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Public Hearing on Home Equity Lending
August 16, 2000
Transcript

          1                  FEDERAL RESERVE BOARD
 
          2                      PUBLIC HEARING
 
          3                  ON HOME-EQUITY LENDING
 
          4                     August 16, 2000
 
          5                     MORNING SESSION
 
          6
 
          7            STENOGRAPHIC REPORT OF PROCEEDINGS had in
 
          8   the above-entitled matter held at the Federal
 
          9   Reserve Bank of Chicago, 230 South LaSalle Street,
 
         10   Chicago, Illinois, MS. DOLORES S. SMITH, Moderator.
 
         11
 
         12       PANELISTS:
                       MR. BRUCE BAKER, Illinois Bankers
         13                 Association
                       MR. MICHAEL O. BROWN, Sable Bancshares,
         14                 Inc.
                       MR. TERRY BIVINS, Ficus Financial
         15                 Services, Inc.
                       MR. DAVID A. BOCHNOWSKI, Peoples Bank, SB
         16            MR. BOB BUTLER, Assurant Group
                       MR. ALEX COLUMBUS, Assurant Group
         17            MR. WILLIAM A. DARR, Office of Banks and
                            Real Estate, State of Illinois
         18            MR. TOM DETELICH, Household Finance
                            Corporation
         19            MR. DAN IMMERGLUCK, Woodstock Institute
                       MR. TOM JAMES, Assistant Attorney General,
         20                 State of Illinois
                       MR. IRA RHEINGOLD, Legal Assistance
         21                 Foundation
                       MR. MICHAEL SHEA, ACORN Housing
         22                 Corporation
                       MR. CRAIG A. VARGA, Illinois Financial
         23                 Services Association
                       MS. MICHELLE WEINBERG, Horwitz, Horwitz
         24                 & Associates
 
 
 
 
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          1                      (Whereupon, the following
 
          2                      proceedings commenced at
 
          3                      9 o'clock a.m.)
 
          4       MODERATOR SMITH:  Good morning.  We're ready to
 
          5   begin with this session.
 
          6            My name is Dolores Smith.  I am the
 
          7   Division Director for Consumer and Community
 
          8   Affairs at the Federal Reserve Board, and I will be
 
          9   the moderator for these hearings, for this
 
         10   particular hearing.
 
         11            Chicago is the third in a series of the
 
         12   hearings that the Board is holding this summer on
 
         13   home-equity lending.  We've already met, had two
 
         14   meetings, the first one in Charlotte and the second
 
         15   one in Boston, and we will be next meeting in
 
         16   San Francisco on September the 7th.
 
         17            The invited panelists and members of the
 
         18   public at our previous meetings offered a wide
 
         19   variety of views on possible ways to address
 
         20   predatory lending practices in the home
 
         21   equity/consumer credit market.  So we look forward
 
         22   to hearing your views on these issues in Chicago
 
         23   today.
 
         24            As in our previous hearings, we will be
 
 
 
 
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          1   discussing the potential use of the Board's
 
          2   rule-writing authority this morning; and then, this
 
          3   afternoon, we're going to turn our focus to
 
          4   alternatives to regulation such as consumer
 
          5   outreach and consumer education.
 
          6            But let me start by introducing our Board
 
          7   panel.  To my right is Ned Gramlich, who is a
 
          8   member of the Board of Governors and who also is
 
          9   the Chairman of our Oversight Committee for
 
         10   Consumer and Community Affairs.
 
         11            To his right is Alicia Williams, who is
 
         12   assistant -- who is a Vice President here at the
 
         13   Reserve Bank of Chicago.
 
         14            To my left, extreme left, is
 
         15   Adrienne Hurt, Assistant Director in the Division
 
         16   of Consumer and Community Affairs; and
 
         17   Jim Michaels, who is managing counsel.  Adrienne
 
         18   and Jim are the ones who are primarily responsible
 
         19   for Truth in Lending matters at the Board.
 
         20            I'll start with some introductory remarks
 
         21   for the record.  The Truth in Lending Act, which we
 
         22   also refer to as TILA, requires creditors to
 
         23   disclose the cost of credit for consumer
 
         24   transactions.
 
 
 
 
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          1            In 1994, the Congress enacted the Home
 
          2   Ownership Equity Protection Act or HOEPA as it is
 
          3   called.  HOEPA added special protections to TILA
 
          4   for consumers who use their homes as security for
 
          5   loans when the rates or fees are above a certain
 
          6   percentage or amount.
 
          7            HOEPA was a response by Congress to
 
          8   accounts of abusive lending practices that involve
 
          9   unscrupulous lenders who made unaffordable home
 
         10   secured loans to house-rich but cash-poor
 
         11   borrowers.  These cases often involved elderly,
 
         12   sometimes unsophisticated homeowners, who were
 
         13   targeted for loans with high rates or high closing
 
         14   fees and with repayment terms that were difficult
 
         15   or impossible for the homeowners to meet.
 
         16            HOEPA requires creditors to provide
 
         17   additional disclosures at least three days before
 
         18   consumers become obligated for such loans.  It
 
         19   prohibits lenders from including certain terms in
 
         20   loan agreements, for example, balloon payments for
 
         21   short-term loans.  It prohibits creditors from
 
         22   relying on a consumer's home as the source of
 
         23   repayment without considering whether the
 
         24   consumer's income, debt, and employment status
 
 
 
 
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          1   would support repayment of the debt.
 
          2            It also requires the Federal Reserve Board
 
          3   to hold hearings periodically to keep abreast of
 
          4   the home equity credit market targeted by HOEPA.
 
          5   The Board held an initial set of hearings in 1997,
 
          6   about two years after HOEPA became effective.
 
          7            This morning, Governor Gramlich will start
 
          8   us off with some remarks about these hearings that
 
          9   we are now holding.
 
         10       GOVERNOR GRAMLICH:  Thank you very much,
 
         11   Dolores.  I'm happy to be here in Chicago.  This
 
         12   is, as Dolores said, the third of our four hearings
 
         13   on this matter.
 
         14            Let me just say a few introductory -- make
 
         15   a few introductory comments about this whole
 
         16   general problem.
 
         17            The last few years have seen an enormous
 
         18   growth in subprime mortgage lending.  The rates of
 
         19   growth in the subprime market you find usually in
 
         20   terms of higher rates than prime mortgages.  These
 
         21   rates of growth have roughly doubled the rates of
 
         22   growth of prime mortgage lending; and, by all
 
         23   accounts, this has been a very socially desirable
 
         24   movement, that credit has been extended to lots of
 
 
 
 
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          1   people who previously had been denied credit and so
 
          2   it's been part of the process of opening up credit
 
          3   markets to lower- and moderate-income individuals.
 
          4            But with every good thing, there is
 
          5   sometimes at least some potential problems that
 
          6   come along in the wake, and one of those may be
 
          7   predatory lending, that by all -- there are a
 
          8   number of anecdotes of abuses taking place in
 
          9   credit markets.  There have been a number of TV
 
         10   specials on this; and there are some suggestions of
 
         11   problem in overall data on mortgage foreclosure
 
         12   rates and things of that nature.
 
         13            So this sets the stage for the issue that
 
         14   we are dealing with today, that somehow the fed
 
         15   would like to use its authority to encourage the
 
         16   good growth in subprime lending, but to curb the
 
         17   abuses, at least those abuses that we have it
 
         18   within our power to curb, and that's our basic goal
 
         19   here today.
 
         20            As Dolores said, the fed does have some
 
         21   authority in this area.  We have some authority
 
         22   under HOEPA.  We have authority under the Home
 
         23   Mortgage Disclosure Act, and we have some other
 
         24   authority.  And these hearings are fundamentally
 
 
 
 
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          1   about what we should do with our authority.  We
 
          2   hope to maintain an analytical focus here with all
 
          3   the specific measures that come up to try to figure
 
          4   out whether the benefits of doing something exceed
 
          5   the cost and this sort of thing.
 
          6            One thing that I should say at the outset
 
          7   is that the fed can't do it all, that we do have
 
          8   authority in this area; but if predatory lending is
 
          9   the problem that many people allege it to be that
 
         10   lots of other groups are going to have to step up
 
         11   as well.
 
         12            It turns out there are nine federal
 
         13   regulators with authority in this area.  We are at
 
         14   the same time talking with them in Washington to
 
         15   try to make sure that all of the federal regulatory
 
         16   agencies are operating with a common play book.
 
         17            Many states have regulatory authority in
 
         18   this area.  Private sector mortgage entities, such
 
         19   as Fannie Mae, Freddie Mac who are kind of in the
 
         20   middle between the public and private sector, they
 
         21   can play a role; and many purely private sector
 
         22   entities such as lending institutions can also play
 
         23   a role by changing some of their practices.
 
         24            This afternoon, the hearings will be
 
 
 
 
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          1   devoted to consumer education, and that is
 
          2   certainly an important part of the mix as well
 
          3   because if borrowers fully understood many of the
 
          4   credit terms that we're talking about today, they
 
          5   probably wouldn't get involved in these credit
 
          6   problems.
 
          7            So this is most likely a multi-faceted
 
          8   issue that needs -- that requires a multi-faceted
 
          9   solution.  The fed does have some limited authority
 
         10   in this area, and we're trying to see how we can
 
         11   best use it; but this is not the only thing that
 
         12   should happen if there is a broad approach on the
 
         13   predatory lending issue.
 
         14            As Dolores said, we have had earlier
 
         15   hearings back in '97, and this is the third of the
 
         16   hearings that we're having this year.  The Treasury
 
         17   and HUD had hearings earlier in the year.  They
 
         18   issued recently a report that had a number of
 
         19   suggestions for us and for the Congress.  And those
 
         20   earlier hearings pretty much set the stage for what
 
         21   we're involved with today.
 
         22            We are trying to take up many of the
 
         23   suggestions that have been made for our action, as
 
         24   I said earlier, to analyze the benefits and cost,
 
 
 
 
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          1   try to figure out exactly what we should do in a
 
          2   way that encourages subprime lending but without
 
          3   the abuses.  And we hope to keep this on a very
 
          4   specific, very specific and analytical plane here
 
          5   to try to guide us through this difficult issue.
 
          6            Thank you very much.
 
          7       MODERATOR SMITH:  We'll be starting the first
 
          8   segment of the hearing in just a minute.  But I
 
          9   wanted to mention that we do have invited panelists
 
         10   this morning and this afternoon; but after those
 
         11   two sets of panels have had -- have engaged in
 
         12   dialogue with us, then we have arranged for an open
 
         13   mic session starting some time between 2:30 and
 
         14   3:00 this afternoon, and this will be an
 
         15   opportunity for members of the public to sign up
 
         16   and to offer their views in three-minute
 
         17   presentations starting, as I said, between 2:30 and
 
         18   3:00.
 
         19            We will be following the order in which
 
         20   people have registered.  You can register at the
 
         21   registration desk with Ms. Hatcher, and I would
 
         22   urge you to do that so that we'll have some idea of
 
         23   how the open mic session will be shaping up.
 
         24            I would remind you that the remarks will
 
 
 
 
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          1   be limited to three minutes, but we will welcome
 
          2   any longer written remarks that you may have for
 
          3   us.
 
          4            So with that, I will move into describing
 
          5   what our rules of procedure are for this morning.
 
          6   We will have opening remarks from each of the
 
          7   invited panelists.  They, too, are asked to confine
 
          8   their remarks to three minutes.  We have two
 
          9   time-keepers who will be keeping track of the time
 
         10   and will be holding up signs, I believe, to signal
 
         11   you when the time -- well, first, when you have one
 
         12   minute left.  And the three minutes go by very
 
         13   quickly.  So when you have one minute left and when
 
         14   your time has expired.
 
         15            I would urge you to sort of keep an eye on
 
         16   them even as you are looking toward us.  If your
 
         17   attention is more directed here, I will try to
 
         18   signal you so that you will know to look and see
 
         19   that your time is expired.
 
         20            You will have an opportunity later to
 
         21   engage in dialogue so this is -- you know, your
 
         22   three minutes are not your last opportunity to be
 
         23   offering us your views.
 
         24            I will ask that you identify yourself for
 
 
 
 
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          1   the record.  There may be questions from the
 
          2   Federal Reserve panel, if there is a perceived need
 
          3   for clarification, and then the general dialogue
 
          4   will start after all of the opening statements have
 
          5   been made.
 
          6            So with that, we will start with Mr. Darr
 
          7   and continue in a clockwise direction until we have
 
          8   finished with everyone.
 
          9       MR. DARR:  Well, thank you very much,
 
         10   Ms. Smith.  My name is William Darr.  I am the
 
         11   Commissioner of the Illinois Office of Banks and
 
         12   Real Estate, and I want to thank you for inviting
 
         13   me here to participate in this important panel.
 
         14            I think we're all aware of some of the
 
         15   anecdotal incidents that Governor Gramlich referred
 
         16   to about how predatory lenders suck the life blood
 
         17   out of their victims; but I think it's equally
 
         18   important that we be aware of the debilitating
 
         19   effects that these types of loans have on the
 
         20   community at large.
 
         21            We know that foreclosures, particularly
 
         22   those in the economically depressed areas,
 
         23   frequently result in declining property values for
 
         24   the hard-working neighbors of the victims; that
 
 
 
 
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          1   boarded up homes can become havens for gangs and
 
          2   drugs; and that the result in the neighborhood
 
          3   depression can discourage much needed development
 
          4   funds from flowing into communities.
 
          5            In Illinois, we've been attempting to walk
 
          6   the fine line between cracking down on these
 
          7   predators who make these loans while maintaining
 
          8   subprime lending as a viable business line and
 
          9   encouraging the American dream of homeownership to
 
         10   hard-working people who might otherwise never have
 
         11   thought such an opportunity was possible.
 
         12            As we work to develop the administrative
 
         13   rules designed to curb this abhorrent practice, we
 
         14   listened to the community and heard firsthand some
 
         15   of the stories of what this scourge might mean to
 
         16   otherwise vibrant neighborhoods.
 
         17            In crafting our proposed rules, we
 
         18   attempted to meet community concerns while not
 
         19   unduly restricting legitimate lenders from
 
         20   marketing their products in these communities.
 
         21            We ultimately crafted a draft set of rules
 
         22   which attempted to limit the most egregious
 
         23   practice of the predators which offered consumers
 
         24   the opportunity to obtain counseling so they would
 
 
 
 
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          1   be better informed of the impact of their financial
 
          2   decisions while stepping up our data collection and
 
          3   enforcement efforts in order to target those who
 
          4   would prey on the poor, the elderly and the
 
          5   uninformed -- underinformed, I should say.
 
          6            But the one core issue which was
 
          7   continually the stepping off point for this debate
 
          8   was the threshold point for defining just what we
 
          9   would -- what we in Illinois called a high-risk
 
         10   loan.  We use HOEPA standards as defined in
 
         11   Section 32, but we're fully aware that this
 
         12   standard is indeed inadequate.
 
         13            It's been estimated in Illinois that
 
         14   Section 32 loans account for less than 1 percent of
 
         15   all loans made.  Clearly, this threshold must be
 
         16   loosened to ensure that a wide perspective of loans
 
         17   are covered and, as a result, scrutinized in more
 
         18   detail.
 
         19            We strongly urge the Federal Reserve to
 
         20   act quickly to lower its Section 32 threshold to
 
         21   800 basis points over Treasury Bills.  We further
 
         22   encourage the fed to better define the fee
 
         23   calculation, to close some of the loopholes which
 
         24   these unscrupulous lenders are using to skirt the
 
 
 
 
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          1   law.
 
          2            But of equal importance -- and here we
 
          3   agree completely with Governor Gramlich -- we
 
          4   encourage the Federal Reserve to use its
 
          5   considerable influence to press for action in
 
          6   Washington to address this same issue.  Without
 
          7   federal action to clamp down on these predators,
 
          8   individual states can only do so much just like the
 
          9   Federal Reserve.
 
         10            Unless the playing field is level to allow
 
         11   both state and federal regulators to crack down on
 
         12   these lenders, we're not going to get very far.  We
 
         13   all need to work together to make sure our
 
         14   communities are not victimized and to ensure that
 
         15   all citizens have the same access to fair and
 
         16   reasonable credit.
 
         17       MODERATOR SMITH:  Thank you.
 
         18       MR. BAKER:  Good morning.  My name is
 
         19   Bruce Baker, and I am Senior Vice President and
 
         20   General Counsel of the Illinois Bankers
 
         21   Association.  The IBA represents over 90 percent of
 
         22   the banking assets in the state which has over
 
         23   700 banks and thrifts of all sizes, and we
 
         24   appreciate this opportunity to appear before you
 
 
 
 
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          1   today.
 
          2            Perhaps more than anywhere else, Illinois
 
          3   has seen a flurry of legislative proposals on
 
          4   predatory lending this year.  In the past eight
 
          5   months, there have been two bills, two amended
 
          6   bills, and a joint resolution introduced in the
 
          7   state capitol; and, in the past five months, the
 
          8   City of Chicago has been drafting an ordinance on
 
          9   the issue.
 
         10            The Illinois banking industry has been
 
         11   closely involved in these efforts.  We recognize
 
         12   the large problem in our communities brought about
 
         13   by a small number of unscrupulous mortgage brokers
 
         14   and lenders, and we want to be part of the
 
         15   responsible solution.
 
         16            Yet just as the Board is holding a hearing
 
         17   today to learn more about this issue, the banking
 
         18   industry also has been climbing the steep learning
 
         19   curve in the past year.
 
         20            We have found there are three principal
 
         21   ways that a bank holding company may become
 
         22   involved in this problem.  First, in recent years,
 
         23   a small number of holding companies have purchased
 
         24   subprime loan companies with high-cost loans
 
 
 
 
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          1   associated with predatory sales practices in their
 
          2   portfolios.
 
          3            Second, many banks, bank subsidiaries
 
          4   purchase interest and securitizations of subprime
 
          5   loans for CRA purposes, and some of these secured
 
          6   ice pools include problem high-cost loans.
 
          7            Third, some holding company subsidiaries
 
          8   have commercial relationships with mortgage
 
          9   originators who, in hindsight, have engaged in
 
         10   predatory sales practices.  These are all areas
 
         11   where bank holding companies and their subsidiaries
 
         12   should be reviewing their policies and practices in
 
         13   order to improve their due diligence and to
 
         14   eliminate any prospect that they are enabling or
 
         15   encouraging predatory sales practices.
 
         16            Beyond that, we concur with the
 
         17   HUD/Treasury's report's recommendation that the
 
         18   Federal Reserve should exercise its authority under
 
         19   HOEPA and lower the Section 32 definition of
 
         20   high-cost loans to an interest rate of 8 percent
 
         21   over comparable Treasury yields.
 
         22            We also support federal legislative and
 
         23   regulatory proposals that would ensure a uniform
 
         24   national application of these definitions and
 
 
 
 
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          1   associated prohibited practices in order to avoid a
 
          2   patchwork of conflicting laws in 15 states and
 
          3   potentially more cities.
 
          4            We also urge you to consider the
 
          5   importance of these definitional thresholds when
 
          6   considering the list of prohibited activities for
 
          7   high-cost loans.
 
          8            Many legitimate prime and subprime loans
 
          9   offer terms like balloon payments and prepayment
 
         10   penalties.  While these and other terms have been
 
         11   exploited by unscrupulous loan originators, they
 
         12   also are useful and desirable underwriting terms
 
         13   that can reduce interest rates and make loan
 
         14   payments more affordable and credit more available,
 
         15   and they are choices made by the consumer.
 
         16            While they may have become part of the
 
         17   problem in the predatory lending context, if that
 
         18   context is defined too broadly, restricting them
 
         19   will have major repercussions throughout legitimate
 
         20   lending markets.
 
