be enough income to support the 23 family for their other expenses during that month. 24 So that's a very easy, clear, already- 0095 1 established standard that the Board could adopt and 2 deal with this problem with the inability to repay, 3 because otherwise it's a fairly amorphous problem. 4 And creditors, I'm sure, have difficulty figuring 5 out what is the right debt-to-income ratio, is this 6 particular homeowner going to be able to make it, am 7 I going to run afoul of the inability to repay 8 standards of HOEPA if it is a HOEPA loan. 9 In addition, the Board -- this is not 10 something the Board has direct authority for, but 11 the Board could seek Congressional authority to 12 eliminate the pattern and practice requirements, 13 because that has made it very difficult for 14 consumers and expensive for consumers and 15 enforcement agencies. For example, in New York, 16 where the Attorney General sued Delta Funding, it 17 ultimately resulted in a settlement, but it would 18 have been very expensive for the Attorney General's 19 Office to have properly prosecuted that issue. 20 And certainly for an individual consumer to 21 prosecute that issue in an individual HOEPA case is 22 just way beyond the expense ability and certainly 23 oftentimes the attorney's ability to be looking at 24 numerous and thousands of loan files in order to 0096 1 establish that. 2 MODERATOR SMITH: Thank you. 3 MR. GRAVINO: I can't respond to all those 4 things; my memory isn't all that good. I do want to 5 talk to a couple of issues, though. The marketplace 6 being a fairly wonderful thing, a lot of things 7 happen when the business grows as fast as it's 8 grown, and those things are called becoming an 9 efficient marketplace. 10 And while we're probably not there, those 11 of you -- I've been in this business since 1963 -- 12 in 1974, the standard for this loan was 18 percent, 13 10 points. I think you'd find in today's 14 marketplace, you're probably around 10 1/2 and 2 on 15 an average loan. That would be the B- type loans. 16 I'm sure you can find examples that go all over the 17 place, but when I look at my portfolio, that's what 18 I see. 19 Flipping, in terms of flipping, we as a 20 lender, of course, are benefited when loans do not 21 flip, and as a retail lender, it's very easy to 22 self-police that if you take a mind to or establish 23 a law that says you can't. 24 But we don't allow flipping within our own 0097 1 bank within the first 18 months, and even after 2 that, then no new points and fees are allowed on any 3 new money extended. Whether that's the most perfect 4 way to do it or not, I don't know. But it works for 5 us, and it really meets our objective of trying to 6 keep the customer on the books for three years. 7 Insurance, we don't sell insurance. 8 Frankly, I won't even comment on it. I'll have to 9 let people who do sell insurance comment on that. 10 Prepayments, here again, you know, we 11 made -- Bruce, you made some comments about a lot of 12 companies that went out of business. We've done a 13 lot of research on these companies also, and what we 14 saw, as much as it was delinquency, it was more so 15 prepayment speeds, the inability of those companies 16 to hold onto their customers. 17 Here again, it's an efficient marketplace. 18 You have loans that were made in 1996 at 12 1/2 to 19 13 percent rates, rates drop, new products come in, 20 something called the two-year and the three-year 21 loan. These products all of a sudden start to make 22 the marketplace more efficient. The rates do get 23 reduced. 24 I mean, I've got a lot of friends in these 0098 1 organizations, and I guarantee you that it wasn't 2 delinquency. You can plan for delinquency. You 3 cannot plan for a marketplace becoming that 4 efficient that quickly. 5 In looking at how do you judge a loan, 6 we've kind of borrowed a little bit from the VA. We 7 do something called the net disposable income 8 analysis, and it has to meet that test before we'll 9 buy it or make it. 10 But, you know, it's an imperfect 11 marketplace out there, but I think there's a lot of 12 good things that are happening, and I would like to 13 see more attention paid to those things that are 14 outside of the scope. 15 I'm going to go back to continuing 16 education. The smarter a borrower is, the better 17 off that borrower is going to be, the better deal 18 they get for themselves. The regulations that are 19 suspect, the things that are not managed right now, 20 they need to be managed. And if that means we have 21 to create new laws to do that, we're all for that. 22 But, you know, when you get down to the 23 economics of the loan, whether you originate that 24 loan or whether you buy that loan, the costs aren't 0099 1 that much different. 2 If I didn't buy the loan from a broker -- 3 and I don't allow brokers to shop. They either have 4 a direct relationship with me or I don't buy 5 business from them. But if I had that broker's 6 office out there, it would cost me almost the same 7 whether I originate it or whether I buy from him, 8 and that has to be built into the economics of the 9 deal. 10 MR. MARKS: Let me, if I may, make two 11 points. I understand, Governor Gramlich, that you 12 are into the free market. Your focus is to make 13 sure that the market works well. 14 Well, if the market is going to work well, 15 if a lender is making a loan and they think it's the 16 best rate that that person should get, and that's a 17 reasonable rate and they're doing the right thing by 18 the consumer, we shouldn't put any roadblocks into 19 the way that that consumer, if they make their 20 payments on time, should be able to find any other 21 loan, and that market should be able to dictate what 22 they can get. 23 And that's why you've got to prohibit these 24 prepayment and some of the balloon payments, some of 0100 1 the way that the late fees are added onto the loan, 2 so that you can allow the free market to work. 3 Let's talk about the other point of 4 flipping, and let's look at it from your point of 5 view that says safety and soundness issue. Well, if 6 you look at a number of lenders out there, they will 7 refinance their own loans that they make. 8 Why would they do that? Why would a lender 9 out there say, "I'm going to give you -- I'm going 10 to make you a 14 percent interest rate loan at, 11 let's say, 5 points," and then in six months, "I'm 12 going to refinance that same loan at a lower rate." 13 Why do they do that? 14 The reason is they're booking the previous 15 fees as net income, they're actually defrauding 16 their investors, and that's not what the free market 17 is about. That's an incentive for them to go out 18 there and defraud their investors and frankly 19 defraud -- put that institution at risk. And that's 20 what it is. 21 So if the concern is, well, we're not 22 really concerned about the consumer, but we're 23 concerned about the safety and the soundness of the 24 institutions, you should be very concerned. You 0101 1 should be concerned about -- take the model of what 2 happened to Fleet Finance and why they were put out 3 of business. You should be concerned about the 4 finance companies, the subsidiaries that are putting 5 the bank holding companies at risk. And that is 6 against the free market. 7 MR. MICHAELS: When you say prohibit 8 balloons, are you talking about just high-cost 9 balloons, or would you recommend prohibiting balloon 10 notes for all types of margins? 11 MR. MARKS: No, I think you have to look at 12 the high-cost balloons. I think it's outrageous 13 that someone can pay the high rates, the high fees 14 for an extended period of time, and on the face of 15 it, 15 years down the road, they have been paying 16 those on time, they owe more, they owe more at the 17 end of 15 years than they did on day one, and there 18 has got to be a clear benefit of the refinancing of 19 what that term is. 20 You know, let's get back, again, let's put 21 this in perspective of saying, what is -- subprime 22 lending was always meant to be a short-term stopgap 23 measure for someone who's got severe financial 24 difficulties. It was never intended to be, once you 0102 1 get in, you never get out. 2 So if you take away the economics, again, 3 we can show thousands of people out there, and we've 4 got thousands of files that we have shown to the FTC 5 and other regulators about the abusive practices. 6 But let's take the cynical approach that says all 7 we're concerned about is safety and soundness of the 8 people out there and the concept. The fact of the 9 matter is that you've got to let people bust their 10 tail to make the payments, and then they should have 11 the option to get a better rate, better term, once 12 they can prove that. 13 And the difference -- we're talking about, 14 if the market is 8 percent, how could we be talking 15 about 9, you know, more than 10 percent, 200 basis 16 points? And how is it that Freddie Mac, who is the 17 government, who is subsidized by the taxpayer -- 18 well, they shouldn't even be allowed to get into the 19 subprime lending market, because the fact of the 20 matter is, we should be focusing on expanding what 21 the conventional market is, because of the NACA 22 track record, with thousands of homeowners who have 23 gone through it, of prime loans for subprime 24 borrowers. It's a proven track record. 0103 1 Freddie Mac and Fannie Mae should not be 2 allowed to constrict the conventional market to make 3 tremendous profits on the subprime lending market. 4 MR. MICHAELS: Would anybody on the 5 industry side like to expand on or elaborate on the 6 role of balloon notes and what kind of rules the Fed 7 might consider in terms of where balloons are useful 8 and help consumers and where balloons don't have a 9 legitimate role? 10 MR. GRAVINO: I'm not sure what -- I'm 11 sorry, go ahead. 12 MR. MISELMAN: Generally, we don't 13 generally even do balloon notes, because they don't 14 usually benefit the consumer. But if a consumer is 15 going to be leaving the property within or before 16 the period that the balloon will come due, then it's 17 a guaranteed benefit, because they will get 18 generally a lower rate on a five-year or a seven- 19 year, and they have ten-year balloons. You get a 20 lower interest rate versus if you took a straight 21 30-year fixed rate. 22 If you end up moving or selling the 23 property or refinancing within those five, seven or 24 ten years, by definition you will get a better deal, 0104 1 because you will have saved every month that you had 2 the loan outstanding. 3 But, again, you have to be aware that that 4 balloon note is coming due. The disclosures that 5 they give you are in bold print, big capital 6 letters, that this is something that's coming due at 7 a certain point in time, and it's very, very clear. 8 Generally, what people see that disclosure, 9 at least in our shop -- I've been doing this for a 10 lot of years -- it's not worth the relatively small 11 benefit that they'll see month to month in payments 12 with a lower interest rate. 13 MR. GRAVINO: We don't do balloon loans, 14 with the exception of what we call a 15, 15 and 30, 15 and generally it is 1/8 to 1/2 of a point. And 16 frankly, I have no objection to anybody regulating 17 that you can't do that. The loans really do no 18 benefit for us. It's a marketplace-driven product. 19 I don't know that it benefits anybody over 20 the long term. You know, it's a 15-year payback -- 21 the loan comes due in 15 years. The average 22 subprime lasts about 28 months. So I'm not sure 23 that anything happens or the customer gets a break 24 on the interest rate. 0105 1 MR. NADON: If I could just echo that and 2 what Howard is saying, the one benefit, to answer 3 your question, that we see -- and we only do a 30 4 and 15, we don't do anything shorter than that -- 5 that one product really is geared towards the people 6 that really do know that in their circumstances 7 they're going to be in the house -- usually they're 8 out within two to five years, because the loan life 9 on the loan is really not that long. 10 But they know that they're going to be 11 relocating or something, and because of the break 12 they get in the rate and the fact that they will 13 have moved or refinanced years before that balloon 14 comes due, they're just saving money. So that's the 15 benefit to the consumer, and it's the only kind of a 16 balloon product that we offer, and it's specifically 17 designed for that kind of a customer. 18 MS. SCHWARTZ: I thought I would mention 19 for the record that Freddie Mac is delighted to be 20 in this segment of the mortgage market, and we will 21 in fact, pursuant to our statutory requirement and 22 our mission, set standards, and we will better this 23 market, which now is very inefficient, nonstandard, 24 and has caused a lot of controversy. 0106 1 I guarantee you, we will add the values 2 that we added to the conforming market to this 3 segment of the mortgage market, and you will stop 4 talking about the risk of prime versus subprime, but 5 will have a continuum of mortgage lending and credit 6 availability that is correctly applied to this 7 segment. 8 MR. MARKS: By your own records, your own 9 records, your own study says that at least 30 10 percent of the people that get -- 30 to 40 percent 11 of the people that get a subprime loan really should 12 get a prime loan. So your economics, you have a 13 responsibility to your stockholders to maximum your 14 profits. So since 40 percent of the people who get 15 your subprime loans could have gotten a prime loan, 16 you're really saying, "Geez, we made 200 basis 17 points," a lot of money for you guys, to really push 18 people into the subprime market. 19 That is, you're creating the market. 20 You're creating this market. I mean, we're never 21 going to be able to outlaw every predatory lender 22 out there. So you've got to deal with the market 23 issue. Well, if the GSCs are creating the market 24 because they're going to profit from it, that's 0107 1 where the fight is, that's the focus. You are the 2 worst problem out there. You are the biggest 3 problem, the GSCs. 4 These predatory lenders, they're small 5 potatoes compared to what you do, but they will be 6 really upset when you pull that switch and you say, 7 "By the way, now we're going to originate 8 mortgages." And all of a sudden all these lenders 9 out there will join with the community and say, 10 "Geez, you know, we don't want Fannie and Freddie 11 to be out there originating mortgages." 12 MS. SCHWARTZ: Thank you. 13 MR. MARKS: You must have a response. I 14 mean, you just can't sit there. Come on, join in. 15 MS. SCHWARTZ: I stand on the record. 16 MODERATOR SMITH: Mr. Golann. 17 MR. GOLANN: I don't want to interrupt the 18 exchange. 19 MS. SCHWARTZ: Thank you, Mr. Marks. 20 MR. MARKS: Okay. 21 MR. GOLANN: I just, since you had 22 mentioned payable-on-demand clauses as an aspect of 23 balloons, I had thought that they had been banned. 24 I must say, they certainly have been banned in the 0108 1 jurisdictions I have been involved in, other than in 2 commercial loans, of course. 3 I was trying to figure out what the 4 economic justification could be that could possibly 5 outweigh the consumer harm, and I can't think of 6 any. I've been waiting here for someone to 7 articulate the case for these things. I don't hear 8 it articulated. 9 MODERATOR SMITH: Thank you. 10 MS. RENUART: Just to add for the record 11 that even though some of the lenders here are saying 12 that their balloons are very innocuous because 13 people have agreed to them and it's in exchange for 14 something else, and there is huge disclosures and 15 everybody is warned and everybody is knowledgeable, 16 that certainly is not true of the clients that I 17 have represented or the clients that other attorneys 18 have contacted me about who they represented who 19 were very surprised about the balloon payment that 20 was there and very shocked by it. 21 It was used by many of the subprime lenders 22 and predatory lenders that were involved in these 23 cases as a way to call them up and say, "Hey, now 24 you have a balloon. Why don't you come back in, and 0109 1 we'll refinance you. Even though we made you the 2 balloon, come back in, and we'll refinance you for a 3 better loan without a balloon," the same lender 4 saying that. 5 People come in, and they pay a whole huge 6 round of closing costs, points and fees again, and 7 then the flipping starts. So it's used as a tactic 8 to get the customers to come back in and to scare 9 them into refinancing. 10 MR. NADON: Just to get some balance to 11 that, there are some people that actually don't do 12 that, and because we never solicit any of our own 13 portfolio, we never do. We actually have pooling 14 and servicing agreements with the people that we are 15 selling loans to that strictly prohibit us from 16 doing that. 17 So we have never in the last eight years 18 done that, and we will not be doing it in the 19 future. So we do not use it as a practice to try to 20 do that. 21 If I am a consumer, and I know that in five 22 years I am going to be moving or retiring or doing 23 whatever and I'm going to leave this house, and I 24 can get an interest rate of 8 percent by taking this 0110 1 15-year balloon loan, or I can get a loan of 8 3/4 2 and get a 30-year fixed loan, my answer is going to 3 be I'm taking the 8 percent loan, because that's 4 going to save me 50 basis points for the first five 5 years that I'm in this deal, and then I'm selling 6 the house anyway. 7 The balloon has never had to be 8 experienced, and no one from Option One has called 9 me and asked me, "Would you please now refinance the 10 balloon that's coming due." Not everyone does that 11 practice. 12 It kind of goes back to one of the 13 statements I made in the opening comments. Not all 14 subprime lenders are predators. Some do some things 15 that have to be corrected. But that is not the case 16 for every one of us. 17 MR. MARKS: But then, would you define a 17 18 percent loan as a subprime or predatory loan? 19 MR. NADON: Yes, I would. That's why we 20 don't make them. 21 MR. MARKS: So you would consider that 22 every HOEPA loan is a predatory loan, then? 23 MR. NADON: A HOEPA loan? 24 MR. MARKS: Yes. 0111 1 MR. NADON: And these are all high-cost 2 loans? That's very aptly named, it's a high-cost 3 loan. We do not make high-cost loans. 4 MR. MARKS: So then how would you define a 5 predatory loan? How would you make a distinction 6 between a subprime and predatory loan? 7 MR. NADON: That's such a -- that's sort of 8 a general and vague question that there is so many 9 factors that go into someone doing something that's 10 predatory, I couldn't give you a real brief answer 11 to that. All I can tell you is that if we're 12 generally going to say that if you make loans under 13 the current HOEPA guidelines, that that is high-cost 14 loan, we agree that is a high-cost loan, and we 15 don't make them. 16 MR. MARKS: But anybody who wants to get a 17 subprime loan, let's take your definition of 18 subprime loan, that means that they cannot get, in 19 theory, they believe they cannot get a conventional 20 loan. Therefore, if you want to look at the 21 marketplace, they're in weakened position, because 22 somehow something is going on that is preventing 23 them from getting an 8 percent conventional loan. 24 MODERATOR SMITH: I think we will -- 0112 1 MR. MARKS: So the fact of the matter is 2 this issue around disclosures and the issue around 3 education is just a false issue, because you're 4 talking about people who are vulnerable, who are 5 desperate, who are in a weakened position. So if we 6 focus on disclosures and on education, that's just 7 crazy. That's not dealing with the issue. 8 Your job is to maximize your profits. You 9 are targeting those people because they are 10 vulnerable because they cannot get a conventional 11 loan. 12 (Applause) 13 MODERATOR SMITH: We will nonetheless be 14 getting into some of those issues this afternoon as 15 far as education and how to better protect the 16 vulnerable consumer. So we will have some 17 discussion of that this afternoon. 18 MR. MARKS: That's what the regulators 19 should be doing now. 20 MODERATOR SMITH: Then, Dwight, did you 21 have a comment? 22 MR. GOLANN: On one of other issues you 23 raised, Elizabeth had mentioned the option of 24 counting unamortized points and fees toward the 0113 1 points and fees tests on the, quote, flipped or 2 refinanced HOEPA loan. That sounds quite reasonable 3 to me, and I would be interested in whether the 4 creditors see a problem. 5 On the 18-month limit on refinancing that 6 Richard Gravino mentioned as just a practice that 7 they follow, I note that that's the same 8 recommendation that HUD and the Treasury make. 9 Given the number of points and fees on a 10 HOEPA loan by definition, it's hard to see how they 11 could be -- how it could make sense to refinance 12 within 18 months, given that interest rates simply 13 don't drop that fast. One would have to have a 14 truly precipitous drop in interest rates, it seems 15 to me, for it to make sense to refinance. 16 Points and fees only on new money extended 17 sounds like an excellent idea. You might want to 18 restrict it to related lenders, because that seems 19 to be where the flipping goes on, as opposed to 20 unrelated lenders. 21 CHAIRMAN SMITH: Yes, Mr. Miselman. 22 MR. MISELMAN: I think maybe a case of if 23 you have a lender who does both subprime and prime, 24 if somebody does reestablish credit within, let's 0114 1 say, 12 months, and they're in their subprime 2 portfolio, and you prohibit them from monitoring 3 their portfolio because they could put them into a 4 prime loan then, it's the same company, and it might 5 be a disservice to the consumer. 6 MR. NADON: Something else just to think 7 about with that. We don't solicit our accounts. It 8 really doesn't affect me very much to put 12 months 9 or 18 months; that's not a practice that we do at 10 Option One. 11 Where I would just ask you to give some 12 consideration is, here is a circumstance that the 13 lender or a broker or somebody is not initiating the 14 contact, but I refinanced my house because of 15 interest rates, let's say, 12 months ago. Somewhere 16 after that, I found out that my wife is going to 17 have a baby, and we wanted to add a room, and I 18 didn't want to sell my house, I just wanted to add a 19 room, so I want a cash-out refinance because we want 20 to do an addition so we could have a bedroom for the 21 baby. 22 I call up the lender under this rule of 18 23 months, and I have had a good relationship with the 24 lender that I'm dealing with today, and I say, 0115 1 "Would you please refinance my loan, because I want 2 $10,000 or $15,000 to put in an add-on," and your 3 answer is "No," regardless of how I've paid you, 4 regardless of the circumstance. 5 So as long as there is some room built in, 6 because there are some legitimate reasons why 7 people, other than interest rate, might want to do 8 some sort of a refinance. 9 MR. GOLANN: That seems a fair comment, and 10 one would have to make sure it didn't become a 11 reason to reimpose all the points and fees from the 12 first loan. But subject to that, I understand your 13 point. 14 MODERATOR SMITH: Yes, Mr. Curry. 15 MR. CURRY: The approach that we've taken 16 in our proposed regulations is really to try to 17 address some of those legitimate concerns. It must 18 be a high-rate loan being refinanced by a high-rate 19 loan, and there is also an exception for additional 20 proceeds that I think would deal with your issue. 21 With Howard's issue of being conventional, it 22 wouldn't meet the test, because both transactions 23 have to be high-rate transactions. 24 MS. RENUART: The problem with that, 0116 1 though, is that there are many loans that were prime 2 that are being refinanced into subprime and at much 3 higher interest rates, and so that rule would not 4 cover it. 5 MR. CURRY: But if you are dealing with the 6 issue of flipping, then I don't think you have a 7 flip there, you really have a change in 8 circumstance. They are really entering into the 9 high-rate loan context with that second transaction. 10 MS. RENUART: But these are often people, 11 from our experience as consumer representatives, 12 folks who had a good loan sometime way earlier in 13 their life to purchase money, and now they're being 14 treated as a subprime borrower in the sense that 15 they either perceive themselves as unable to get 16 better credit or they're being treated that way by 17 someone who is soliciting them for their business. 18 And because the new lender wants to be in the first 19 position, they will only refinance, they won't make 20 them a second on their house. 21 So they refinance not only decent prime 22 mortgages but also rehabilitation loans made through 23 various cities in this country that are either zero 24 interest rate or low interest rate or not even 0117 1 payable until the property is sold. Those are being 2 flipped into high-rate mortgages. 3 So there's a bigger problem than, I 4 think -- I don't mean to criticize your proposal, 5 but there is sort of a larger picture to look at 6 that would be not covered and not regulated by what 7 you're suggesting. 8 MR. GRAVINO: I think you have, continuing 9 on with what you say, you have a larger, a very 10 difficult problem when you start limiting points and 11 fees by using percentages. 12 Going back to Bruce's remarks, the 13 economics of the deal, I mean, this is just an 14 example. You do have unscrupulous lenders out 15 there. They're going to take advantage of the 16 situation. 17 I'm not sure how you end this up, but, I 18 mean, you have a customer who wants to take $20,000 19 to put an add-on on their home. They have an 8 1/2 20 or 9 percent first mortgage. The cost of doing that 21 $20,000 add-on is about $3,000. That's what it 22 costs to make the loan; whether you're first, 23 second, 200,000th, it doesn't matter, it's very 24 close to that number. 0118 1 So, if you limit 5 points on the $20,000 2 loan, all of a sudden you're at a $1500 fee, which 3 doesn't cover the cost of making the loan. So what 4 do you do? Do you now take that loan, add it onto 5 your $80,000 first that you have, refinance that 6 whole thing, and charge them 3 points? 7 The customer, you know, if you charge them 8 10 points on the $20,000, he would have paid $2,000; 9 if you charge him 3 points on the $100,000, now he 10 is paying $3,000, and he is still paying $3,000 to 11 get $20,000 as opposed to $2,000 to get $20,000. 12 One comes under the HOEPA regulation, one does not. 13 The one that he pays more, and you've done 14 a disservice to him, is the one that doesn't come 15 under the HOEPA regulation. That's a difficult -- 16 you know, you start to push people into those types 17 of arenas. 