Morning Session of Public Hearing on Home Equity Lending
August 4, 2000
|
Morning Session of Public Hearing on Home Equity Lending |
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
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)
|
August 4 hearing on home equity lending |
Afternoon session |
Complete transcript
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