         21            We urge you to address these definitional
 
         22   thresholds with caution both in terms of their
 
         23   numbers and their underlying definitions.
 
         24            Again, thank you for including us in this
 
 
 
 
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          1   discussion today.  The Illinois banking industry
 
          2   looks forward to working with you on this problem
 
          3   in a sincere and constructive manner.
 
          4       MODERATOR SMITH:  Mr. Rheingold?
 
          5       MR. RHEINGOLD:  Good morning.  My name is
 
          6   Ira Rheingold.  I am an attorney with the Legal
 
          7   Assistance Foundation.  I run a foreclosure
 
          8   prevention project here in Illinois, and I counsel
 
          9   low-income and moderate-income homeowners
 
         10   throughout the community, and I have talked with
 
         11   attorneys throughout the country and throughout the
 
         12   State of Illinois about the predatory lending
 
         13   problem.
 
         14            I have three minutes, so I have three
 
         15   thoughts.
 
         16            One, the opportunity that the Federal
 
         17   Reserve Board has today is an important
 
         18   opportunity, and the authority that the Federal
 
         19   Reserve Board has is a broad authority.
 
         20            There's two parts of their authority.
 
         21   One, it can lower the T bill threshold, and we
 
         22   strongly urge that the T bill threshold be lowered
 
         23   to 8 percent.
 
         24            It also can increase what is covered in
 
 
 
 
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          1   the points and fees trigger.  We think the
 
          2   authority is there to do that.  I think the
 
          3   authority is clear that it be can done, and there
 
          4   are items that need to be included, to simplify the
 
          5   system, but also to make sure that definition
 
          6   includes all the areas where there may be
 
          7   problems.
 
          8            For instance, per diem interest should be
 
          9   included in that.  Credit insurance should be
 
         10   included in that.  And the Federal Reserve should
 
         11   clarify that yield spread premiums, a payment to a
 
         12   broker, is also included in the definition of
 
         13   points and fees.
 
         14            Second, it has the authority in connection
 
         15   with mortgage loans that designate unfair,
 
         16   deceptive practices or practices designed to evade
 
         17   HOEPA.  They can also look at refinance loans,
 
         18   which is what we're talking about today, and outlaw
 
         19   practices associated with abusive lending.  That's
 
         20   part of your authority and it's something you can
 
         21   do.
 
         22            You can prohibit no document loans on
 
         23   high-fee loans because no doc loans is a big
 
         24   problem.  Balloon payments on high-fee loans.  You
 
 
 
 
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          1   can prohibit credit insurance.  You can prohibit
 
          2   mandatory arbitration.  You can take a look at
 
          3   asset-based lending on an individual basis as
 
          4   opposed to a private practice.  Those are things
 
          5   that you have the authority to do and you should
 
          6   use.
 
          7            You should figure out and we can talk
 
          8   today about prohibiting flipping and what that
 
          9   means.  And you can prohibit prepayment penalties
 
         10   and you can prohibit the financing of fees, and I
 
         11   think those are all things that are associated with
 
         12   abusive practices.
 
         13            Second, accountability.  The system is
 
         14   broken.  We have a system of brokers.  We have a
 
         15   system of lenders.  We have a system of path-though
 
         16   lenders.  We have a system of securitizers.  And
 
         17   when I represent people and we're in foreclosure,
 
         18   the lender I am dealing with is the securitizer,
 
         19   the holder of the loan.  And when we go to court
 
         20   and we say, this person has been deceived or fraud
 
         21   has been committed, we didn't do it.  The broker
 
         22   did it.  The originator did it.
 
         23            The strength of HOEPA is it has
 
         24   pass-through liability, and it needs to be -- the
 
 
 
 
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          1   reason why the trigger needs to be lowered and the
 
          2   fees need to be included more is to extend
 
          3   pass-through liability to everybody, and that
 
          4   pass-through liability should be extended to the
 
          5   broker, to the lender.
 
          6            Third and quickly, objectivity.  Anecdotal
 
          7   evidence.  We think there's plenty of objective
 
          8   statistics out, but foreclosure rates have
 
          9   skyrocketed.  The NTIC study which shows subprime
 
         10   lending matching up with foreclosures, that's
 
         11   objective.  The Woodstock study which shows that
 
         12   lending in subprime markets are being targeted to
 
         13   minority communities, that's objective.  And the
 
         14   Census report that showed a 365 percent increase in
 
         15   foreclosures.
 
         16            Finally, if it's anecdotal, it's because
 
         17   we don't have the objective statistics.  The
 
         18   lending industry does.  And with HMDA, you can
 
         19   collect those objective statistics so we can take a
 
         20   look more objectively as to what's going on, what
 
         21   are the APRs, what are the fees and what are the
 
         22   default rates on those type of loans.
 
         23       MODERATOR SMITH:  Thank you.
 
         24       MR. DETELICH:  Good morning, Governor Gramlich,
 
 
 
 
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          1   and other representatives of the Federal Reserve
 
          2   Board.  Thank you for this opportunity to speak at
 
          3   this very important meeting today.
 
          4            My name is Tom Detelich.  I am Managing
 
          5   Director of Branch Operations for Household Finance
 
          6   Corporation which includes the branch operations of
 
          7   Household Finance and Beneficial Finance.
 
          8   Household has, for over 120 years, helped millions
 
          9   of working Americans meet their financial needs in
 
         10   good and in trying times.
 
         11            Our position on predatory lending is
 
         12   perfectly clear.  Unethical lending practices of
 
         13   any type are abhorrent to our company, to our
 
         14   employees and, most importantly, to our customers.
 
         15   These practices undermine the integrity of the
 
         16   marketplace we compete in and limit our ability to
 
         17   provide financial service needs to this country's
 
         18   diverse consumer market.
 
         19            That is why Household is one of the few
 
         20   lenders to testify in support in favor of the
 
         21   passage of the Homeownership and Equity Protection
 
         22   Act in 1994.  We worked with Congress in crafting
 
         23   that bill in an effort to reach the appropriate
 
         24   balance between protecting consumers from offensive
 
 
 
 
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          1   business practices and maintaining the appropriate
 
          2   flow of credit to Americans with less than perfect
 
          3   credit.
 
          4            Today, we support the efforts of the
 
          5   Federal Reserve Board to help eliminate unethical
 
          6   lending practices; however, we question whether
 
          7   increasing the scope of HOEPA or adding new
 
          8   legislation or new disclosures is the right
 
          9   answer.
 
         10            For example, in North Carolina, this year,
 
         11   legislation was passed that resulted in an HFC,
 
         12   most likely other lenders as well, and restricting
 
         13   the credit available in that state resulting in
 
         14   fewer loans to customers who would have otherwise
 
         15   qualified for credit.
 
         16            Indeed, HOEPA itself may limit the number
 
         17   of lenders willing to lend to certain credit worthy
 
         18   segments of the market.  This is not clearly the
 
         19   original intended fact of HOEPA or the Federal
 
         20   Reserve today I'm sure.
 
         21            Among the many approaches to eliminating
 
         22   predatory lending that Household does support,
 
         23   there are three that have broad support among
 
         24   industry and consumer groups alike.  We believe
 
 
 
 
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          1   that these three approaches speak to the heart of
 
          2   how to best eliminate unethical lending practices
 
          3   from our industry.
 
          4            First and foremost, enforcing existing
 
          5   legislation and regulations.  Nearly every
 
          6   anecdotal case of predatory lending involves some
 
          7   type of fraud or deception.  Enforcing existing
 
          8   laws that prohibit these practices will eliminate
 
          9   many of the bad actors from our industry.
 
         10            Second, we need to simplify and improve
 
         11   the clarity of existing disclosures.  Many examples
 
         12   of predatory lending involve consumers who did not
 
         13   understand the transaction they agreed to despite
 
         14   numerous disclosures given days in advance.  We
 
         15   simply need to have better disclosures, not more
 
         16   disclosures.
 
         17            Third, we need to educate our consumers.
 
         18   An informed consumer will recognize the deceptive
 
         19   practices of predatory lenders and will make better
 
         20   choices.
 
         21            Household has a number of consumer
 
         22   educational initiatives in place that we would be
 
         23   happy to share.  We are certain that the collective
 
         24   efforts of the industry and consumer groups can
 
 
 
 
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          1   result in even better ideas.
 
          2            We are pleased that Household is often
 
          3   cited as the standard for high ethics and fair
 
          4   consumer dealings by our regulators and our
 
          5   legislators.  We look forward to working with these
 
          6   legislators and these regulators and other
 
          7   reputable lenders in an effort to eliminate our
 
          8   ranks of unethical and illegal practices in order
 
          9   to protect our customers and the longevity of our
 
         10   business.  Thank you.
 
         11       MODERATOR SMITH:  Mr. Bivins?
 
         12       MR. BIVINS:  Thank you.  My name is
 
         13   Terry Bivins.  I'm a mortgage broker, originating
 
         14   conforming and non-conforming loans in Illinois,
 
         15   Indiana and Wisconsin.
 
         16            As a result of doing business in three
 
         17   states, I have to comply with three different sets
 
         18   of regulations.  As in one of the hand-outs that
 
         19   was provided before this hearing, it states, "There
 
         20   is no ready method of measuring the amount of
 
         21   predatory lending or how prevalent the problem it
 
         22   represents."
 
         23            Until you can measure this activity, you
 
         24   cannot manage it.
 
 
 
 
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          1            In Illinois, a company is licensed, but
 
          2   not the loan originators.  In Indiana, the company
 
          3   is licensed, but not the originators.  In
 
          4   Wisconsin, not only is the company licensed, but
 
          5   every loan originator is licensed.
 
          6            In Illinois, if I have an employee who I
 
          7   fire for something I feel is unethical, there is no
 
          8   method for the state to stop this individual from
 
          9   moving to another company whether it be another
 
         10   broker or going to work for a bank, going to work
 
         11   for a finance company.  He can still be in the
 
         12   business.
 
         13            In the state of Wisconsin, I fire an
 
         14   individual, he is turned into the state and he
 
         15   loses his license for a minimum of five years.
 
         16            Until you have a method of licensing or
 
         17   registering every loan originator in this country
 
         18   and then being able to track the loans or the
 
         19   initiatives from Fannie and Freddie Mae so that you
 
         20   can follow from that foreclosure back to who has it
 
         21   today on to who originally originated it as a
 
         22   company as well as who the original loan officer
 
         23   was and take action against that individual, this
 
         24   problem will not go away and we do not know the
 
 
 
 
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          1   extent of it.  Thank you very much.
 
          2       MODERATOR SMITH:  Ms. Weinberg?
 
          3       MS. WEINBERG:  Good morning.  My name is
 
          4   Michelle Weinberg.  I'm a consumer protection
 
          5   attorney in Chicago, and a substantial part of my
 
          6   practice involves consumer credit issues including
 
          7   predatory lending.  I would like to thank you for
 
          8   inviting me to speak today.
 
          9            First, I would like to say that I
 
         10   completely concur with the problems and solutions
 
         11   presented by Elizabeth Renuard (phonetic) of the
 
         12   National Consumer Law Center.  I won't repeat them,
 
         13   but I wanted to put that in.
 
         14            I would like to focus on one point today,
 
         15   and that is the exclusion of open-end credit plans
 
         16   from coverage under HOEPA.  The exclusion of
 
         17   open-end credit plans from HOEPA coverage has
 
         18   invited predatory lenders to structure loans to
 
         19   meet the formal requirements of that exclusion.
 
         20            It should be kept in mind by the Board
 
         21   that predatory lenders are just that, they are
 
         22   predatory.  They will take advantage of any
 
         23   loophole Congress and the Board creates for them
 
         24   because they are motivated by the desire to make
 
 
 
 
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          1   the largest profit off of each transaction without
 
          2   respect to the individual needs of the borrower.
 
          3            The case of Carol Drahoble, a client of
 
          4   mine, will illustrate that point.  Ms. Drahoble
 
          5   applied for a home improvement loan in the amount
 
          6   of $13,000.  She did not request a line of credit,
 
          7   and she was not given any disclosures and was not
 
          8   told that the loan was being structured as a line
 
          9   of credit.  She didn't even know this until the day
 
         10   of the closing when he brought the loan documents
 
         11   to her place of employment for her to sign during a
 
         12   break.  She saw at that point that it was a $75,000
 
         13   line of credit, and she objected to it.  She said,
 
         14   I don't want this money.  I have no intention of
 
         15   ever drawing any more than the $13,000.
 
         16            In response to her objection, the broker
 
         17   told her that she didn't have to borrow anything
 
         18   beyond the first 13,000 and it wouldn't cost her
 
         19   anymore as long as she did not do so.
 
         20            What he did not tell her and what she did
 
         21   not see was that the broker was charging $5,900 in
 
         22   fees for her to get this $13,000 loan that she
 
         23   applied for; and because it was structured as an
 
         24   open-end loan, the disclosures were not segregated,
 
 
 
 
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          1   and this broker fee was actually disclosed on the
 
          2   back page, on Page 2 of a four-page document.
 
          3            So she did not see that until -- she had
 
          4   no idea she was being charged almost $6000 for this
 
          5   loan until she received her first billing statement
 
          6   which showed a $20,000 loan balance.
 
          7            In making this loan, the broker and lender
 
          8   took advantage of the loopholes.  And because only
 
          9   a creditor is liable under the Truth in Lending
 
         10   Act, the broker was free to disregard his
 
         11   responsibility to provide the early health
 
         12   (phonetic) disclosures.
 
         13            Second by structuring the loan as a
 
         14   health, the lender can avoid making other key
 
         15   disclosures such as finance charges and including
 
         16   broker's fees in the APR.
 
         17            As observed by the 7th Circuit in this
 
         18   area in the case of Benyon versus BankOne, when an
 
         19   activity of this kind of technical nature is
 
         20   comprehensively regulated by the Federal Reserve
 
         21   Board -- and no one doubts that this particular
 
         22   agency is a repository of genuine expertise -- the
 
         23   courts generally leave the plugging of loopholes to
 
         24   the agency, and we are asking that this particular
 
 
 
 
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          1   loophole be plugged by the agency.
 
          2            And, again, finally because HOEPA does not
 
          3   cover open-end loans, the disclosures were not made
 
          4   in this case.  Thank you very much.
 
          5       MODERATOR SMITH:  Thank you.  Mr. James?
 
          6       MR. JAMES:  Yes.  Tom James from the Office of
 
          7   the Illinois Attorney General.
 
          8            As a prosecutor, my concerns are chiefly
 
          9   in the enforcement area.  Of course, as you know,
 
         10   the only area that we're allowed to enforce under
 
         11   TILA is with the Section 32 loan, and so I wanted
 
         12   to address a couple of concerns.
 
         13            In three minutes, I can hardly scratch the
 
         14   surface, but I think there are -- first of all, we
 
         15   need more enforcement powers at the state level.
 
         16   Section 32 is an important facet of TILA, but
 
         17   there's a lot of TILA that we don't get to enforce,
 
         18   and there are a lot of abuses that -- particularly
 
         19   the open-ended credit and other abuses that occur
 
         20   which, if we had enforcement power under TILA,
 
         21   would give us a lot of ability to move when other
 
         22   agencies can't or don't have the capacity.
 
         23            I wanted to touch on the reporting and
 
         24   inspection.  What we discovered was a lot of the
 
 
 
 
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          1   predatory lenders were very good at flying beneath
 
          2   our radar.  TILA triggers are too high.  The
 
          3   reporting and inspection with respect to things
 
          4   like yield spread premium, prepayment penalties,
 
          5   no doc loans, as Ira pointed out, when these things
 
          6   -- when there's no database that we can observe
 
          7   that attest for variances from, you know, how many
 
          8   people are doing this, where is it occurring, how
 
          9   often does it happen, variations from the standard
 
         10   deviation with respect to cocktail practices would
 
         11   give us enough -- would help us in the detection
 
         12   process.
 
         13            I think it's important to recognize also
 
         14   that there's vertical integration in the
 
         15   marketplace, and the pass-through liability is
 
         16   absolutely critical and it needs to be expanded
 
         17   past the HOEPA, the Section 32 loans.
 
         18            The broker, wholesaler and securitization
 
         19   people do work, we believe, together, and they
 
         20   produce a single result when they engage in
 
         21   predatory lending.
 
         22            I think -- I'm not sure how many TILA
 
         23   prosecutions have been brought by the federal
 
         24   government.  I would say less than a handful.  I
 
 
 
 
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          1   mean, HOEPA violations.
 
          2            So the enforcement is simply not being
 
          3   done; and the reason for that is I think a lack of
 
          4   inspection, a lack of reporting under HMDA, and I
 
          5   can't imagine what else, but perhaps bureaucratic
 
          6   trifling.
 
          7       MODERATOR SMITH:  Thank you.  Mr. Varga?
 
          8       MR. VARGA:  My name is Craig Varga.  I'm the
 
          9   General Counsel of the Illinois Financial Services
 
         10   Association.  IFSA is the largest Illinois trade
 
         11   association for what we call market-funded
 
         12   lenders.
 
         13            Market funded means it's private capital.
 
         14   It's not coming -- it's not a depository
 
         15   institution.  It's not coming from the sale of CDs
 
         16   or anything else or deposits.  Money is privately
 
         17   raised, and it makes it imperative, therefore, that
 
         18   the loans that are made get paid back and that
 
         19   program features on loans not be such that it
 
         20   impairs or puts at risk the ability to get repaid.
 
         21            So a lot of what we'll talk about here
 
         22   today when we talk about market conditions,
 
         23   marketing economies, competitiveness of the
 
         24   subprime market are geared to the fact that this is
 
 
 
 
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          1   private money and the loans have to get repaid in
 
          2   order for new loans to get made and the access to
 
          3   credit to be provided.
 
          4            IFSA is, as I said, market-funded
 
          5   lenders.  They make diversified loans, auto, credit
 
          6   card as well as home equity.  Most of the major
 
          7   middle-market mortgage lenders in the country are
 
          8   members of IFSA.  It was founded in 1917, and it's
 
          9   been the largest trade association for such
 
         10   lenders.
 
         11            I'm also a partner in a law firm of Varga,
 
         12   Berger, et al.  And the reason that that has some
 
         13   importance is I spend a lot of my time defending
 
         14   lenders in both individual cases and particularly
 
         15   class action cases brought by plaintiffs' attorneys
 
         16   and legal aid attorneys and so forth.  And I think
 
         17   that that has a real bearing here in understanding
 
         18   that it's easy to put labels on things and call it
 
         19   "predatory lender" as if the person was wearing a
 
         20   T-shirt saying that.
 
         21            It's not that simple.  Facts are messy.
 
         22   When you go to Court and you have to actually have
 
         23   somebody prove something and you get to
 
         24   cross-examine other people and assess whether those
 
 
 
 
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          1   facts are in fact what they are espoused to be, you
 
          2   find that the process just isn't that simple.  It
 
          3   gets messy.
 
          4            Therefore, it's a very individualized
 
          5   thing.  And the difficulty I have with the labeling
 
          6   of predatory is that proposals that suggest that we
 
          7   can broad brush across the board and say, this is
 
          8   no good, this is predatory, this person is engaging
 
          9   in such a tactic ignores the messiness of those
 
         10   facts.
 
         11            As far as IFSA goes, what are we for?
 
         12   We're for an informed consumer and a competitive
 
         13   market.  We're for simplified disclosures.  We're
 
         14   for consumer education.  We think that people ought
 
         15   to get taught personal finance courses in high
 
         16   school early, often and continuing.
 
         17            We're also concerned about the possibility
 
         18   of unintended consequences coming from all this.
 