18 MR. MARKS: But so what if it comes under 19 the HOEPA regulation? I mean, it's not -- it should 20 be a prohibition to do things, but it's not a 21 prohibition, it's a disclosure. I mean, this whole 22 thing that somehow people are scared to death to be 23 subject to disclosure says, if they do something 24 that they should be scared to death, they certainly 0119 1 should be disclosed. 2 MR. GRAVINO: I don't think disclosure is 3 the issue; it's the penalty for making a mistake 4 under HOEPA that's the real scary issue for most. 5 MR. MARKS: There should be a penalty, 6 shouldn't there, that says -- 7 MR. GRAVINO: Not if they make an honest 8 mistake. 9 MR. MARKS: But you can't have the 10 exception make the rule. If the rule is that you 11 should be penalized if you're making a loan that 12 shows on the face of it that the borrower cannot 13 afford it, that's not an honest mistake, that's just 14 making a predatory loan. 15 MR. GRAVINO: Different issue. I was not 16 talking about that. 17 MR. WALKER: Dolores, I would like to ask a 18 question. 19 MODERATOR SMITH: Mr. Walker, please. 20 MR. WALKER: To what extent do appraisals 21 and rising real estate values add to the issue and 22 problem of flipping, I'm curious, to panelists. 23 MR. MISELMAN: I think it certainly adds to 24 it. As property values go up, you know, a subprime 0120 1 borrower now has the availability, with his equity 2 in his property, to get cash. It is perhaps more 3 likely to be targeted. And if the property values 4 had stayed about the same or only increased 5 typically maybe 4 or 5 percent a year, they may not 6 be ready to get any cash out for several years. So 7 now when folks have a lot of equity in their 8 property, they could become a target. 9 So I think the fact that appraisals have 10 gone up certainly in Massachusetts, there is equity 11 there. You know, you have seen the advertisements 12 where you are sitting on cash in your home, and 13 whether that's appropriate or not for people to see 14 might come under HOEPA or not as far as advertising. 15 But when there's equity there, that's money that 16 could be tapped into, and people will try to talk 17 them into it. 18 MODERATOR SMITH: Ms. Carey. 19 MS. CAREY: I think that that's accurate, 20 and I think that goes to the question of ability to 21 repay as opposed to collateral values, and looking 22 at people's asset worth rather than their ability to 23 repay, as you mentioned. So I do think, yes, that 24 does tie in. 0121 1 MS. RENUART: I just wanted to add briefly 2 historically the rise in predatory lending only has 3 occurred since the mid-1980s when property values 4 have risen dramatically. And so as they continue to 5 rise, the problem is still going to be there, 6 because this asset can be targeted by the lenders. 7 MODERATOR SMITH: Anyone else on that 8 point? 9 MS. HURT: I just wanted to ask -- I've 10 just briefly looked at the Massachusetts regulation, 11 but could you tell us or share with us some of your 12 deliberations on choosing two years in prohibiting 13 refinancing, as opposed to 18 months, or why you 14 chose to prohibit refinancings for a certain period 15 of time at all. 16 MR. CURRY: To some extent the prohibition 17 is arbitrary. It is part of the process of the 18 public hearing process. This is two years, put it 19 on the table, hear from the industry why it works or 20 it doesn't work from an economic standpoint. 21 We also looked to the North Carolina and 22 New York provisions in terms of establishing an 23 initial threshold subject to public comment. I was 24 interested in the comments in terms of 18 months 0122 1 here as part of that process. 2 MS. HURT: So the choice of the time period 3 is fairly arbitrary. 4 MR. CURRY: To the same extent that, you 5 know, I think there is definitely a need to lower 6 some of the triggers, let's come out with something 7 to start the debate. That's really the approach 8 that we've taken. 9 MS. HURT: But you've also seemingly taken 10 the position that -- I don't want to put words in 11 your mouth, but one effective way to deal with loan 12 flipping is to impose some sort of time period in 13 which you couldn't refinance. 14 MR. CURRY: Yes, that the longer the period 15 that you have, the more likely that there is a 16 legitimate reason for refinancing. The shorter the 17 period, the more likely that it's an oppressive 18 tactic of loan flipping. 19 So we looked also to, you know, tie into 20 when you are financing a high-rate loan with another 21 high-rate loan and whether or not additional 22 proceeds were being advanced. We're trying to 23 distinguish between what might be a legitimate 24 transaction versus an oppressive tactic. 0123 1 MS. HURT: Did you discuss or could you 2 share with us some of the other approaches to 3 addressing loan flipping that you decided against 4 adopting. 5 MR. CURRY: I think initially, you know, 6 when you start this process, with this ban of 7 refinancing outright, then you have to take into 8 account the economic and market issues, and this is 9 really what the process is: Yes, there are probably 10 legitimate reasons for this type of -- or why 11 refinancing might occur within a short period of 12 time; how can you try to differentiate and have some 13 flexibility with what otherwise would be a hard and 14 fast rule? 15 MR. MARKS: I would like to know from the 16 lenders, what is your position on the North Carolina 17 law where, on the flipping, there needs to be a net 18 tangible benefit for any loan that is flipped? 19 MR. GRAVINO: I think it's any loan that's 20 made, not necessarily just flipped. 21 MR. NADON: It's any loan that's 22 originated. 23 MR. GRAVINO: Any loan that's originated. 24 We frankly require that on all loans, whether 0124 1 they're in North Carolina or not. 2 MR. NADON: When you are making a loan, 3 there should be a benefit to the borrower; 4 otherwise, you really have to ask yourself, why are 5 you doing this? We struggle with the wording of it 6 only to the extent that it says "a reasonable 7 tangible net benefit," and there is no definition 8 given, there is no guidance given as to what does 9 that mean. 10 So I don't know if it's as simple as we 11 reduced the borrower's payments by $300 a month, or 12 we reduced the interest rate on his underlying first 13 mortgage from, you know, 12 percent to 10 percent. 14 I don't know what those rules are. 15 And so as we are underwriting loans in 16 North Carolina, it gets to be a challenge for the 17 underwriters to know, what calculation am I supposed 18 to do, what am I supposed to take into 19 consideration? Over what term does that net benefit 20 need to take place? Is it over the potential 30- 21 year term of the loan? Is it over the average life 22 of three years? 23 It's very problematic for us. We're right 24 now asking people to try to help us get a 0125 1 definition, frankly, of what that means. 2 MR. MARKS: But would you in general 3 support that? 4 MR. NADON: Absolutely. I think every 5 loan, as I said -- every loan that is made should be 6 providing a benefit to the consumer. 7 I will add, though, that this is a two-part 8 transaction. We are lending money; they are 9 borrowing. They are asking for money. So they also 10 have to have some hand in helping us define what do 11 they want and do they need it. I can't read their 12 mind. I don't know what's exactly in their head. 13 So we can only do our best efforts. 14 That's what we're trying to do in North 15 Carolina as we do in all the other states. Frankly, 16 we've tried to provide a benefit to the consumer on 17 every loan since we started our company. 18 MR. MARKS: Then I would like to ask Mr. 19 Curry, what would be the position of the State 20 Banking Commissioner on a similar kind of -- similar 21 piece of regulation that would say that, on any loan 22 that is made, there would need to be a net tangible 23 benefit to the consumer? 24 MR. CURRY: I think that's what we're 0126 1 trying to say in the flipping provision that we're 2 looking at, that as an initial matter, that flipping 3 is questionable. We've carved out these areas of 4 advanced funds, additional funds are being advanced 5 for whatever the borrower's purposes are. That's 6 the carve-out that we've come up with. 7 I mean, we're open to it. We looked at the 8 North Carolina law as too vague, so we're trying to 9 provide some definition. And again, you know, we're 10 in the rule-making and public hearing process and 11 comments. We want to know what's a better way to do 12 it or a refinement of it. It really goes to the 13 same issue, I agree with you. 14 What I think is important too is the 15 borrower's ability to repay in terms of suitability 16 of these products. That's really the issue, is that 17 at some point in time it's unsuitable. That's where 18 I think there's a clear need to refine the existing 19 regulation, aside from the statutory issues. We've 20 seen in some cases where the forms, the files are 21 beautiful, but you know that that is not verified 22 income, and we want to tighten up that requirement. 23 MR. GRAVINO: As a lender in North 24 Carolina, it is the vagueness of the law that people 0127 1 are struggling with. We elected to remain in the 2 state. Most of our counterparts have not done that. 3 But simply because of the way we had to 4 interpret the law -- we had to give it wide berth -- 5 we're seeing, within one month, we have seen almost 6 a three-quarters drop in the number of applications 7 being submitted in that state. And that isn't 8 anything other than we're just not sure how to 9 interpret the law and how to make it reasonable and 10 make it work. 11 So we've taken a very conservative position 12 on it, and we've seen -- as I said in my opening 13 statements, there's a void that's going to be 14 filled. Somebody is going to fill it, and I just 15 hope they're reputable lenders. 16 MR. MARKS: But we keep hearing that, that 17 if you guys don't do it, and you guys consider 18 yourself legitimate and trustworthy and all those 19 nice things, but -- 20 MR. GRAVINO: I feel very good about 21 myself. 22 MR. MARKS: -- but why shouldn't the issue 23 be that at some point no one should get those loans, 24 that because we have -- we have regulations in this 0128 1 country that say, you know, if you go out and buy a 2 refrigerator and you make a mistake, well, you know, 3 the penalties on that are that you are going to lose 4 your money. But if you go out and you put your 5 house at risk, we're going to put protections in 6 this country to say, well, we're going to prevent 7 certain things from being done even despite 8 yourself, because the consequences are very severe. 9 Why isn't the position saying a 17 percent 10 loan that puts your house at risk shouldn't be made, 11 shouldn't be made, and saying that should be the 12 issue, not that somebody else who you consider more 13 devious and more underhanded should go out there and 14 do that? 15 MR. GRAVINO: Actually, the way the law is 16 written in North Carolina, you wouldn't get anywhere 17 near 17 percent, and we never were to begin with. 18 The issue, Bruce, I guess what you are saying is 19 going to happen, people are going to be restricted 20 from credit. We'll see what happens. 21 MODERATOR SMITH: I would also say at this 22 point that we can have this discussion about making 23 or not making loans or permitting them about 17 24 percent. To the extent that the focus of today's 0129 1 hearing is on measures that can be taken within the 2 Federal Reserve Board's authority, that is not one 3 of them. So maybe we could just go on to other 4 items. 5 MR. MARKS: In that respect, we disagree, 6 that the Federal Reserve certainly has the 7 jurisdiction over its entities that it does regulate 8 to say that this is a deceptive or this is a 9 predatory practice to do that. This hearing 10 shouldn't be defined on some marginal issue of 11 whether HOEPA regs are going to kick in at 17 12 percent or 15 percent. You certainly do have that 13 authority. 14 MODERATOR SMITH: We will be discussing in 15 the next section some other items, and I think that 16 maybe we just ought to move along. Mr. Golann. 17 MR. GOLANN: I can't resist making one 18 comment, which is I heard an echo in Richard 19 Gravino's comments of something I said at the 20 beginning, which is if the standard is very vague, 21 it's not like not knowing where the cliff is. Good 22 lenders don't want to fall off; we'll stay well away 23 from the cliff. Other people might walk closer 24 because they're not so concerned about falling off. 0130 1 We have an interest in defining where the 2 edge of the cliff is, and I think the Fed could be 3 very helpful, quite apart from whether you agree at 4 this specific limit. 5 MODERATOR SMITH: Jim. 6 MR. MICHAELS: This segment, our focus has 7 been on how could the Fed use its authority under 8 HOEPA to define specific acts or practices that are 9 unfair and deceptive, and flipping is the obvious 10 one that comes up. 11 We've heard people say, you know, it's hard 12 to define predatory lending, but you need to have 13 some specific rules that define certain practices 14 that are deceptive that's going to help. And there 15 are certain practices that are already clearly 16 unlawful or illegal, whether it is deceptive 17 advertising, misleading people about credit 18 insurance, falsifying loan documentation, falsifying 19 the applicant's income on a loan application; these 20 are all practices that are already unlawful. 21 The question I have is, if the Fed were to 22 use its HOEPA authority to define these kinds of 23 practices which are unlawful under other laws as 24 being unlawful under HOEPA, does that add anything 0131 1 to the kinds of remedies that are available? Is 2 that a useful endeavor? 3 MS. RENUART: The answer in my mind is yes, 4 because the other laws you're referring to are a 5 patchwork of unfair and deceptive trade practices 6 acts that exist in the states, and in a significant 7 percentage of those state laws, they do not apply to 8 either credit transactions, mortgage lending, or the 9 particular type of lender might be excluded from 10 coverage. 11 So it's very unclear throughout the rest of 12 the nation whether the laws will actually pick up on 13 this type of behavior. If you're talking about 14 outright fraud, yes, every state has the common law 15 tort of fraud. But fraud is a very difficult thing 16 to prove, not only because of all the various 17 elements involved in reliance and damage and all 18 that, but you have to prove it by clear and 19 convincing evidence, so it is a much harder standard 20 than if all of the states' unfair and deceptive 21 trade practices acts would apply. 22 Now, Massachusetts happens to have a very 23 broad statute, but that's not true for other states. 24 Virginia, for example, excludes all credit 0132 1 transactions outright, so you can't get to that type 2 of behavior, but for, in my opinion, the Board 3 adding a list of what it considers to be unfair and 4 deceptive trade practices to HOEPA, which, again, is 5 a small segment of the lending population. It's the 6 high-cost loans as defined under the act. We're not 7 talking about it applying to everybody; we're 8 talking about it applying to a smaller group of 9 loans. 10 MR. ALGIERE: Any definition must be clear 11 and concise; otherwise we could open up a floodgate 12 of litigation against banks or what have you. And, 13 again, I preface my remarks with fraud and deceptive 14 lending practices are unconscionable, it must be 15 stopped, but definitions have to be clear and 16 concise; otherwise we get into litigation. It could 17 potentially open up floodgates of litigation. 18 MR. MARKS: But every piece of legislation 19 is always broad -- 20 MR. ALGIERE: Absolutely. 21 MR. MARKS: -- by way of definition. So 22 always the regulators are going to do that. So, you 23 know, this discussion of saying it has to be -- yes, 24 it's a truism. 0133 1 MR. ALGIERE: Let's make an effort to make 2 it clear and concise. 3 MR. MARKS: Absolutely. 4 MR. ALGIERE: Since we're here discussing 5 if indeed something needs to be defined, my 6 statement is just let's try our hardest to make sure 7 it's clear and concise. 8 MR. MARKS: So the argument against the 9 North Carolina law can't be because it is vague, 10 because every piece of legislation is that way, so 11 therefore, it's always up to the regulators and the 12 enforcement entities -- 13 MR. ALGIERE: I just want to make myself 14 clear. I did not make that statement, because I 15 haven't read the North Carolina law. 16 MR. MARKS: I'm saying, the comment from 17 the other lenders, that that can't be the argument. 18 That doesn't fly on its face. 19 MODERATOR SMITH: Jim. 20 MR. MICHAELS: I want to cover as many 21 topics as possible, and I want to change the focus a 22 little bit to this concept of unaffordable lending. 23 Under HOEPA, creditors may not engage in a pattern 24 or practice of extending credit without regard to 0134 1 the repayment ability of the consumer. In that 2 specific prohibition, creditors are directed to give 3 consideration to the consumer's current and expected 4 income, their current obligations, and their 5 employment status. 6 For purposes of this hearing, there are 7 some questions that we may not be able to resolve or 8 that we could debate for the rest of the day, and 9 one of them is the merits of the pattern or practice 10 requirement which Congress has inserted into HOEPA 11 and whether Congress ought to lift the pattern or 12 practice requirement. 13 The other issue that it seems that we could 14 debate for the rest of the day would be what 15 constitutes a pattern or practice, how do you know 16 when there is a pattern or practice. 17 So, for the next 20 or 30 minutes or so, I 18 would kind of like to put those questions aside and 19 focus on perhaps some more specific issues. 20 Currently, there is no specific requirement 21 for documenting the consumer's repayment ability in 22 order to avoid violating this requirement. For 23 example, you could have a rule that says you are 24 engaged in a pattern or practice of making loans 0135 1 without regard to the consumer's ability to repay if 2 you don't have a practice of doing the following, 3 and that list could include verifying the consumer's 4 income, verifying employment status, verifying 5 debts, using credit reports. 6 There are similar requirements which are 7 part of HOEPA in connection with the ability to use 8 prepayment penalties, and the question we would like 9 to focus on now for a little while is whether or not 10 it would make sense to use similar verification 11 requirements for purposes of this unaffordable 12 lending issue. 13 MR. ALGIERE: I would just like to make a 14 comment. I would hope that during -- this is 15 something under the Division of Supervision -- that 16 under a safety and soundness examination during the 17 review of loans, that if indeed an examiner or 18 examiners do come across some type of pattern such 19 as that, that some action would be taken. Am I 20 correct in that assumption? 21 MR. MICHAELS: We hope so. 22 MR. ALGIERE: I would hope so. If they see 23 a significant number or a number of files where 24 there is no income verification, credit reports are 0136 1 poor -- 2 MR. MICHAELS: Let me tell you the 3 distinction, which is that is true, but then you are 4 dealing with a safety and soundness issue, which is 5 different from dealing with a HOEPA violation, and 6 the ramifications and remedies come under HOEPA. 7 MR. MARKS: But that's what the Federal 8 Reserve, in my previous life -- yes, I mean, you 9 look at the CAMEL ratios, you look at all the 10 information, yes, you need to. That is part of what 11 the Federal Reserve does, it does the safety and 12 soundness, and that gets to the heart of HOEPA in 13 some ways. We're saying this is bad on all ends: 14 It's bad for the consumer; it's bad for the 15 investors and the lenders. 16 But let me start to address the issue of 17 what's affordable. When we do our lending through 18 NACA, we don't go by the ratios. We take the 19 person's rent, what the verified rent is, and we say 20 that's how much you're qualified for the mortgage 21 payments. And then we look at their regular pattern 22 of savings, and we say we'll increase it by your 23 regular pattern of savings. 24 We think that's a more accurate way to look 0137 1 at it, not by the ratios, but look at whether 2 someone can afford the mortgage, even what people 3 consider subprime borrowers, and the results of the 4 performance of the loans has really been 5 extraordinary. 6 But to get to what is affordable, even if 7 you don't do that way of looking at what's 8 affordable, certainly if you're talking about ratios 9 that go above 40 or 43 percent, there should be a 10 test that says, document that this thing -- that the 11 borrower can make those payments. There should be a 12 threshold that says, at a certain debt-to-income 13 ratio, you've got to document that the person can 14 afford it. 15 And, you know, I guess we do it on a 16 personalized basis, we discuss it; that's what we do 17 as a nonprofit to make sure that it works. We're 18 not saying that should be what every lender does, 19 but let's have a justification, some debt-to-income 20 ratio that says, okay, that shows they can pay for 21 it. 22 And let's make it clear that you can't do 23 it on equity in-house, you can't do asset lending, 24 because I agree that a lot of lenders do not want to 0138 1 foreclose on loans. Some do; some have that as a 2 practice. I assume that's not your business -- 3 MR. GRAVINO: Can't afford it. 4 MR. MARKS: -- to want to foreclose, or 5 what Steve is out there doing. But there are some 6 that do that. We will agree that the majority don't 7 want to do that. Some might get as much money out 8 of the borrower and then not have to take the action 9 to foreclose. So asset lending doesn't make a lot 10 of economic sense. 11 MR. NADON: If I could just say, I 12 absolutely agree with you. It makes no sense in our 13 business to do asset-based lending, none. Frankly, 14 of all the people that I know in this industry with 15 the bigger companies, none of us do that. 16 Absent fraud, we are finding out what they 17 make, we're verifying the employment, we're running 18 merged credit reports to make sure we have all of 19 the credit information. You are looking at before 20 and after debt ratios, so you can see what can they 21 afford before and what are we doing to them after 22 the loan is done, so you can see what kind of an 23 impact you're having. 24 You're doing all of those things for just 0139 1 that reason, because the loss severity, if you take 2 something to foreclosure, is in the 35, 36 percent 3 range of the principal balance. It's an absolute 4 lose-lose proposition: We lose a lot of money, and 5 the borrower loses their home. We do not want to do 6 that. So I don't know of someone that's a major 7 lender that is doing any asset-based type lending. 8 MS. RENUART: Is that the same as no-doc 9 lending in your mind? 10 MR. NADON: When you say "no-doc," I'm not 11 exactly sure what you mean. We're verifying the 12 income, we're verifying the employment, we're 13 verifying the credit, we're verifying the debt 14 ratios before and after. We're doing all that work 15 on every single loan that we do. 16 MS. RENUART: So when Bank One Financial 17 Services has a program of making light-documentation 18 or no-documentation loans, and New Century in their 19 latest prospectus shows that they make 30 percent of 20 their variable rate loans in the first quarter of 21 this year as no-document or stated-income loans, 22 would you find that acceptable to you in your 23 business? 24 MR. NADON: Stated-income loans can be very 0140 1 acceptable as long as the income that you are 2 looking at is a reasonable figure for what the 3 person does for a living and you are verifying that 4 they're actually there doing the work. It is not 5 inherently a bad loan if someone doesn't hand you a 6 W-2. 7 MS. RENUART: Then how do you verify it? 8 MR. NADON: I'll give you an example. 9 Someone says that they are working at McDonald's and 10 they are making whatever they would make at 11 McDonald's, $5 or $6 an hour, and that's what they 12 put on the 1003. You do the math on your 13 calculator, and you say, "What they're telling me 14 they make is what they would make there." 15 I call McDonald's and find out if they'll 16 verify they're working there, are they in fact the 17 counterperson or whatever they would have as the job 18 title, and how long have they been there. And they 19 tell me that's how long they've been there and 20 that's what they do. 21 I take a look to see, on their past 22 servicing of debts, is the income that they needed 23 to have to service the debts that the credit report 24 and the borrower have indicated that they have, is 0141 1 the servicing of the debt indicating that that 2 income has in fact been coming through the 3 household? 4 And if I look at my loan and I say, am I 5 doing anything that appreciably increases or 6 negatively then impacts his ability to continue to 7 service the after-loan debts, and if I'm not doing 8 anything, his outgo before in total was $800 a month 9 and his outgo after it is $800 a month, and he has 10 got a good performance record before, I have every 11 reason to believe, if I verify his employment just 12 as I talked about, that he is going to continue to 13 pay me the way he was paying other people before. 14 MS. RENUART: Based on what you said, you 15 absolutely verify something; you make no loans in 16 which there is no attempt at all to verify. 17 MR. NADON: That's correct. 18 MS. RENUART: So if other subprime lenders 19 were making, by their definition, no-documentation 20 and stated-income loans, which meant to them no 21 verification, you would think that would be 22 inappropriate? 23 MR. NADON: If they didn't do anything? I 24 think that's -- "inappropriate" might be -- I 0142 1 wouldn't use the word "inappropriate" -- 2 MR. MARKS: Come on, Steve, say it. 3 MS. RENUART: So it should be something the 4 Board should regulate, then, or prohibit? 5 MR. NADON: I think maybe they should just 6 rethink their business practices. 7 MODERATOR SMITH: Mr. Curry. 8 MR. CURRY: I would just say, from our 9 standpoint at the State, we are dealing with a 10 specific class of loans. Once you reach whatever 11 the final trigger is, basically a high-rate loan is 12 a predatory loan, and I think it is only appropriate 13 to tighten up the repayment ability requirements to 14 require verification. That's the approach we have 15 given. 16 I would also like to say, strictly from an 17 examination standpoint, trying for licensed lenders, 18 to the extent that we would want to have an 19 administrative enforcement action, let alone 20 litigation, pattern and practice is very difficult 21 to deal with. We have opted to eliminate it from 22 our regulations only because our enabling statute 23 allows us to do more than the Fed does. So that's 24 our approach. 