         19   The thought that simply moving the triggers and,
 
         20   therefore, encompassing a higher percentage of
 
         21   loans that are made today ignores the fact that
 
         22   when we move the triggers that 1 percent that was
 
         23   being mentioned earlier might be 1 percent but
 
         24   simply at a higher level such that the loans below
 
 
 
 
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          1   that that we're thinking we're increasing the
 
          2   percentage of coverage, those loans aren't being
 
          3   made, so we're still only covering the alleged
 
          4   1 percent, which gets me to another point, the
 
          5   alleged 1 percent or other statistics.
 
          6            I suspect we're going to hear a lot about
 
          7   statistics here today.  I remind everybody that
 
          8   Mark Twain once said, "There are lies, damn lies
 
          9   and statistics."  And statistics can be a claim to
 
         10   support any particular thing, and I urge everyone
 
         11   to keep that in mind and urge the Board to study
 
         12   this matter, as others have suggested as well,
 
         13   before we make any across-the-board determinations
 
         14   of anything.  Thank you.
 
         15       MODERATOR SMITH:  Thank you.  Mr. Shea?
 
         16       MR. SHEA:  Mike Shea, ACORN Housing.  I would
 
         17   like to start by acknowledging and thanking the
 
         18   ACORN members in the audience who have taken time
 
         19   off their busy schedules to attend.  Thank you,
 
         20   Governor Gramlich, for holding this meeting.  I
 
         21   would ask and request that in the future as you
 
         22   hold these kinds of meetings that you at least
 
         23   consider holding one of them in the evening or on
 
         24   the weekend when more working people could attend.
 
 
 
 
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          1            ACORN Housing Corporation operates a
 
          2   pre-purchase and delinquency counseling agency.
 
          3   We've counseled approximately 150,000 people over
 
          4   the last ten years.  We recently celebrated a
 
          5   creation of the 30,000th homeowner through our
 
          6   program.
 
          7            Over the last three years, we've been
 
          8   inundated with clients who have been caught up in
 
          9   predatory loans and are trying to get out or else
 
         10   who are trying to refinance through cash-out
 
         11   refinance in order to do debt consolidation or fix
 
         12   their homes.
 
         13            We've heard one horror story after
 
         14   another.  As a result, we've waged an aggressive
 
         15   campaign against subprime lending.  We're currently
 
         16   in negotiations with five subprime lenders, and
 
         17   we've proposed state legislation for five states,
 
         18   and we're currently moving city legislation around
 
         19   the country.
 
         20            One thing we found is that subprime
 
         21   lenders will do the right thing when they're asked
 
         22   to and educated and when they're forced to.  We
 
         23   recently concluded an agreement with an AmeriQuest
 
         24   Mortgage Corporation, which is one of the largest
 
 
 
 
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          1   subprime lenders in the country.  It has three
 
          2   parts to it.  The first is a pilot program in ten
 
          3   cities which will offer the best subprime mortgage
 
          4   product to low-income communities.  Chicago is one
 
          5   of those communities.
 
          6            Secondly, they have adopted best practices
 
          7   which is, we think, one of the best in the
 
          8   industry; and, third, they have agreed to work with
 
          9   us to try to raise the bar for the entire
 
         10   industry.  They understand that to stay in
 
         11   business, the abuses of predatory lending have to
 
         12   be corrected.  And we're finding that some of the
 
         13   subprime lenders are becoming more enlightened as
 
         14   they become educated and are willing to work with
 
         15   us to raise the bar.
 
         16            We're here largely because of people like
 
         17   Lola Bosley, who lives in the Marquette Park area
 
         18   on the south side of Chicago.  She's an elderly
 
         19   widow.  She was making $350-a-month mortgage
 
         20   payments until she was refinanced in January of '99
 
         21   by Creative Mortgage.  She has -- her income is
 
         22   $900 a month, Social Security, fixed income.  After
 
         23   her refinance, her debt service on her loan is $700
 
         24   per month.
 
 
 
 
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          1            We're here because of people like
 
          2   Casey Newsome, who lives on the west side of
 
          3   Chicago, who refinanced with Associates.  Received
 
          4   a $32,000 loan.  Of this loan, $3500 were in fees
 
          5   and closing costs, and an additional $6000 was in
 
          6   single premium credit life insurance.  Fully
 
          7   one-third of her loan was made up of fees.  Her
 
          8   loan carried a 14.5 percent interest rate.
 
          9            We're here because of people like
 
         10   Lily Petty, who's also here today who lives on the
 
         11   west side of Chicago who was forced to refinance
 
         12   her loan.  She needed cash out; and, as a result,
 
         13   her interest rate is 14 percent which was
 
         14   originated at the time when rates were 7 percent.
 
         15   Her loan was packed with fees and amounted to
 
         16   30 percent of the loan.
 
         17            I will address the questions that you have
 
         18   put in your materials in the discussion.  Thank
 
         19   you.
 
         20       MODERATOR SMITH:  Thank you.  Mr. Brown?
 
         21       MR. BROWN:  Good morning.  My name is
 
         22   Michael Brown.  I'm Chairman and CEO of
 
         23   Sable Bancshares which is a community development
 
         24   financial institution located on the west side of
 
 
 
 
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          1   Chicago that services the credit and development
 
          2   needs of the citizens, in particular, in North
 
          3   Lawndale which happens to be where a number of the
 
          4   predatory lending abuses have occurred which have
 
          5   led to the legislation that we're here to talk
 
          6   about today.
 
          7            As a digression, I would like to stop and
 
          8   thank the Board for the invitation today, and I
 
          9   look forward to and engaging in a complete
 
         10   substantive discussion.
 
         11            Because the time is short, though, I have
 
         12   written a statement, a prepared statement.  I'm
 
         13   going to quickly embark on somewhat of a different
 
         14   but risky path.
 
         15            It's clear to me that the issues
 
         16   associated with predatory lending require a
 
         17   balanced approach in their resolve.  Legislation is
 
         18   extremely important as it relates to its ability to
 
         19   restrict the predatory lending.  There's no
 
         20   question about it.  And I do believe that hearings
 
         21   such as this go a long way in addressing this
 
         22   concern.
 
         23            However, my focus today -- and, again, the
 
         24   comments will be very quick -- will deal with a
 
 
 
 
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          1   different part of the solution.
 
          2            It's my belief or our belief that it's
 
          3   important that we encourage and stimulate the
 
          4   natural forces of the business market within the
 
          5   communities where predatory lending occurs in order
 
          6   for us to have the kind of resolve that's
 
          7   sustainable and long-term.  I think that sort of an
 
          8   approach matched up against focus and strong
 
          9   legislation, in our opinion, will serve the needs
 
         10   of the community that are hardest hit by the
 
         11   predatory lending issue.
 
         12            I think the first point that needs to be
 
         13   underscored is that we need to aggressively
 
         14   continue to improve the access to credit.  We need
 
         15   to make sure that we have a broad cross-section of
 
         16   lenders that are willing to operate in these
 
         17   communities.
 
         18            Now that may sound strange from a bank
 
         19   holding company that has, as one of its
 
         20   subsidiaries, a community bank, a $52 million asset
 
         21   institution.  However, again, it's our belief that
 
         22   competition is good; that through competition what
 
         23   you ultimately do is that you attract quality
 
         24   lenders both from the standpoint of micro lenders
 
 
 
 
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          1   -- a full complement, the large community banks,
 
          2   credit unions, community banks, et cetera, all who
 
          3   are doing, what?  Competing for the business of the
 
          4   customer.
 
          5            Recent statistics indicate that those
 
          6   markets are good markets and they exist and they're
 
          7   vibrant.  In 1998, there were 27,470 loans that
 
          8   were made in that community or in the Chicago
 
          9   community that were designated as subprime loans.
 
         10   That represented a 1600 percent increase in
 
         11   subprime lending in the City of Chicago.  That's
 
         12   significant.
 
         13            It also spawn something else that people
 
         14   never believed would happen, and that is the
 
         15   creation of a secondary market which created
 
         16   liquidity which makes lending possible in
 
         17   communities where lending or access to credit was
 
         18   very difficult in the past.  Choices are very
 
         19   important.
 
         20            The one last point that I would make, and
 
         21   I know my time has expired, is that I think we need
 
         22   to start taking a broader view of the market as
 
         23   well, and that is, we need to look at technology
 
         24   and encourage the integration of technology into
 
 
 
 
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          1   the subprime lending game.  And what that simply
 
          2   means is that we need to have lenders who have the
 
          3   ability to take technology, utilize it to identify
 
          4   lenders of choice that can service the needs of the
 
          5   community and match those lenders up who are
 
          6   willing against individuals who have an interest in
 
          7   procuring credit in those particular communities
 
          8   and doing it in an efficient and timely manner.
 
          9            That goes back to the issue of choice.
 
         10   That gives people the opportunity to get the best
 
         11   rates and work with the best lender in order to
 
         12   effect change in the community.
 
         13            I would like to conclude by saying that,
 
         14   indeed, there is no one solution that we can
 
         15   advance to address this particular problem.
 
         16   Predatory lending is insidious and it has to be
 
         17   addressed; and today's hearing will go a long way,
 
         18   I think, in not creating new issues, but closing
 
         19   the loop on several issues that have been in
 
         20   existence for a long period of time.
 
         21       MODERATOR SMITH:  Thank you.  Mr. Immergluck?
 
         22       MR. IMMERGLUCK:  Thank you, Governor Gramlich,
 
         23   members of the staff of the Board and the bank.
 
         24   I'm Dan Immergluck.  I am Senior Vice President of
 
 
 
 
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          1   the Woodstock Institute here in Chicago.
 
          2            The Woodstock Institute has conducted
 
          3   policy research on mortgage credit, community
 
          4   investment for more than a quarter of a century.
 
          5   We welcome this opportunity to talk about one of
 
          6   the greatest threats to neighborhood stability
 
          7   today and to community reinvestment:  Predatory
 
          8   lending.  We look forward to the Board taking
 
          9   meaningful action to improve regulation.
 
         10            We recognize the need for lenders to offer
 
         11   loan products to those with imperfect credit; but
 
         12   the home equity loan market has become extremely
 
         13   segmented by race and by age with subprime
 
         14   specialists, many of which have exhibited abusive
 
         15   lending practices, targeting minority neighborhoods
 
         16   and especially minority elderly folks.
 
         17            The home equity loan market, particularly
 
         18   the subprime portion, suffers from extreme market
 
         19   failure stemming from profoundly imperfect
 
         20   information as well as large negative spill-overs
 
         21   or, in the economics jargon, negative
 
         22   externalities.
 
         23            The information problem is due in part to
 
         24   the fact that many subprime lenders are simply not
 
 
 
 
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          1   familiar with the basics of the mortgage process.
 
          2   They suffer from fundamental and life-long
 
          3   disadvantages in basic literacy and financial
 
          4   experience.  This is due to decades of exclusion
 
          5   from the financial system and from our separate and
 
          6   unequal educational system.
 
          7            At the same time, many of these borrowers
 
          8   are under substantial economic duress and are
 
          9   isolated from those who might give them advice.  As
 
         10   a result, they are highly susceptible to
 
         11   manipulation by brokers and lenders who are highly
 
         12   compensated just for closing a simple refinance
 
         13   loan.
 
         14            Let me be clear.  The fundamental
 
         15   difference in financial knowledge between the
 
         16   borrower and the lender in these transactions is so
 
         17   great that counseling or remedial education a
 
         18   little laudable will never overcome it.  Certainly
 
         19   end disclosures will do nothing to address this
 
         20   problem.
 
         21            Moreover, there's too much money to be
 
         22   made by the broker and the lender for him to allow
 
         23   a deal to be lost due to the actions of what will
 
         24   always be some meagerly financed credit counseling
 
 
 
 
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          1   or education campaign.  The counselor will always
 
          2   find she's entered the pictured long after the
 
          3   homeowner has already been sold on the loan.
 
          4            The second source of market failure is the
 
          5   negative public cost from skyrocketing and
 
          6   geographically concentrated foreclosures.  These
 
          7   aren't anecdotal.  We're talking about
 
          8   5000 foreclosures started in the Chicago area by
 
          9   subprime lenders in 1999.  Not an anecdote.
 
         10            Foreclosure is not a private event,
 
         11   especially not in a lower- and moderate-income
 
         12   community.  It often results, as Mr. Darr said, in
 
         13   vacant and later abandoned properties which in turn
 
         14   leads to blight and crime.  This affects property
 
         15   values, business investment, tax base and overall
 
         16   community health.  Classic examples of negative
 
         17   spill-overs.
 
         18            90-day delinquency rates for C grade loans
 
         19   according to a voluntary industry survey of
 
         20   27 subprime lenders are 10 percent, 40 times the
 
         21   delinquency rate of prime refinance loans and
 
         22   5 times the rate for FHA loans.  For D grade loans,
 
         23   it's 22 percent, almost 90 times the prime rate and
 
         24   11 times the FHA rate.
 
 
 
 
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          1            Because the public cost of foreclosures
 
          2   are not internalized into the transaction, the
 
          3   underegulated market results in an excessive amount
 
          4   of high-risk lending.
 
          5            Let me say that we do not underestimate
 
          6   the challenge the fed faces in issuing regulations,
 
          7   but ask the Board to leave any excuses for inaction
 
          8   to the defenders of predatory lending.  The Board
 
          9   should get to the business of issuing meaningful
 
         10   regulation and fulfill the mission given to it by
 
         11   Congress.  Thank you.
 
         12       MODERATOR SMITH:  Mr. Bochnowski?
 
         13       MR. BOCHNOWSKI:  Thank you, Governor Gramlich,
 
         14   representatives of the Federal Reserve.  I am
 
         15   David Bochnowski, CEO of Peoples Bank in Munster,
 
         16   Indiana.  Our headquarters are located about
 
         17   30 miles from here.  I appreciate this opportunity
 
         18   to testify on behalf of America's community
 
         19   bankers.
 
         20            In Boston, ACB member Bill Gothrup urged
 
         21   you to greatly improve the supervision of
 
         22   unsupervised non-bank lenders and avoid
 
         23   stigmatizing legitimate loans in terms as
 
         24   predatory.  I want to reinforce those
 
 
 
 
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          1   recommendations and also add to ACB's support for
 
          2   lowering the HOEPA APR trigger to 8 percent.  But
 
          3   that's not enough.  Consumers need access to
 
          4   mainstream institutions and the education and
 
          5   counseling to help them avoid being victimized by
 
          6   predatory lenders.
 
          7            Here's what Peoples Bank is doing on these
 
          8   issues:  A few years ago, we tore down half the
 
          9   city block and opened a state-of-the-art office in
 
         10   East Chicago, Indiana, an increasingly diverse
 
         11   community.  We offer services in both English and
 
         12   Spanish.  This continues the bilingual tradition
 
         13   for Peoples Bank in East Chicago.  We long ago
 
         14   offered English and Polish as our two languages.
 
         15            Peoples is now discussing opening another
 
         16   office in Gary, Indiana, a community, which like
 
         17   Chicago, suffers from the shift to less
 
         18   labor-intensive domestic steel industry.
 
         19            We know it takes community banks being
 
         20   involved in their communities to help stimulate new
 
         21   economic activity and stabilize the mortgage
 
         22   markets.  Peoples Bank already provides
 
         23   homeownership education.  We and 12 other community
 
         24   institutions jointly sponsor regulated
 
 
 
 
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          1   homeownership seminars even though community banks
 
          2   are very competitive.  Each of us has banded
 
          3   together to fill a need, to help consumers
 
          4   understand what loans are about and how to avoid
 
          5   predatory terms.
 
          6            Peoples Bank recently hosted an evening
 
          7   session -- and all these sessions are in the
 
          8   evening -- and it was conducted in both English and
 
          9   Spanish.  Over 30 people attended.
 
         10            Community banks all over the country are
 
         11   doing similar things; but, clearly, more needs to
 
         12   be done.  For example, effective public service
 
         13   advertisements could help offset the aggressive
 
         14   marketing from predatory lenders alerting consumers
 
         15   of potential danger and urging them to seek
 
         16   education and counsel.
 
         17            ACB also recommends improved disclosure of
 
         18   high-cost loans.  That does not mean more
 
         19   disclosures.  More boilerplate will not help ours
 
         20   and will also add to the burden that is already on
 
         21   banks.
 
         22            Once you have drafted new HOEPA
 
         23   disclosures, ACB recommends that you field test
 
         24   them to see what works and what doesn't in the real
 
 
 
 
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          1   world of average borrowers.
 
          2            Let me conclude on a few points:
 
          3            First, community banks are not part of the
 
          4   predatory problem.  They are key to the solution.
 
          5            Second, subprime lending has helped many
 
          6   homeowners become owners.
 
          7            Third, expanding HOEPA coverage too much
 
          8   and restricting certain terms could be both harmful
 
          9   and ineffective.
 
         10            Fourth, borrowing education and counseling
 
         11   are essential buffers against predatory lenders.
 
         12            Fifth, disclosure should be simplified and
 
         13   field tested.
 
         14            And, finally, ACB will continue to work
 
         15   with you and other agencies and, most importantly,
 
         16   our customers and communities to eliminate
 
         17   predatory lending practices.  Thank you.
 
         18       MODERATOR SMITH:  Mr. Butler?
 
         19       MR. BUTLER:  Thank you for inviting us to
 
         20   participate in this discussion.  I'm Bob Butler,
 
         21   Chief Life Actuary at the Assurant Group.  Joining
 
         22   me is Alex Columbus from our Govern Affairs
 
         23   Department.
 
         24            I would like to throw out a few ideas for
 
 
 
 
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          1   later discussion.  I will limit my comments to
 
          2   credit life and credit disability insurance sold on
 
          3   home equity loans.
 
          4            First, I would like to clear up one
 
          5   misconception.  I have seen statements circulated
 
          6   that the credit life loss ratio is 40 percent.
 
          7   40 percent is the loss ratio of all credit life
 
          8   insurance sold by all companies and all markets.
 
          9   It is not the loss ratio for this book of
 
         10   business.
 
         11            The Assurant Group has been writing in
 
         12   this market for, oh, maybe, three, four years, and
 
         13   so we've been in it a relatively short period of
 
         14   time.
 
         15            What we have found though is the average
 
         16   age of the insured is four to ten years older.
 
         17   Most of our accounts write both home equity and
 
         18   other lines of business.  So isolating the
 
         19   experience has been difficult.
 
         20            We do have four large accounts that
 
         21   specialize in home equity business.  Those four
 
         22   accounts have earned $46 million worth of premium.
 
         23   The loss ratio right now is 49 percent for the
 
         24   credit life.  It's an immature loss ratio.  As the
 
 
 
 
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          1   people age, the loss ratio will decline.  We think
 
          2   the underlying loss ratio on credit life for this
 
          3   market is 60 percent and not 40 percent.  Under
 
          4   credit disability, we're running 116 percent loss
 
          5   ratio which is something we'll have to correct.
 
          6            We believe credit life and credit
 
          7   disability insurance provides real value.  I mean,
 
          8   we paid out over 20 million credit life claims
 
          9   already in this market on those four accounts.  We
 
         10   urge you not to throw out this valuable product
 
         11   because of perceived abuses.  Fix the abuses.
 
         12            One way to do it would be to send a letter
 
         13   to the insured post closing and give -- tell them
 
         14   exactly what they bought, what the terms of the
 
         15   deal were; and then, in the privacy of their home,
 
         16   they can decide whether or not they want the
 
         17   insurance.  Our product comes with a 30-day free
 
         18   look.  If they decide they do not want the product,
 
         19   we will give a full refund.
 
         20            Two other things we'll throw out.  One,
 
         21   refunds.  Some states allow the rule of seven-day
 
         22   refund.  What we would urge is, in those states,
 
         23   refund on a rule of anticipation or actuarial
 
         24   method.  Rule of anticipation gives back to the
 
 
 
 
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          1   insured what we would charge for the remaining
 
          2   coverage.  So it's a fair return.
 