0143 1 Mr. Michaels' idea that the more clarity, 2 if you cannot eliminate it by statute, the more 3 clarity, a clear test you have to establish 4 predatory practice is great. We just have it a 5 little bit easier, fortunately. 6 MR. GRAVINO: I'm going to step in here a 7 little bit on the stated income, because we do 8 stated-income loans. But I believe we have always 9 limited the stated-income loan to a professional 10 borrower. We don't do -- 11 MS. RENUART: To what, I'm sorry? 12 MR. GRAVINO: To a professional. 13 MS. RENUART: A professional person? 14 MR. GRAVINO: Yes. We don't do them to 15 McDonald's workers. 16 There is a market out there for that type 17 of loan. There are professionals who just really 18 don't mind paying an additional fee to not have to 19 disclose all the incomes or give you W-2 forms. 20 That market has been here for some time. 21 But I find, in terms of our own market 22 performance, that that is a very high-performing 23 marketplace. The loans that we make on stated 24 income to professionals, our delinquency is very, 0144 1 very low. 2 MS. RENUART: But are these HOEPA loans? 3 MR. GRAVINO: No, they're not HOEPA loans. 4 I didn't think we were addressing just HOEPA. 5 MR. MARKS: Is there a certain -- what is 6 your threshold debt-to-income ratio that you use? 7 What is your threshold for total debt-to-income 8 ratio? 9 MR. CURRY: We're using basically 50 10 percent of gross monthly income against the 11 payments, monthly payments. 12 MR. MARKS: 50 percent. And are the 13 lenders that you're using? 14 MR. GRAVINO: (Inaudible) 15 MR. MARKS: And that's what you're doing at 16 Option One as well, 50 percent? 17 MR. NADON: We have programs, depending on 18 the loan to value, that can handle as high as 60 19 percent. Our average borrower is at 39. 20 MS. RENUART: Of gross? 21 MR. NADON: 39 percent of gross income is 22 our average. 23 MODERATOR SMITH: Yes, Mr. Miselman. 24 MR. MISELMAN: You know, what I've seen, 0145 1 being in the mortgage brokerage industry, is 2 wholesalers will provide us the capital to provide 3 to the consumer. They don't just look at ratios 4 anymore. It's actually trickled down to even prime 5 borrowers, where you can run someone through an 6 automated underwriting system. 7 Automation is here, and many, many, many 8 brokers, if not all of them, should be on it if 9 they're not already. And it's almost like a black 10 box. The data goes in. You put it in accurately, 11 based on what the consumer tells you. 12 When it comes out of that black box, if 13 it's an approval, you don't know necessarily what 14 the criteria is, whether it was -- could it go with 15 a 65 percent ratio if they happen to have $100,000 16 in the bank and they're only borrowing $80,000? The 17 next day they could pay that loan off, should they 18 ever get into trouble. 19 So it looks at so many different scenarios 20 that to only focus on income as a criteria, we've 21 kind of gone in the other direction, and we're 22 looking at the whole package. And sometimes it's 23 tough to figure out, but it usually makes common 24 sense. The people with the higher ratios have very, 0146 1 very strong compensating factors, either 2 particularly good credit or particularly high assets 3 or some combination. 4 MR. MICHAELS: Would there be any problem 5 with incorporating into this documentation that 6 assets could be considered as long as they were 7 liquid assets and were other than the home? 8 MR. MISELMAN: Sure. We have programs that 9 have requirements of six months worth of reserves 10 where, you know, that would carry them if they had, 11 say, some real tragedy happen, and they have to sell 12 the house and they can't work, the next day they're 13 out of work. 14 If they have six months' reserves, it gives 15 them six months worth of payments to handle while 16 they're not working. They could cover the mortgage 17 payment. You know, the ultimate worst case is put 18 the house on the market if it's a true tragedy. So 19 reserves are a big, big factor in prime and subprime 20 lending. 21 I would imagine that New Century at some 22 point, if they're doing a no-doc loan and it's to 23 someone who -- it's HOEPA loan or not, if they have 24 a high default ratio, as was said over here by 0147 1 Steve, they lose money when they have to try to take 2 a house back, they will stop the program. So they 3 look at their data, and all wholesalers do, and they 4 respond to what the market wants. 5 MR. MICHAELS: Moving on to the next topic, 6 we have spent a lot of our time this morning talking 7 about the Board's regulatory authority dealing with 8 what sometimes is referred to as substantive rules 9 or substantive limitations. 10 We would like to talk now about disclosure 11 issues, and we could certainly have some debate 12 about the value of additional disclosures generally. 13 But we are asking for comment on a federal 14 regulation that has to be published, and we would 15 like to have some discussion this morning about some 16 specific disclosures as well. And I will list five 17 that are on our mind and then open up the 18 discussion, and we can take these in any order. 19 The first is additional disclosures about 20 credit insurance and similar products, such as debt 21 cancellation agreements. The second would be 22 disclosure about the availability of consumer credit 23 counseling services. The third would be additional 24 disclosures about balloon payments. The fourth is 0148 1 whether the HOEPA disclosures that are given to 2 consumers at least three days before the loan 3 closing could themselves be improved. And the fifth 4 is additional disclosure regarding foreclosure 5 notices. 6 We're particularly interested in the 7 foreclosure notices and whether or not -- and this 8 is a somewhat different approach than is 9 traditionally taken, because foreclosure has 10 traditionally been a state or local area of 11 regulation. 12 What we're thinking about in terms of 13 foreclosure is whether or not there ought to be, as 14 part of HOEPA's rules, minimum federal standards for 15 the types of actual notice to consumers that they 16 will get in a default situation where foreclosure is 17 the next step, and what type of information would 18 need to be in that notice to prevent the possibility 19 that consumers who have been the subject of a 20 predatory loan or abusive practices will not have 21 ample opportunity to assert as a defense to the 22 foreclosure those predatory practices. So with 23 that, I would like to open it up for discussion. 24 Let me rephrase the foreclosure question. 0149 1 Is there any reason why the Fed should not establish 2 minimum federal standards for giving actual notice 3 to consumers in foreclosure cases and for the 4 minimum amount of information that needs to be in 5 those foreclosure notices? Is there any reason why 6 that shouldn't occur? 7 MR. NADON: If I could ask just a general 8 question which is nonresponsive, so forgive me, is 9 there a reason to believe that all of the state 10 requirements that we currently have are inadequate? 11 MR. MICHAELS: Well, we have received 12 comment on this issue from time to time, and this 13 started back in 1998 when we were looking at the 14 issue of mortgage reform generally under Truth in 15 Lending and RESPA. We issued a report to the 16 Congress that went through the litany of the 17 problems related to predatory lending. 18 What we heard at that time was that there 19 were some states that, first of all, still did not 20 require actual notice to a consumer, that 21 publication of an impending foreclosure was 22 sufficient. And what we've heard from some Legal 23 Aid attorneys is that when they go to see -- when a 24 client comes to see them and says, well, "I haven't 0150 1 been able to pay my mortgage. Am I in 2 foreclosure?", the Legal Aid attorney has to say, "I 3 really can't tell you for sure." 4 So we do have reason to believe that it is 5 a live issue. And the subissue is, even in states 6 where the consumer does get actual notice, the 7 question is what is the quality of that notice and 8 what kind of information are they receiving; are 9 they getting the right kind of information about 10 their legal options at that point. 11 MR. GRAVINO: Isn't the intent to 12 foreclose -- is that a state requirement? I thought 13 that was a state requirement. 14 MR. MARKS: Absolutely. That is where you 15 can look at Massachusetts where you have -- it takes 16 a long time, Soldiers and Sailors. You have Georgia 17 where it is a nontraditional foreclosure; you just 18 have to notify the first Tuesday every month, it's 19 on the State House steps, and it's two weeks' 20 notice. So it really is -- it is very particular to 21 every state, and the disclosure would be particular 22 to every state that is required. 23 MR. GRAVINO: Our practice, when we send 24 out intention to foreclose at whatever level we send 0151 1 out, 10 percent of all customers, we frankly think 2 that that's the right way to do it: This is 3 regardless of where you're at, what state you're in, 4 et cetera, we send it out at the 45-day or 5 two-payment-down delinquent notice. It goes out at 6 that stage. I'm in favor -- 7 MR. MARKS: That's a demand letter that you 8 send out at that point. 9 MR. GRAVINO: Yes. 10 MR. MARKS: Which is a -- 11 MR. GRAVINO: -- 60-day thing. 12 MR. MARKS: Right. 13 THE STENOGRAPHER: Could you speak into the 14 microphones, please. 15 GOVERNOR GRAMLICH: Let me ask a question 16 about this. Some of you were saying earlier that 17 already disclosures were so voluminous that the 18 added use was very slight. And if you look at any 19 one of these things that Jim has mentioned, they 20 seem to be logical on their face. 21 Is there a problem in just getting so many 22 disclosures that nobody pays attention to any of 23 them? Or is there some way we could -- some way to 24 deal with that issue? 0152 1 MR. GRAVINO: I think that certainly is an 2 issue. I mentioned that we kind of poll our 3 customers quite often on what they like and what 4 they don't like, and one of the issues that they 5 consistently come up with is they did not understand 6 what they were signing at closing. 7 I don't know whether additional forms are 8 going to do you any good. I mean, Illinois is 9 having a terrible problem with predatory lending, 10 and I think in Illinois there is almost 12 state 11 requirements, 12 forms that are additional to the 12 federal requirements that you have to sign in that 13 state, which just gets to be mind-boggling. 14 We're all for one form, get it as simple as 15 possible, and I think the consumer would be a lot 16 better off if we could do that. I mean, I'm in this 17 business, and I go to closings and I'm confused. I 18 can imagine, you know, what happens out there. 19 MR. GOLANN: I would draw a basic 20 distinction between the first four items mentioned 21 and the last one, which is foreclosure. The first 22 four, I gather, would be along with the rest of the 23 pile at closing. Foreclosure is fundamentally 24 different. There is not the danger that it will be 0153 1 confused with something else. 2 I know that the Fed has heard about this in 3 the Consumer Advisory Council, so I'm interested to 4 hear that one major lender actually does manage to 5 get out these foreclosure notices on a national 6 basis. It sounds like it's doable. 7 Then the question becomes how to make them 8 clear and simple enough that they -- without trying 9 to advise, "Now, these are your rights under Georgia 10 law. If you happen to live in states that begin 11 with the letter I, you have these rights," and so 12 forth. 13 MR. GRAVINO: You have to do that. 14 MR. GOLANN: Well, one could simply warn 15 about a foreclosure and say that you may have rights 16 or you should consult someone. 17 MR. MARKS: What he is saying is what every 18 lender really does, and that is at 60 days, if 19 someone is two months behind, they will send a 20 demand notice that says that you've got 30 days to 21 come up with full arrears. That's what every 22 servicer does out there. What you are saying, you 23 are taking the demand notice as a foreclosure 24 certification. 0154 1 MR. GRAVINO: It's not the demand yet; it's 2 the intent. 3 MR. MARKS: The intent that you're going to 4 refer it to the foreclosure process if you don't 5 bring the full arrears up. That's a standard that 6 every lender does. 7 MR. GOLANN: Maybe we're holding this part 8 of this hearing in the wrong place, because I'll 9 just note that there are Legal Services attorneys 10 from places like Mississippi who at least have told 11 the Fed that it doesn't happen for their clients. 12 MR. NADON: What most of us do, that's 13 called a notice of intent to foreclose. And then in 14 addition to that, at least on our side in our 15 servicing group, we sort of pair up a loss 16 mitigation person with the people that are doing the 17 foreclosures. So at the same day that action 18 starts, the loss mitigation person is working 19 directly with the consumer, because we don't want it 20 to go down that process. 21 So they're trying to help them find 22 solutions, help them find longer-term ways that they 23 can either get themselves righted financially, 24 because oftentimes just the reason they came to a 0155 1 subprime lender in the first place is some life 2 event happened to them, and that may happen again 3 after we made the loan to them. So we try to work 4 with those and find other ways, other solutions to 5 their problems, so we don't have to get to the bad 6 part. 7 MR. MARKS: There should be a way, to make 8 the distinction, there should be, at the actual 9 foreclosure, there certainly should be something 10 that's sent out that you can go to see these 11 counseling agencies for assistance. 12 I think it's clear that -- I mean, we do 13 hundreds of closings every month, and as much as we 14 want to spend the hours, two or three hours at the 15 closing to go through every document, the reality is 16 that, as clear as the disclosure might be or the 17 document might be, the person is excited about 18 buying the house, and they are going to take all 19 those documents, they're going to put them hopefully 20 in a safe place. And if any issue comes up, it is 21 probably a few years down the road, and no one, no 22 matter how well schooled you are or whatever, is 23 going to remember those documents. 24 Certainly to notify people when there is an 0156 1 issue out there at the time the issue comes up of 2 I'm at risk of losing my house, there should be some 3 kind of way -- "Here's a foreclosure notice, but you 4 can go to see these agencies who can help you," and 5 then the Federal Reserve giving incentives to the 6 lenders to do workouts. 7 So it says that, you know, there is an 8 encouragement to say how do we prevent this person 9 from getting too far into it, because by the time 10 that -- the day you send it to the foreclosure 11 attorney, you've incurred over $1,000 of the 12 attorney's fees just on the face of that, to do 13 that. 14 So you want to prevent that, if the Federal 15 Reserve had stuff in there that would say, "Here is 16 an incentive and encouragement to work with people 17 to prevent it to be referred to foreclosure." 18 MS. RENUART: If I could sort of perhaps 19 help clarify the discussion about what's the 20 difference -- what do the states do with the notice 21 of intent to foreclose, and what does the industry 22 do, et cetera, and how the state laws might differ 23 on foreclosure, our organization writes several 24 legal treatises, and one of them compiles a list of 0157 1 all the state foreclosure and right to redeem 2 statutes. 3 So based on my knowledge of that, and my 4 knowledge of having been a consumer legal services 5 lawyer myself for many years, I think the difference 6 is, in standardized mortgage documents, such as 7 Freddie Mac's, Fannie Mae's, the FHA and the VA, 8 there is a standard clause that requires a notice to 9 be sent out of an intent to accelerate, and it tells 10 you how many days you have to pay up your arrearage 11 so that acceleration and further action doesn't 12 happen. 13 Quite separate from that, though, many 14 states don't have any additional legal requirements. 15 That's just by virtue of the mortgage, what I just 16 described. But legally many states don't require 17 any notice of intent to foreclose, don't require any 18 actual notice of a sale date, they simply require 19 publication in a newspaper. 20 More than 50 percent of all the states in 21 this country allow nonjudicial foreclosure, which is 22 a very quick and easy process, and I'm sure many 23 lenders appreciate that. But on the other hand, the 24 consumers find it more beneficial to have judicial 0158 1 foreclosure, because then they have an opportunity 2 to raise their claims and defenses. 3 So what we are recommending in our written 4 testimony is that the Board state that it would be 5 an unfair and deceptive trade practice in a high- 6 cost loan to proceed nonjudicially to foreclose, and 7 that because every state does have a judicial 8 foreclosure procedure, that that's the only way to 9 allow a consumer to have the real ability, a true 10 real ability to raise defenses, because otherwise, 11 in a nontraditional foreclosure state, the only way 12 you can raise anything to stop a foreclosure is to 13 find an attorney who is willing to do the extreme 14 amount of work it takes to get into court, get an 15 injunction, file all the papers to do that. 16 Most people do not have access to lawyers 17 on that basis. Even if there are Legal Services 18 lawyers in their area, many of them don't handle 19 mortgage foreclosure transactions. So there is very 20 limited and spotty representation. 21 MR. MICHAELS: We touched on counseling for 22 a second, and notice of available counseling at the 23 operative time when there is a foreclosure 24 impending. I mean, we'll talk this afternoon a 0159 1 little bit about who pays for the counseling and how 2 to ensure that counselors are qualified. Is there 3 also a need for better information about the 4 availability of credit counseling at an earlier time 5 when the high-cost loan is first made? 6 MR. MARKS: Yes. I mean, certainly 7 counseling is important, but, you know, we've talked 8 about this subprime, focusing on the subprime and 9 the predatory lending practices. The vast majority 10 of those loans are made by mortgage brokers out 11 there, independent mortgage brokers that the lenders 12 are buying from. 13 They're not in the business -- and that 14 means that these mortgage brokers, they deal with 15 real estate agents at the purchase and sale. The 16 deal is already done. The deal is already done. 17 There is no counseling that's done out there for 99 18 percent of all the mortgages that are done, all the 19 subprime mortgages that are done in this country. 20 So we've got to get past this issue of, you 21 know, we're looking at the very small percentage of 22 loans that could involve counseling, because again 23 you get back to the economics. 24 The economics are, someone goes out there. 0160 1 They find a real estate broker who gets them a 2 house. The real estate broker does a quick 3 qualification and says, "Yes, I think there is a 4 mortgage broker out there that I can do a deal 5 with." There is a purchase and sale on the house. 6 There is no counseling that goes on there. 7 They will refer people to the mortgage broker. The 8 mortgage broker will find the lender out there who 9 will table fund the mortgage, and the deal is done. 10 There is not -- if we focus on counseling, 11 come on, that's not the reality of the industry. 12 We're looking at that 1 percent that could be 13 affected versus getting to the economics. The real 14 estate agent wants to get the deal done, the 15 mortgage broker wants to get as much fees as the 16 mortgage broker can get, and the lender wants to get 17 the highest rate. That's the bottom line. 18 MODERATOR SMITH: Ms. Schwartz. 19 MS. SCHWARTZ: Speaking about counseling, 20 something kind of interesting that we introduced to 21 the market this year and are excited about is a new 22 product called Credit Works. 23 We're funding an initiative in 19 cities 24 where those borrowers who appear to be B and C 0161 1 borrowers on paper, as would be defined by the 2 subprime lenders, we're having them go through an 3 18-month intensive counseling process, restructuring 4 of debt, and we're working with counseling, as well 5 as a couple large lenders are providing market rate 6 loans as market prices that are similar to prime 7 rate mortgages. But on paper those people would 8 definitely go to a subprime lender at much, much 9 higher rates and points, as is indicated in the 10 subprime segment. 11 It's new to our company because we're 12 betting on the counseling, because for every other 13 reason, if they came through our models with those 14 credit parameters and characteristics, they would be 15 qualified much more in the subprime segment than the 16 typical loans we buy. 17 This is kind of a new effort for us to 18 continue to expand the prime effort to bring more 19 people into better rate mortgages, and that's 20 something that we've introduced this year, as well 21 as the counseling. 22 MR. MARKS: There is no question that 23 counseling works. I mean, just -- 24 MS. SCHWARTZ: We hope so. We're looking 0162 1 forward to the results. 2 MR. MARKS: -- just the NACA program shows 3 that it works. I mean, you know, yes, we do -- we 4 will counsel people on whether they are NACA 5 qualified, meaning that they're credit qualified, 6 asset qualified, income qualified. And then once 7 they are qualified, then you determine how much they 8 can afford. 9 There is no question that it works, but we 10 just can't get the focus away from the economics of 11 the vast majority of the industry and that there is 12 no economic interest to educate the consumer, 13 because if Option One was to educate the consumer or 14 Provident was to educate the consumer, what you are 15 educating the consumer is what your options are out 16 there, and the options might be a lower cost loan, 17 and it might be another lender out there. So, you 18 know, that's the truth -- 19 MS. SCHWARTZ: These loans were in our 20 pipeline. We couldn't buy them. What I'm trying to 21 make a statement here on, these loans would 22 definitely go to subprime lenders, but because of 23 the counseling program for 18 months that they have 24 to finish, in conjunction with our lenders and the 0163 1 credit counseling agencies, we're making a market we 2 otherwise would be uncomfortable making because of 3 the credit characteristics. I'm just trying to 4 clarify that. 5 MR. MARKS: Well, let me ask you, do the 6 lenders in Freddie Mac look at the credit scores? 7 Do you do a lot of your lending based on the credit 8 scores? 9 MS. SCHWARTZ: There are numerous variables 10 that we base our lending criteria on. Credit scores 11 are one of them. 12 MODERATOR SMITH: How are you identifying 13 people for participation in your program? 14 MS. SCHWARTZ: We're working with the 19 15 cities in our Expanding Markets area in conjunction 16 with some of the largest lenders in the country that 17 are in those cities that will buy through at current 18 rates. So I should know, but I'm not in charge of 19 that program. 20 MODERATOR SMITH: And are they people who 21 consider themselves ready to go out and buy houses? 22 Are they willing to -- do you have any problem 23 keeping them in the program for 18 months? 24 MS. SCHWARTZ: There are 200,000 people in 0164 1 that pipeline who are undergoing significant 2 foreclosure -- they've been either foreclosed, in 3 bankruptcy, and/or already are possibly in the 4 subprime segment or maybe are just looking to buy a 5 house. There is already a pipeline we can tap to 6 bring people into a market rate, prime-oriented 7 rate, that otherwise we wouldn't make if they 8 weren't in this program, because they didn't come 9 through our normal programs. 10 MR. MARKS: And out of that 200,000, how 11 many have closed? 12 MS. SCHWARTZ: This is brand-new. But 13 there is a pipeline, and we're pretty excited about 14 this. We will track it. We'll let the world know 15 as soon as we know. 16 GOVERNOR GRAMLICH: I had a question about 17 it too. So how do you get people to wait 18 months 18 before they get their house? 19 MS. SCHWARTZ: Well, the ones that can't 20 wait -- since there is already a pipeline in there, 21 obviously the people who want cash today, what is 22 their other option? We have another product that is 23 a merit-rate step-down product that will compete 24 with the prepayment penalty mortgages in, let's say, 0165 1 the A- segment of the mortgage market. 2 We'll offer that at a higher rate, slightly 3 higher than our prime-oriented rates. But we'll 4 offer, after 24 months of current pay history, a 5 lower rate to that borrower, without having to get 6 flipped, refinanced, incur fees. That's through 7 market competition, that's what we're about. 8 GOVERNOR GRAMLICH: I see. So they get the 9 loan and they're in the counseling. 10 MS. SCHWARTZ: They don't have to be in 11 counseling to get that loan. If they need something 12 immediately, we have a product that we have at a 13 much lower rate environment than the typical 14 subprime segment that we offer to compete for 15 someone who needs cash today. That's out in the 16 market that we offer today. But if they go through 17 intensive counseling, they can get a lower rate. 18 MR. MARKS: What the difference between an 19 A and an A- loan? 20 MS. SCHWARTZ: Do you know the difference? 21 I don't know all the differences. 22 MR. MARKS: No, but I'm curious. 23 MS. SCHWARTZ: It is a nonstandard market 24 out there. 0166 1 MR. MARKS: Okay. But what's the 2 difference between an A and an A-, other than it's a 3 much higher interest rate? 4 MS. SCHWARTZ: There is a range of credit 5 out there in the segment of risk across the spectrum 6 from A- to D, but I can assure you that most lenders 7 out there don't have the same programs that say A- 8 is equal to a B or a C; they all differ. That's why 9 we're being pretty cautious about how we buy all of 10 these loans. 11 MR. MARKS: It would be interesting to know 12 the difference between -- because you are charging 13 200 basis points more for an A versus an A-, and 14 there is no discernible difference between the two. 15 So I would love to know what the answer to that is. 16 MR. GRAVINO: There are discernible 17 differences. It's a lot of issues. You have to 18 look at -- you have to kind of look at the risk of 19 the deal. The difference between an A, which you 20 are talking about as a prime -- 21 MR. MARKS: Yes. 22 MR. GRAVINO: -- and a subprime -- 23 MR. MARKS: Something that Freddie or 24 Fannie would buy and then provide them the 0167 1 conventional rating. 