          3            Another thing we'll throw out, another
 
          4   idea is in calculating a single premium, many
 
          5   states require you to calculate a series of monthly
 
          6   premiums and then add them up, but you add them up
 
          7   discounting for interest and mortality.  We suggest
 
          8   that that be done and that will give the insured
 
          9   the time use of their money.  In effect, they'll
 
         10   have earned investment income on their purchase.
 
         11   Thank you.
 
         12       MODERATOR SMITH:  Thank you.  This first
 
         13   segment of our discussion this morning will hold us
 
         14   on examining possible changes to the rate and fee
 
         15   triggers that we have mentioned.
 
         16            Adrienne Hurt will lead this part of the
 
         17   discussion.
 
         18       MS. HURT:  Thank you.  It's clear that in spite
 
         19   of HOEPA's protection, predatory lending persists
 
         20   and, as some have stated, all subprime loans are
 
         21   not predatory.  However, many of the anecdotal
 
         22   reports and the lawsuits involve subprime loans.
 
         23            Some of these loans contain terms such as
 
         24   balloon payments and prepayment penalties that are
 
 
 
 
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          1   restricted in the high-cost loans that are subject
 
          2   to HOEPA.  And some of these loans fall just below
 
          3   the HOEPA triggers.
 
          4            So one suggestion being made to further
 
          5   deter predatory lending is to expand HOEPA's
 
          6   coverage to extend its protections to a larger
 
          7   class of transactions.
 
          8            A loan is subject to HOEPA if the loan's
 
          9   APR exceeds the rate of the Treasury securities
 
         10   with a comparable maturity by more than
 
         11   10 percentage points.  So, for example, if a
 
         12   consumer has a loan with a ten-year term and the
 
         13   APR is a little above 16 percent, today, that loan
 
         14   would be subject to HOEPA.
 
         15            A loan is also subject to HOEPA if the
 
         16   points and fees paid by the borrower at or before
 
         17   closing exceeds the greater of 8 percent of the
 
         18   loan amount or $400; and that $400 is adjusted
 
         19   annually by the CPI.  It's currently $451.
 
         20            The Board has the authority to expand
 
         21   HOEPA's coverage under both of these triggers.
 
         22   HOEPA authorizes the Board to adjust the APR
 
         23   trigger by 2 percentage points, up or down, from
 
         24   the current threshold of 10 percentage points above
 
 
 
 
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          1   the Treasury security with a comparable maturity.
 
          2   The points and fees test may be adjusted by
 
          3   including more fees in the calculation.
 
          4            We would like to hear your views on
 
          5   expanding the triggers including the possible
 
          6   effects of this expansion.  We would like to spend
 
          7   about 15 minutes just focusing on the APR trigger
 
          8   and then move on to discussing the points and fees
 
          9   trigger.
 
         10            During this discussion, if you're aware of
 
         11   any data that suggests how many loans are currently
 
         12   covered by HOEPA, and if you have any estimates on
 
         13   how many more loans might be covered if the APR
 
         14   trigger were lowered to 8 percent, we would
 
         15   appreciate that information.
 
         16            We can start the discussion perhaps with
 
         17   Mr. Darr or Mr. Rheingold based on your comments in
 
         18   your opening statements.
 
         19       MR. DARR:  As I mentioned in my opening
 
         20   statement, we would certainly support the lowering
 
         21   of the APR threshold down to 8 percent.
 
         22            As far as additional coverage, you know,
 
         23   I'm not sure that our data is any better than
 
         24   anybody else's, but we've heard -- and I take this
 
 
 
 
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          1   from Woodstock Institute -- the current threshold
 
          2   only covers about less than 1 percent.  I believe,
 
          3   Dan, it was 7/10ths of 1 percent, according to your
 
          4   numbers.  We think that the coverage will increase
 
          5   maybe up to in the neighborhood of 4 percent.
 
          6            Any additional coverage -- and I know
 
          7   you're restricted as to how much you can reduce the
 
          8   threshold, but we would strongly encourage you to
 
          9   reduce it the full 2 points to 8 percent to cover
 
         10   the maximum.
 
         11       MR. RHEINGOLD:  If I can just add a little
 
         12   bit.  In the past few years, I have looked at
 
         13   thousands of loans, and our agency probably
 
         14   represents a couple hundred clients.  I'd say
 
         15   three-quarters, four-fifths of those clients have
 
         16   HOEPA loans.  I would say almost every one of those
 
         17   HOEPA loans are the points and fees trigger.
 
         18            I can think of maybe one or two loans --
 
         19   and I have seen some of the worst loans you can
 
         20   ever imagine.  They do not hit the APR trigger.
 
         21   It's simply too high.  We never -- there's I think
 
         22   one instance in the last few years of looking at
 
         23   thousands of loans where the APR trigger was hit.
 
         24            Lowering it to 8 percent I think would be
 
 
 
 
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          1   capturable.  Again, the point about capturing more,
 
          2   in my mind, most important point is the
 
          3   pass-through liability, making the market
 
          4   accountable for each other.
 
          5       GOVERNOR GRAMLICH:  I wonder if I could ask
 
          6   you, just on that point alone, do you have any --
 
          7   from these loans you have looked at -- I realize
 
          8   you didn't count them up and all of that, but do
 
          9   you have any off-hand notion if we went to 8 points
 
         10   what the coverage would be under the rate
 
         11   trigger?
 
         12       MR. RHEINGOLD:  I don't think that the increase
 
         13   would be tremendous because we're still talking
 
         14   about APRs that would be in excess of 14 points.
 
         15   We see 14 points, 14 and a half APR, but they are
 
         16   not frequent.  I would say most of the APR that we
 
         17   look at are in the 13 and 12 range.  Never the 16
 
         18   range.
 
         19       MR. IMMERGLUCK:  Governor, the source that Bill
 
         20   referenced is in the HUD/Treasury report, and it's
 
         21   based on --
 
         22       GOVERNOR GRAMLICH:  Yes, we know that.
 
         23       MR. IMMERGLUCK:  But if you look at that
 
         24   history, basically, it's 5 percent.
 
 
 
 
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          1       GOVERNOR GRAMLICH:  Yes, we know those numbers
 
          2   and -- right.  Yes?
 
          3       MR. SHEA:  I would like to share some lessons
 
          4   we've learned in our recent discussion with
 
          5   AmeriQuest Mortgage, which is one of the largest
 
          6   subprime lenders based in Orange County,
 
          7   California.  They did about 60,000 loans last
 
          8   year.
 
          9            In our discussions with them, we asked
 
         10   them, were the APR threshold lowered like 2 points,
 
         11   what would it do to their business?  They currently
 
         12   do not do HOEPA loans.  They said it would capture
 
         13   about 11 percent of their business.
 
         14            In further discussions with them, they
 
         15   have committed to work with us to try to lower the
 
         16   APR threshold in state legislation, if that could
 
         17   be done, to 6 and a half percent.  Their view, that
 
         18   would probably capture about 30 percent of their
 
         19   business by lowering it to 6 and a half percent.
 
         20            They would support this because they think
 
         21   that this would force industry participants to
 
         22   engage in cost-cutting.  They do not think it would
 
         23   decrease the volume of loans that they would be
 
         24   able to make very much, but they think it would
 
 
 
 
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          1   drive out many of the bad apples in the industry
 
          2   who make enormous profits oftentimes in this
 
          3   industry.
 
          4            So they would favor the cost-cutting that
 
          5   such a lowering of the threshold would bring
 
          6   about.
 
          7       MR. DETELICH:  If I could give a different
 
          8   viewpoint there?
 
          9            While lowering the APR trigger would
 
         10   certainly increase the coverage of HOEPA, the
 
         11   question is, will that reduce or eliminate any of
 
         12   these unethical lending practices?  And I think
 
         13   that's questionable.
 
         14            Some of the earlier testimony in Charlotte
 
         15   and Boston clearly indicated that lenders
 
         16   intentionally do not make loans in that credit
 
         17   segment that would qualify in the HOEPA area.  In
 
         18   other words, they're not in the market.  Lowering
 
         19   the trigger would likely mean fewer lenders making
 
         20   loans to this segment of the market.
 
         21            I think Mr. Brown said it well:  Choices,
 
         22   good choices are what will keep the active -- will
 
         23   keep predatory lenders away.  Borrowers with few
 
         24   choices are the prey of the predatory lenders, and
 
 
 
 
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          1   raise or lowering the trigger will mean fewer
 
          2   choices for a good number of lenders or borrowers.
 
          3       MR. VARGA:  On that front, if I could, I would
 
          4   like to say that this is an area where the lack of
 
          5   the statistics and the ease of which certain
 
          6   statistics are thrown around based on anecdotal and
 
          7   informal review of files is really not the thing
 
          8   that ought to be the basis for making wholesale
 
          9   changes.
 
         10            Now our association and market-funded
 
         11   lenders are for enforcement of the law with respect
 
         12   to the "bad apples"; but the concern is, as
 
         13   Mr. Detelich said, if you reduce the triggers, you
 
         14   may simply not be increasing the coverage from
 
         15   whatever percent to whatever percent.  You may just
 
         16   be increasing the amount of loans that aren't going
 
         17   to get made and the "percentage of coverage"
 
         18   remains the same.  And that's a very real concern
 
         19   for people who are designing their programs that
 
         20   face the risks that come with making HOEPA loans.
 
         21   And I think that's a very real concern.
 
         22            The other thing is, again, the fact that
 
         23   there simply aren't statistics.  Many of the people
 
         24   who make HOEPA loans now are not people who even do
 
 
 
 
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          1   HMDA reporting.  Unless they do a large volume of
 
          2   purchase money mortgages, they're not even required
 
          3   to HMDA report.  The HMDA reporting now doesn't
 
          4   include rate and terms and that degree of
 
          5   specificity.
 
          6            So I don't believe there's anybody out
 
          7   there who has statistics on -- good, reliable
 
          8   statistics now on HOEPA loans and what would
 
          9   happen, even assuming market conditions stayed the
 
         10   same and we simply dropped the triggers, on how
 
         11   many more loans we get covered by.
 
         12            And, again, we urge that it's not a static
 
         13   market.  If we move the triggers, it's going to
 
         14   affect lender behavior, and that's a constant to
 
         15   keep in mind.
 
         16            I think the key point is if you need to
 
         17   develop the statistics, why not develop statistics
 
         18   and then look at this after the fact once those are
 
         19   developed?
 
         20       MR. BIVINS:  From your hearings in 1997, it was
 
         21   concluded it was too early to really gauge the
 
         22   effect of HOEPA.
 
         23            Having been in business in 1994 when HOEPA
 
         24   came about, there was no change in the lenders that
 
 
 
 
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          1   were doing loans and willing to provide the
 
          2   disclosures at that time.  In recent years, the
 
          3   majority of the lenders that I brokered business to
 
          4   have, in fact, stopped doing HOEPA loans.  So there
 
          5   has been an effect there.
 
          6            But I have never had -- I believe I have
 
          7   had one customer not go through with the loan
 
          8   because of the additional three-day disclosure.
 
          9   Every borrower, including myself, who takes out a
 
         10   loan looks to see what is the payment, can I afford
 
         11   it, and make a decision.  The disclosures have not
 
         12   discouraged people from taking these loans out and
 
         13   I don't think they will in the future.
 
         14            At some point, if you push more loans into
 
         15   being HOEPA, the lenders are going to make a
 
         16   business decision to go back and start doing HOEPA
 
         17   loans again and live with the consequences of the
 
         18   disclosures, the additional documentation and
 
         19   possibly, you know, the press that they're going to
 
         20   receive from it.
 
         21       MR. IMMERGLUCK:  Can I make the point, if the
 
         22   argument being made by the industry here, the
 
         23   subprime industry, is that we're not -- we're going
 
         24   to see fewer loans if the levels are lowered.
 
 
 
 
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          1   Why?   Because we want to avoid scrutiny.
 
          2            Well, if that's the case, then so be it.
 
          3   We want fewer loans made.  If we know that we have
 
          4   22 percent delinquency rates in D grade paper which
 
          5   are essentially the loans covered by HOEPA, they
 
          6   need the scrutiny.  They need more scrutiny.
 
          7            The second point is, right now, HOEPA is
 
          8   Swiss cheese.  There are all kinds of ways to not
 
          9   make -- to not have HOEPA loans but to make up the
 
         10   fees in other ways, to do prepayment penalties in
 
         11   various ways that are consistent with the law, to
 
         12   have credit life insurance with commissions that
 
         13   generate the revenue for the originator through the
 
         14   commissions.
 
         15            If we don't deal with a definition of
 
         16   points and fees and make it universal, I don't care
 
         17   what you do about the interest rate trigger.  It
 
         18   won't matter.  People will find ways to be below
 
         19   the trigger if you don't make that definition
 
         20   comprehensive.
 
         21       MR. DETELICH:  I think you misunderstood the
 
         22   point.  The reason that lenders it's my
 
         23   understanding -- Household does make HOEPA loans.
 
         24   The reason that lenders who don't make HOEPA loans,
 
 
 
 
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          1   my understanding is, is not to avoid scrutiny.
 
          2   It's the cost of the compliance.
 
          3       MR. IMMERGLUCK:  That's what the lender says.
 
          4   The reality is the lender doesn't want to comply
 
          5   with HOEPA.  It's an easy response to make that
 
          6   it's the cost of compliance, but the reality is, we
 
          7   don't want to avoid scrutiny.
 
          8       MR. DETELICH:  What other scrutiny is there
 
          9   today of HOEPA loans?
 
         10       MR. IMMERGLUCK:  When a lender sells a
 
         11   security, an asset-based security and that lender
 
         12   has to say there are 50 HOEPA loans in here, right
 
         13   now in this climate, that security will be hard to
 
         14   sell.
 
         15            The stigma associated with HOEPA is
 
         16   significant because lenders know that this is a big
 
         17   concern.  So lenders are avoiding HOEPA loans
 
         18   because lenders don't want the scrutiny of those
 
         19   loans.
 
         20       MR. SHEA:  Solomon Smith Barney and Merrill
 
         21   both committed to us just last week that, in fact,
 
         22   moving forward, they will never buy HOEPA loans.
 
         23       MR. RHEINGOLD:  I'm actually a little amused by
 
         24   this conversation because I hear all these people
 
 
 
 
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          1   who don't make HOEPA loans, yet we see HOEPA loans
 
          2   left and right all the time.  I mean, I have a list
 
          3   of every subprime -- 165 pops-up prime lenders, and
 
          4   I can tell you that we had HOEPA loans identified
 
          5   by all those people.
 
          6            Now if what they're saying is by lowering
 
          7   the interest rate credit won't be offered, I think
 
          8   that's absurd.  I think that the cost of credit --
 
          9   I have no problem -- and, again, we have to know
 
         10   what HOEPA does.  HOEPA doesn't say you can't make
 
         11   those loans.  HOEPA simply says you got to give
 
         12   additional disclosure, and there are certain things
 
         13   in there you can't do.  And if they're saying the
 
         14   cost of making those HOEPA loans are great, then
 
         15   pass it on to the interest rate and make your money
 
         16   that way.  And if the interest rate -- and then let
 
         17   the marketplace do its business.
 
         18            So if the interest rate isn't competitive,
 
         19   a couple years from now, people's credit get
 
         20   better, they can refinance.  If they don't want to
 
         21   make those loans, good, don't make those loans.
 
         22       MR. BROWN:  You know, to be crystal clear, Tom,
 
         23   I do believe -- and, clearly, my comments
 
         24   underscore the fact that I believe that the market
 
 
 
 
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          1   should have all of its forces working which means
 
          2   the competition has to drive this process.  There's
 
          3   no question about it.
 
          4            But I think because of the marketplace
 
          5   that these particular loans are being made in that
 
          6   it's very important that we understand that we have
 
          7   -- we have to make sure that the neck is as broad
 
          8   as possible so that we, under the HOEPA laws, get
 
          9   as many of those lenders involved in one simple
 
         10   thing:  Compliance through disclosure.
 
         11            Terry, you said that disclosure didn't
 
         12   necessarily obviate a loan being made.  I think you
 
         13   said one, but I think it's poor to understand that
 
         14   once those loans were made that you had six days
 
         15   wrapped around that person's loan closing which
 
         16   allowed them to become real clear on what it is
 
         17   that they were getting involved in; and that,
 
         18   historically, has not been the case.  So lower the
 
         19   net.  I think there's value in that.
 
         20       MODERATOR SMITH:  Mr. Baker?
 
         21       MR. BAKER:  The resounding evidence that we've
 
         22   obtained here in Illinois is that most lenders will
 
         23   not make loans over whatever the threshold is that
 
         24   the defines high-cost loans in the present
 
 
 
 
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          1   environment.
 
          2            We've had a lot of participation, the
 
          3   benefit of input from lenders all over the country
 
          4   and here in Illinois because of the City of Chicago
 
          5   ordinance which has held a lot of fascination and
 
          6   fear for people around the country because it can
 
          7   be copied by an untold number of cities.
 
          8            And if you look at the proposals today
 
          9   that are floating around, starting with the North
 
         10   Carolina legislation going through the current
 
         11   Chicago draft ordinance and many of the proposals
 
         12   being -- supported by many of the people in this
 
         13   room, the devil's in the details.
 
         14            When you look at the list of what
 
         15   constitutes predatory lending activity, it's very
 
         16   uncertain.  It's not that lenders are looking to
 
         17   avoid scrutiny on this question.  They're looking
 
         18   for certainty; and when you look at the proposals
 
         19   as what constitutes predatory lending, it's going
 
         20   -- you don't know who your judge is going to be
 
         21   down the road and it's going to be a very
 
         22   subjective decision.  Take a look at some of the
 
         23   words used in some of these proposals.
 
         24            With that kind of lack of certainty, most
 
 
 
 
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          1   lenders are simply not going to make loans over the
 
          2   threshold.  And that's going to drive people in the
 
          3   subprime market to the marginal lenders and the
 
          4   problem is going to simply increase.
 
          5       MR. BOCHNOWSKI:  If I might interject.
 
          6   Responding to Ira's point, community banks don't
 
          7   make HOEPA loans.  It's a fact.  And the reason why
 
          8   community banks don't make HOEPA loans -- I guess,
 
          9   there's two parts of this.  One is that we got a
 
         10   lot of risk, and one of the risks that we have is
 
         11   reputation risk.  We have to stay in that
 
         12   community.  My company has been in business for
 
         13   90 years.  That's the primary reason I suppose why
 
         14   we don't go through the reach.
 
         15            But the point that is raised is the
 
         16   enforcement authority.  No matter what changes we
 
         17   might make in the HOEPA triggers, who's going to
 
         18   enforce the law?  Who's going to go in and do what
 
         19   happens to us?  Who's going to come in, as the fed
 
         20   does, and examine us, inspect us I guess or, as the
 
         21   FDIC does, examines it?
 
         22            I think a lot of issues that we're
 
         23   discussing really goes to who is going to take the
 
         24   hard look; and I think that would eliminate a lot
 
 
 
 
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          1   of the unscrupulous brokers that are out there that
 
          2   are putting these deals together and collecting
 
          3   their fees and walking away.
 
          4       MR. RHEINGOLD:  And that's again the point
 
          5   about raising the trigger or lowering the trigger
 
          6   as the case may be.
 
          7            We want the market to do its due diligence
 
          8   so that when we have those broker fees included in
 
          9   whatever form they are and that trigger is loaded,
 
         10   all those fees are included, when a loan comes from
 
         11   a broker and the fees are high enough, then that
 
         12   lender won't make the loan until it does its due
 
         13   diligence over that.
 
         14            When there's a no doc loan, a lender won't
 
         15   make that loan.  When that application says this
 
         16   person has $3000 in income and their back-end ratio
 
         17   is 38 percent, that lender looks past that
 
         18   application and looks at their income and makes
 
         19   sure that that's happening.  What we want is the
 
         20   market to control this stuff.
 
         21            So by making those fees included in there
 
         22   and by lowering the threshold, people are looking
 
         23   over their shoulder.  The market is looking over
 
         24   its shoulder.  The lender looks at the broker, the
 
 
 
 
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          1   secondary market looks at the lender so that those
 
          2   bad behaviors that are occurring, they'll be
 
          3   monitoring because they don't want to be liable for
 
          4   it; and that's what's so important about increasing
 
          5   the loans covered under HOEPA.
 
          6       MODERATOR SMITH:  Mr. Bivins, would you have
 
          7   the last word on this segment before we move to
 
          8   costs and fees?
 
          9       MR. BIVINS:  Mr. Rheingold made a statement
 
         10   that he's seen hundreds, perhaps thousands of HOEPA
 
         11   loans.  I would question when they were
 
         12   originated.  Prior to October or so of 1998, most
 
         13   lenders were in fact originating HOEPA loans.
 
         14   Today, in this market, I see very, very few lenders
 
         15   originating HOEPA loans today.
 
         16       MR. JAMES:  I might interject there that in
 
         17   November 1998, the first lawsuit by law enforcement
 
         18   agency that I'm aware of in Minnesota sued on HOEPA
 
         19   loans and the market dried up.  And we sued a month
 
         20   later, and Massachusetts sued right in the middle.
 
         21       MR. BIVINS:  I think the market forces on Wall
 
         22   Street have a lot more to do than --
 
         23       MR. JAMES:  That pass-through liability had a
 
         24   lot to do with it because the lawsuit we filed
 
 
 
 
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          1   said, in asking for the remedy, rescission from the
 
          2   culprit and from its assigns.
 
          3       MR. IMMERGLUCK:  Let's just be clear.  If
 
          4   lenders are saying they're not going to make loans
 
          5   under HOEPA, the reason they're not making them may
 
          6   be due to the fact that they know that the loans
 
          7   over the threshold are problematic, okay.  That's
 
          8   my closing comment.
 
          9            There's somehow a notion of because of
 
         10   compliance or because of disclosure costs or
 
         11   something else, that's why we're not making the
 
         12   loans.  Maybe it's because those loans have
 
         13   problems.  That may be -- HOEPA may be a very good
 
         14   signal for the loans with problems, so that may be
 
         15   why they cut back on those loans.
 
         16       MODERATOR SMITH:  Adrienne, would you move us
 
         17   on to the next portion?
 
         18       MS. HURT:  Sure.  Oftentimes in having this
 
         19   discussion, there's a great focus on the points and
 
         20   fees testing.  So we'll move along on that.
 
         21            But I did have one question about the APR
 
         22   triggers.  There were a couple of the comments
 
         23   suggesting that most HOEPA loans are covered by the
 
         24   points and fees test and not the APR test.  So I
 
 
 
 
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          1   guess the question would be -- and you can respond
 
          2   to it in this next segment -- do you see any
 
          3   downside to lowering the triggers for the points
 
          4   and fees but not lowering it for the APR?
 
          5            But moving to the points and fees test, as
 
          6   I mentioned earlier today, a loan is covered by
 
          7   HOEPA if the points and fees paid by the borrower
 
          8   at or before closing exceed the greater of
 
          9   8 percent of the loan amount or $451.  And except
 
         10   for interest, the points and fees test consists of
 
         11   all items that are included in the APR in the
 
         12   finance charge, including compensation that's paid
 
         13   to brokers by the consumer at or before closing.
 
         14            The Act specifically excludes reasonable
 
         15   closing costs that are paid to unaffiliated third
 
         16   parties like appraisal fees, the title insurance,
 
         17   recording fees and the like.
 
         18            HOEPA authorizes the Board to add such
 
         19   other charges to the points and fees test as the
 
         20   Board deems appropriate.  Now presumably this
 
         21   provision is limited to points and fees paid by the
 
         22   consumer at closing.
 
         23            The Board's Federal Register Notice
 
         24   identified three fees that have been suggested for
 
 
 
 
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          1   inclusion in the points and fees test.  Optional
 
          2   credit life insurance premiums; and, when a loan is
 
          3   refinanced with the same creditor, counting a
 
          4   prepayment penalty or points related to the prior
 
          5   loan is cost associated with the refinance loan.
 
          6            Let's start with a discussion of credit
 
          7   life insurance premiums and other insurance
 
          8   products.
 
          9            Single premium credit life has often been
 
         10   associated with loans that are identified as
 
         11   predatory.  And someone questioned whether that
 
         12   type of insurance has any economic benefit to
 
         13   consumers.  Some have even suggested that it be
 
         14   prohibited, and that's an issue that we'll discuss
 
         15   later this morning.
 
         16            But for purposes of the coverage test, the
 
         17   question is is there any reason why single premium
 
         18   credit life insurance should not be included in the
 
         19   points and fees test?
 
         20       MR. COLUMBUS:  If I could please speak to that?
 
         21   Let me introduce myself.  Alex Columbus, Compliance
 
         22   Council with Assurant Group.  We sell a lot of
 
         23   credit insurance.
 
         24            You run the risk if you include the
 
 
 
 
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          1   insurance in the points and fees test of the
 
          2   unintended consequences; and what I have been
 
          3   hearing a lot of the lenders saying is that the
 
          4   loan will not be made.
 
          5            I think you have to ask yourself what will
 
          6   you be achieving by including the insurance in the
 
          7   points and fees test?  What abuse -- what alleged
 
          8   abuse are you going to be addressing?
 
          9            And I would submit to you that all you
 
         10   would be doing is creating a type of loan that
 
         11   you're going to put into a bucket that you have to
 
         12   have added recordkeeping and added disclosures, and
 
         13   that the insurance, alleged insurance abuse of the
 
         14   packing, in other words, the uninformed or the
 
         15   actual outright fraud of the sticking of the
 
         16   insurance charge into the loan is not going to be
 
         17   addressed because the alleged abuse as performed by
 
         18   the broker or the lender is still going to go on
 
         19   because they're going to go out and sell the loan,
 
         20   and they're going to -- it's just going to be a
 
         21   loan that you now have to keep records on.
 
         22            If you really want to address the abusive
 
         23   practice, the packing of the insurance, that there
 
         24   are more effective means of doing that; and
 
 
 
 
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          1   Mr. Butler suggested one which we think is a very
 
          2   effective and reasonable alternative and that is
 
          3   the post-closing notice and coupling that with a
 
          4   30-day free look.
 
          5            If you say that on any type of loan that
 
          6   has credit insurance on it we're going to include
 
          7   it in the points and fees unless a 30-day free look
 
          8   is required and post-closing notice is provided,
 
          9   the lender is not going to pack the insurance
 
         10   knowing that 30 days later the insurance is going
 
         11   to be taken off because the consumer is going to be
 
         12   told that they just finance the purchase.  The
 
         13   insurance is very costly for a lender to book the
 
         14   insurance on a close-end loan and then take it
 
         15   off.  There's a lot of system stuff, and it's very
 
         16   expensive to do.
 
         17            We propose that the notice be sent to the
 
         18   consumer at their home where they can read it at
 
         19   their leisure away from the pressures involved in
 
         20   the closing atmosphere; that the notice be written
 
         21   in plain language and inform the consumer that you
 
         22   just -- whether you knew or not, you just bought
 
         23   insurance.  You financed it.  This is the rate.
 
         24   This is the term of the insurance.  This is how
 
 
 
 
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          1   much it cost.  You have the right to cancel it
 
          2   within 30 days and get 100 percent of your money
 
          3   back.  This is the number that you call to cancel
 
          4   it.  This is how you cancel it.
 
          5            That will address the issue.  That will
 
          6   address the packing issue; and that's a more
 
          7   reasonable way of addressing the issue than
 
          8   including it in the points and fees which it's not
 
          9   going to really address the issue.
 
         10            I think in looking at the Board's
 
         11   authority -- if I may continue, please -- you have
 
         12   to, yes, grant it.  HOEPA says that the Board can
 
         13   include in the points and fees such items that it
 
         14   deems appropriate, but you have to make a
 
         15   determination based upon Congress's intent; and I
 
         16   think that Congress's intent was clear in the way
 
         17   it structured HOEPA and TILA, and it says that
 
         18   TILA, the way they define the finance charge, is
 
         19   the costs that are a condition of obtaining the
 
         20   credit, in other words, the mandatory costs.  And
 
         21   when they enacted --
 
         22       MODERATOR SMITH:  If we could break in.
 
         23       MR. COLUMBUS:  I think this is an important
 
         24   point that I would like to make.  I will finish
 
 
 
 
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          1   after this.  It's very short.
 
          2            When they enacted HOEPA, this was after
 
          3   TILA, and they tied the HOEPA points and fees test
 
          4   to the finance charge; and the finance charge in
 
          5   TILA expressly excludes credit insurance as long as
 
          6   it's a voluntary purchase.  Okay.  That's the key.
 
          7   As long as it's a voluntary purchase.
 
          8            And had they wanted to include the
 
          9   insurance in HOEPA's points and fees tests, they
 
         10   wouldn't have tied it to the finance charge.  All
 
         11   right.  And I think the Board understood this when
 
         12   they wrote Reg Z and they expressly authorized
 
         13   truncated coverage and the sale of credit
 
         14   insurance.
 
         15       MODERATOR SMITH:  Thank you.
 
         16       GOVERNOR GRAMLICH:  I wonder, without rehashing
 
         17   the whole legislative history of this -- I'm just
 
         18   trying to get at your bottom line.
 
         19            I take it your bottom line is that if this
 
         20   30-day free look is given with all the terms you
 
         21   specified, then the credit life insurance becomes
 
         22   optional, voluntary.  It should not be included in
 
         23   the points and fees triggers.  But if the 30-day
 
         24   free look is not given, then I take it you're
 
 
 
 
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          1   saying that you have no objection to having the
 
          2   points and fees included?   That you have credit
 
          3   life included in the points and fees test?
 
          4       MR. COLUMBUS:  That would be a compromise that
 
          5   we could live with.  And I think that actually
 
          6   HOEPA and TILA already -- we talked about
 
          7   enforcement and passing through the enforcement;
 
          8   and I think that HOEPA and TILA already provide a
 
          9   lot of penalties and enforcement abilities.
 
         10            Let's look at it.
 
         11       GOVERNOR GRAMLICH:  We know the rest of it.  I
 
         12   am just trying to get at your bottom line.
 
         13       MR. COLUMBUS:  No because if the insurance is
 
         14   packed, then it ceases to become a voluntary
 
         15   purchase.
 
         16       GOVERNOR GRAMLICH:  We understand.
 
         17       MR. COLUMBUS:  And it should be . . .
 
         18       MODERATOR SMITH:  Mr. Michaels?
 
         19       MR. MICHAELS:  Yes, I want to go back to what
 
         20   you opened up with which is -- your statement was
 
         21   that if we put credit insurance premiums in the
 
         22   points and fees test, the loan would not be made.
 
         23            Can you elaborate on your rationale for
 
         24   that?
 
 
 
 
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          1       MR. COLUMBUS:  I am just basing it on what I've
 
          2   heard this morning.  A lot of the lenders have said
 
          3   that if you lower the APR that that would result in
 
          4   unintended consequences of less loans being made.
 
          5            Well, inclusion of the insurance in the
 
          6   points and fees test is also -- in every case is
 
          7   going to make the loan a HOEPA loan.  So that is
 
          8   going to have the same effect as the APR lowering
 
          9   and so forth.  I am just basing it on what the
 
         10   lenders have said this morning.
 
         11       MR. MICHAELS:  It seems to me, though, at that
 
         12   point there's three possible -- at least three
 
         13   possible options which is, you don't sell the
 
         14   insurance for that loan.  You sell the insurance on
 
         15   a basis where the premiums are not paid up front at
 
         16   a closing that are paid monthly, then it wouldn't
 
         17   go in the points and fees test, right?  Those are
 
         18   two options.  Or it's a no loan (phonetic).
 
         19       MR. COLUMBUS:  Let me address those.  It's been
 
         20   suggested that, you know, monthly pay insurances is
 
         21   a viable alternative.  And it can be a viable
 
         22   alternative.  However, I do not think that it will
 
         23   be one that consumers will avail themselves of
 
         24   because of the realities of the financial situation
 
 
 
 
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          1   that most of these individuals are in.  Okay?
 
          2            You have to look at the issue from the
 
          3   presumption that insurance is a good thing.  Okay?
 
          4   And that what we're doing is by financing the
 
          5   insurance and selling it as a single premium
 
          6   product is making a good thing affordable for
 
          7   individuals who voluntarily choose to purchase it.
 
          8   Okay?
 
          9            And that is the thing that single premium
 
         10   finance insurance does is that for those people
 
         11   that voluntarily choose and make the decision that
 
         12   they want insurance, it becomes affordable by
 
         13   financing.  On a monthly pay basis, it becomes
 
         14   unaffordable.
 
         15            The unfortunate reality is that this is a
 
         16   segment of the market that is not served by the
 
         17   traditional insurance industry, and that is because
 
         18   these -- you know, I will generalize it -- this
 
         19   segment of the market does not qualify for and
 
         20   cannot afford the high-dollar insurance policies
 
         21   that the agents seek the commissions on.  And so
 
         22   they are a hugely underinsured segment of the
 
         23   population.
 
         24            By financing the insurance, you make it
 
 
 
 
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          1   affordable for them.  And Mr. Butler just testified
 
          2   as to the value of the product as evidence.  We're
 
          3   running over a 100 percent loss ratio.  That means
 
          4   we're paying out on the disability product more
 
          5   than we get in.  And on the life product, we're
 
          6   paying 50 to 60 percent loss ratio.
 
          7       MR. MICHAELS:  I guess I've not quite
 
          8   understood why the insurance is unaffordable.  The
 
          9   consumer pays for PMI on a monthly basis, and it's
 
         10   affordable.
 
         11            Why is it the credit life insurance is not
 
         12   affordable on a monthly basis?
 
         13       MR. BUTLER:  It's affordable for certain
 
         14   people, but the single premium makes it even more
 
         15   affordable.  So there would be a segment of the
 
         16   borrowers that will be served by the single premium
 
         17   product.  It does make it more affordable.
 
         18       MR. BIVINS:  Also, sir, credit life insurance
 
         19   is regulated by the state.  The rates for the
 
         20   insurance are regulated by the state, and a person
 
         21   is eligible for the insurance at age 18 or perhaps
 
         22   as high as 65.  And the rate charged for a 65-year
 
         23   old person is the same as would be charged for a
 
         24   20-year old person.
 
 
 
 
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          1            If you go to an age-rated policy and a
 
          2   health-rated policy, then the break, depending on
 
          3   the state, is somewhere between age 40 and 45.
 
          4   Then suddenly the age-rated policy becomes much
 
          5   more expensive than above that age than it does
 
          6   below that age.  Therefore, it's a product that can
 
          7   be affordable to everybody.  Not only do the states
 
          8   regulate the rate that is charged, they also
 
          9   regulate the commissions that are charged.
 
         10            I'm sure you can make a statement that
 
         11   over the last 20 years those rates have gone from
 
         12   $1 to $1.20 per hundred down to 50 cents and
 
         13   below.  So the product is not nearly as expensive
 
         14   it as used to be.  People buy it.  They have it.
 
         15   They typically don't have other coverages.
 
         16       MR. JAMES:  There's a disadvantage, though, in
 
         17   that the life of the average loan is under 7 years
 
         18   or so.  So that if you buy a single premium policy
 
         19   for a 30-year loan and -- the history is people
 
         20   refinance out of those loans.
 
         21       MR. BIVINS:  Mr. James, I don't believe there's
 
         22   a credit life product that will go for 30 years.
 
         23   The longest term is 120, perhaps, months.
 
         24       MR. JAMES:  So that's the life of the loan.
 
 
 
 
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          1       MR. BIVINS:  The second mortgage loan -- the
 
          2   net credit life only insures the payoff balance.
 
          3   Oftentimes it is truncated so it is only in effect
 
          4   for the first years of the loan knowing that the
 
          5   policy is going to get paid off -- the loan is
 
          6   going to get paid off before the insurance would
 
          7   run out.
 
          8       MODERATOR SMITH:  Mr. Rheingold?
 
          9       MR. RHEINGOLD:  What the credit insurance does
 
         10   is it skims equity from the house.  It's taking the
 
         11   person's equity out of their home.
 
         12            The most telling comment that was made is
 
         13   that every -- if credit life insurance or credit
 
         14   disability insurance is included in points and fees
 
         15   -- they didn't even ask about anything -- it would
 
         16   automatically be a HOEPA loan.  That means it's
 
         17   pretty damn expensive.
 
         18            And to amortize that over that 30 years at
 
         19   a high interest rate is absurd, and it's a way of
 
         20   taking people's equity out of their home, and it's
 
         21   not -- the problem is is that they're concerned if
 
         22   you take it out of the equity of their home, people
 
         23   will have a choice, and it will be a consumer
 
         24   choice because it's a separate.  Here, you can buy
 
 
 
 
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          1   this.  This is good for you.  If you pay it,
 
          2   great.  If you don't pay it -- people have that
 
          3   separate choice.  They're not going to take it.
 
          4            But if it's part of their house and they
 
          5   don't realize there's any cost at this point in
 
          6   time, then they'll do it.  That's their big
 
          7   concerns.  If you separate it out, people aren't
 
          8   going to buy it.
 
          9       MR. BUTLER:  That's why we would have the
 
         10   post-closing notice.  We would expose them to the
 
         11   cost and to the terms of the contract and give them
 
         12   a full refund and tell them the amount of the
 
         13   refund.
 
         14       MR. RHEINGOLD:  I think at some point we could
 
         15   have a discussion about disclosures and notice and
 
         16   the lack of sophistication of homeowners that get
 
         17   that.
 
         18            I mean, I think it's a noble idea.  I
 
         19   think that notices, I think the disclosures serve
 
         20   almost no purpose and are not regarded by the
 
         21   consumer in any -- by the consumer with almost no
 
         22   protection whatsoever.
 
         23       MR. BUTLER:  You don't think if they saw the
 
         24   total premium that --
 
 
 
 
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          1       MR. RHEINGOLD:  I don't think they would
 
          2   understand it.
 
          3       MODERATOR SMITH:  Mr. Varga, you will have the
 
          4   last word before we move on.
 
          5       MR. VARGA:  Just a couple of points on the
 
          6   credit insurance.  First of all, I am an exciting
 
          7   guy like Ira.  I read these loan files all the
 
          8   time.  I'm not sure that I've ever seen a borrower
 
          9   who is involved in any litigation or involved in
 
         10   who has any other life insurance, so that the
 
         11   credit life insurance product that they have is the
 
         12   only life insurance that they have.
 
         13            Many times what's happening is that the
 
         14   point in time that the borrower dies, were it not
 
         15   for the credit life insurance, the loan balance
 
         16   that would be otherwise due that would be factored
 
         17   into the overall family financial equation at that
 
         18   point in time would be one that couldn't be paid
 
         19   and, in this instance, the home would be lost.  In
 
         20   other instances, it would be that the car would be
 
         21   lost because, at that point in time, it's a
 
         22   critical point in time.
 
         23            All the claims can be made that are always
 
         24   made that the premiums are too expensive.  Of
 
 
 
 
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          1   course, it's not competitively underwritten.
 
          2   Anybody can get it at any age with any health
 
          3   condition basically.
 