2 MR. GRAVINO: You're normally looking at 3 someone who has been late on their mortgage in the 4 last 12 to 24 months probably twice. 5 MR. MARKS: Two 30s. 6 MR. GRAVINO: Two 30s. You're probably 7 looking at consumer debt that is past due, probably 8 looking at a bankruptcy in the past 24 months. 9 MR. MARKS: For an A-? Come on, that's not 10 right. 11 MR. GRAVINO: I'm sorry, but -- 12 MODERATOR SMITH: You asked -- 13 MR. MARKS: I want you to be truthful. 14 MR. MICHAELS: I'd like to shift this a 15 little bit, because we started out talking about 16 disclosures generally. 17 MR. MARKS: A- is not bankruptcy. 18 MR. MICHAELS: We started talking about 19 disclosures generally, and one of the assumptions 20 was that consumers get an awful lot of information 21 at closing, perhaps more information at closing than 22 they can absorb, but there are a couple of these 23 disclosure options here that would not necessarily 24 be at closing. Obviously foreclosure is one of 0168 1 them. 2 The other two that I would like to focus on 3 that might not be at closing would be a disclosure 4 dealing with credit insurance, which could come 5 after closing in connection with the consumer's 6 right to rethink the decision to buy credit 7 insurance and perhaps cancel and get a rebate. And 8 the other disclosure that might not come at closing 9 would be one pertaining to balloon notes, which 10 could come as early as application. 11 So let's focus on credit insurance, for 12 example. Would it make sense to give consumers 13 information about the purchase of credit insurance 14 that they may not have absorbed at closing? It may 15 have been there, but they may not have had an 16 opportunity to focus on it. 17 Would there be some consumer protection in 18 giving them a post-closing notice that says, "You 19 may not have focused on it. You just bought credit 20 insurance. This is how much insurance you just 21 bought. And in your state you may have a right to 22 cancel this and get this money refunded to you"? 23 Does that make sense? 24 MS. HURT: Can I just add to that, do you 0169 1 think something along those lines would help the 2 packing issue, that is, consumers not knowing that 3 they signed up for credit insurance? Or is the 4 problem that, whether they knew or not, they felt 5 that they were coerced into taking it, that they 6 wouldn't get the credit? 7 Maybe I'm not being clear on that, but, 8 essentially, do you think that that would help the 9 packing at all, where consumers don't know they have 10 the insurance, so as Jim was saying, if they get a 11 post-closing notice, then they might, you know, 12 reconsider? 13 MODERATOR SMITH: Elizabeth, who should 14 have been recognized a little bit go. 15 MS. RENUART: That's okay. I've been 16 talking a lot. In response to your specific 17 question, I think it can have a positive impact on 18 the packing, but only if not only what is rebated is 19 the unearned insurance premium using the actuarial 20 method rather than the Rule of 78s, because that 21 unfairly benefits the insurer or creditor, whoever 22 is retaining the premium, but also the interest that 23 would be earned over the life of the loan on the 24 increase in the principal amount because that 0170 1 insurance premium is being financed. 2 So, if you just simply rebate the insurance 3 premium itself, the amount that it originally cost 4 is still part of the principal amount and is still 5 going to generate interest at, since we're talking 6 about high-rate loans, very expensive interest 7 rates, which could be several thousands of dollars 8 over the life of the loan. 9 One example we've included in our written 10 testimony shows a credit insurance premium of 11 $11,000, and so over 30 years at 17, 18 percent, 12 whatever the rate is going to be, it's quite a bit 13 of money. So the packing, I think there is some 14 disincentive by the rebate and the notice that might 15 encourage some people. 16 MR. MICHAELS: I don't want to sound like 17 an economist here, because I'm clearly not, but the 18 other side of the argument is if they get the 19 $11,000 rebate, then they would reinvest the $11,000 20 or pay down the loan $11,000. 21 MS. RENUART: Well, some creditors might 22 say, "We're going to apply it against the 23 principal," and that might -- and that could 24 alleviate the problem of the interest accumulating. 0171 1 But many people are just going to, say, quite 2 clearly not really understand what the amount of the 3 check was, whether it's the right amount or really 4 know what it's about, and cash the check. 5 So it doesn't prohibit the packing in the 6 first instance, which not only generates the higher 7 principal, but generates higher points on that 8 higher principal, higher points and amounts, I mean, 9 and also the higher interest that will be collected 10 over the life of the loan. So I think it will have 11 some impact, but not significant. 12 MR. MICHAELS: You might want to treat the 13 points issue different than the interest on the 14 financing issue. 15 MS. RENUART: I'm sorry? 16 MR. MICHAELS: You might be able to treat 17 the points issue differently than the issue of 18 paying interest on what you finance. 19 MS. RENUART: Well, I just think our 20 earlier discussion about credit insurance will have 21 the effect that you are asking about much stronger 22 than this notice about the potential rebate, and 23 that is just simply include it in the points and 24 fees or abolish it altogether in high-rate loans. 0172 1 MODERATOR SMITH: Mr. Nadon, Mr. Miselman, 2 and then Mr. Golann. 3 MR. NADON: Just a comment, because we 4 don't sell the insurance, so I'm giving you just a 5 little bit of experience. I started out in the 6 finance company business about 20-some years ago, 7 and I remember firing somebody for doing this, 8 because finance companies, I think, still to this 9 day sell a lot of this kind of insurance stuff. 10 I found someone that was intentionally 11 putting insurance products into the loan, so that 12 immediately after funding, the borrower could 13 cancel, so that he could give additional cash to the 14 borrower. Our loan limits said he could only borrow 15 $25,000. By adding insurance on top, he got the 16 borrower $30,000, and the borrower wouldn't take the 17 deal unless he got $30,000. 18 So he said, "Let me just put the insurance 19 on the deal, and then immediately send me a letter, 20 and I will send you a check back for the other 5 21 grand, so now you have 30." 22 So I would encourage you, and that was -- 23 you don't like to terminate people, but that was a 24 good termination, because I didn't like that 0173 1 practice. 2 So I would encourage you, if you're going 3 to do something on this kind of insurance, if a 4 rebate is going to be done, I think it should only 5 go onto the principal balance, not back into the 6 borrower's hands, because they could also figure 7 that out, and that's just a way to kind of get 8 around the system. 9 That would alleviate certainly the 10 additional interest that gets charged on those kinds 11 of insurance premiums, because some of the premiums 12 I've heard are high, real high. So I would just 13 encourage you to do that; otherwise, you could have 14 all kinds of operational problems within the lenders 15 themselves. 16 MR. MISELMAN: It seems to me that as 17 brokers we don't generally sell, it is usually a 18 lender thing, so I don't really cross it day to day. 19 But it seems, from everything I've heard, the best 20 way to do it would be to do it prior to the closing, 21 involve the issues of perhaps paying down. 22 If somebody did have a $5,000 premium and 23 financed it, and then they wanted to cancel it, if 24 you put it towards the principal, their mortgage 0174 1 payment isn't going to change, unless they happen to 2 have a short-term adjustable loan, so they're still 3 going to be stuck with the payments month to month. 4 I think the real way to do it is to make 5 sure they understand what they're getting into up 6 front, and whatever kind of disclosure is done, 7 people are doing it without the borrower's 8 knowledge, and that's obviously a problem. 9 I'm certain a signature on a form should 10 certainly be encouraged. The ability that they can 11 shop for this particular insurance with outside 12 folks probably would be a good thing. And then in 13 the case of a refinance or a second mortgage have a 14 recision period, where if they want to take any and 15 all of that paperwork back to their own personal 16 attorney, their significant other or a relative, 17 they have a chance to cancel the whole shooting 18 match and start all over again. 19 So prior to is, in my opinion, the absolute 20 best way to alleviate any problems. 21 MR. GOLANN: Another aspect of what I do, 22 I'm a director of an insurance company that does not 23 lend to consumers. In fact, I'm the Vice-Chairman 24 of the board, and I've just sat through two days of 0175 1 annual meetings talking about things like loss 2 ratios. And I have to tell you that if I had a 3 product that had the kind of loss ratios that this 4 does, 25 percent, maybe, 20 percent, I would drool 5 all over it, and I suspect my marketing people would 6 too. 7 I suspect that there would be a significant 8 temptation, if I had to give a notice, to try to 9 give a notice in a way that produced the fewest 10 cancellations possible. You are relying more than 11 usual on the efficacy of disclosure and on the good 12 faith of the people that will implement this 13 disclosure. I think it's quite a temptation. 14 MR. MARKS: Just by the fact that the 15 commissions that are paid to the attorneys when they 16 get people to buy credit life insurance or any other 17 credit insurance are so astronomical, the profit 18 margins in that are just tremendous. 19 So, you know, without hearing all of, you 20 know, just the loss ratios and all of that, they are 21 very, very low, it's really that you've got the 22 closing attorneys and the other people in there just 23 really encouraging people and pressuring them to 24 take this, because it's extraordinarily profitable. 0176 1 We're seeing closing attorneys getting 60 to 70 2 percent of the premiums on it, just because it's 3 such a great deal for the companies that do it. 4 So it's something that should not be 5 allowed to be financed, because it's not in the best 6 interests, in virtually every circumstance, of the 7 borrowers. And just these two lenders here, they 8 said that they don't do it, and they're in the 9 subprime lending market, and that's being kind. 10 That's your term. We call it predatory. 11 MODERATOR SMITH: Jim, did you have other 12 topics? 13 MR. MICHAELS: Yes. We're coming close to 14 the time that we need to break for lunch. I wanted 15 to get a couple questions in about disclosures, and 16 particularly the unique disclosures that come under 17 HOEPA. 18 Under HOEPA you get a disclosure three days 19 before closing, which is a fairly abbreviated 20 disclosure compared to what consumers are going to 21 see in closing. So one danger is, if you add 22 additional disclosures, that it will no longer be 23 abbreviated and simple. 24 But the question is, can that disclosure be 0177 1 improved? Is the consumer getting the right kind of 2 information three days before closing? And I give 3 you one of the examples: A consumer will get on 4 that disclosure the APR and will also get the 5 monthly payment amount. 6 What we've heard people say is they can 7 sell a loan with that monthly payment amount because 8 that's a monthly payment amount that's lower than 9 what the consumer is currently paying on their 10 mortgage. What they don't know is that it could 11 still be lower yet, because they don't realize that 12 the monthly payment on that disclosure is one that 13 relates to a total loan amount that is larger than 14 their loan request. It includes a lot of financed 15 fees. 16 So it might help to have the consumer look 17 at that monthly payment in relationship to the 18 amount of the total loan, but that's not a 19 disclosure they get now. 20 The other thing that might go on that early 21 disclosure is the monthly income that the creditor 22 has used in underwriting that loan and determining 23 that that's an appropriate monthly payment that the 24 consumer can afford. There is an opportunity for a 0178 1 consumer who has given their monthly income to a 2 broker, for example, to have the broker pad that 3 income so that the creditor can underwrite the loan. 4 Having that disclosure show the income used by the 5 creditor would hopefully deter some of that. 6 So with those two examples, can the HOEPA 7 disclosure three days before closing be improved? 8 That's the question. 9 MS. RENUART: Well, into a vacuum I will 10 march, a vacuum of silence, that is, not a vacuum of 11 will. I think that without destroying the brevity 12 and simplicity of the current notice, you could add, 13 I think, the things you're alluding to quite 14 quickly. 15 And that would be, what I think would be 16 important is the total amount of charges, prepaid 17 finance charges you are paying on the loan, so that 18 will list out the prepaids; the total amount of 19 other closing costs that are being charged, that 20 will list those out; and the total loan amount. 21 This gets to what the allegations in the 22 First Alliance Mortgage case are about, in the 23 Minnesota complaint filed by the Attorney General, 24 which is that First Alliance sells people on the 0179 1 amount financed, they focus on that in their whole 2 sales pitch to the customer, that this is the amount 3 you're borrowing, which is the amount financed, 4 rather than the total loan amount. 5 So people then don't have a way, from what 6 they hear, leading up to the signing of the papers, 7 they don't have a way to see that what they think 8 they're borrowing is really much smaller than what 9 they actually are borrowing because of all the 10 points, fees and closing costs that are stacked on 11 top. 12 So just the addition of, I think, those 13 three numbers. I think there was some suggestion of 14 adding the interest rate. I don't think you should 15 ever add the interest rate in conjunction with the 16 APR, because it is too confusing, because then 17 lenders will say, "Look at the interest rate. The 18 government just confuses you by giving you the APR. 19 Ignore the APR, ignore the man behind the curtain, 20 just look at the interest rate." And of course we 21 know the interest rate is not the true cost of the 22 credit. 23 MS. KOGUT: It is true, in the First 24 Alliance Mortgage Company case, one of the things we 0180 1 hear from consumers is that they had no idea how 2 much money they had borrowed. I mean, imagine that, 3 walking away from the closing and not knowing 4 actually how much money you borrowed. 5 But I'm reluctant to endorse any changes 6 that would just amount to more disclosures. These 7 consumers were treated to such an intense oral 8 deceptive sales technique that I think they are 9 really in a position to disregard anything they get 10 in writing. 11 I mean, I think it certainly would be 12 helpful if they got a piece of paper a few days 13 before the closing saying, "This is how much money 14 you're going to borrow," but it is still -- I think 15 still for many of these consumers, they might not 16 have even woken up to that or even read it, they 17 were so in tune with what the loan originator was 18 saying to them, which was so much along the lines 19 of, you know, "No need to read these pieces of paper 20 here. These are just kind of things the lawyers 21 make us give you." 22 MR. MICHAELS: What about the consumer's 23 monthly income; would that help? 24 MS. RENUART: Stating what -- 0181 1 MR. MICHAELS: Stating the monthly income 2 that was used by the creditor in processing. 3 MS. RENUART: I don't think that helps 4 significantly, because many of the brokers, in 5 particular, who are working with -- again, that's 60 6 percent of the market, and probably a higher 7 percentage of predatory loans that are being made by 8 brokers -- they say to our clients, you know, "What 9 I put down here, you know, don't worry about it. 10 I'm just putting down what you need to have on the 11 application." 12 And if the consumer ever questions, "Well, 13 that's not really my true income, that's too high," 14 they say, "Oh, we have to put that down. It doesn't 15 mean anything," again, ignore the man behind the 16 curtain kind of discussion. 17 So, again, the more that happens, and we 18 have heard this from many clients, the less likely 19 it will be that, when they see that wrong figure on 20 the HOEPA notice, they will be alarmed. 21 MR. MISELMAN: When it comes time for 22 closing, a lot of lenders now actually have an 23 application, a typed application based on what the 24 mortgage broker submitted to them, so that if there 0182 1 is a discrepancy, the borrower can catch it at the 2 closing. 3 So if they originally said $3,000 a month 4 income, when they actually get to the closing, one 5 of the forms is the actual application that was 6 transferred from the broker to the lender, to the 7 wholesaler. And at that point, you know, they can 8 review the application to see if the facts that they 9 originally gave to the broker are what ultimately 10 made it to the lender. So that's kind of being done 11 a lot in the marketplace right now. 12 There are a lot of other loans as well now 13 that have come up. There is the no-income loan, 14 which is what we've kind of -- no income 15 verification, where people can state an income. 16 They have come out with no-ratio loans, which is the 17 fact that you just state your job, you state your 18 job title, and as Steve was saying, an underwriter 19 will underwrite just to the reasonableness -- you 20 know, if someone works at McDonald's and they 21 state -- and they don't state, but they're going for 22 a $250,000 loan, you wonder how you could qualify 23 that unless they happen to own the franchise. 24 So they're starting to address all these 0183 1 issues, where you can't fraudulently put down 2 different -- you know, incorrect income, and that's 3 what it really would come down to. 4 MS. HURT: May I ask, in the Massachusetts 5 proposal, you've added some enhancement, you've done 6 some enhancement about HOEPA disclosures by, for 7 example, requiring a disclosure that the consumer be 8 told that there may be a less costly alternative and 9 some other things. Could you share with us your 10 thinking on adding that disclosure versus some other 11 disclosure. 12 MR. CURRY: I think it's the same thought 13 process when you're probably getting any regulation 14 with a disclosure. Here, because of the nature of 15 it, you're already in the high-rate loan provisions. 16 You want to use the disclosures as last chances to 17 tell people to get out of the deal or to raise the 18 issue that it's financially questionable or has 19 serious implications. That's what we are trying to 20 do. 21 It's the same thing with the credit 22 products. We have a disclosure for that, basically 23 requiring acknowledgment that they know -- to sort 24 of reinforce the message that "You don't have to buy 0184 1 this, and it's not necessarily in your best 2 interest. Let us know if this was presented to 3 you." That's really the rationale. 4 In my career as a bank regulator, I do fear 5 the accreted weight of all these disclosures, but 6 you have to make a decision, on a particular subject 7 matter, is it worth throwing an extra piece of paper 8 on it. In this type of transaction, I think the 9 balance favors disclosure. It's clear, so you can 10 see the financial and other implications of the 11 transaction ahead of time. 12 MR. GOLANN: Many of the disclosures that 13 appear in the Massachusetts real estate transaction 14 are proposed by the Legislature through somebody's 15 perhaps misguided hope to solve some particular 16 problem, and they're not the responsibility of the 17 Banking Commissioner. 18 I will just say that the most useful thing 19 that the Fed can do, and I'm not suggesting that 20 it's on your plate, would be to restrict the number 21 of state disclosures, so that at least there would 22 be a limited number and they would be accurate. 23 I'll say the other thing -- 24 MR. CURRY: That's heresy as a former 0185 1 regulator. 2 MR. GOLANN: I know that. I remember from 3 my state enforcement that the worst cases to 4 litigate were the ones that had wonderful paper 5 disclosures that they could point to that you knew 6 that the consumers had never really read or been 7 given a chance to digest. 8 MS. KOGUT: All of these problem mortgage 9 lenders have the cleanest files. The ones with the 10 highest costs and the biggest areas of deception, 11 the files could not be cleaner. That's always a 12 problem. 13 MODERATOR SMITH: Mr. Gravino. 14 MR. GRAVINO: We have a practice that has 15 been very effective for us in terms of income 16 disclosure, and that is we have a fraud unit. And 17 as part of our closing process, we give a customer a 18 notice that says, "We have a fraud unit. We are a 19 federally insured institution. Any information on 20 your application had better be accurate," or words 21 to that effect. And that has surfaced quite a bit 22 of the problem, and we're -- well, the form is 23 working for us, but it has real meat behind it. 24 MODERATOR SMITH: Thank you. Any other 0186 1 issues? Any other issues that we -- yes. 2 MS. RENUART: I'm sorry, I just wanted to 3 add about the notice issue that we think the three- 4 day advanced notice, because it's so unusual in 5 mortgage transactions -- you don't get that many 6 things three days in advance; the big stack is when 7 you get the closing -- so this is your big warning, 8 your advanced warning system is really what the 9 HOEPA notice is about. 10 And I think if the Board tied or sort of 11 thought of that mandatory counseling preconsummation 12 in conjunction with the three-day notice, it could 13 work very well, because if the homeowner then took 14 the three-day notice to their mandatory counseling 15 session prior to entering into it, the counselor, 16 properly trained, properly funded, whatever, and 17 those are all big ifs, if that system was in place, 18 that would be an additional person who would look at 19 this early warning system notice and say, "Oh, wait 20 a minute. What are you getting yourself into? 21 Let's just figure this out and see whether this 22 really makes sense." 23 So the two together, I think, should work 24 very well. But the National Consumer Law Center 0187 1 really supports this three-day advanced notice as a 2 warning system. 3 MR. GOLANN: I would second that. 4 MODERATOR SMITH: Any other issues that you 5 would like to bring up before we adjourn? 6 MS. RENUART: I'm sorry to keep going. I 7 wanted to address one thing that was mentioned by 8 Dennis at the end, who is not here right now, when 9 he made his opening remarks, and that is that 10 perhaps we should have more enforcement of existing 11 laws. 12 And that ties to another area which the 13 Board did not specifically ask comment about, but 14 what has been mentioned by Ms. Kogut in the FAMCO 15 loan file, and that is mandatory arbitration 16 clauses. 17 So that no matter how much money we can 18 throw at the FTC or at the state attorney generals' 19 offices or at the private attorneys or the Legal 20 Services offices around the country to enforce these 21 actions through private attorney general 22 enforcements -- which is what the statute Section 23 1640 in Truth in Lending is all about, and Congress 24 envisioned private attorney general enforcement as 0188 1 the main way to effectuate the public policies 2 behind the Truth in Lending Act and HOEPA -- if 3 everything is shunted off into mandatory 4 arbitration, where as we know there are no national 5 set rules, it depends on what arbitration company 6 handles it, and there are the big three, and then 7 there are many others out there, there is no 8 consistent way of knowing whether a consumer's 9 rights can actually be vindicated in that process. 10 There are high filing costs, there are high 11 arbitration costs, there is no rule of law 12 necessarily applied. The arbitrators don't have to 13 be attorneys, necessarily. It's sort of the Wild 14 West, once you're thrown into mandatory arbitration. 15 That's something that the Board, I think, 16 should give serious consideration to, because all of 17 what else we might say or all of what else you might 18 do might not amount to a hill of beans if everything 19 is thrown into this Wild West way of enforcing Truth 20 in Lending and HOEPA, through mandatory arbitration 21 clauses. 22 And those are appearing everywhere and 23 creeping ever more greatly into mortgage lending. 24 They're very widely used in credit card 0189 1 transactions, automobile financing transactions, 2 certainly mobile home purchases and others, and they 3 are seen widely now in the mortgage lending side. 4 Finally, we haven't talked about open-ended 5 credit, and in our written comments, we talk -- we 6 specifically ask the Board to consider asking 7 Congress to include open-ended. 8 We have examples in our written testimony 9 of loan-splitting transactions where two very 10 major -- the biggest finance companies will make a 11 closed-end mortgage transaction on one day and, on 12 the same day or a few days after, make a much 13 smaller open-ended transaction, sometimes to fund 14 the points on the closed-end transaction. And 15 surprise, surprise, the open-ended transaction is 22 16 percent or higher APR, which would be a HOEPA loan 17 but for the fact that it's open-ended. Thank you. 18 MS. HURT: I'm sorry, I just want to follow 19 up on that. In the original HOEPA hearings we had, 20 and also in the legislative history, there was the 21 issue of whether HOEPA should apply to open-ended 22 credit. And periodically, and maybe you will have a 23 few examples, I would think, or just from my 24 experience, we've heard a lot of anecdotal evidence 0190 1 about predatory or stories of predatory lending. It 2 doesn't often involve open-ended credit. 3 MS. RENUART: Well, I can only tell you 4 that Beneficial Finance and Household Finance are 5 doing this, and they are extremely large finance 6 companies. So if they are making open-ended loans 7 that may actually be spurious open-ended loans, 8 there may be a legal claim about that. But that 9 aside, I don't know how else to -- 10 MS. HURT: I guess I would say that if you 11 have or you know others that have examples of 12 that -- 13 MS. RENUART: Yes. 14 MS. HURT: -- because to my understanding, 15 based on the anecdotal evidence that we've heard, 16 and we've heard through the HUD and Treasury 17 hearings and in other instances, it very rarely, if 18 ever, involved open-ended credit. So I think if you 19 are suggesting that it should cover open-ended 20 credit, then anecdotal evidence of that, if you have 21 it, or if you know others that have it, it would be 22 beneficial to us. 23 MS. RENUART: Thank you. 24 MODERATOR SMITH: Thank you very much. We 0191 1 thank the panel for being here this morning and 2 sharing your views with us. We hope that, if your 3 schedule permits, you're able to stay for the 4 remainder of the hearing. And a reminder about your 5 written statements, if you would give them to one of 6 us or to Kyung who is in the audience. 