          4            But the point is that at point in time
 
          5   it's absolutely paramount that there be a source of
 
          6   funds, to pay off the loan, and credit life
 
          7   provides it; and I have never seen a borrower who
 
          8   had any other insurance.
 
          9            Another thing, I've never seen a credit
 
         10   life insurance policy that didn't have a 30-day
 
         11   free look period.
 
         12            So with respect to if that becomes the
 
         13   additional criteria for exclusion from the points
 
         14   and fees test, maybe building on what we have with
 
         15   Truth in Lending that excludes it from the finance
 
         16   charge, I suppose that would be one thing that
 
         17   could be added.  I've never seen one without it.
 
         18            Another thing with respect to it on the
 
         19   single premium versus the monthly, another thing I
 
         20   see in the real world of experiencial life and
 
         21   patterns on how people pay and when they default is
 
         22   that if you are charging the premium monthly,
 
         23   people who are behind and struggling behind and the
 
         24   lender forbearing and accepting late payments and
 
 
 
 
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          1   so forth, people are likely to enable themselves to
 
          2   make that monthly payment, likely to cancel that
 
          3   credit life.
 
          4            So they might have kept it for six months,
 
          5   then started struggling with their loan payment and
 
          6   canceled the credit life.  So they're really
 
          7   getting less value for the credit life that they
 
          8   paid for for six months; but then because they're
 
          9   getting behind, cancel in the seventh or eighth
 
         10   month.
 
         11            Whereas, a single premium, they have it
 
         12   throughout.  If the person defaults on the loan,
 
         13   their insurance doesn't get cancelled.
 
         14            Here, if you paid it monthly, even if a
 
         15   person didn't voluntarily drop it in that seventh
 
         16   month I described, if they got behind on the loan,
 
         17   I believe that when it's paid monthly the lender
 
         18   would be able to -- when a borrower is in default
 
         19   and hasn't made that monthly payment, the borrower
 
         20   wouldn't have insurance because they hadn't made
 
         21   that monthly payment.
 
         22            All the lenders string along and let
 
         23   people be in default for a couple months before
 
         24   anything happens.  That's an absolute.  I see it
 
 
 
 
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          1   all the time.
 
          2            So here you would have people who hadn't
 
          3   made their monthly payment in the seventh or eighth
 
          4   month who aren't going to have credit life
 
          5   insurance.  And I think that it's significantly of
 
          6   less utility for them than paying it in the single
 
          7   premium.
 
          8            Now if we want to talk about the cost
 
          9   issues and those kind of things, maybe that's a
 
         10   whole different point; but I see credit life and --
 
         11   not just credit life, but credit IUI.  For the
 
         12   market segment that we're talking about here that I
 
         13   see litigated in cases, employment is a big cause
 
         14   of default, and I think credit IUI is a valuable
 
         15   product in that sense, and I don't think that
 
         16   people are going to end up getting utility out of
 
         17   it if they pay for it monthly.
 
         18       MODERATOR SMITH:  Adrienne?
 
         19       MS. HURT:  In the short remaining time we have
 
         20   before the break, we would like to discuss
 
         21   expanding HOEPA's coverage by applying to a new
 
         22   loan the points charged on the prior loan that's
 
         23   refinanced by the same creditor.
 
         24            When is it appropriate?  I guess the
 
 
 
 
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          1   question is when is it appropriate to count fees
 
          2   related to a prior loan, to a refinanced loan?
 
          3   And if there are other fees you believe that should
 
          4   be included in the points and fees test, we would
 
          5   like to your views on that.
 
          6       MODERATOR SMITH:  Who would like to start?
 
          7       MR. RHEINGOLD:  I will be more than glad to go
 
          8   if no one else is volunteering.
 
          9            I just want to make one correction or at
 
         10   least my interpretation is that in terms of fees to
 
         11   the broker, the language of the law says it's any
 
         12   payments made directly or indirectly to the
 
         13   mortgage broker.  It doesn't say by the consumer.
 
         14   It just says paid directly or indirectly to the
 
         15   broker at the time of the closing.  And that, to
 
         16   me, means that yield spread premiums should be
 
         17   included as the law is written.  But if it's not, I
 
         18   think it's something that should absolutely be
 
         19   included in the points and fees because it is a fee
 
         20   that goes to the cost of the loan, and it's
 
         21   something that -- that is one thing.
 
         22            Second, in the definition of finance
 
         23   charge in terms of Truth in Lending, per diem
 
         24   interest is counted as a part of the finance
 
 
 
 
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          1   charge.
 
          2            Yet, in the commentary under HOEPA,
 
          3   per diem interest is excluded in the points and
 
          4   fees trigger.  I'm not sure why that is.  And I
 
          5   have seen a number of loans just below the HOEPA
 
          6   radar screen that if you added that per diem
 
          7   interest, it would become HOEPA loans.  That's a
 
          8   fee that will be financed over the life of the
 
          9   loan, and we think that's something that needs to
 
         10   be included as well.
 
         11            I will leave the -- I will get back and
 
         12   let somebody else talk about the finance charge of
 
         13   the previous loan and let them deal with that, and
 
         14   I will be glad to respond.  Let somebody else have
 
         15   the floor.
 
         16       MS. HURT:  There is also the issue of whether
 
         17   it's still the same question about applying loans
 
         18   on a previous loan -- I'm sorry, applying fees
 
         19   relating to a previous loan on the new loan,
 
         20   prepayment penalties or points.
 
         21            Does anyone want to comment on prepayment
 
         22   penalties or points?  But the overall question, all
 
         23   of these fees apply to the prior loan; and the
 
         24   question is should they apply to a refinance
 
 
 
 
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          1   loan?   It's a way of getting that loan.
 
          2       MR. VARGA:  I would speak to that one.  I've
 
          3   never seen -- I haven't seen all the loans, but
 
          4   I've never seen a lender apply a prepayment penalty
 
          5   when it's refinancing its own loan.  I just don't
 
          6   think that's happening in the marketplace.
 
          7            Now, you know, market conditions change
 
          8   and what wasn't being done two years ago might be
 
          9   done now and vice versa and so forth as we go
 
         10   forward.  But I've never seen that.
 
         11            So I think that the argument might be,
 
         12   well, then, if lenders aren't doing it, then let's
 
         13   codify it into law.  I think it just isn't done in
 
         14   the marketplace.
 
         15       MS. HURT:  What about points?
 
         16       MR. VARGA:  Well, I understand that what you're
 
         17   talking about is taking the points from a prior
 
         18   loan and adding them into the HOEPA trigger for the
 
         19   next loan on refinance.  I think that that would
 
         20   have the effect of pushing many, many, many loans.
 
         21            Maybe Mr. Detelich -- it looks like he
 
         22   wants to say something.
 
         23            I think it really skews inclusion of loans
 
         24   that are really otherwise possibly far from being
 
 
 
 
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          1   HOEPA loans into being HOEPA loans and triggers the
 
          2   whole set of consequences that we talked about
 
          3   before in a changing landscape that I think in
 
          4   today's climate and going forward is going to have
 
          5   significantly different lender behavior than maybe
 
          6   has been behavior lender in the past about making
 
          7   HOEPA loans.
 
          8            And it isn't to -- speaking to what
 
          9   someone else said here before that lenders are
 
         10   trying to avoid scrutiny with respect to HOEPA
 
         11   loans.  What they're trying to avoid is having
 
         12   additional quivers in the arrow of a borrower's
 
         13   attorney to use the fact that it's a HOEPA loan as
 
         14   additional leverage to forestall foreclosure and do
 
         15   a variety of other things.
 
         16            It's problems with saleability of the loan
 
         17   in loan portfolios.  It's not to withstand
 
         18   scrutiny.  It's the additional exposure that it
 
         19   brings in terms of leverage that ultimately affects
 
         20    -- and this is an important thing to keep in mind
 
         21   -- whether this loan is going to get repaid so
 
         22   that more capital can be had to make more loans
 
         23   going forward.
 
         24       MR. DETELICH:  If I could comment and confirm
 
 
 
 
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          1   what Mr. Varga said about -- I don't know of any
 
          2   companies either that charge a prepayment penalty
 
          3   to their own customer in a refinance transaction.
 
          4   I've never seen that happen in my 24 years in the
 
          5   business.  I'm sure it happens with some lenders.
 
          6   I've not seen it.
 
          7            On the issue of including points on a
 
          8   previous transaction in the points and fees test.
 
          9   The problem with that is it creates an uneven
 
         10   playing field.
 
         11            The way that I treat one of my own
 
         12   customers is going to be different in a refinance
 
         13   transaction, different than another lender would
 
         14   treat that customer.  In other words, the other
 
         15   lender would not be counting points in the previous
 
         16   transaction.
 
         17            We have an uneven playing field.  There's
 
         18   an opportunity for an unscrupulous lender to
 
         19   actually prey on my customers offering a loan that
 
         20   has little benefit but actually ends up being
 
         21   slightly better than mine just because I don't have
 
         22   the extra waiting period or whatever.
 
         23            I think you need to keep a level playing
 
         24   field on how I treat my customers and other lenders
 
 
 
 
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          1   treat my customers.
 
          2       MODERATOR SMITH:  Mr. Rheingold, and
 
          3   Mr. Immergluck, and Mr. Shea, and Mr. Bochnowski.
 
          4       MR. RHEINGOLD:  Very quick.  The point that
 
          5   we're getting at is we want to prohibit flipping.
 
          6   I think we're talking about we don't care who the
 
          7   other lender was because brokers change lenders who
 
          8   they make deals with.  So the lender is responsible
 
          9   for the previous loan.
 
         10            I think it's a good idea and I think we
 
         11   need to think how it gets tailored.  We want to
 
         12   prevent the thing that doesn't provide a benefit
 
         13   for people.  And the notion is if something has
 
         14   happened within the past year, then you should have
 
         15   increased scrutiny on it.  And even if the points
 
         16   and fees on that loan aren't unbelievably high, if
 
         17   you add in the existing refinance, one, it
 
         18   prohibits some of the equity scheming that we see
 
         19   all the time and the kind of flipping.
 
         20            So I think it's a good idea.  I think
 
         21   other people probably have addressed it in previous
 
         22   hearings on how exactly it needs to be typed.  What
 
         23   we consider a flip; how frequently is it
 
         24   occurring?
 
 
 
 
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          1            It is not an infrequent occurrence for us
 
          2   to see a HOEPA loan that gets flipped six months
 
          3   later to a non-HOEPA loan.  So suddenly, even
 
          4   though we think that that broker engaged in that
 
          5   behavior, that lender engaged in that behavior,
 
          6   when that foreclosure comes down the line, that's
 
          7   not a HOEPA loan.   We have no redress.
 
          8            So I think if it occurs within a certain
 
          9   period of time, I think it's a very good idea to
 
         10   include the previous fees.
 
         11       MR. IMMERGLUCK:  Following what Ira said.
 
         12   Brokers have a set of lenders that go from -- if
 
         13   you just try to deal with flipping within the same
 
         14   lender, it's completely easily circumvented.
 
         15   They'll just go from one lender to the next lender
 
         16   to the next lender.
 
         17            So I would say that's -- if you only
 
         18   constrain it to the existing lender, it's going to
 
         19   have almost an insignificant impact.
 
         20            The problem is you can have a loan right
 
         21   now that has 7.9 points as defined under HOEPA, has
 
         22   a 5 point prepayment penalty and has 10 points or
 
         23   20 points in credit life insurance and it isn't a
 
         24   HOEPA loan.  The settlement charges on the loan
 
 
 
 
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          1   will eat up 40 percent of the equity in the home.
 
          2   It's absurd.  The law isn't working.  It's totally
 
          3   broken.
 
          4            I just want to -- since I wasn't allowed
 
          5   to respond about the seven or eight minutes of
 
          6   comments by the credit life representative,
 
          7   46 percent of credit -- in a study done by Purdue
 
          8   at their Credit Research Center which is an
 
          9   industry-funded research center, 46 percent of
 
         10   credit life recipients that were sold lump sum
 
         11   credit life said they either got credit insurance
 
         12   and was never told that the insurance was optional
 
         13   or they felt pressured to purchase and felt buying
 
         14   the insurance would approve their ability to get
 
         15   the loan.
 
         16            This isn't voluntary.  And the notion that
 
         17   this is occasional packing is absurd.  So I just
 
         18   wanted to make sure that that was clear.
 
         19       MODERATOR SMITH:  Mr. Shea?
 
         20       MR. SHEA:  I would welcome the opportunity at
 
         21   some time to introduce Mr. Detelich to
 
         22   Casey Newsome of Chicago who was in fact refinanced
 
         23   by the Associates which is a finance company
 
         24   similar to Beneficial.
 
 
 
 
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          1            Eighteen months after the refinance,
 
          2   Associates once again solicited Ms. Newsome for
 
          3   another refinance to flip their own once again;
 
          4   and, in fact, they were going to charge the prepay
 
          5   penalty on their original loan on the new loan.
 
          6            So it does happen.  The Associates does it
 
          7   fairly commonly.  I believe we have at least two
 
          8   cases from your company as well.
 
          9       MR. VARGA:  Excuse me.  I have to say something
 
         10   at this point.  I have been in a lot of these
 
         11   forums and consumer advocates in a lot of other
 
         12   contexts around the country, and one of the ground
 
         13   rules we've had in those kind of discussions, in
 
         14   bar forums has been that we don't mention lenders'
 
         15   names.  Those lenders --
 
         16       MR. SHEA:  You don't name names?  This is
 
         17   reality, jack.
 
         18       MR. VARGA:  Well, those lenders aren't here
 
         19   with respect to responding to these specific
 
         20   assertions that are reported as fact.  And it's
 
         21   great to come in with all of that and be able to
 
         22   tout all that; but those people aren't here in a
 
         23   way to go through that loan file and be able to
 
         24   address that.
 
 
 
 
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          1            I don't think that in a forum such as this
 
          2   where we're talking about, yes, there's an
 
          3   industry, yes, there's a consumer point of view
 
          4   that we have to sit here and tar specific lenders.
 
          5            If you want to talk about specific
 
          6   programs that ACORN has worked out with specific
 
          7   people, I suppose, you know, that's one thing.  But
 
          8   when you are hurling accusations at people, I don't
 
          9   think that we really need the names of those
 
         10   particular companies.
 
         11            So, you know, I suppose the rules are
 
         12   whatever they are, but that's an industry point of
 
         13   view on it; and I will say that in other forums
 
         14   where we have these kinds of discussions, that's
 
         15   one of the ground rules.
 
         16       MODERATOR SHEA:  Mr. Shea, please finish.
 
         17       MR. SHEA:  I'm done.  Thank you.
 
         18       MODERATOR SMITH:  Mr. Bochnowski?
 
         19       MR. BOCHNOWSKI:  Again, community banks are not
 
         20   actively engaged nor do we have any interest in
 
         21   flipping loans.  It's not in our best interest or
 
         22   in our customer's best interest.
 
         23            What I would be concerned about it is as
 
         24   times change.  And right now in our marketplace, I
 
 
 
 
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          1   know no one who charges a prepayment penalty on the
 
          2   loan.  And I must admit, at the community bank
 
          3   level, it's really tough to get fees out of our
 
          4   customers.
 
          5            But as times change, we might find
 
          6   ourselves, depending on how you write these rules,
 
          7   in a situation where someone is going to come in
 
          8   with a legitimate reason for refinancing their
 
          9   loan.  They may want to take more equity out
 
         10   because their circumstances have changed.
 
         11            In that circumstance, if we also had,
 
         12   again, a situation where fees were being charged,
 
         13   where prepayments were enforced or could be
 
         14   enforced in the marketplace, we might be
 
         15   stigmatizing a loan that would be harmful to our
 
         16   customers and that we would want to put, in the
 
         17   best interest of our customer, on our books because
 
         18   they're trying to draw out additional cash or
 
         19   whatever their specific reason might be.  So I
 
         20   would be cautious.
 
         21       MODERATOR SMITH:  Mr. Bivins?
 
         22       MR. BIVINS:  There's a question of if you
 
         23   included the points and fees in previous loans in a
 
         24   refinance, are you going to bring a lot of loans
 
 
 
 
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          1   into HOEPA that otherwise wouldn't?
 
          2            In today's market with interest rates
 
          3   rising, there are a lot of first mortgages,
 
          4   purchase money loans that are being written with
 
          5   adjustables.  Everybody thinks the rates are going
 
          6   to go back as low as 7 percent at some point.  They
 
          7   may be getting a loan at an interest rate that is
 
          8   very low today that's going to graduate, increase
 
          9   over time.
 
         10            Their situation may change.  They want to
 
         11   refinance and take equity out of their home.  The
 
         12   market may move so that they feel it's time to move
 
         13   from an adjustable to a fixed rate; and you could
 
         14   be bringing in borrowers and forming loans to HOEPA
 
         15   disclosures, and I don't believe that's your
 
         16   intention here.
 
         17       MODERATOR SMITH:  I think we're ready for --
 
         18   did you have something?
 
         19       MS. HURT:  One more question.
 
         20       MODERATOR SMITH:  And then we're going to take
 
         21   a break.
 
         22       MR. MICHAELS:  This may not come out so much in
 
         23   the form of a question.  It depends on whether you
 
         24   can answer it.
 
 
 
 
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          1            I am going to address it to you,
 
          2   Mr. Detelich, but it's really a question or
 
          3   request, I guess, posed to any lenders who make
 
          4   HOEPA loans, as a lender who says they make HOEPA
 
          5   loans.
 
          6            I guess the question is do you have --
 
          7   have you studied or do you have some idea of what
 
          8   percentage of your loans would be covered by HOEPA
 
          9   if, in fact, we dropped these triggers?  Have you
 
         10   studied that or are you in the process of studying
 
         11   it?   Can you help us with that type of data?
 
         12       MR. DETELICH:  We know that today it's about
 
         13   10 percent of the loans that we make in total.  We
 
         14   think it may, depending if all of these are
 
         15   implemented, it would probably more than double,
 
         16   somewhere around double.
 
         17            Now I have to qualify that.  Tracking for
 
         18   this is very difficult.  We're tracking it in
 
         19   reverse fashion, looking back at the hurdles and
 
         20   the price of each of the loans.  But it's
 
         21   approximately 10 percent, and it could
 
         22   approximately double.
 
         23       MR. MICHAELS:  Can you help us a little bit
 
         24   with some of the assumptions that went into that in
 
 
 
 
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          1   terms of change in the points and fees trigger or
 
          2   the change in the APR trigger?
 
          3       MR. DETELICH:  Primarily the APR trigger.  The
 
          4   points and fees did go to identify -- you know,
 
          5   again looking back without the exact data and how
 
          6   the regulation would change, it's primarily the APR
 
          7   trigger that would push it up to somewhere around
 
          8   19 percent.
 
          9       MR. MICHAELS:  And then the 10 percent figure
 
         10   now, is that based on APR or mostly points and
 
         11   fees?  Do you have some idea of what percentage?
 
         12       MR. DETELICH:  By the way, that is for the
 
         13   loans that we book here today, just looking at a
 
         14   sample.  So it's not looking at a portfolio.
 
         15       MR. MICHAELS:  But of the 10 percent, do you
 
         16   know what part of those are based on the APR
 
         17   trigger?
 
         18       MR. DETELICH:  Using points and the fees --
 
         19   using the points to calculate the APR, it's the APR
 
         20   trigger, yes.  We don't make -- I don't think we
 
         21   make any loans today, HOEPA loans, that go through
 
         22   the hurdle based on points.  In fact, I'm certain
 
         23   we don't.  All of our HOEPA loans are APR trigger
 
         24   loans only.  Only.
 
 
 
 
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          1       MR. MICHAELS:  Thank you.
 
          2       MODERATOR SMITH:  We'll be coming back to some
 
          3   of these issues, I'm sure, after the break; but
 
          4   we're going to take ten minutes, and we will
 
          5   reconvene at five after the hour.
 
          6                      (Whereupon, recess taken at
 
          7                      10:51 o'clock a.m.)
 
          8                      (Whereupon, back on the record
 
          9                      at 11:09 o'clock a.m.)
 
         10       MODERATOR SMITH:  If the panelists would rejoin
 
         11   us, we are ready to reconvene, and we're going to
 
         12   start with a question from Ms. Williams on the
 
         13   preceding segment.  We are starting with or without
 
         14   you.  Please start.
 
         15       MS. WILLIAMS:  The question that I wanted to
 
         16   ask is we talked a little bit this morning about
 
         17   the various proposals at the state level as well as
 
         18   at the city level, and could you talk a little bit
 
         19   about how those proposals discussed the triggers as
 
         20   well as the points and fees?
 
         21       MR. COLUMBUS:  Are you talking about the
 
         22   post-closing notice?
 
         23       MS. WILLIAMS:  The city ordinance that was
 
         24   talked about a little bit earlier this morning as
 
 
 
 
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          1   well as the state proposal.
 
          2       MR. BAKER:  I would like to start off with the
 
          3   comment that most of the proposals that we have
 
          4   seen as introduced suggest an interest rate
 
          5   threshold of 5 percentage points over competent
 
          6   Treasury yield and a total of 3 points in fees.
 
          7            Clearly that would be so low as to cut off
 
          8   a huge segment of the subprime market where lenders
 
          9   choose simply not to make loans over that
 
         10   threshold.  In fact, that would cut into the
 
         11   B subprime market as well as the C and D subprime
 
         12   markets.
 
         13       MODERATOR SMITH:  Could you use the mic and see
 
         14   if it's working.
 
         15       MR. BAKER:  Can you hear me now?
 
         16            The current draft of the Chicago ordinance
 
         17   is still at a 6 and a half percent interest rate
 
         18   above competent Treasury yields and the 5 points in
 
         19   points and fees.  We've had a number of proposals
 
         20   down in Springfield that likewise began with 3 and
 
         21   5 threshold.
 
         22            In terms of the definitions of predatory
 
         23   practices when you look at those proposals, they
 
         24   have a lot of big terms.  I don't recall any of the
 
 
 
 
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          1   specific words offhand since they're not on the
 
          2   table today, but they include things like simply
 
          3   deceptive practices or pressurized sales or things
 
          4   of that nature; and that's what gives cause --
 
          5   concern to lenders is that strictly a subjective
 
          6   judgment could be made after the fact by somebody
 
          7   who's not happy with a piece of paper, and that's
 
          8   just too much of a danger for any responsible
 
          9   lender to walk into especially a regulated lender
 
         10   who's being judged on the safety and soundness of
 
         11   their lending decisions.
 
         12            There are a lot of comments to be made,
 
         13   but those are the points I would like to make.
 
         14       MR. IMMERGLUCK:  Alicia, I would just make one
 
         15   point, and Commissioner Darr should chime in
 
         16   because one reason why the thresholds are so
 
         17   important in HOEPA is Commissioner Darr and other
 
         18   folks I think at the state level are, to some
 
         19   degree, hamstring by them.
 
         20            I mean, I appreciate the Commissioner's
 
         21   efforts to try to fight the predatory lending
 
         22   problem.  There was basically a commission set up
 
         23   by a legislator in Illinois that to some degree fed
 
         24   into the regulations that have come out of the
 
 
 
 
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          1   Commissioner's office.  And the discussion about
 
          2   what the threshold would be was pretty much -- it
 
          3   was a commission that was pretty much -- I think I
 
          4   counted 24 industry representatives and 3 consumer
 
          5   representatives at the meeting I went to with a
 
          6   couple government people.
 
          7            There was really an assumption that the
 
          8   HOEPA levels were the appropriate levels.  There
 
          9   was no discussion of why was that appropriate, what
 
         10   makes that appropriate, how much?  The discussion
 
         11   of what percentage of loans are covered never came
 
         12   up.  It was just, these were Section 32 loans, and
 
         13   that is what we followed.  Sure enough, when the
 
         14   draft regulations came out in Commissioner Darr's
 
         15   office, they used -- they just said Section 32
 
         16   basically.
 
         17            So, you know, you do have to realize that
 
         18   state regulators and others are, to some degree --
 
         19   you are setting the precedent for them.
 
         20       MR. DARR:  Thank you, Dan.  I wanted to bring
 
         21   that point up before in that lively discussion we
 
         22   had prior to the break.
 
         23            That is definitely the case.  We don't
 
         24   feel that we have, via a rule anyway, the authority
 
 
 
 
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          1   to set rates or go in a different direction.  And I
 
          2   have a feeling the legislature would agree with us
 
          3   on that.  We feel Illinois legislates their
 
          4   responsibility.
 
          5            So we -- that's why we pegged our rules;
 
          6   and, frankly, the HOEPA thresholds are the trigger
 
          7   point for everything in our rules, whether consumer
 
          8   counseling, the prohibition against certain
 
          9   activities.  They are the linchpin to our whole
 
         10   rule-making efforts.
 
         11            That's why I'm so anxious for the feds to
 
         12   exercise their authority on this important issue.
 
         13       MODERATOR SMITH:  Mr. Bivins?
 
         14       MR. BIVINS:  If I could make a comment.  I will
 
         15   get to the city thing, but I want to address first
 
         16   some of the consequences of HOEPA itself.
 
         17            We've heard some comments that the
 
         18   industry will find the loopholes that are there.
 
         19   As HOEPA went into effect and lenders stopped doing
 
         20   HOEPA loans and brokers were not able to charge as
 
         21   high broker fees, the tendency in the past was to
 
         22   make a second mortgage when in fact that would be
 
         23   appropriate and that's what was being requested for
 
         24   home improvement, for debt consolidation, and for
 
 
 
 
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          1   cash out.
 
          2            As a result of HOEPA, I believe there are
 
          3   a lot more loans that are being done as first
 
          4   mortgage refis because the money to be made on a
 
          5   small second mortgage just isn't there anymore.
 
          6            Part of the compromise in the City of
 
          7   Chicago ordinance was that loans of $16,000 and
 
          8   under, that a broker lender could charge $800 for a
 
          9   reasonable cost originating that loan, and that
 
         10   $800 could be charged on a $10,000 loan or it could
 
         11   be charged on a $8000 loan which would be the
 
         12   equivalent of 10 points, but then it would not be
 
         13   part of this predatory disclosure that the City had
 
         14   brought out.
 
         15            So that's one thing that the city in this
 
         16   process has brought to the table that we have not
 
         17   seen at the federal level.
 
         18       MR. VARGA:  One other thing, speaking to the
 
         19   state efforts.  Most of the companies in the
 
         20   association I represent are not regulated,
 
         21   supervised by OBRE.  They're regulated by the
 
         22   Department of Financial Institutions in Illinois
 
         23   under which licensees who have the license --
 
         24   consumer's loan act license can make real estate
 
 
 
 
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          1   secured loans.
 
          2            Those rules likewise pick up on the
 
          3   Section 32 trigger, and it's not just simply
 
          4   because, well, that was easier.  The suggestion
 
          5   perhaps made earlier here where somebody did it
 
          6   unthinkingly or reflexibly, it was done with a lot
 
          7   of thought, I believe; and part of the rationale
 
          8   was that you would have an unequal, unlevel playing
 
          9   field if you had the triggers be lowered with
 
         10   respect to state licensed lenders supervised by DFI
 
         11   or OBRE in comparison to federally regulated banks
 
         12   and thrifts who would not be subject to that state
 
         13   regulation; and there is an overlapping competition
 
         14   for some of the customers that we're talking about,
 
         15   and that's my idle concern.
 
         16            Again from the standpoint of understanding
 
         17   that market-funded lenders, to stay in business,
 
         18   need to be able to compete as against people who
 
         19   are competing against them and not have an unlevel
 
         20   playing field.  So that's part of the reason.
 
         21            DFI isn't here, but I think that needs to
 
         22   be said that I think that was the thought process.
 
         23       MR. MICHAELS:  Mr. Bivins, you said something
 
         24   which caught my attention insofar as the preference
 
 
 
 
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          1   in terms of the lenders -- economics of the lender
 
          2   is that they want to make the refi the first rather
 
          3   than the second small mortgage because the consumer
 
          4   is looking for a relatively small amount of money.
 
          5            So the question I have is is that
 
          6   something we should be looking at?  Should we be
 
          7   looking at HOEPA rules that encourage in some way
 
          8   the making of that small second mortgage instead of
 
          9   refinancing the whole first mortgage?   And, if so,
 
         10   how would the fed do that?  Is that something you
 
         11   would do through triggers?  This is open for
 
         12   anybody to comment on.
 
         13       MR. JAMES:  Well, I would say that this goes
 
         14   right back to refinancing, how you treat those
 
         15   points on the prior loan.
 
         16            If you have a rule that says you got to
 
         17   treat those points as HOEPA trigger, include them
 
         18   in the subsequent refinance, you're going to push
 
         19   lenders into making seconds instead of refinancing
 
         20   the whole ball of wax again.
 
         21            And part of what happens when you have
 
         22   seconds is you don't -- the state laws that are in
 
         23   place that have been formulated over the last
 
         24   100 years to protect consumers come into play.  And
 
 
 
 
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          1   they're not preempted.
 
          2            So it would have a dual effect.  It would
 
          3   give us the power to exercise laws that were --
 
          4   that have been dealing with these problems over the
 
          5   last century.  And it would also make the lenders
 
          6   -- it would be a disincentive to strip that equity
 
          7   on the second time around.
 
          8       MR. BAKER:  It's important to keep in mind,
 
          9   though, that the lender has a lesser interest with
 
         10   a second mortgage as opposed to a first.  The risks
 
         11   are higher.  The prospects of recovery are less,
 
         12   and that's going to be underwritten in the cost of
 
         13   the loan, either in points or fees or in the
 
         14   interest.
 
         15            You also have to remember that the amount
 
         16   of a second mortgage is going to be much less,
 
         17   typically a $40,000 amount or maybe $80,000 tops,
 
         18   something like that.  And there, when you are
 
         19   looking at 5 points in fees, you're only talking
 
         20   about $400 on a $80,000 loan.
 
         21            So the risks of greater.  The amount of
 
         22   fees that can be charged are really de minimis in
 
         23   the scheme of thing, and that makes the whole loan
 
         24   a lot more problematic and a lot more risky for the
 
 
 
 
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          1   lender and probably less -- from a lender's point
 
          2   of view, it should be less subject to these types
 
          3   of restrictions.
 
          4       MR. MICHAELS:  How does the Federal Reserve
 
          5   account for that in terms of -- you know, what
 
          6   could we do in terms of our rules that would make
 
          7   it more likely that a lender would want to take
 
          8   that risk?   Are you talking about changing the
 
          9   regulatory scheme for the smaller loans?   Is there
 
         10   something that we could do?
 
         11       MR. BAKER:  You are asking a fairly broad and
 
         12   important question.  I don't think it's the role of
 
         13   the fed or any governmental body to want to direct
 
         14   the market into one loan product versus another
 
         15   loan product.  I think that should be left up to
 
         16   the marketplace.
 
         17            I think -- and I don't have an exact
 
         18   answer to your question.  I don't think anybody
 
         19   does, and that's why you are holding hearings
 
         20   today.  I think when the ultimate problems are
 
         21   distilled and isolated, they need to be addressed
 
         22   directly.
 
         23            Somebody mentioned this morning that
 
         24   individual loan originators aren't licensed.  No
 
 
 
 
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          1   matter what rules you make on thresholds and on
 
          2   definitions and on dos and don'ts, there will
 
          3   always be a market of tens of thousands of
 
          4   individuals out there that will figure out the next
 
          5   way to get around the corner and to continue plying
 
          6   their trade.
 
          7            So I think you're going to have to -- I
 
          8   don't think there's a simple answer to your
 
          9   question.  But I would caution you to think twice
 
         10   about trying to direct the market into one loan
 
         11   product versus another.
 
         12       MR. MICHAELS:  I wasn't talking directing the
 
         13   loan product.  It's a question of whether or not
 
         14   the complications of the regs or the complexities
 
         15   of the regs would be different on the smaller loans
 
         16   than the larger loans.
 
         17       MR. BIVINS:  My comments were based on the cost
 
         18   of origination.  The feds could address it by
 
         19   saying loans of a certain size and under are
 
         20   excluded from HOEPA.
 
         21            If the threshold is -- ends up being
 
         22   6 points in fees, then 6 points on a $10,000 loan
 
         23   is $600, and when you put in what the lender is
 
         24   charging, the broker is basically left with
 
 
 
 
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          1   nothing, and he's not going to originate that
 
          2   loan.  He can charge 1 or 2 points on a first
 
          3   mortgage refinance that might be $100,000.  It
 
          4   would be for a 30-year loan instead of 5 or 10;
 
          5   and, therefore, he will go through the process of
 
          6   originating.
 
          7            When I started in business in 1983, I got
 
          8   a lot of $5,000 loans.  Today, I have very few
 
          9   lenders that will do a loan under 10.  Most of them
 
         10   are at 15 and above.
 
         11            So when you apply all these HOEPA triggers
 
         12   to any loan, there is a disincentive to make a
 
         13   small loan because you cannot justify the time and
 
         14   energy that goes into it.
 
         15       MODERATOR SMITH:  Mr. Rheingold?
 
         16       MR. RHEINGOLD:  I have two thoughts.  One, I
 
         17   would have no problem, speaking for myself, in
 
         18   having different triggers for a small second.
 
         19            As Tom said, there is federal reaction on
 
         20   the first claim, not the second.  Encouraging the
 
         21   seconds, a state can regulate seconds; and having a
 
         22   higher trigger on seconds, I would have no trouble
 
         23   with that at all.
 
         24            The second thing -- and I think you talked
 
 
 
 
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          1   about the marketplace -- I think one of the
 
          2   problems that we hear about the seconds is that the
 
          3   broker makes his money from that upfront fee, and
 
          4   then they're gone from the transaction.
 
          5            So I think the marketplace -- the lender
 
          6   and the broker have got to sit down together and
 
          7   figure out how the broker is going to make money
 
          8   when that loan performs and that their compensation
 
          9   works not only by that initial upfront payment by a
 
         10   loan that's successful, a loan that doesn't come
 
         11   into default.  And I think that's the way the
 
         12   marketplace needs to change.
 
         13            So that upfront fee isn't the only
 
         14   compensation the broker gets, but that the broker
 
         15   gets compensated when a loan is successful, and
 
         16   that ends the disincentive to make all these loans
 
         17   that are failing because there is no incentive for
 
         18   the broker to make -- they don't care because
 
         19   there's no check in the system.  So if that loan
 
         20   fails, we got our money, I'm gone and nobody knows
 
         21   that the broker made that loan.  Nobody tracks it.
 
         22            If there's a system in place where the
 
         23   broker gets compensated over time because a loan
 
         24   performs, then I think that's something the market
 
 
 
 
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          1   can do.  Now whether or not the Federal Reserve has
 
          2   anything to do with that is another story, but that
 
          3   would be one of my responses.
 
          4       MR. BAKER:  If I could say, I don't think the
 
          5   banking industry would disagree with what Ira just
 
          6   said; but then the devil's in the details.  If
 
          7   you're going to compensate that broker through the
 
          8   overhead which is going to be factored into the
 
          9   interest rate, and then you add that indirect
 
         10   compensation back into your calculation for the
 
         11   HOEPA triggers, you're going to end up turning that
 
         12   loan into a HOEPA loan anyway and then the lenders
 
         13   are going to say, we don't want to make HOEPA loans
 
         14   for many of them.  So, again, the devil's in the
 
         15   details.
 
         16            I think the banking industry would concur
 
         17   with Ira's suggestion, but then don't include that
 
         18   indirect compensation in the calculation in the
 
         19   definition in determining whether it's a HOEPA loan
 
         20   or not.
 
         21       MR. VARGA:  I guess that also gets us into and
 
         22   maybe complicates the Federal Reserve Board's task
 
         23   in the difficulty in reconciling with RESPA and HUD
 
         24   and the booming efforts that we're trying to get at
 
 
 
 
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          1   defining broker compensation that have been and
 
          2   proved to be very difficult.
 
          3            So when you have sort of a compensation of
 
          4   the broker based on performance of the loan over a
 
          5   period of time, that's not the way things are being
 
          6   done now, and it just adds another complicating
 
          7   wrinkle to what has already proved to be a pretty
 
          8   intractable difficulty in dealing with RESPA broker
 
          9   compensation issues.  It's not a reason not to do
 
         10   it, but it's just throwing another log on the
 
         11   fire.
 
         12       MS. WILLIAMS:  I would like to ask one more
 
         13   question.  Dan, you said earlier, and I believe,
 
         14   Mr. Darr, you agreed that the state was pretty much
 
         15   hamstrung because of what the fed has or has not
 
         16   done.
 
         17            So if you could kind of give me a sense of
 
         18   what you're suggesting from your view point the
 
         19   feds should do in order to facilitate what the
 
         20   state is trying to do with their proposal.
 
         21       MR. IMMERGLUCK:  I should clarify, we certainly
 
         22   would like the state to, you know, use a threshold
 
         23   that's substantially below the current HOEPA
 
         24   threshold, and we think that the state does have
 
 
 
 
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          1   the power to do that.
 
          2            My comment was it is harder for the state
 
          3   to take that position if the fed has not.  They
 
          4   expect leadership from the federal level and they
 
          5   can look to the federal level on that leadership.
 
          6            Certainly the last part of your question
 
          7   is I think what the rest of the morning is for.  We
 
          8   have -- you know, we've written formal comments on
 
          9   all the things that happened; but the main thing is
 
         10   to expand the definition of points and fees so it
 
         11   really reflects, not from the industry perspective,
 
         12   the borrower's perspective of what the cost -- what
 
         13   the settlement costs of the loan are excluding
 
         14   escrows, excluding PMI, but everything else should
 
         15   really be included in the charges definition.
 
         16   Otherwise, there's always going to be opportunities
 
         17   for other profit centers to pick up the slack and
 
         18   to strip equity.
 
         19       MR. VARGA:  I have one comment, clarification
 
         20   on something I said about half an hour ago.  It
 
         21   might have sounded like there's one thing we can
 
         22   throw into the points and fees that nobody has any
 
         23   difficulty with because they don't do it which is
 
         24   the lender refinancing its own loan and charging a
 
 
 
 
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          1   prepayment penalty which was suggested nobody ever
 
          2   does.
 
          3            I was informed during the break that there
 
          4   are some very legitimate loan programs where a
 
          5   person is given a choice of having a prepayment
 
          6   penalty, even if they refinance with the same
 
          7   lender, in exchange for a lower rate; and,
 
          8   therefore, people who know they're going to stay in
 
          9   their home are willing to take a prepayment penalty
 
         10   even if they refinance with the same lender in
 
         11   exchange for a lower rate.  So there's nothing
 
         12   abusive about that, per se, at all.
 
         13            But apparently those programs exist so
 
         14   that the thought that, you know, we can throw that
 
         15   one in the points and fees because nobody does it
 
         16   and nobody cares and it won't impact anything,
 
         17   that's really not correct.
 
         18       MR. RHEINGOLD:  If I could just respond.  I
 
         19   think there's a mythology that we talk about when
 
         20   we talk about consumer choice.
 
         21            I mean, in the subprime market, there is
 
         22   no consumer choice.  Or maybe in some perfect
 
         23   world, there is consumer choice and competition.
 
         24            The competition that we see on a daily
 
 
 
 
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          1   basis is between the lender and the broker.  The
 
          2   lender is trying to tell the broker, bring us those
 
          3   loans.  We'll pay you compensation, and we'll do
 
          4   good by you.
 