7 So with that, we are adjourned until 1:30. 8 We will reconvene promptly. A reminder, if you 9 wanted to appear this afternoon, to sign up at the 10 desk. So thank you very much. 11 (Luncheon recess) 12 13 14 15 16 17 18 19 20 21 22 23 24 0192 1 AFTERNOON SESSION 2 MODERATOR SMITH: I believe we're ready to 3 start, and so I will. I'm Dolores Smith. I'm the 4 Division Director for Consumer and Community Affairs 5 at the Federal Reserve Board, and I'll be moderating 6 for the hearing this afternoon. 7 For those of you who have just joined us, 8 we welcome you, especially the panelists, although I 9 was glad to see some of you here this morning. We 10 did hear some interesting things this morning. I 11 think they will be useful to us in our 12 deliberations, and we look forward to receiving your 13 views this afternoon. 14 Let me start by introducing the Board 15 Panel, and I will -- this morning Ned Gramlich, who 16 is a member of the Board and the Chairman of our 17 Oversight Committee for Consumer and Community 18 Affairs, was able to join us on the Panel. He has 19 left us for the afternoon, but I just wanted to let 20 you know that we did have him in attendance here. 21 And so on the panel this afternoon, I will 22 start at my extreme right with Richard Walker, who 23 is Vice-President here at the Federal Reserve Bank 24 of Boston. Then Sandy Braunstein from the Board, 0193 1 who is Assistant Director in charge of Community 2 Affairs. Then we have Jim Michaels, Managing 3 Counsel for Regulations, and Adrienne Hurt, 4 Assistant Director for the Regulations Program. 5 Adrienne and Jim are the ones who are most 6 closely associated with dealing with matters having 7 to do with the Home Ownership Equity Protection Act 8 and in developing whatever regulations will come out 9 of these hearings. So that's kind of who we are. 10 We have some rules of procedure for this 11 afternoon, as we did this morning. First of all, 12 our invited panelists who have joined us here will 13 have three minutes each to give opening statements 14 before we get into the more general discussion of 15 the issue for the afternoon, which has to do with 16 consumer outreach and consumer education. 17 And we have, in the first row in the 18 audience, timekeepers. They will be lifting up a 19 card that says "One Minute Remaining," and then 20 "Please finish" when you are approaching the three- 21 minute mark. There is also, I think, a little 22 musical beep that goes off when the three minutes 23 are up, which you may or may not hear. You may 24 confuse it with some of the cell phones that keep 0194 1 going off. 2 But aside from that, I said this morning, 3 although I didn't get around to using it, that if 4 perchance you are looking in this direction instead 5 of toward the timekeepers, that I would sort of give 6 you the time's up signal. But I think we'll do just 7 fine. 8 Then, at the conclusion of the opening 9 statements, then we will get into a more general 10 discussion where we are hopeful that, as in the case 11 this morning, it will be more of a round-table 12 discussion than just witnesses appearing before this 13 Panel. So that ought to be interesting. 14 So for the afternoon session, then, we will 15 start with the opening statements, and then we'll 16 go. 17 MS. MOSELEY: I want to thank the Board for 18 having us here. 19 MODERATOR SMITH: Would you state your 20 name. 21 MS. MOSELEY: Norma Moseley from the 22 Ecumenical Social Action Committee in Boston. I've 23 been working as a housing advocate for about 34 24 years, so I'm not the new kid on the block. And I 0195 1 have been watching the cycles of predatory lending 2 in the '80s and early '90s and now starting all over 3 again. 4 I'd like to make one comment that, based on 5 this morning's testimony, I heard from the lenders 6 in that group that there are very small percentage 7 of predatory lenders out there and the rest of the 8 subprime lenders are good guys. 9 Well, for a small number, they're having an 10 enormous impact. I think part of this is because of 11 the massive advertising that they are able to do 12 over television, mail solicitation, door-to-door 13 solicitation and phone solicitation. So, for a 14 small group, they're spending a lot of money, so 15 there must be some money in it. So when you say 16 there are only a small group of predatory lenders, 17 don't let that deceive you into thinking that there 18 isn't a whole lot of predatory lending going on out 19 there. 20 The other thing I want to say right at the 21 beginning is that this is the third panel I've been 22 on in three months dealing with predatory lending: 23 The FDIC, the National Consumer Law Center and the 24 Federal Reserve. And it seems to me that after this 0196 1 meeting the fact-finding should be complete, and 2 it's about time to get down to action. And action 3 isn't more disclosures, I can tell you that. Our 4 families don't even get through the disclosures that 5 they're given at the closing. 6 I'd like to talk with people about forming 7 some subcommittees or task forces and dealing with 8 it on parallel lines and levels as to how we can 9 come about getting some resolution to this problem, 10 not all regulation, not all disclosures, but what 11 can we do. There are a lot of people out there who 12 have a lot of good ideas, and I think that that 13 should be the next step. And I hope, at the 14 conclusion of this meeting, that there will be some 15 ongoing dialogue to really develop strategies and 16 not just talk about them any more. 17 MODERATOR SMITH: Thank you. 18 MS. COHEN: Hi. I'm Nadine Cohen from the 19 Lawyers Committee for Civil Rights Under Law of the 20 Boston Bar Association, and I hope I get Norma's 21 extra seconds there. So make sure. 22 Subprime loans grew in the greater Boston 23 area by 435 percent between 1994 and 1998, and 24 subprime lending in high minority areas in that same 0197 1 period grew by over 1000 percent. Subprime lending 2 in minority areas is three times greater than in the 3 general metropolitan area, and it's also greatest in 4 refinancing. 5 Now, while not all subprime loans are 6 predatory, it's clear we have a dual lending market 7 where low-income minority borrowers, who are most 8 vulnerable, are targeted by the unscrupulous 9 lenders, and they're targeted for high-interest, 10 high-fee loans that result in stripping homeowners 11 of color and communities of color of their wealth. 12 The word "sub "means below or beneath, and 13 we are accepting a dual market where people of color 14 are routinely given less favorable terms in loans 15 than whites, and often regardless of their ability 16 to pay back the loans or their credit history, and 17 they are thus relegated to a lower status. 18 Instead of helping people who have limited 19 incomes or past credit problems, by allowing the 20 predatory lenders, we are charging people of color 21 more than we charge wealthier white borrowers and 22 subjecting them to more onerous terms. The goal 23 should be to get all borrowers in the prime market 24 and get them loans at reasonable rates with 0198 1 reasonable terms. 2 While consumer education is extremely 3 important, the Federal Reserve Board must use its 4 regulatory and enforcement powers to stop the 5 unscrupulous lenders from taking advantage of 6 people. The Lawyers Committee would support 7 lowering the interest rate, prohibiting the 8 prepayment penalties, all the things that were 9 probably talked about this morning. 10 We also want to see expanded HMDA data 11 collection, and most importantly, I think in terms 12 of this panel, there has to be support for financing 13 of consumer counseling programs and consumer 14 education and enforcement programs by private fair 15 housing groups and by legal groups. One suggestion 16 for ensuring borrowers are protected is support 17 funding of attorneys or lay advocates who can 18 represent borrowers at the closings and review the 19 loan documents. We need to put low-income borrowers 20 in an equal position. 21 MODERATOR SMITH: Thank you very much. 22 MR. RAYMOND: Hi. I'm very pleased to be 23 here today. I thank very much the Board for 24 inviting me. I am Len Raymond. I'm the founder and 0199 1 director of Homeowner Options for Massachusetts 2 Elders. We are a 17-year-old statewide nonprofit 3 that works with older homeowners in terms of 4 sustaining their independence in their homes. 5 I would also like to, before I get into my 6 short substantive statements here, to congratulate, 7 because I think I have to do this, the Bank 8 Commissioner of Massachusetts and the Secretary of 9 Consumer Affairs, because I was very proud that they 10 were, quote-unquote, lowering the bar this morning 11 in terms of the announcement of their regulation, 12 which I think is much needed, especially in the area 13 of elder homeowners who are victims. 14 There is no question in my mind, and we can 15 certainly hopefully discuss this later on in more 16 detail, but those regulations will have a direct 17 impact in alleviating some of those problems or 18 difficulties. 19 I'm going to also quickly run through some 20 issues here which I would like to have us hopefully 21 elaborate and hopefully the audience will 22 participate in and the panelists later on as well. 23 But certainly, as has been noted already, 24 the availability of counseling I think is going to 0200 1 be a really critical issue in being able to make 2 things work for the clients that we're talking 3 about, the homeowners seeking the refinancing. 4 There are obviously questions of quality of that 5 counseling, its availability, the fiscal resources 6 to support it, and some sort of set of standards at 7 the same time. 8 I'm trying to reiterate Norma's point about 9 public awareness. Most people, I believe, by this 10 time have heard about the "Don't Borrow Trouble" 11 campaign, which was really started here in Boston, 12 and Norma had a lot to do with getting it off the 13 ground with MCBC and other folks. Now its 14 statewide. But that's an incredibly important 15 initiative there. Again, it shows the need for very 16 expensive, punchy, frequent and correctly timed 17 advertising on the other side of the issue here. 18 Education and outreach for the target 19 populations -- we're talking about on a long-term 20 basis -- is extremely important. Our program, the 21 HOME program, has been providing for some time now 22 and is continuing to refine it, but a program 23 designed specifically for senior homeowners that 24 deals with not only immediate financial questions, 0201 1 but also such important life issues as remainder 2 life planning and successful aging in place. 3 The last thing I would like to comment 4 about is that we really need to get out of the box, 5 I think. This is my fourth session, which 6 unfortunately I think -- America has this penchant 7 for 30-second attention spans. No offense to the 8 Board, but I think we really need to seize upon, as 9 I read here from the Board, the desire to have not 10 just the regulatory remedies discussed but to have 11 very much a broad spectrum of possibilities 12 discussed, and I hope we do that today. 13 MODERATOR SMITH: Thank you very much. Mr. 14 Callahan. 15 MR. CALLAHAN: Thank you. I thank you for 16 inviting us today. My name is Tom Callahan, 17 representing two organizations today: the 18 Massachusetts Affordable Housing Alliance, which I'm 19 Director of, and I'm the Co-Chair of the Mortgage 20 Committee of the organization called the 21 Massachusetts Community Banking Council, which is a 22 cofounder with the City of Boston of the "Don't 23 Borrow Trouble" campaign. 24 Consumer education is a very important 0202 1 piece, I think, in the predatory lending issue. 2 That's why the Massachusetts Community Banking 3 Council, which is a consortium of nine banks and 4 nine community organizations, was formed ten years 5 ago to try to identify and continue to work on 6 issues of concern to both community groups and banks 7 specifically in low and moderate income communities. 8 A couple of years ago it identified this 9 issue of high-cost lending, predatory lending, and 10 tried to attack it in a way -- in a couple of 11 different ways. One, we produced a foreclosure 12 counseling guide that told people where they could 13 get assistance, basically from which types of 14 nonprofit agencies. 15 Two, we tried to encourage and we're still 16 trying to encourage banks to offer alternative 17 credit products so that people have an alternative 18 to the high-cost subprime and predatory lenders out 19 there. 20 And three, we tried to develop a very 21 broad-based consumer education campaign that would 22 at least in some small way attempt to match the 23 marketing muscle of the subprime lenders, which has 24 been impressive, to say the least, in terms of their 0203 1 reach into specifically low and moderate income and 2 minority communities through the mail, through door 3 to door, through TV, through almost any medium you 4 can think of. 5 "Don't Borrow Trouble" is a campaign, like 6 I said, in partnership with the City of Boston and 7 now in partnership with the State Office of Consumer 8 Affairs and the Division of Banks that has developed 9 posters that will go in main streets, businesses, 10 mailings to homeowners, PSA, commercials for TV and 11 radio, ads on subway, the MBTA system and regional 12 transit systems throughout the state. 13 We think it's too new to judge its 14 effectiveness, but we think it will be a good 15 counter to, like I said, the marketing power of the 16 predatory and subprime lenders. 17 However, and I'll just finish with this -- 18 we can talk more about this -- education, as I think 19 Nadine said, should not be a substitute for tougher 20 regulations. And I think Congressman Leach called 21 the Fed AWOL on this issue of regulation of subprime 22 lenders. And while I don't pretend to take a 23 position on that, whether or not the Fed is AWOL, I 24 think that the Division of Banks here has provided a 0204 1 model for the Fed to follow into what can be done 2 within existing regulations to toughen up the 3 regulations on predatory lenders. Thank you. 4 MODERATOR SMITH: Thank you. Mr. White. 5 MR. WHITE: I would also like to thank the 6 Board for giving us this opportunity to participate 7 in your deliberations. My name is Allen White. 8 I've been a Legal Services attorney in Philadelphia 9 for about 17 years now and have been interested, 10 along with a few other people who are seeing the 11 anecdotal stories about predatory lending, in trying 12 to gather some data and some research to try and 13 look at some of the big questions about subprime and 14 predatory lending on a more empirical basis. 15 And recently Professor Mansfield and I 16 gathered some statistics through a fairly tedious 17 process of going through SEC filings on both the 18 interest rates charged by subprime lenders and on 19 foreclosures. 20 One of the definitions that's been offered 21 of predatory lending is a loan that's made that has 22 a substantial likelihood of being foreclosed on. 23 And I think frequently these type of hearings in the 24 last year have begun with some untested hypotheses, 0205 1 including the premise that a substantial portion of 2 the subprime mortgage lending that's being done is 3 somehow beneficial or providing useful -- or meeting 4 social needs, and there are a small group of 5 outliers who are harming consumers and homeowners. 6 And I think some of the data, the very 7 little data that are out there, suggests that there 8 is a serious problem. I think we handed out a 9 couple of slides that I brought with me, graphics, 10 that have the results of the tabulations that we 11 made about foreclosures and serious delinquencies, 12 and this was for about 15 or 20 lenders who reported 13 their data publicly. 14 Perhaps not surprisingly, subprime 15 foreclosures and serious delinquencies are 16 substantially greater than foreclosures and serious 17 delinquencies for conventional lenders. For 18 conventional lenders, it's a little over 1 percent, 19 and for the subprime industry, over 4 1/2. In fact, 20 the Mortgage Information Corporation is now 21 reporting for 1999 that those rates are approaching 22 5 percent. 23 But the other two slides that I brought 24 with me basically are intended to show that even 0206 1 that 4.6 or 5 percent rate of serious delinquencies 2 seriously understates the problem. First of all, 3 every subprime lender whose data we've looked at has 4 delinquencies and foreclosures increasing year after 5 year, partly because their volume is growing, partly 6 because the loans are seasoning. 7 So we have the example here of Equicredit, 8 probably the number one -- it is in fact the number 9 one originator of subprime loans, and you can see 10 three years in a row having mounting delinquencies. 11 And this is the pattern you will see with all 12 subprime lenders. 13 Finally what the third slide is intended to 14 illustrate, instead of looking at the foreclosures 15 for a single lender -- for a single point in time, I 16 should say, if you look at loans that are made and 17 originated in a period of time and follow them 18 longitudinally as a cohort of loans, a pool of 19 loans, the numbers are much more dramatic. 20 In this particular pool of loans, of the 21 6,000 loans we saw, over 1300 of those people who 22 got those loans are now in foreclosure. And this is 23 two years after the loans are originated. So it 24 raises an interesting question, whether you should 0207 1 disclose to people who are taking these loans out, 2 "You have a one-in-four chance of losing your home 3 if you take this loan out." 4 MODERATOR SMITH: Thank you. Mr. Anderson. 5 MR. ANDERSON: Thank you. While the 6 participants of this meeting will discuss the 7 minutia of subprime lending, maybe we can also 8 answer the question of how many angles can dance on 9 the head of a pin. 10 And if you will pardon me for being 11 cynical, but after being in the real estate business 12 for 22 years, a great deal of what is called 13 predatory lending is little more than good 14 old-fashioned fraud. 15 I only have three minutes, which I will go 16 over -- my apologies to you up front -- so I will 17 spare you the statistical analysis, which the Fed 18 ignores anyway. Instead I'll give you a few 19 examples to show how widespread mortgage fraud is. 20 Very few mortgages go bad in the first few 21 months. Knowing that, Yawu Miller, a reporter for 22 the Bay State Banner, asked me for a list of recent 23 mortgages that are already in default. We found 24 Aryan Wiley, an 80-something-year-old black woman 0208 1 in foreclosure on a loan from Advanced Financial 2 Services. The loan was originated after she had 3 previously defaulted on a loan to United Companies 4 Lending. 5 The story that Ms. Wiley told us, who was 6 clearly suffering from some sort of dementia, and 7 her grandnieces, who reeked of alcohol at ten 8 o'clock in the morning, told us something was very 9 wrong. She was referred to Ms. Moseley, who 10 uncovered more unseemly family finances. A few 11 months later she lost her home to foreclosure, and 12 no regulators did anything. 13 Surely the Fed can't be responsible for 14 every real estate transaction, so let's go back to 15 1990. As the New England real estate market was 16 collapsing, a condo developer develops several 17 new -- finishes several new developments. His first 18 eight sales go through Northeastern Mortgage 19 Corporation, a leading mortgage originator at the 20 time and a leader in originations that end in 21 foreclosure. Of those eight, all eight are 22 foreclosed. 23 When Northeastern Mortgage goes bankrupt, 24 Cawley has to come up with a new scam. He records 0209 1 phony deeds and phony mortgages and creates a paper 2 trail needed to get a refinance mortgage. Of the 30 3 units he sold this way, all but three have been 4 foreclosed. One of those that was not foreclosed 5 supplied us with the RESPA form clearly marked 6 "Refinance." All this fraud and foreclosure, and 7 the Fed does nothing. 8 Back to developer Richard Cawley. With all 9 the foreclosures, there are bargains to be purchased 10 and flipped. This time he has a major bank willing 11 to finance his business, because they need loans in 12 minority areas for CRA compliance requirements. 13 A Boston Globe article that was July 2 of 14 '95 showed seven properties that Cawley had built, 15 arranged financing on, sold, then bought back at 16 foreclosure, then flipped through Fleet Bank. Fleet 17 and the Boston Fed have told us that all these loans 18 have been taken care of. So why, of the seven, have 19 four been foreclosed? 20 And the one who wasn't foreclosed told us a 21 very different story. The owner of Unit 9 bought 22 her unit for $90,000 in 1993. Cawley bought it for 23 $25,000 a month earlier. But the new buyer told us 24 that she didn't have a down payment. So Cawley gave 0210 1 her a check at the day of closing to cover the 2 difference. Oh, those home buyer classes to make 3 sure inexperienced buyers don't get into trouble? 4 The Fleet originator told her it wasn't necessary 5 and checked it off on the form. 6 Did Fleet approach her to make sure there 7 were no problems with the mortgage, as they told the 8 Boston Globe and the Boston Fed they were going to 9 do? No. The owner said the only time she heard 10 from Fleet was when they came after her because she 11 stopped paying her condo fees because the common 12 electricity in the development was disconnected, and 13 there was a huge water and sewer bill. It seems 14 Cawley had omitted to tell her that the water and 15 sewer and the electric bills hadn't been paid in a 16 while. 17 With all this a matter of record testified 18 on this stage, did the Fed do anything? No. 19 But we were talking about subprime lending 20 and predatory lending. The owner of Unit 9, after 21 getting over the financial difficulties thanks to an 22 extra part-time job, was a bit short of money. 23 Since she overpaid for her condo six years earlier 24 and Fleet did nothing about her loan, she had no 0211 1 equity to borrow against and had to go to a subprime 2 lender. 3 So her $81,000 Fleet loan and her $15,000 4 subprime loan means a principal of $96,000. But 5 since Fleet stopped doing business with Richard 6 Cawley, the most expensive condo to sell in her 7 development was Unit 8, right next door. It sold 8 for $78,000 last year. After six years, in a red- 9 hot real estate market, her unit is still not worth 10 what she paid for it. 11 This is all a matter of public record, and 12 the Fed knows this. At previous hearings I gave the 13 Fed data on about 80 Fleet-financed Cawley and other 14 speculator loans, and what has the Fed done? 15 Nothing. 16 If past is prelude, then these hearings are 17 a sham. What difference does a few points on an APR 18 trigger mean when the Fed ignores solid evidence of 19 good old-fashioned fraud? Instead of these 20 hearings, the individuals in the Fed should be 21 telling us why they haven't done anything in five 22 years. 23 MODERATOR SMITH: Thank you very much. 24 We will now go on to the discussion phase 0212 1 of this session, and I'll say that -- there are a 2 couple of general questions that we would like to 3 focus on. One of them has to do with your views on 4 what techniques have been or might be most effective 5 in performing outreach to the targeted populations, 6 the vulnerable individuals that might fall prey to 7 predatory lenders. And another has to do with what 8 role can the Federal Reserve play in community 9 outreach and consumer education. Are there 10 sufficient materials available? Are there delivery 11 system issues. 12 And then, Sandy, do you have anything 13 specific to get us started on? 14 MS. BRAUNSTEIN: Well, actually, I would 15 kind of like to hear a little more about the "Don't 16 Borrow Trouble" campaign, since that's a big thing 17 up here, from either Tom or Norma, more about how 18 did you decide what techniques to use, do you have 19 any information at this point on how effective it's 20 been in the communities. 21 MS. MOSELEY: I'll start, Tom, and then you 22 can pick it up. It's a fairly recent campaign, and 23 I don't believe, unless it's on Boston cable TV, I 24 haven't seen the TV spots aired yet. Am I correct? 0213 1 MR. CALLAHAN: Correct. 2 MS. MOSELEY: But let me just say one thing 3 before we get into that specific thing. We're 4 talking about outreach to potential victims of 5 predatory lending, and yet the predatory lenders 6 call it "marketing." And there's a big difference. 7 Outreach is all squishy, fuzzy, see you at 8 a social gathering. Marketing is business driven 9 and profit driven. And until the same amount of 10 money can be put into marketing our solutions as 11 they can selling their product or marketing their 12 product, you're going to get nowhere. 13 These people are not easy to reach. I 14 mean, you can have billboards, you can have 15 newspaper articles like Yawu does. But when you 16 watch cable TV on any weekend or any evening, you 17 see ad after ad after ad, and they're talking about, 18 you know, "When the banks say no, we say yes," and 19 "The loans are out there," and "You can pay off 20 those high-interest credit card debts," and "You're 21 going to save $300 a month." And it's just one big 22 jolly thing. "We can do it over the phone." "We 23 close at your house." You bet they do. Boom, and 24 they're right there. 0214 1 I'm just saying, until there is that same 2 dedication to wanting to prevent predatory lending 3 as there is to making the loans, all the hearings 4 and all the regs aren't going to happen. Education 5 is a really slow process. It isn't the solution. 6 You've got to market your solutions with the same 7 vigor and the same dollars that are put into the 8 lending process. 9 That didn't answer your question at all. 10 MS. BRAUNSTEIN: No, actually it did -- 11 well, part of it. I want to follow up on that a 12 second. Where are the dollars coming from for the 13 "Don't Borrow Trouble" campaign? 14 MR. CALLAHAN: It's a collection of -- City 15 of Boston is putting in the most money, I believe. 16 The initial first-year contribution was $50,000 the 17 City of Boston is putting in. MCBC itself put in 18 $10,000. And then another $50,000 or so was raised 19 from Fannie Mae, Freddie Mac, the Mass. Bankers 20 Association, the Mass. Mortgage Bankers Association, 21 and I'm probably forgetting a couple. But it was a 22 team effort. The City of Boston went out and 23 recruited some of those folks, and MCBC helped in 24 that regard as well. 0215 1 I think that is one issue. We've been able 2 to do that for the launching of this campaign, but 3 to sustain this campaign, will that same type of -- 4 those same type of resources be there? I think the 5 City of Boston and the State have now committed to 6 this in terms of staffing hot lines in an ongoing 7 way for consumers to call. 8 I mean, I think that was one key element of 9 the "Don't Borrow Trouble" campaign. We wanted to 10 make sure there was a place where people just didn't 11 see a poster or get a brochure in the mail without 12 having a place to call that they could pursue the 13 issue and get questions answered and get help and 14 get referred to a counseling agency like Norma's, 15 which is part of the City of Boston's and will be 16 part of the State of Massachusetts's campaign. 17 But I'm worried about the ability to 18 sustain that type of funding over the long term, 19 because it needs to be a lot more than a one-shot 20 deal to compete with predatory lenders. 21 The other answer, just picking up a little 22 bit on what Norma said, I think the best outreach 23 method -- I think the best thing we can do from an 24 outreach perspective to low-income consumers is to 0216 1 put the predatory lenders out of business. 2 I think defining predatory loans and doing 3 things like lowering the APR trigger to 5 percent 4 above Treasury, prohibiting balloon payments, 5 prohibiting prepayment penalties, those types of 6 things that I'm sure were talked about this morning, 7 I think are going to be the things that really help 8 us in our outreach, because it will give us a 9 starting point where at least people are not getting 10 the most outrageous conditions and terms that you 11 can imagine. 12 There are other programs, I think, that 13 exist out there. We have a program called the Home 14 Safe Program, which is a homeowner resource center. 15 It really evolved out of our success in helping 16 people get into homes through home buyer counseling. 17 This is a program that's really designed to 18 reach people in the first year or two of home 19 ownership, before they have a crisis, before they 20 need an equity loan, before they have problems with 21 their home that they can't deal with, with 22 information and resources that are available to 23 homeowners. But it's really trying to reach folks 24 in this non-crisis situation. 0217 1 I think those types of things are key, 2 where you could talk to folks. Education up front 3 in the prepurchase about predatory lenders in the 4 prepurchase classes are important, but we find, 5 since the bulk of this problem is in equity-type 6 lending to homeowners, you don't really realize the 7 problems and the issues you're going to deal with as 8 a homeowner until you're actually in the door and 9 experiencing life as a homeowner. 10 So that's why the postpurchase classes, I 11 think, are so key. There is not a lot of support 12 for postpurchase classes out there. The banks fund 13 prepurchase classes because it's in their self- 14 interest. But postpurchase, not a lot of folks. 15 We've been able to scrap together some money to fund 16 that program, but there are only three programs that 17 I know of in the state, really, that do extensive 18 postpurchase counseling, largely because of a lack 19 of funding. 20 MODERATOR SMITH: Would you remind me when 21 the "Don't Borrow Trouble" was launched. 22 MR. CALLAHAN: Just in the last few -- 23 earlier this year, basically the last few months of 24 spring. And it's being rolled out in different 0218 1 phases. Many homeowners have already received the 2 initial mailing from the Mayor, but as Norma said, 3 the TV and radio spots are in production right now 4 and haven't aired yet. Posters are going up now in 5 community centers and in main street businesses 6 around the city. So it's just starting to produce 7 calls, and it's too early to track data from it. 8 MS. BRAUNSTEIN: Will you have any way of 9 being able to tell whether it's been successful? 10 MR. CALLAHAN: The call centers I think 11 will be our best way to track, both the State call 12 center that's going to be set up later this summer 13 and the City call center that's already fielding 14 calls. 15 I think we'll be able to tell, one, how 16 many people are calling, and, two, you know, what 17 level of assistance is needed for those folks. 18 There's going to be -- those folks answering the 19 phones will be trained to provide a certain level of 20 advice and assistance, but then for people that are 21 really in need of counseling and further assistance, 22 they will be referred to an agency like Norma's. 23 So I think there will be the ability to 24 tell what level of advice and assistance is needed, 0219 1 and then once we find out how many people need the 2 real in-depth counseling and foreclosure-prevention 3 type assistance, we'll be able to track that as well 4 and see how successful -- 5 MS. MOSELEY: It's already on the Banking 6 Commissioner's line. I think it's punch 4 or 7 something if you want the "Don't Borrow Trouble" hot 8 line. I know because I was trying to reach the 9 Commissioner's Office yesterday. 10 So it's already there. It's part of a 11 menu. It doesn't rise up and hit you in the face, 12 but it's part of a menu. 13 MS. BRAUNSTEIN: Can I just -- I'm sorry, 14 one more question on this. You mentioned, Tom, 15 letters going out. Who is getting -- is it just in 16 certain communities or every homeowner in the city? 17 MR. CALLAHAN: Mayor Menino in the City of 18 Boston is sending a letter to every homeowner in the 19 city. This is actually the second mailing. He did 20 last year send a general, just, letter, and then 21 this is a letter with the brochure which was 22 specifically designed for the "Don't Borrow Trouble" 23 campaign, which, I think, is more -- hopefully will 24 attract even more attention. 0220 1 MS. MOSELEY: It goes out with the tax 2 bills. 3 MODERATOR SMITH: Ms. Cohen. 4 MS. COHEN: I just wanted to add something 5 to that. I think any communication, and I don't 6 know if the Mayor's letter is being translated into 7 other languages, but I think that's a critical 8 piece, because many homeowners and borrowers are 9 immigrants, people for whom English is not the first 10 language. And I think that we have to ensure that 11 any outreach materials get translated. 12 I always worry about all the HOEPA 13 disclosures and the Truth in Lending disclosures. I 14 don't think they even say anything that our 15 utilities bill say, that "This is an important 16 document. You should bring it to someone to be 17 translated." 18 And I have had cases where I've had a 19 family who spoke no English, were Hmongs, and they 20 didn't understand what they were signing. The 21 lenders just took them through the whole thing, and 22 there was no one to explain anything to them. 23 That's always the danger in disclosures. 24 I also wanted to emphasize, when you talked 0221 1 about what techniques work, I think Tom really 2 identified it. I mean, we have to get rid of all 3 the balloon payments, the prepayment penalties, all 4 the indicators of predatory loans, and I think that 5 really helps. But short of that, I think you really 6 need people to be represented at these closings, 7 either by lay advocates like Norma and Len or from 8 Tom's group or by trained attorneys. 9 The Lawyers Committee is now working with 10 the National Consumer Law Center on a program to 11 train attorneys and later community people on how to 12 recognize predatory loans and what legal avenues 13 people have when they get involved in predatory 14 loans. 15 And I think that's critical. We're sending 16 people into these closings in a totally unequal 17 situation. It's hard enough -- I always tell the 18 story that I always thought it was easier to have a 19 nine-month pregnancy and have a baby than to buy a 20 house. I think I started the process around the 21 same time. And I as an attorney was overwhelmed by 22 the paperwork, by the numbers, by the whole process. 23 And we're sending in unsophisticated 24 borrowers, elderly people, people who don't always 0222 1 speak English, who are most vulnerable, and they're 2 not represented. I don't think there are many other 3 situations in life where you are risking so much 4 without any real protections. 5 So I would push that as part of an 6 education and a funding campaign. 7 MR. CALLAHAN: Actually, if I could ask 8 Norma to tell that story about the time you did show 9 up at the closing. I think that's instructive to 10 Nadine's point, if I may be so bold. 11 MS. MOSELEY: Well, I go to all my clients' 12 closings, by the way. But this was an elderly 13 couple in South Boston who had gotten into a 14 refinance -- I think this was going to be their 15 second refinance in about 18 months. And 16 interestingly enough, on the documents it indicated 17 that "If you are elderly, call the Elderly 18 Commission. You may want to have someone with you." 19 So, they did, and I did, and I was there. 20 And I had prepped these people. I had seen the 21 documents. It was clearly a ridiculous loan. They 22 were elderly, and the gentleman was also 23 handicapped. 24 The closing was at their home. So the 0223 1 lawyer came up, and just bit by bit he was asking 2 them to sign this, sign this, sign this. I said, 3 "Wait, wait, wait. Let's go over this." They had 4 been prepped. We had been over it. But they played 5 the part. 6 And so we did, and they would ask -- stop 7 and ask a question, "But I applied for a 30-year 8 fixed rate mortgage. Now you've got this as a 15- 9 year variable." "Oh, well, that must have been a 10 mix-up in the documents. But go ahead and sign it." 11 "No, we're not going to sign it." 12 And then, "So what does the rate go up to?" 13 And then they see all this LIBOR plus. "What does 14 that mean?" "It just means they base it on some 15 kind of prime rate in the market somewhere over in 16 London." I don't know what the hell it means 17 either. 18 But at each document, they HUD settlement 19 statement, "Where is the broker? What's this 20 broker's fee? We didn't pay a broker." "Oh, yes 21 you did. That gentleman who came to your house 22 wasn't from the bank. He was a broker." "Well, I 23 didn't know that. I thought I was applying to the 24 bank." 0224 1 Anyway, to make a long story short, they 2 didn't sign anything. So the lawyer said, "Could I 3 use your phone?" He got on the phone, and he 4 evidently called the broker and said, "This family 5 isn't going through with this loan." And the broker 6 said, "Give me a minute." 7 And he came back from the phone and said, 8 "Well, look, we can make this a 30-year fixed. We 9 can drop the interest from 14 down to 10. We can 10 knock off these broker's fees and put you in a 11 really good loan." 12 And I said to them, "Do you want to go with 13 a mortgage company that just like that can change 14 the terms? Because if you were eligible for them 15 now, you were eligible for them before." And they 16 said, "No." So we went out and got a prime loan 17 with somebody else. 18 But I was so delighted. They called back 19 for three weeks in a row, sweetening the pie every 20 time, saying, "You can't get it. You have lousy 21 credit." They already had been approved for their 22 loan somewhere else. 23 So, I mean, it does make a difference. It 24 does make a difference if you are there. You don't 0225 1 have to be a lawyer that can -- all you have to do 2 is ask the right questions, because the lawyer for 3 the lenders, they don't like to be asked the right 4 questions. And by the way, if you really want to 5 get a batch of scoundrels, get those lawyers who 6 close these loans. I don't know how they sleep 7 nights. They're sleazy. 8 MS. BRAUNSTEIN: To play devil's advocate 9 for a second, one of the things obviously we hear 10 everywhere is that one of the ways that the 11 predators operate most effectively is by gaining the 12 trust of their clients through all that personal 13 contact and even taking them to lunch, whatever. 14 Okay. So if there was a requirement that 15 people had to be represented at their closings, how 16 do we know that the trusted lender wouldn't say, 17 "Oh, don't worry about that. I'll get you 18 somebody"? 19 MS. MOSELEY: They do already, even though 20 their documents all say, "The attorney is 21 representing the lender. You have a right to an 22 attorney on your own," and it's there. You know, 23 disclosures aren't the issue. Everything is 24 disclosed. It's right out there. So what? 0226 1 MS. BRAUNSTEIN: I'm just saying, how would 2 you make that happen to make sure that everybody has 3 good representation at closing? 4 MS. MOSELEY: I think it has got to be 5 almost -- I don't know how you -- whether legally 6 you can require it, a third party, you know, an 7 independent third party there. But if there were a 8 way to do it legally, you would save a lot of people 9 from getting into bad loans. 10 MS. BRAUNSTEIN: Well, another thing that 11 we've heard is that possibly people who are getting 12 HOEPA loans should be required to go to housing 13 counseling first. That's another kind of take on 14 what you're talking about. 15 We have had some conversations, and I would 16 like some reaction from the whole panel on this, 17 we've had some conversations with some housing 18 counselors who have told us that even when they can 19 get to a client before they enter into a deal, and 20 they go over it with them and show them how this is 21 not a good deal for them, that oftentimes the 22 client, because they're in need of the money to pay 23 a doctor bill or something like that, will enter 24 into the deal anyway, that there has been a great 0227 1 deal of frustration with that. 2 And I don't know -- I was wondering if 3 that's been anybody here -- like Norma, I guess you 4 do more of it than anybody, or Leonard, your 5 experience, has that been the case? 6 MR. RAYMOND: Certainly that often is the 7 case. As I think, as Norma and I were sitting this 8 morning listening to the testimony, again, we 9 reiterate the issue that irrespective of the 10 substance and the length of the disclosures, that 11 oftentimes the people who are in these circumstances 12 are desperate, absolutely desperate. So they may 13 very well go through, although I would say our 14 experience, most of the time we see people post this 15 situation, not often previous. 16 If it's a situation where, indeed, we're 17 talking about, okay, three days before, pursuant to 18 the HOEPA regulations, we're going to get people 19 connected with a counselor, there might be some 20 possibility during some circumstances of making a 21 difference. I think a good number of people we 22 could perhaps make some difference. But there will 23 always be a minority of folks who, no matter what, 24 are going to go forward. 0228 1 MS. MOSELEY: What happens is people get 2 into a situation where they're delinquent on a loan. 3 Let's say it's even a decent loan. They're just 4 delinquent and foreclosure is imminent. And 5 because, you know, when you're in foreclosure, that 6 doesn't give you a very good credit score, so you 7 probably already decide on your own, you can't go to 8 a regular lender and refinance out of this. 9 Subprime lenders are right there, filling 10 the gap. And even though, you know, you can point 11 out, as Len said, all of these things, they say, "I 12 have to do it, because I'm going to lose my home 13 otherwise, and I've got to close." 14 We do explore with them the options, if it 15 sounds like it can work, a Chapter 13. And their 16 response is, "Oh, but that's going to ruin my 17 credit." Here they are in foreclosure. And I say, 18 you know, "At this point, your credit is the least 19 thing to worry about. Let's look at saving your 20 home and starting to rebuild your credit." 21 But you see the reasoning isn't, you know, 22 the way you might reason it or you might reason it, 23 but this is what is going on. This is what they 24 see. Chapter 13 ruins your credit. A foreclosure, 0229 1 being in foreclosure and then doing a subprime loan 2 somehow is going to keep your credit neat and clean 3 and dandy. I'm looking at the real world, the way 4 they see it. 5 MS. BRAUNSTEIN: Tom, you mentioned in your 6 opening statement working to try with lenders to 7 develop alternative products to subprime loans. I 8 was wondering how successful you have been at doing 9 that. 10 MR. CALLAHAN: I'll turn that back to 11 Norma, because she's actually been the agency 12 that's -- MCBC has tried to facilitate a little bit 13 of that, but Norma's agency has had the most 14 success. But it's been actually disappointing in 15 the overall response. We hosted a breakfast, MCBC 16 did, for some 30 lenders or so, and maybe one or so 17 has followed up with Norma to try to add -- Norma 18 has a list of four lenders that provide some 19 alternative financing in these, and I'll let her 20 describe that. 21 In response to your previous question, 22 though, I wanted to say, I think the later you see 23 people in the process, the more likely it is they're 24 going to go forward with that, maybe against their 0230 1 own interests, but with that subprime loan or 2 predatory loan. 3 That's why I think this maintaining -- 4 trying to maintain a relationship from prepurchase 5 to non-crisis postpurchase counseling to early 6 delinquency and foreclosure-prevention counseling, 7 we have had successful cases in our office of people 8 who have taken our non-crisis postpurchase workshops 9 and then have been marketed to by these, and just at 10 the very early stages of thinking about it call our 11 counselor, because they have a relationship with him 12 or her, and say, "This sounds attractive in one way, 13 but I have some questions," or "I'm a little leery 14 about it. Can you help me go through it." And they 15 come in, and our counselor sits down and we go 16 through it. 17 And more often than not, those folks who 18 are sort of at the beginning stages of thinking 19 about maybe they need some equity credit or for a 20 variety of reasons, those folks we can usually make 21 sure they don't fall into that trap and get them a 22 better deal, if they really do need that, or in some 23 cases work with them on budgeting issues. And one 24 of the goals of "Don't Borrow Trouble" is actually 0231 1 convincing people at times they don't need to borrow 2 more money. That's the worst thing they can do in 3 certain circumstances. 4 So it's really, you know, budgeting and 5 money management as much as trying to find a loan 6 for them. 7 I'll let Norma talk about -- 8 MR. RAYMOND: Actually, I wanted to 9 interject. I think it's very important for us to 10 get back, because that's a really critical question, 11 to those alternative products. But we've 12 participated in the "Don't Borrow Trouble" program 13 as well statewide, but I think that's a slice. 14 That's one slice. 15 I think there is another slice here that's 16 very important, that's more of a long-term kind of 17 prevention approach. Since we work exclusively with 18 people 50 and over, mainly elders, we are 19 continuously getting exasperated by the fact of 20 people coming to us late in the process, often in 21 foreclosure itself, and we're just mystified as to 22 why people made the choices that they did, et 23 cetera, how did they get trapped in these 24 situations. 0232 1 We became convinced that we had to spend 2 some time, some considerable time putting together 3 what we called an elder economic literacy product, 4 which goes out to the community. We have done this 5 in 30 communities across the state. We work with 6 Councils on Aging. We developed a set of manuals 7 that deal with not just refinancing issues, but 8 important life skills. 9 Remember, we're dealing with a population 10 that has particular needs. For us, most of our 11 clients who are elderly are widows. In an average 12 year, 85 to 86 percent of our clients will be single 13 women, average age of 80, average income of $10,000 14 to $12,000, all homeowners, nonetheless, and 15 experiencing all kinds of difficulties. 16 So it was very important for us to go into 17 the community, with the Councils on Aging, bringing 18 in other professionals from Legal Services, from 19 various housing and other kinds of elder services. 20 And we present this as a part of what we call 21 Remainder Life Planning. 22 It's a set of skills in terms of surviving 23 in your house long term, preserving as much equity, 24 getting your options, finding out ways to off-load 0233 1 your needs into various programs and services which 2 are low cost, no cost, preferably government 3 programs, et cetera. And we have been very 4 successful in that. 5 But that's, again, one slice of the pie. 6 It's one piece here, and I think we need -- 7 MS. BRAUNSTEIN: How are you reaching your 8 audience? Are you using existing -- 9 MR. RAYMOND: We go out to the Councils on 10 Aging. We have the Bank Commissioner's Office 11 working with us. They have been participating in 12 the program, the various AAAs, area agencies on 13 aging, housing advocates, as well as the Legal 14 Service folks who are working particularly with 15 senior citizens and their problems. It's scheduled 16 way ahead of time, so a lot of advertising. 17 One of the other techniques we have found 18 is we have what we call circuit rider counseling. 19 We actually have people who then show up post those 20 sessions at the designated times we'll announce. So 21 we have those wonderful situations where an elderly 22 gentleman will come in and say, "Well, I decided to 23 go by the COA today to pick up some information, and 24 by the way, I have this friend who has this 0234 1 problem," those situations. 2 It's a piece of the pie. It's a small one, 3 but nonetheless a very significant one. And we've 4 reached several thousand elders this way and want to 5 continue on doing that, again, giving people some 6 tools, tools in terms of really important written 7 materials, manuals on various issues, refinancing, 8 the dangers of certain kinds of financial 9 situations, what kind of scams are directed 10 particularly at elders, what kinds of options and 11 resources are available to them, et cetera. 12 One of the biggest issues we deal with is 13 the problems of credit cards, which has absolutely 14 exploded. One of the biggest reasons why people are 15 moving at this stage of life into looking at 16 refinancing is because they've run up credit cards. 17 15 years ago, when I got started in this business, 18 it didn't exist. Now we're talking an average of 19 $7,000 or $8,000 per elder. The recent record in 20 the office is $146,000, one senior, of credit card 21 debts. 22 There is no question that there is an 23 informal network out there where essentially when a 24 widow reaches $10,000 or $12,000 of credit card debt 0235 1 which she cannot maintain, and she gets harassed by 2 the collection agencies, interestingly enough the 3 question arises in those conversations with the 4 harassing collector, "Gee, do you have a home? Oh, 5 you don't have a mortgage? Oh, a small mortgage? 6 We can refer you out." 7 So, again, these are the kinds of things 8 we're trying to get people some basic skills, tools, 9 also very important for them to know that there are 10 places to go, numbers to call, et cetera. 11 Again, it's one basic piece, but it's a 12 significant one nonetheless. 13 MS. BRAUNSTEIN: Do you know if that kind 14 of thing is going on in other cities? Is AARP aware 15 of what you're doing? Do you work with them at all? 16 MR. RAYMOND: Well, certainly I think 17 they're aware of us and we're aware of them. But 18 this is a project -- we've essentially had a very 19 small grant from the Crossroads Foundation and a 20 small grant from the late, great Bank of Boston to 21 get this off the ground, but essentially we are 22 literally -- this is held together by baling wax, 23 strings and bubble gum, because we have to rely on 24 our community lenders to help defray some of the 0236 1 cost who participate in the program. 2 MS. HURT: May I ask, do you have any 3 thoughts on reverse mortgages as an alternative 4 to -- that you would like -- 5 MR. RAYMOND: Our organization basically 6 created reverse mortgages for this part of the 7 country some 17 years ago, and we have, last count, 8 I think, 68 community lenders, credit unions, mutual 9 savings banks, cooperatives, et cetera, who work 10 with us as. And we have created actually a whole 11 array of financial options for seniors, some of 12 which are equity conversions, some are not. 13 Our real strong feeling is that the real 14 success of aging in place successfully is preserving 15 as much equity as possible. Reverse mortgages can 16 be extremely good under some circumstances. They 17 can be the wrong thing for a heck of a lot of other 18 elders. 19 So we really take the maximum of equity 20 conservation, equity preservation, off-load it, and 21 only using loans as a last resort. That means any 22 kind of loan, but especially reverse mortgages, 23 because they are, pardon the expression, damnably 24 expensive, and they deplete equity. They can be 0237 1 good tools under some circumstances. 2 Because of that we created a product called 3 SELOC, which is a senior equity line of credit 4 product, which is designed specifically for elders. 5 Again, it's more of a prevention tool. It was 6 designed for elders who have little or no debt, but 7 again, that large group of elders who are just 8 basically surviving by their wits, month to month, 9 and all it takes is one major problem to bump them 10 off. And these are the folks that are, pardon the 11 expression, the raw meat for predatory lenders. 12 You know, when the ten-year-old car dies, 13 when the roof goes and there is no public program to 14 pay for it, when there is an in-home care problem or 15 an expense with the hospital that is not covered by 16 insurance, that's often when people are driven. 17 They go to the local bank. The bank will make the 18 correct decision that your income is too small, 19 especially given your credit card debt. 20 So what happens next is they pick up the 21 newspaper with the wonderful block ad, "No credit/ 22 bad credit?" Or they submit to that wonderful 23 advertisement which Norma alluded to. We won't name 24 them. Athletes should be selling underwear, not 0238 1 loans. But essentially that's when they get hooked 2 into this stuff. 3 So this was a tool which we provided for 4 them, because it's a loan design that doesn't depend 5 on credit criteria. It's purely the fact that they 6 own this house. But it's a qualified loan, which 7 means disbursements are made after a consultation 8 with the program, because we try to find other kind 9 of solutions and ways. 10 But in addition to that, which is very 11 important, we have been able to really intervene in 12 terms of home repair issues, so they don't hopefully 13 get hooked into the whole home repair scam 14 situation. And they have options of either 15 amortizing the loan, paying the interest only, or 16 they can defer payment altogether. But it's a way 17 for us to stretch things out. 18 MR. WALKER: I wanted to ask a question 19 with regard to credit, and actually maybe Jim or 20 Adrienne can answer this question. I have an 21 elderly mother who continues to get almost daily 22 solicitations from credit card companies with the 23 checks in them. Does that continue to be legal for 24 them to do that? 0239 1 MR. MICHAELS: Yes. 2 MR. CALLAHAN: Can the Fed do something 3 about that? 4 MS. COHEN: There is something the Fed can 5 do, perhaps. And it's not only elderly people. I 6 mean, I know I'm old, but I'm not that elderly yet, 7 and I get lots of those checks, and they're 8 tempting. 9 MR. WALKER: But for the elderly, 10 because -- well, for example, for my mother, I mean, 11 she has dementia, so to her it looks just like one 12 of her regular checks, and she has written herself 13 some credit loans as a result of that. 14 MS. MOSELEY: I wanted to talk about the 15 alternatives, going back to Tom's thing. We did 16 have a really neat program going with BayBank back 17 in the good old days when there was a BayBank. 18 We could bring troubled homeowners to 19 BayBank with a hardship letter explaining how they 20 got into their circumstances where they've got some 21 credit issues, you know, if there were extreme 22 catastrophic or unforeseen circumstances, so that 23 credit wasn't going to be the issue. 24 But we looked at LTVs of 80 percent, LTVs, 0240 1 and debt-to-income, with everything paid off, about 2 max 38 percent. That is a damn conservative loan, 3 and the bank liked it. It was a money maker. And 4 Fannie Mae was buying them, because they didn't see 5 anything other than the LTV and the debt-to-income. 6 They didn't investigate the credit. The bank took 7 that. 8 We did, oh, probably 80, 85 of those loans 9 because it was statewide lending, and BankBoston 10 continued it on a scaled-down basis when they took 11 over BayBank, and Fleet isn't doing it at all. 12 So I'm back sort of behind the eight ball 13 trying to reach out now to the smaller community 14 banks and sell this program literally on a 15 community-by-community basis statewide, because 16 you're never going to get a whole bunch of them. 17 They may get two or three a year. That is not going 18 to break the portfolio. And they're performing 19 loans. So I'm out there trying. 20 MS. COHEN: I just want to say that also in 21 some of the settlements we did early on in the late 22 '80s with some of the banks around some 23 discriminatory practices, we did get programs also 24 that were similar to what Norma said, which shows 0241 1 that the banks can do them. The mainstream prime 2 lenders can make loans to lower-income borrowers 3 that are successful loans. 4 I think when the Fed looks at -- does CRA 5 reviews and looks at banks' performances, you have 6 to look at how innovative are they in developing 7 products that can meet the credit needs of the 8 consumers. And I think too often we forget that. 9 I just want to add a few other things, 10 because unfortunately I have to leave at three 11 o'clock, but I think the mandatory reporting of 12 credit payments for borrowers who have high-interest 13 loans is critical, because for borrowers who do make 14 their payments on time, it's important that they 15 start establishing a good credit history. And if we 16 let lenders get away with not reporting them, I 17 think it's really a travesty. 18 I think in CRA and compliance review the 19 Fed really needs to look at the banks' subsidiaries 20 and affiliates and not just the banks, because 21 that's where a lot of the problems are. And, again, 22 in the regulatory field, when you do the CRA 23 reviews, to really not give CRA credit to lenders 24 who have all the balloon payments and the prepayment 0242 1 penalties and all the indicators of those predatory 2 loans. 3 And lastly, I think this is something we 4 probably all would support, is expanding HMDA data 5 collection to include types of loans and loan 6 characteristics, like fees, prepayment penalties, as 7 well as borrower characteristics around credits 8 scores. 9 So I think that it really is such a 10 multi-pronged approach from the regulatory end, the 11 CRA review end, the HMDA data collection end, and 12 the education and outreach end. But I think we need 13 financial support in the outreach and education end, 14 and that's critical. You know, the "Don't Borrow 15 Trouble" campaign can be great, but it could be 16 short-lived unless it's continuing and unless there 17 is funding for lawyers and lay advocates to be, one, 18 trained in how you recognize predatory loans and how 19 you work with consumers and actually to provide 20 attorneys. 21 I am pretty sure -- the Lawyers Committee 22 works with many of the big law firms in town. Now, 23 some of them I think I could get involved in a 24 program to provide some kind of pro bono 0243 1 representation, but I need some money to provide the 2 administration of a program, the training, the 3 resources, and that's not easy to find. 4 MS. BRAUNSTEIN: That kind of brings me 5 back to the question Dolores asked at the top that 6 we never really addressed, that taking aside the 7 regulatory answers to this, okay, just looking at 8 the outreach education piece of predatory lending, 9 what is it that we, the Fed, could do to help, in 10 the sense of we've heard various things from people, 11 you know, we see a lot of stuff going on around the 12 country, a lot of materials being developed. 13 I mean, is there really a need for more 14 materials, or is it more that there's a need for 15 better delivery mechanisms for the materials that 16 are out there? What is it that we could do to 17 facilitate this process? 18 MR. WHITE: Well, at the risk of diverting 19 the discussion a little, I would like to echo what 20 Professor Golann said this morning, which is -- and 21 I certainly don't want to take anything away from 22 community education and outreach efforts; a lot of 23 what is going on in Boston is wonderful -- but there 24 is a basic problem that you have with the complexity 0244 1 of these transactions on the one hand and adult 2 literacy on the other hand. 3 You have an American population about 40 4 percent of whom can't really realistically compute 5 with decimals and fractions. That's what the 6 national adult literacy survey tells. Probably 90 7 percent of people can't understand the trade-offs 8 between points and interest over the life of a loan. 9 So you're just not going to -- Professor 10 Golann talked about the Boston school system as 11 being the culprit. I'm not sure where the blame 12 lies exactly. I think part of it is just that these 13 transactions are so inherently complex, we can't 14 expect 100 percent of the population to be fully 15 equipped to deal with the difference between an 16 advantageous and a predatory loan. 17 So I get back to the most valuable thing 18 the Fed can do right now at this moment in history 19 is exercise its power to substantively regulate 20 these credit transactions. And let me just suggest 21 what I view as the two most important, although 22 there are certainly a lot of things you can do. 23 First is to really seriously look at this 24 question of no-benefit refinancing. And it's very 0245 1 difficult, it seems to me, for this industry to 2 defend a transaction in which you take somebody who 3 has a conventional 9 percent, 8 percent mortgage and 4 refinance it at 12 percent, and they get a minimal 5 amount of cash out, less than 10 percent of the 6 loan. They're paying an effective rate for that new 7 advance in the hundreds of percent. 8 Those are indefensible transactions, and 9 they should be outlawed. And there is a very 10 specific authority in Reg Z -- the Act, rather, for 11 the Board to do that. 12 The second substantive area I think the 13 Board really ought to look at is repayment ability, 14 which I think ties very directly to the foreclosure 15 numbers we've look at. 16 You know, you have this vast experiment 17 that's going on right now. It used to be, you know, 18 if a mortgage was going to be more than 41 percent 19 of your income, you weren't going to get that loan. 20 Now the standard in the subprime industry has crept 21 up from 50 percent to 59 or 60 percent 22 debt-to-income ratios, with very little regard to 23 residual incomes and serious problems with 24 verification of income. 0246 1 Those are all areas that it seems to me 2 there is very clear authority for the Fed to 3 regulate. And I think at least the Fed ought to set 4 some guidelines and say, "Those of you lenders who 5 are going to venture into the great beyond in taking 6 risks with people's ability to repay are going to be 7 subject to the possibility of being found in 8 violation of these HOEPA standards." 9 Remember, the idea of a subprime borrower 10 is somebody who has credit problems; in other words, 11 payment history problems. There is nothing inherent 12 about taking somebody, you know, who has problems in 13 the past with paying their bills, saying, well, you 14 should also give them a loan amount such that they 15 are over conventional debt-to-income standards. 16 For some reason that has just happened and 17 become kind of a norm, and one of the things the Fed 18 can and ought to do is bring those payment ability 19 norms back in line with the conventional market. 20 One other point about the counseling 21 information to borrowers, I do think the North 22 Carolina model where you take somebody who's about 23 to enter into a subprime loan and you divert them 24 and say, "You cannot sign up for that loan; that 0247 1 loan will not be valid or enforceable unless you 2 first go see a counselor," is probably one effective 3 technique of catching people, although obviously it 4 would be fairly late in the process at that point. 5 MS. MOSELEY: Is that legal? Does that 6 withstand the test of somebody exercising their own 7 independent rights to be -- I'm just playing devil's 8 advocate too. 9 MS. COHEN: It's in the North Carolina 10 legislation. So, unless it's challenged, it is 11 legal. I guess people could always waive it. My 12 concern is more of what John said, is the banks or 13 the lenders just go, "Oh, you know, you don't need 14 that," and you check it off. 15 MR. ANDERSON: That was exactly what I 16 was -- I think I'm a fish out of water with all of 17 these people discussing what we can do, because I 18 spoke with the people from whom the "Don't Borrow 19 Trouble" program comes from at the City, or at least 20 a person who was somewhat responsible for it, and at 21 the end of our conversation he said, "Well, how much 22 fraud do you think is in the market?" 23 And I said, "Well, I only know 24 intrinsically where I've been for the last 22 years, 0248 1 which is the Dorchester-Roxbury-Mattapan market, and 2 I peg it at about 25 percent." And he looked at me, 3 "25 percent of the market is fraudulent?" 4 And I started second-guessing myself, and I 5 went and spoke with Ada Focer, who I've done work 6 with in the past and whose opinion I trust 7 implicitly, and I told her, "I said 25 percent," and 8 she said, "It's probably more than 30 percent," from 9 work that she had done with a couple of MIT grad 10 students in the early '90s. 11 For example, when we're talking about debt 12 ratios and income ratios, if a person wants to 13 borrow X amount of money and they don't have the 14 money to qualify for that loan, when you get out in 15 the real world, the mortgage originator is going to 16 be under great pressure, because it's their income, 17 to say, "You make $35,000. You don't make $30,000. 18 Why is your income so low this year? Well, we'll 19 write a letter to explain." 20 I had a lawyer tell me one time that he got 21 out of the traditional mortgage lending business in 22 the -- or representing mortgage lenders in the '80s 23 because he was having nightmares about all the 24 letters that were written to the lenders about why 0249 1 there were problems. You just make them up as you 2 go along. 3 And the fact that, as I mentioned earlier, 4 there is so damn much fraud out there, which is so 5 obvious, which is recorded at the Registry of Deeds, 6 and you only have to go down and take a look at it, 7 and nobody does anything about it. 8 So of course this perfectly forthright 9 mortgage originator, who is a nice guy and has a 10 family with two kids and a dog and would never hurt 11 anybody, is all of a sudden under pressure to say, 12 "Well, Bill got away with it. Nothing happened to 13 Sue. Sure, I can puff those numbers a little bit." 14 And then you get the person who might be looking for 15 a perfectly legitimate loan who has now borrowed too 16 much, who is now in trouble. 17 How do you get rid of the fraud? You hang 18 a few lawyers. You put a mortgage company out of 19 business. You put a developer in jail. 20 When the developer that I made mention to, 21 when I was telling the Fed about all the nasty stuff 22 that he was doing, the Fed made such a small noise 23 about it that he was in court, in Federal Court plea 24 bargaining a mortgage fraud felony charge, and they 0250 1 knew nothing about it. His lawyer was saying, "He's 2 the nicest guy on the face of the earth. That was 3 years ago," while we were in this room talking 4 about the fraud that was going on. 5 So, I mean, argue about the minutia, but if 6 25 percent of the market is fraudulent, unless 7 you're going to do something about that, then my 25 8 percent of the market is not going to be affected by 9 any of this. And in fact if your regulations get 10 too strict, you'll push more people into the 11 fraudulent range. 12 MS. MOSELEY: John, wouldn't you say, just 13 by going down Banker and Tradesman -- 14 MR. ANDERSON: Oh, I don't use -- I use my 15 own data. It's better than Banker and Tradesman. 16 MS. MOSELEY: I read the Banker and 17 Tradesman each week, and under mortgages, I can put 18 a little X against those that are going to go bad 19 within five years or three years by name. 20 MR. ANDERSON: My kids can do it. 21 MS. MOSELEY: You don't even have to look 22 up anything. This is a bad one, this is a bad one, 23 and this is a bad one. 24 Then one of the techniques in trying to get 0251 1 around how much you can lend on a first mortgage, 2 there's one very prominent finance company that 3 will -- someone will apply for a loan, and they will 4 break it into two loans. One is a first mortgage 5 with reasonably good rates, 30-year first, no 6 prepayments, all of this. 7 Then the second mortgage is an equity line 8 of credit which has the prepayment penalties, which 9 is negative amortizing, and they're going to pay off 10 more when they pay this off, if they ever pay it 11 off, than they will have borrowed. But because it's 12 an equity line of credit, it isn't the same. So the 13 secured loan is only, you know, within the ratios 14 that they allow. 15 So they have all of these little 16 techniques, and the interest rate on the equity line 17 is 18 1/2 percent. Actually, she is going to pay it 18 off and pay the penalty, and then we're going to 19 refinance her at a 12 percent one. 20 MR. WALKER: I just want to ask John a 21 question. John, in your opening statement you went 22 back to 1990. We're in 2000 now. What are you 23 seeing right now? Are you seeing the same kind of 24 flips that you -- 0252 1 MR. ANDERSON: The same guys are in 2 business. Nothing happened to them. Not only are 3 the same guys in business, but they're still doing 4 business with the same banks. Of course there are 5 new people, because they can do arithmetic. You 6 don't have to be a brain surgeon. You just have to 7 know real estate and do arithmetic. 8 The same guys are in business. Richard 9 Cawley has a new condo development in Dorchester, 10 closed a deed the other day where somebody paid him 11 $176,000 in cash. It's possible. I don't think so. 12 I don't know what the story is there. 13 One of the guys that I mentioned in my 14 previous Fed testimony was Jeff Roche. He sold a 15 property on Westville Street recently in which, if 16 you looked at Banker and Tradesman, because Banker 17 and Tradesman doesn't do loans or sales under $100, 18 it looks like a sale from Jeff Roche to a buyer 19 using an FHA loan. But since I don't use Banker and 20 Tradesman's data, if you looked an hour later, there 21 was a $10 deed from that person to another person. 22 I don't know what the situation is. I 23 don't have the time to track down every one. But 24 it's no longer -- the property is no longer in the 0253 1 hands of the person who said that they were going to 2 live there for at least six months under the FHA. 3 Who is doing anything about it? Nothing. 4 Nobody. That's out there. It's as broad as day. 5 When I testified last year -- last time, 6 four years ago, I told you there was a property that 7 was owned for five minutes that was bought for 8 $35,000 and sold for $79,000 in five minutes, and I 9 submitted it to the Fed. The time stamps were on 10 it. 11 There was a property that sold recently, 12 bought for -- oh, geez, I can't remember the 13 address. It was bought for 79 and sold for 185 in 14 eight minutes. There was no renovation done. It 15 was just a pure flip, and it was done with a loan 16 with a small down payment loan from a major bank. 17 Since these guys didn't get hurt -- for 18 example, Jeff Roche went and originated a bunch of 19 loans through ACORN, several of which have gone bad. 20 Richard Cawley went to Capital Mortgage, which does 21 FHA funding, and several of those have gone bad. 22 There was an auction last week on Brunswick Street 23 in Dorchester. 24 I just spoke with Bruce Marks, who was on 0254 1 your panel this morning, and he said he hadn't seen 2 me in a while. I said, "I get tired tracking down 3 all the investors, the non-owner/occupant investors 4 who are using your loan programs." 5 With the help of Yawu Miller from the Bay 6 State Banner we found three. We weren't even 7 looking for them. We were just looking at mortgages 8 that went bad really fast. We found investors 9 buying properties through NACA and Fleet. You get 10 tired of seeing it all the time. It's not even 11 surprising. 12 MR. MICHAELS: This is for Mr. White. You 13 referenced before the research that you and 14 Professor Mansfield at Drake Law School had done 15 regarding -- I guess you said you used securities 16 filings to analyze pools of subprime loans and 17 categorize them by rate so you can see where the 18 distribution was. 19 Since you were here this morning, you 20 probably heard our discussion about the Board's 21 authority under HOEPA to adjust the APR triggers and 22 the rates and fees triggers. I guess I would 23 appreciate it if you could sort of elaborate on how 24 you think the Board could use your data, 0255 1 specifically what you think your data tells us about 2 how the Board should go about using its authority. 3 MR. WHITE: Well, one thing I think is very 4 helpful, in Professor Mansfield's article in the 5 South Carolina Law Review is a table with 6 distributions of interest rates from 1995 to 1999 7 charged by subprime lenders, the ones that are 8 publicly disclosed. And you can see the median rate 9 for mixed pools of loans is about 11 percent. Those 10 are the note rates, not the APRs. 11 And, you know, you can also see the 12 percentage, if you draw a line at any cutoff, of how 13 many loans in the market in those years you would 14 have excluded or included at any variety of 15 different triggers. I think all the proposals under 16 consideration for APR triggers would still only 17 affect a very small percentage of the loans. 18 But perhaps more significantly, if you 19 start with the idea that conventional rates have 20 been in the 7, 8 and 9 range, and the subprime 21 rates, the median rates, have been 10, 11 and 12 22 percent, and you look at the fact that these are 23 secured loans, so even if you have large numbers of 24 foreclosures -- some lenders may be 10 percent or 0256 1 more -- if they're recovering 80 percent of their 2 money in the foreclosure, the actual losses on these 3 loan pools will be very small, 2 or 3 percent per 4 year. And that would be very high. Typically it 5 would be more like 1 percent a year. 6 So even a very risky pool of subprime 7 loans, the pricing should not be much higher, 8 however far up the risk scale you want to go, unless 9 you are really making loans that are guaranteed to 10 go into foreclosure. 11 So it seems to me you can take from those 12 ranges of interest rates and from, you know, the 13 real credit -- the cost of credit losses, that when 14 you get beyond 13 or 14 percent in today's interest 15 rate environment, you're really talking about 16 pricing that's not risk based; it's just price 17 gouging, price discrimination. You're charging 18 people more than the credit risk warrants and the 19 current cost of funds warrants. 20 So there shouldn't be any reservation about 21 discouraging or making impossible to do lending at 22 those kinds of rates above 13, 14 percent. And, you 23 know, nobody in the industry has tried to make that 24 case. 0257 1 People in the industry have said, "Gee, you 2 know, we're worried you might start entrenching on 3 legitimate lending if you lower the triggers." But 4 I haven't heard a single member of the lending 5 industry come forward and say, "Let me show you a 6 loan product at 14 percent with 10 points or 7 7 points which is a beneficial, useful, appropriately 8 priced loan product," because they can't make that. 9 MR. MICHAELS: How do you think we can use 10 the data in your study to determine the percentage 11 of subprime loans covered by HOEPA now and the 12 percentage that might be covered if the triggers 13 were adjusted? Do you think we can use the data for 14 that purpose? 15 MR. WHITE: Certainly. I mean, it's not 16 comprehensive, because it's only the subprime 17 lenders who securitize, which is probably less -- a 18 little less than half of all the subprime loans that 19 are made. But as I say, there are tables in the 20 back of the South Caroline Law Review article that 21 will tell you the exact number out of the million or 22 so loans that were surveyed that were at 14-15, 23 15-16, 16-17. You can draw the cutoff anywhere you 24 like, and you can tell from those tables how many 0258 1 ought to be affected. 2 But I do also think, when you look at the 3 loss rates, that you can also draw the conclusion 4 that pricing above a certain point is really just 5 not risk-based pricing anymore; it is just price 6 gouging. 7 MR. MICHAELS: Did you draw a conclusion 8 about the percentage of subprime loans that were 9 covered by HOEPA in your study? 10 MR. WHITE: Well, it would be fairly easy 11 to figure out, I guess, with a 10 percent APR 12 trigger -- well, let me say this: The information 13 that's in the article, which I didn't participate in 14 putting together, is just about the rates. There is 15 no public information about points. 16 A lot of us who see these loans anecdotally 17 feel like there's a lot more price gouging and 18 exploitation happening on the points than on the APR 19 end and that anything that can be done to drive down 20 the cap on those points is probably a good thing. 21 As far as the interest rates, as I say, it 22 is probably fewer than 10 percent of the loans that 23 are above the existing APR trigger. And in fact 24 most HOEPA loans that are HOEPA loans now are HOEPA 0259 1 loans because of the points, not because of the 2 rates. If you lower the rate trigger from 10 above 3 Treasury to 8 above Treasury, you're still only 4 going to be capturing less than 20 percent, I 5 imagine, of the market, maybe less now. 6 MR. MICHAELS: When you say that most of 7 the loans covered by HOEPA now are covered by the 8 points and fees trigger as opposed to the rate 9 trigger, can you give me some idea of how you came 10 to that conclusion. 11 MR. WHITE: Well, I can't say I have a 12 statistical basis for that. I represent -- I've 13 litigated a number of cases under HOEPA, and I 14 represent a lot of clients who have HOEPA-covered 15 mortgages, and it's just been my experience, up 16 until about 1999, that charging 10 points was sort 17 of a standard in a given segment of the industry. 18 Lenders like UC Lending and FAMCO and a number of 19 others, sort of 10 points was the default number of 20 points they charged. 21 Now that HOEPA loans have become less 22 popular, it seems to be like 7 1/2 points seems to 23 be the standard that's being charged, you know, in 24 the high-risk end of the market, particularly for 0260 1 loans of less than $50,000. 2 MR. MICHAELS: Thank you. 3 MODERATOR SMITH: With that, I will adjourn 4 this portion -- did you have anything else? 5 MR. RAYMOND: Excuse me. I apologize. It 6 seems that you were begging the question earlier, 7 and that is that we would -- in terms of having the 8 Board work with community advocates, we feel very 9 strongly that we would like to issue a challenge. 10 The challenge would be, can we leave here 11 with hopefully a commitment to sitting down with 12 some lenders and attempting to -- Norma was talking 13 about it earlier. She is having difficulty in terms 14 of providing these alternative financial 15 instruments. We tried the same thing ourselves and 16 have had some success. 17 But the issue that we feel very strongly is 18 that, okay, it appeared to me, from reading 19 materials and preparing for this meeting, that you 20 weren't only talking about regulatory issues in 21 terms of addressing this problem, which is obviously 22 very diverse and has a lot of different aspects to 23 it. 24 But unequivocally to us there is certainly 0261 1 a large number of folks who are going to be victims 2 otherwise who, if we had a real program to provide 3 them with prime lending, despite the fact that they 4 may have some hardships or some extenuating 5 circumstance or, as was mentioned earlier today, 6 there was this whole issue of how many -- this large 7 number of folks, what is it, 40 percent of the folks 8 who, quote-unquote, are actually higher credit risks 9 than what they are ranked; they end up in the subpar 10 ranks, and in reality they are A credit. 11 These are the kinds of folks we think we 12 could provide for if we had a real alternative 13 program working with lenders, and we would like to 14 solicit the Fed to actually work with an actual 15 committee that's set up to deal with this. 16 MS. MOSELEY: How many banks do you hear, 17 mainstream banks, advertising on the radio for their 18 alternative mortgage products? No. They're talking 19 about their on-link -- I don't know. But, you know, 20 it's all that kind of technology stuff that they can 21 offer. 22 I'm suggesting that the predatory lenders 23 are out there selling their products. The banks are 24 out there selling technology. Why not have some of 0262 1 the banks, particularly with this "Don't Borrow 2 Trouble" campaign, but "Come see your friend at X 3 bank"? 4 It can't just be "Don't do something"; it's 5 "We can offer you something better." That's the 6 missing part, that "We can offer you something 7 better. We can offer you a hot line number. We can 8 send you to a Len Raymond or a Norma Moseley." 9 MR. RAYMOND: A counseling agency. 10 MS. MOSELEY: And after 50 come in in one 11 week, you say, "Shut them off, I can't handle them 12 all. I don't have anywhere to take them." 13 MR. WALKER: Well, we'll certainly be 14 willing to sit down and talk with you in any way we 15 can be helpful. 16 MS. MOSELEY: That would be really good. 17 MR. RAYMOND: Certainly we think a credible 18 partner could be set up. 19 MODERATOR SMITH: Thank you very much for 20 being here this afternoon and offering your views. 21 And we are ready to -- we're going to take about a 22 five- or ten-minute break, maybe five minutes, and 23 then go into the open mike session. 24 (Recess) 0263 1 MODERATOR SMITH: Okay. We are ready, and 2 I think the mikes are live. 3 What I'm going to do is to read the list of 4 the people who have signed up for this session, and 5 we will be going in this order. What I would like 6 to do is for you to alternate mikes. You will each 7 have three minutes apiece. We have two timers, so 8 that depending on which mike you are using, you will 9 be looking at our person here at each end of the 10 table. 11 The names that I have, if I can read them 12 all correctly, Mr. Davis. Is it Tim or Jim? 13 MR. DAVIS: Tim. 14 MODERATOR SMITH: Okay, Tim Davis, City of 15 Boston. Daniel Ram -- 16 MR. RAMGEET: Ramgeet. 17 MODERATOR SMITH: Ramgeet. All right. I 18 will ask you all, when you do come to the mike, both 19 to say your name and to spell it for our -- for the 20 record. 21 Willy Knight. Ed France. Lucille May or 22 Willy May? 23 FROM THE AUDIENCE: Willy May unfortunately 24 left. 0264 1 MODERATOR SMITH: Okay. Ruth Dillingham. 2 Leonard C. Akins? 3 MR. ALKINS: Alkins. 4 MODERATOR SMITH: Alkins. Okay. Jim 5 Campen. Andrea Luquette? 6 MS. LUQUETTA: Luquetta. 7 MODERATOR SMITH: Okay. And Bruce 8 Fitzsimmons. 9 So that's the order. We'll start with Mr. 10 Davis. And then if the next person can kind of be 11 ready to go on the other side. Sit close. 12 MR. DAVIS: Hi. My name is Tim Davis. 13 That's T-i-m D-a-v-i-s. I am a senior program 14 manager with the City of Boston Department of 15 Neighborhood Development, and I oversee the "Don't 16 Borrow Trouble" program for the City of Boston. 17 Just to talk very briefly about that program and 18 also on the issue of what we are seeing with 19 subordination requests in our department as well. 20 First of all, we are pleased that through 21 the many years of effort we've put into our first- 22 time home buyer program, we're beginning to see 23 that, probably more so in Boston than in many 24 cities, that first-time home buyers now see 0265 1 education as an integral part to the home-buying 2 process. And we're hoping that that will translate 3 with the "Don't Borrow Trouble" program to 4 homeowners as well. 5 And to give you some of the preliminary 6 results from the first couple of months of the 7 "Don't Borrow Trouble" program, from the calls and 8 inquiries we've received, 33 percent of our 9 inquiries have been general inquiries, people who 10 just want to know more about the program. Those are 11 the types of people that we hope that, when they are 12 looking to refinance, will call us later. 13 42 percent had specific questions about 14 loan terms. So hopefully those are people that we 15 are helping before they actually take the predatory 16 loan. 17 8 percent were behind in their mortgage, 18 but it was resolved by our staff without need for 19 further referral. 9 percent were referred to 20 foreclosure prevention services, specifically Norma 21 Moseley, who has been with you today. And 8 percent 22 were referred to our own City of Boston home repair 23 program, with an additional 1 percent with other 24 questions. 0266 1 What we are seeing with that is that there 2 are a lot of people who are beginning to call us 3 based on the notion of "Don't Borrow Trouble" and 4 "Call us before you sign." 5 The program is still in its youth. We have 6 done mostly print advertisements and things like 7 that. We're just starting the TV PSA. We'll know 8 that really in a little while. 9 To finish up, I would like to say something 10 quickly about subordination requests, which we get 11 for grants that we have done. We have mortgages on 12 the properties. We are seeing a lot of people 13 coming who want subordination requests who do want 14 to refi despite what we tell them, despite the 15 problems they might see with the loan, because they 16 want to consolidate debts. 17 MODERATOR SMITH: Thank you very much. I'm 18 not going to mangle your name again. I'll just say 19 Daniel. 20 MR. RAMGEET: Hi. My name is Daniel 21 Ramgeet. I'm a community organizer for ACORN, and I 22 am here to give testimony on behalf of my mother, 23 Sandra Ramgeet, R-a-m-g-e-e-t. She's the president 24 of Massachusetts ACORN. 0267 1 ACORN members applaud the Federal Reserve 2 for holding hearings and starting to move forward 3 against predatory loans that are destroying our 4 neighborhoods. ACORN thinks that the Federal 5 Reserve has the power to put an end to predatory 6 lending and should have done so long ago. Too many 7 families have already been robbed of their dreams of 8 home ownership and have become hopeless of ever 9 owning a home. 10 ACORN thinks that the Federal Reserve 11 should use its regulatory authority against 12 predatory lendings. These loans which are targeted 13 to low income and minority communities cheat the 14 American people out of tens of thousands of dollars 15 and in the worst cases force families out of their 16 homes. Our community needs the Federal Reserve to 17 live up to its responsibilities and to help protect 18 families against these wealth-stripping loans. 19 ACORN's recommendation are that you, the 20 Federal Reserve, will support the prohibition of 21 lending without consideration of repayment ability 22 and prohibit the common practice of providing 23 teasers, which the American families can't afford, 24 then the interest rate goes up and so does the 0268 1 monthly payments. 2 The practice of financing credit insurance 3 as part of loans is a deceptive practice. Predatory 4 lenders often finance high-cost credit insurance 5 into the loans, which also increase monthly 6 payments, even though the borrowers could get the 7 equivalent insurance from another carrier at a lower 8 rate without the additional interest. 9 The issue of loan flipping definitely needs 10 addressing. Loan flipping is where the lenders 11 refinance loans basically solely to generate extra 12 fees and to provide no benefits for the borrowers. 13 This often forces borrowers to either lose their 14 homes after years of paying their mortgage, and then 15 some borrowers refinance. 16 Predatory lenders are making a fortune from 17 our misery. ACORN president quotes, "There is 18 something very wrong when it is considered a 19 legitimate business practice to provide loans that 20 rob us from our life savings that we put in our 21 homes and leave us homeless." 22 I'd like to submit this on behalf of ACORN 23 members that have been victims of these predatory 24 lenders, and unfortunately they can't be here today 0269 1 because they have to work. 2 MODERATOR SMITH: Thank you very much. Why 3 don't you hand it to him, and he will give them to 4 us. 5 MR. RAMGEET: One other thing. Remember, 6 the people united will never be defeated. Thank you 7 very much. 8 MODERATOR SMITH: Thank you. Thank you for 9 coming. Mr. Knight. 10 FROM THE AUDIENCE: He left as well. 11 MODERATOR SMITH: Okay. Mr. France. 12 MR. FRANCE: My name is Ed France. I'm a 13 Brockton ACORN member. I am also a victim of the 14 predatory lenders, as was stated when we came back 15 there. 16 I have a mortgage through Equicredit. I 17 had a mortgage through RMC, and then they sold it to 18 IMC. The loan was for -- it was 13 percent. I went 19 with Equicredit because I got 2 points lower on 20 that. And with Equicredit I'm paying a $69,000 21 mortgage. I have a ten-year mortgage. I'm expected 22 to pay, at the end of the ten years, a $64,000 23 balloon payment. At that time I will have already 24 paid off my loan. And I try to pay as much as I can 0270 1 over and above my 654 that I owe. 2 Equicredit is constantly sending me letters 3 for insurance. They're telling me that I'm 4 eligible. They don't tell you how much it's going 5 to cost you. It's a constant, ongoing thing. I 6 just disregard them. I'm constantly getting letters 7 in the mail, you know, for other loan officers. 8 They keep getting information on me somehow. 9 With my loan through Equicredit I pay all 10 the insurance. I pay all my property taxes. And I 11 ask my -- the guy that did my mortgage, I says, 12 "Arthur, did you know about the $64,000 balloon 13 payment?" He says, yes, he did. He said that 14 Equicredit expects me to pay -- to refinance with 15 them within a three-year period, which is telling me 16 that I'm going to have to pay more brokerage fees 17 again, plus closing costs and everything else, to go 18 back with the mortgage with them. 19 This is very unfair and very unjust. I 20 wish we could put an end to this. 21 If I refinance in three years, I have a 22 prepayment penalty. And I wish you guys could do 23 something about, you know, putting an end to this. 24 We pray to a higher God up above, a spiritual God. 0271 1 These people that are doing these loans, they're 2 praying to a higher money called the color green. 3 I thank you for your time here. I really 4 hope you can help us out. 5 MODERATOR SMITH: Thank you very much. 6 Ruth Dillingham. 7 MS. DILLINGHAM: I'm going to cede my time 8 to Mr. Fitzsimmons. We're on the same topic. 9 MODERATOR SMITH: Mr. Alkins. 10 MR. ALKINS: Good afternoon. My name is 11 Leonard Alkins. That's A-l-k-i-n-s. I'm the 12 president of the NAACP Boston branch. 13 I thank you for having these hearings, but 14 at the same time I'm insulted that the NAACP was not 15 notified that these hearings were coming about, nor 16 were we invited to participate in a process that we 17 have been involved in since the mortgage scam here 18 in Massachusetts. 19 I don't know if you have involved the NAACP 20 in other cities that you have been in, but this 21 impacts people of color, and for us to be excluded 22 from the process leads me to wonder, is there going 23 to be any change in what has not been happening in 24 our community? 0272 1 The mortgage scams, the flipping of 2 mortgages have been a problem for a long time. They 3 never went away. The message that's being sent by 4 State Government, Federal Government and local 5 communities, meaning the City of Boston, sends the 6 message that it's business as usual. 7 We have elderly people in our community who 8 are being ripped off by irresponsible contractors 9 who work with the City of Boston to repair elderly 10 people's homes. There is no accountability. There 11 is no monitoring of these programs. 12 You have legalized loan-sharking going on 13 by banks charging outrageous points for mortgages, 14 outrageous fees, when you talk about credit cards. 15 And what is the Federal Reserve Bank doing? Does 16 anybody care about poor people and elderly people in 17 this country? People who have power and don't use 18 it are just as bad off as the people who don't have 19 power. 20 We ask the Federal Government, the Federal 21 Reserve Bank, to enforce the regulations that are on 22 the books today, deal with those individuals who are 23 violating the subprime market laws. Get rid of them 24 once and for all, prosecute them and prohibit them 0273 1 from getting back into the business. It's a 2 revolving door. And we must act. 3 These laws and regulations have been on the 4 books for a long time. Why has it taken us so long 5 to take a look at it again? And why are you only 6 giving the community three minutes to discuss the 7 frustrations that we have been putting up with for a 8 long time? You need to come into the community and 9 see firsthand what is going on, what is not being 10 done. Enough is enough. 11 MODERATOR SMITH: Thank you. Mr. Campen. 12 MR. CAMPEN: My name is Jim Campen, 13 C-a-m-p-e-n. I'm Associate Professor of Economics 14 at the University of Massachusetts in Boston. I'm a 15 former member of the Boston Fed's Community 16 Development Advisory Council. 17 I've done a number of studies on mortgage 18 lending in Boston and surrounding cities, and I'm 19 now under contract with the Massachusetts Community 20 Banking Council to do a study using 1999 HMDA data, 21 which should be available, and HUD's list of 22 subprime lenders to do a study of subprime lending 23 in the Boston area. 24 Preliminary analysis using 1998 data shows 0274 1 the same sort of thing in Boston that other people 2 have reported, I'm sure, this morning, when I wasn't 3 here, has been found in other cities. For example, 4 subprime lenders accounted for 9.4 percent of all 5 loans in the City of Boston -- that's refinance 6 loans in 1998; 24 percent of loans to blacks, but 7 only 5 percent of loans to whites; 32 percent of 8 loans in low and moderate income census tracts that 9 are more than 75 percent black and Hispanic, but 10 only 7 percent of loans in low and moderate income 11 tracks that are more than 75 percent white. So the 12 racial divide is a primary thing here rather than 13 the income issue, according to that data. 14 My comments have to be very brief, so I 15 want to make one point, which is that those of us 16 who do studies and people who look at the results of 17 studies and depend on the results of those studies 18 are hurting because of the lack of good data on 19 subprime lending. The situation now is that HMDA 20 data does not provide any information which allows 21 anybody to identify any particular loan as a 22 subprime loan. And of course they can't identify 23 any loan as a predatory loan. 24 The way that most studies are done is that 0275 1 HUD produces a list each year of subprime lenders; 2 that is, lenders that they have determined make -- 3 the majority of their loans consist of subprime 4 loans. But those lenders make other loans which are 5 not subprime loans, and there are many lenders who 6 make predominantly prime loans but also make 7 subprime loans. 8 So what we need, what I urge the Board to 9 do, using its existing authority under the existing 10 legislation and to push for additional legislation, 11 is to expand the Home Mortgage Disclosure Act to 12 include three different kinds of data: data about 13 loans, including interest rates, points, the 14 existence of prepayment penalties, balloon 15 penalties, balloon payments and so on; secondly, to 16 include information about borrowers to allow there 17 to be good data collected on the extent to which 18 subprime loans are going to prime borrowers who are 19 qualified for non-subprime loans; and third, since 20 there is a lot of evidence, a lot of anecdotal 21 evidence that there is a very large racial dimension 22 to the provision of subprime loans, it's important 23 to amend HMDA so that information on the race of 24 borrowers can be collected for all borrowers. 0276 1 As it is now, loans taken over the phone or 2 through the mail or over the Internet, borrowers do 3 not even have to request -- lenders do not have to 4 request the information about the race of the 5 borrower. In Boston, for example, in 1998, for 30.2 6 percent of the subprime loans that were made, there 7 was no information on race or ethnicity of the 8 borrower, compared to 10 percent of the prime loans. 9 So I urge the Federal Reserve Board to use 10 its authority to expand the HMDA data that is 11 collected and made available to the public. 12 MODERATOR SMITH: Thank you very much. 13 MR. WALKER: Excuse me, Dolores. Jim, do 14 you have that in written -- in terms of the 15 categories of information that you are suggesting? 16 MR. CAMPEN: I was planning to submit 17 written -- 18 MR. WALKER: Okay. Thanks. 19 MODERATOR SMITH: Andrea. 20 MS. LUQUETTA: Good afternoon. My name is 21 Andrea Luquetta. That's L-u-q-u-e-t-t-a. I'm the 22 Director of Housing and Community Reinvestment for 23 the Massachusetts Association of CDCs. Our members 24 are nonprofit community-based organizations that 0277 1 engage in a variety of community development 2 activities, often in partnerships with banks, often 3 under the CRA. 4 Over the past several years, MACDC and 5 allied organizations have successfully negotiated 6 with area banks commitments to increase CRA lending 7 by several billion dollars. We are motivated to 8 pursue such commitments in part because financial 9 institutions have not met the credit and capital 10 needs of LMI and minority communities. 11 However, we've also been motivated by 12 troubling instances where a bank or another lender 13 has created negative consequences as a result of 14 trying to originate CRA-qualified loans or to fill a 15 market niche through what has become known as 16 subprime lending. 17 Therefore, in addition to pursuing 18 commitments by the banks to lend at certain volumes 19 in LMI areas, we have also pursued mechanisms to 20 make sure that the loans are responsibly 21 underwritten and do not negatively impact the 22 borrower or community. 23 For example, several years ago one of our 24 members in Chelsea documented that a particular 0278 1 institution's bank and mortgage lending affiliates 2 had originated home-secured loans to LMI and 3 minority borrowers in that area at much higher 4 amounts than all other lenders in that area. 5 For example, a mortgage -- I'm sorry, a 6 loan to a low-income borrower from the mortgage 7 lending affiliate was more than $8,000 more than the 8 typical loan originated by all other lenders in the 9 same population. On average, an African-American 10 applicant to the bank received a loan worth 30 11 percent more than all the loans offered by all the 12 other lenders. And the average Asian applicant to 13 the mortgage lending affiliate received a loan worth 14 more than 65 percent more than all other loans 15 offered by all other lenders. 16 This is 1996 HMDA data. It is old, but the 17 case was still made. 18 In at least one case, this had a negative 19 effect on the ability of the borrower to maintain 20 their home. A Cambodian family that had borrowed 21 from this lender faced not being able to make 22 necessary repairs to their home, including repairing 23 major code violations, because this lender had lent 24 them 145 percent more than the property was actually 0279 1 worth, and this was confirmed by several appraisers. 2 In addition to the Chelsea examples, we 3 have also heard of similar activity, such as you 4 heard today from John Anderson, in the 5 Dorchester-Roxbury-Mattapan area. Thus some 6 lenders, in the name of helping to meet credit needs 7 of lower and moderate income and minority borrowers 8 and mortgage lending affiliates trying to fill a 9 market niche, have actually had negative 10 consequences and destabilized our communities. 11 For our part, we have negotiated with these 12 lenders mechanisms to ensure that folks do not get 13 in over their heads, that they use responsible 14 appraisers, and that they contract with community 15 organizations like Norma Moseley's -- I'm sorry, I 16 am going to go a little bit over -- like Norma 17 Moseley's to go through foreclosure counseling, 18 foreclosure prevention and postpurchase counseling. 19 However, the ability of community 20 organizations to document and address the activities 21 of lenders that destabilize our communities is 22 limited. The regulators, and specifically the 23 Federal Reserve Board, have many more resources and, 24 most importantly, the authority to regulate 0280 1 practices that are currently on the legal side of 2 HOEPA thresholds but are nonetheless harming our 3 communities. 4 And I just want to emphasize this point. I 5 understand that you spent the afternoon discussing 6 community outreach efforts, and I did come in the 7 morning where you were discussing changing the 8 triggers and doing regulatory activities. And I 9 think that the community outreach part is very 10 important and necessary, but that's not the area 11 that the Federal Reserve really stands to make an 12 important change. 13 It's really in your authority as a 14 regulator, rather than as a funder of community 15 outreach or even a supporter or cheerleader of 16 community outreach, where you have the power and the 17 ability to make dramatic, dramatic changes that will 18 help all of the community outreach to have a smaller 19 market to deal with. 20 So I'm going to just summarize the rest of 21 my testimony and just echo some of my colleagues in 22 encouraging you to use your authority to lower the 23 HOEPA triggers; make them more inclusive; to revise 24 the definition of points and fees to include all the 0281 1 costs a borrower is required to pay in order to get 2 the loan; to prohibit prepayment penalties, balloon 3 payments, frequent refinancing or flipping of loans 4 and lending without regard to the borrower's ability 5 to repay on all high-cost HOEPA loans, as well as 6 making changes, as Jim Campen said earlier, to the 7 HMDA data. 8 Finally, I would also urge that under CRA 9 examination procedures, that a lot of these issues 10 also be covered, including through the foreclosures, 11 because it's not enough that lenders are making and 12 originating these loans and therefore inflating 13 their origination numbers; it also has to be 14 reviewed what happens after the origination takes 15 place and what happens to the families and the 16 communities in order for the bank or the lender to 17 get CRA credit. Thank you. 18 MODERATOR SMITH: Mr. Fitzsimmons. 19 MR. FITZSIMMONS: Good afternoon. My name 20 is Bruce Fitzsimmons, F-i-t-z-s-i-m-m-o-n-s. I'm an 21 attorney practicing law in Boston. I'm also on the 22 Board of Directors of the Massachusetts Conveyancers 23 Association, a 3,000-member statewide real estate 24 bar. 0282 1 In the Commonwealth of Massachusetts, real 2 estate closings are conducted by attorneys. In most 3 cases, the closing attorney represents the lender 4 and also acts as the title insurance agent. 5 The MCA appreciates the concerns that have 6 led to the introduction of HR 4250 and 2415 and 7 related legislation. The concerns of the 8 Massachusetts Conveyancers Association relates to 9 technical issues with the proposed legislation. 10 First, the concerns raised about predatory 11 lending practices have related to refinances and 12 second mortgage transactions. There is no reason to 13 extend the Home Ownership and Equity Protection Act 14 to residential mortgage transactions in which the 15 loan is being used to acquire or construct the 16 dwelling. 17 Secondly, the MCA believes that the 18 provisions of HOEPA which exclude fees or premium 19 for title examination, title insurance, or similar 20 purposes, as long as the charges are reasonable, the 21 lender receives no direct or indirect compensation, 22 and the charges paid to a third party unaffiliated 23 with the lender, should be retained. In 24 Massachusetts in particular, affiliated business 0283 1 arrangements with lenders are exceptions rather than 2 the rule. The lender does not benefit from those 3 types of charges. 4 Thirdly, the MCA is concerned with the new 5 Provision 129K of the Truth in Lending Act which 6 states that "No creditor or other person may require 7 or allow the collection of a premium for credit 8 insurance or a debt cancellation contract on a 9 single-premium basis through an up-front charge paid 10 by the borrower at the initiation of the loan." 11 The objection here is with the words "No 12 creditor or other person may require or allow." 13 Members of the MCA are involved in the closing of 14 mortgage loans, and we believe it is an impractical 15 burden placed on the closing attorney, who might be 16 viewed as the "other person" who "allows" the lender 17 to obtain the single premium in connection with the 18 transaction, the role of policing the lender. 19 We're not aware of any other section of the 20 Truth in Lending Act or other consumer protection 21 statute that imposes such an obligation on third 22 parties. 23 Lastly, we note that HR 3901 contains a 24 provision that "A conforming home loan document in 0284 1 which blanks are left to be filled in after the 2 contract is signed shall not be enforceable under 3 federal or state law." 4 We believe that room should be left here 5 for correction of scrivener's errors in a mortgage 6 or for the filling in of recording information on an 7 instrument which will be recorded simultaneously 8 with the mortgage which requires the instrument 9 number from the mortgage. 10 Thank you very much for the opportunity to 11 present these comments. 12 MODERATOR SMITH: Thank you very much, Mr. 13 Fitzsimmons. And I thank everyone who signed up for 14 the open mike session. 15 Is there anyone else who did not sign up 16 but who would like to offer their views at this 17 time? (No response) 18 Well, if not, with that, we will adjourn 19 this hearing. But, again, I thank you in the 20 audience both who participated and who came here to 21 hear the presentations made by the invited panelists 22 and by the open mike presenters. 23 We have, I think, gained some important 24 perspectives offered here today and will be taking 0285 1 advantage of them in our analysis as we work to 2 develop proposals and recommendations to the Board 3 on measures that might be taken within the Board's 4 authority to amend the HOEPA provisions of the Truth 5 in Lending Act and to take other measures that might 6 be helpful in helping to eliminate predatory lending 7 practices. 8 So, with that, unless we have other 9 comments from the Panel, then we are adjourned, and 10 I thank you again. 11 (Whereupon the proceedings were 12 concluded at 4:00 p.m.) 13 14 15 16 17 18 19 20 21 22 23 24 0286 1 C E R T I F I C A T E 2 I, Carol H. Kusinitz, Registered 3 Professional Reporter, do hereby certify that the 4 foregoing transcript, Volume I, is a true and 5 accurate transcription of my stenographic notes 6 taken on August 4, 2000. 7 8 9 _____________________________ 10 Carol H. Kusinitz 11 Registered Professional Reporter 12 13 14 - - - - 15 16 17 18 19 20 21 22 23 24
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