          5            That consumer at home doesn't have a
 
          6   panoply of choices.  You can have this interest
 
          7   rate, and you can have this interest rate or you
 
          8   can have a lower interest rate if you get a
 
          9   prepayment penalty.
 
         10            That doesn't happen in the communities
 
         11   that are being devastated by these type of loans.
 
         12   It just doesn't happen.  I have yet to meet a
 
         13   client -- and I know it's anecdotal -- who
 
         14   understand they had a prepayment plan.  Never.  And
 
         15   never did anyone say to them, oh, by the way, you
 
         16   can accept this prepayment penalty and then we'll
 
         17   lower your interest rate.  Never happens.
 
         18            I will also add just as a point, I have
 
         19   never, ever -- and I doubt this conversation ever
 
         20   occurs in the marketplaces that we're talking about
 
         21    -- about yield spread premiums.  Oh, by the way,
 
         22   the broker says to the homeowner, see this fee
 
         23   here?  Here's your choice.  You can pay me this fee
 
         24   and it can get financed.  Or you know what?   If
 
 
 
 
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          1   you can't pay that fee, that's too much of a fee,
 
          2   we'll have the lender pay us and increase your
 
          3   interest rate.
 
          4            It doesn't happen.  And that's a myth that
 
          5   keeps going on here.  There is not consumer choice
 
          6   in the communities that we're talking about.  And
 
          7   there is no competition for that market.  There
 
          8   isn't.  The competition is to see how much money
 
          9   brokers can collect and how much money the lender
 
         10   is going to make; and that consumer in those
 
         11   communities are not offered an array or a panoply
 
         12   of choices so that they can have good credit.
 
         13       MR. VARGA:  Well, if I can respond to that.
 
         14   Ira, again, we both look at these loan files and I
 
         15   see -- in Illinois, it's a required statement under
 
         16   OBRE regs that require the borrower information
 
         17   document and the broker disclosure agreement.
 
         18            Any of those documents have in them -- and
 
         19   it's been suggested by some of the people as part
 
         20   of this HUD and broker compensation effort and
 
         21   discussion and battle of wills who had premiums for
 
         22   years -- a very specific thing that says, I'm a
 
         23   broker, I'm going to get paid in connection with
 
         24   getting a loan for you.  You can either pay me up
 
 
 
 
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          1   front, and you might get a lower rate, or you can
 
          2   pay me built into the rate, and it's going to
 
          3   affect the rate that you are getting.
 
          4            I have seen those in files signed by
 
          5   people.  I mean, you can say, Ira, that disclosure
 
          6   doesn't mean anything, and I suppose we can just
 
          7   scuttle Truth in Lending and RESPA and everything
 
          8   else that goes with it or we can say that people
 
          9   shouldn't be given loans and shouldn't be given
 
         10   access to credit and we can all make that decision
 
         11   for them, if that's what you want to do.
 
         12            But the disclosure is there.  I actually
 
         13   believe one of the clearer disclosures is on a
 
         14   single piece of paper, and it says, I'm going to
 
         15   get paid because I am helping you with this and it
 
         16   can be one way or it can be the other.  Some
 
         17   experts have put those together and suggested you
 
         18   do it as an either/or thing, and I see those in
 
         19   files.
 
         20            So I don't see how you can say that it
 
         21   isn't clear to people how the broker is going to
 
         22   get paid one way or another.  It's there.  If they
 
         23   don't read it, there is an element of personal
 
         24   responsibility involved here.
 
 
 
 
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          1            The other thing you said, this isn't a
 
          2   competitive marketplace.  I want to mention one
 
          3   study here.  Other people have talked about
 
          4   statistics; and with apologies to Mr. Twain here
 
          5   that I mentioned earlier, here's one from the
 
          6   Office of Thrift Supervision in their empirical
 
          7   study they did on the mortgage lending industry
 
          8   including the subprime.  Maybe you've read it.  It
 
          9   was released on several months ago, and it's from
 
         10   the Research and Analysis Staff of the Office of
 
         11   Thrift Supervision.
 
         12            They looked at, with respect to subprime
 
         13   mortgages, over 1.8 million subprime mortgages, and
 
         14   they conclude that anecdotes support both
 
         15   contentions as to horror studies, excessive
 
         16   profits, excessive losses claimed by lenders.  They
 
         17   say, however, the empirical data we found suggests
 
         18   that the subprime market overall is a well
 
         19   functioning competitive market.  So apparently
 
         20   somebody thinks there's some competition.
 
         21            Now these are only federal authorities.
 
         22   They have only looked at apparently whatever data
 
         23   is reported.  I know they're not the Woodstock
 
         24   Institute.  There are not various other people
 
 
 
 
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          1   involved here, but apparently somebody has looked
 
          2   at it and determined that it's a competitive
 
          3   marketplace.
 
          4       MODERATOR SMITH:  Ms. Weinberg?
 
          5       MS. WEINBERG:  Well, I just wanted to echo what
 
          6   Ira was saying.  I'm seeing -- personally, I'm
 
          7   seeing more and more prepayment penalties.  I think
 
          8   the last six loans I've looked at, they all had
 
          9   prepayment penalties, and not one of these
 
         10   potential clients knew that it was there.
 
         11       MR. JAMES:  I would like to comment on the
 
         12   prepayment penalties.
 
         13            Until about two years ago, the general
 
         14   wisdom was that prepayment penalties were illegal
 
         15   in Illinois.  And even if you saw one, no one would
 
         16   think of enforcing them because we would have
 
         17   prosecuted them.
 
         18            And out of the hat came the Mortgage
 
         19   Parity Act of 1982, an act that's been around for
 
         20   something like a generation that has just newly
 
         21   been interpreted by lenders to preempt the Illinois
 
         22   prohibition against prepayment penalty.
 
         23       MR. VARGA:  It wasn't just interpreted by
 
         24   lenders by that.  It's been long interpreted by the
 
 
 
 
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          1   OTS as enabling prepayment penalties to be charged
 
          2   on Parity Act loans.  I mean, the law has been what
 
          3   it is, and the OTS has long said that.
 
          4       MR. BAKER:  In fact, there's a 7th Circuit case
 
          5   that says as much.  You should be aware of that.
 
          6       MR. VARGA:  The fact that the suggestion that
 
          7   somebody is taking some unfair advantage of
 
          8   something, the law is what the law is and has long
 
          9   been, and the OTS has long agreed.
 
         10            Maybe those who are bringing these cases
 
         11   -- and I have defended some of these cases --
 
         12   ought to have looked at the law a little more
 
         13   before they brought the cases.
 
         14       MODERATOR SMITH:  Mr. Immergluck?
 
         15       MR. IMMERGLUCK:  Couple points.  One is I think
 
         16   the OTS is reconsidering their opinion on that
 
         17   through an advanced notice of proposed rule-making;
 
         18   and, secondly, on the study that Mr. Varga just --
 
         19   it's actually the same data source that I cited in
 
         20   my opening remarks.
 
         21            With all due respect to Governor Gramlich,
 
         22   economists tend to have certain viewpoints due to
 
         23   their training, corresponding with economists who
 
         24   offered that study.  The study is highly flawed.
 
 
 
 
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          1   And the same study has data that says the 90-day
 
          2   delinquency rates for C grade loans, which
 
          3   compromise almost 20 percent of the sample of the
 
          4   loans looked at in that study, have delinquency --
 
          5   are 10 percent, 40 times the delinquency rate of
 
          6   prime refinance loans and 5 times the rate of FHA
 
          7   loans.  For D grade loans, the rate is 22 percent,
 
          8   90 times the prime rate.
 
          9            The foreclosure rate for all subprime
 
         10   loans, including the 55 percent of the subprime
 
         11   loans in this study that are A minus loans, so are
 
         12   not high risk, very high risk loans, are more than
 
         13   four times the FHA foreclosure rate.  And FHA is a
 
         14   program that NTIC and other folks have demonstrated
 
         15   has devastated urban neighborhoods.  These are
 
         16   loans with foreclosure rates four times as high.
 
         17            So given that 20 percent of the subprime
 
         18   loans that are C and D are driving this, their
 
         19   foreclosure rates are clearly on the order of 5 or
 
         20   10 percent.
 
         21            What does that mean?   In urban
 
         22   neighborhoods based on the FHA data, that means
 
         23   foreclosure rates of 20 percent.  What does a
 
         24   foreclosure rate of 20 percent in a low-mod
 
 
 
 
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          1   community mean?   Abandonment of 20 percent.
 
          2            It's one thing to have foreclosures in a
 
          3   middle and upper income community.  We don't see
 
          4   them.  Why?  Because someone buys the house.  When
 
          5   we have them in low-mod communities, they get
 
          6   abandoned.  They get blighted.  Blights the
 
          7   neighborhood and it draws crime.
 
          8       MR. DETELICH:  If I could just comment because
 
          9   when I hear numbers like that, 20 percent, that's
 
         10   -- I'm not sure how you got from where you were
 
         11   from 5 percent to 20 percent, but I can only
 
         12   speak --
 
         13       MR. IMMERGLUCK:  Which 20 percent?
 
         14       MR. DETELICH:  I can only speak to our --
 
         15       MR. IMMERGLUCK:  20 percent of the loans in the
 
         16   study were C and D loans.
 
         17       MR. DETELICH:  Okay.  Any what was the
 
         18   foreclosure rate?
 
         19       MR. IMMERGLUCK:  The foreclosure rate of all
 
         20   subprime loans was about 3 percent, four times the
 
         21   FHA foreclosure rate.  But that's for all subprime
 
         22   loans.
 
         23            Delinquency rate for the C loans was
 
         24   10 percent which is 40 times the delinquency rate
 
 
 
 
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          1   for prime loans.  For the D loans, it was
 
          2   22 percent.  Prime loans have a delinquency rate of
 
          3   a quarter point.
 
          4       MR. DETELICH:  I can say this:  While I don't
 
          5   have hard or exact statistics, I can tell you that
 
          6   every one of those categories you just cited, they
 
          7   sound off the wall in terms of how high --
 
          8       MR. IMMERGLUCK:  This is an industry survey.
 
          9       MR. DETELICH:  It sounded like you said that
 
         10   the survey itself was suspect though.
 
         11       MR. IMMERGLUCK:  It's suspect because I think
 
         12   it's voluntary.
 
         13       MR. DETELICH:  And I would agree with you.
 
         14       MR. IMMERGLUCK:  The bias is in the other
 
         15   direction from what you are suggesting.  This is a
 
         16   voluntary survey of 27 out of 200 some prime
 
         17   lenders who volunteer their data to this private
 
         18   company.
 
         19       MR. DETELICH:  I'm questioning technique.
 
         20       MR. IMMERGLUCK:  If you're a bad lender,
 
         21   they're less likely to volunteer the data than if
 
         22   they are a good lender.
 
         23       MR. VARGA:  My only point is with the
 
         24   admonition of statistics --
 
 
 
 
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          1       MR. SHEA:  In July -- excuse me.  It's my
 
          2   turn.  In July, the ACORN Housing Corporation loan
 
          3   counseling operation did a survey of 1500 of our
 
          4   clients who are currently in our counseling program
 
          5   who have subprime loans with prepaid penalties.
 
          6            Of those 1500, we found 12 who understood
 
          7   fully the nature of the prepaid penalty.  12 out of
 
          8   1500.  Of those 1500, 1200 would swear on a stack
 
          9   of bibles that they were told that they could
 
         10   refinance their loan and move to a better loan
 
         11   whenever they were ready, whenever they had
 
         12   repaired their credit and bettered their lot in
 
         13   live.  1200 felt that they could refinance.
 
         14            It's only when many of them went to
 
         15   actually try to refinance that they understood and
 
         16   was hit with this prepaid penalty.
 
         17            Ira made another point I would like to
 
         18   respond to and that is that there is no competition
 
         19   for these loans in the neighborhoods where ACORN
 
         20   is.  This is the failure of the mainstream lenders;
 
         21   and the fact that there are no mainstream lenders
 
         22   on this panel and that they have not responded and
 
         23   participated in the HUD hearing speaks volumes in
 
         24   our mind.  They are not participating in the feds
 
 
 
 
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          1   process speaks volumes in our minds.
 
          2            You know, ACORN, NTIC, Woodstock, we've
 
          3   all done very good jobs bringing mainstream first
 
          4   mortgage credit into underserved communities.  We
 
          5   have not been as successful getting mainstream
 
          6   banks to step forward to provide cash-out refis,
 
          7   small home loans, equity loans.  They have them
 
          8   available on the books, but they do not market
 
          9   aggressively in our communities.  Yet if mainstream
 
         10   lenders would step up and do their role, we would
 
         11   not have nearly the problem with predatory loans
 
         12   that we currently have.
 
         13       MR. VARGA:  I guess the suggestion there is is
 
         14   that non-banks are not mainstream lenders.  There
 
         15   are many non-bank "mainstream lenders" who are the
 
         16   market-funded lenders who are providing the loans
 
         17   that increase the access to credit; and these are
 
         18   the people who their reward for that is the abuse
 
         19   heaped on them in these kinds of comments that we
 
         20   hear today that equates, apparently now, every
 
         21   non-bank subprime lender with being a predatory
 
         22   lender.
 
         23       MR. SHEA:  Are you going to stop him from
 
         24   talking out of turn or should we just all butt in?
 
 
 
 
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          1       MS. HURT:  Actually I'll butt in.
 
          2       MR. SHEA:  Okay, great.
 
          3       MR. VARGA:  I didn't realize -- I heard people
 
          4   throughout the day just simply make comments and
 
          5   have dialogue.
 
          6       MS. HURT:  I know.  That's absolutely fine.  We
 
          7   wanted to --
 
          8       MODERATOR SMITH:  The problem is that some --
 
          9   some panelists do sort of ask and are recognized --
 
         10   or not recognized immediately and, you know, we do
 
         11   need to have kind of a mix.  It's not essential
 
         12   that everyone wait for recognition before entering
 
         13   into the discussion, but we do need to have some
 
         14   mix of the two types.  Adrienne?
 
         15       MS. HURT:  Moving along to examining possible
 
         16   additional restrictions or prohibition for specific
 
         17   acts or practices.  Under HOEPA, the Board is
 
         18   authorized to prohibit acts and practices.
 
         19            And just briefly as background:  In
 
         20   connection with mortgage loans generally, the Board
 
         21   can declare a practice unfair or deceptive if it
 
         22   finds the practice to be unfair, deceptive or
 
         23   designed to evade HOEPA; and, in connection with
 
         24   refinancing of mortgage loans, if the Board finds
 
 
 
 
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          1   the practice is associated with abusive lending or
 
          2   otherwise not in the interest of the borrower.
 
          3            The Board's notice raised several topics
 
          4   for discussion.  Because we have limited time
 
          5   today, we're going to focus on four.  Loan
 
          6   flipping, unaffordable lending, regulating credit
 
          7   insurance and approving disclosure.
 
          8            Beginning with loan flipping, it is
 
          9   clearly a practice that is associated with
 
         10   predatory lending, and it is a problem.  Flipping,
 
         11   as we're going to discuss it, refers to the
 
         12   frequent refinancing of home-secured loans where
 
         13   the consumer derives little economic benefit and
 
         14   the lender receives significant income through
 
         15   fees.  The fees are typically added to the loan
 
         16   amount and thus reducing the homeowner's equity in
 
         17   the home.
 
         18            Suggestions for addressing loan flipping
 
         19   have been made including restricting the amount of
 
         20   fees that may be imposed on a refinance loan and
 
         21   limiting the number of refinancings within a
 
         22   specific period of time unless a net tangible
 
         23   benefit is provided to the borrower.
 
         24            The question is within the regulatory
 
 
 
 
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          1   context, what approach, what regulatory approach
 
          2   would effectively curb refinancings that don't
 
          3   benefit borrowers that result in equity stripping
 
          4   and loan flipping without impairing transactions
 
          5   that help borrowers and without imposing price
 
          6   controls?
 
          7            And I will just add a couple of other
 
          8   questions.  For example, if there were a rule that
 
          9   limited the number of refinancings on a loan, what
 
         10   would be the basis for deciding whether that period
 
         11   of time should be 12 months, 24 months, 36 months,
 
         12   18 months?  And how would one measure whether a
 
         13   loan provides a tangible net benefit to a
 
         14   borrower?
 
         15       MR. BAKER:  If I may?  I think, first of all,
 
         16   you need to be careful in looking at the phrase net
 
         17   tangible benefit or tangible net benefit.
 
         18            What is a net benefit?  Is it a loan -- a
 
         19   second loan refinancing that places you under
 
         20   greater debt obligation?  Is that not a net benefit
 
         21   if the proceeds of that loan are used for
 
         22   legitimate a purpose for financing college
 
         23   education or something like that?
 
         24            I think you're going to have a hard time
 
 
 
 
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          1   defining what a net benefit is.  And these are the
 
          2   kinds of uncertainties in the list of "predatory
 
          3   activities" that are going to keep lenders under
 
          4   the threshold at all times because they're never
 
          5   going to know when they're going to be
 
          6   second-guessed as to whether the purpose of the
 
          7   loan produced a net tangible benefit.
 
          8            You are going to have to be very careful
 
          9   about that.
 
         10       MODERATOR SMITH:  Mr. Bochnowski, and then
 
         11   Mr. Bivins.
 
         12       MR. BOCHNOWSKI:  I would agree.  Again, in the
 
         13   context of flipping which community banks are not
 
         14   involved in, our problem as banks, with all due
 
         15   respect to the regulators who are here, these are
 
         16   always issues that are hindsight.  They're never a
 
         17   problem at the time; and how would we define a net
 
         18   benefit to the borrower?
 
         19            We're in the business of underwriting a
 
         20   loan.  Either we can underwrite it or we can't, and
 
         21   either it fits our underwriting criteria or it
 
         22   doesn't.
 
         23            To have to get -- to go behind the
 
         24   transaction and ask a checking list or a pecking
 
 
 
 
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          1   order of questions as to what the benefit is and
 
          2   then to put ourselves in the position of time alone
 
          3   is made to make that decision to the borrower?  I
 
          4   think we're going far beyond what historically has
 
          5   been housing finance in this country.
 
          6       MR. BIVINS:  To address just loan flipping and
 
          7   earlier comments about prepayment penalties, I can
 
          8   tell you that prepayment penalties strongly
 
          9   discourage people from refinancing, just due to the
 
         10   fact that their payoff balance is substantially
 
         11   higher because of this prepayment.
 
         12            And sometimes it's impossible to refinance
 
         13   in today's market because there is not enough
 
         14   equity to include that extra payoff balance.
 
         15            So even though the Parity Act may be used
 
         16   in Illinois that it wasn't originally intended to
 
         17   be, it is having net effect, and it does have an
 
         18   effect on price.
 
         19            I get rate sheets every day from numerous
 
         20   lenders, and there will be different interest rates
 
         21   based on the type of loan that is being offered;
 
         22   and if a lender is able to use the Parity Act, that
 
         23   interest rate -- and therefore include a prepayment
 
         24   penalty, that interest rate will be much lower to
 
 
 
 
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          1   the consumer.
 
          2            Is it the broker that's just trying to
 
          3   make money?   My experience and also being active
 
          4   in the State Association Mortgage Brokers here in
 
          5   Illinois, if a broker is charging a fee and that's
 
          6   his compensation, then he is going to try and get
 
          7   the loan from the lender at the lowest interest
 
          8   rate possible.  It's going to be the most benefit
 
          9   to the consumer.
 
         10       MODERATOR SMITH:  Mr. Columbus and Mr. Varga.
 
         11       MR. COLUMBUS:  In terms of how insurance is
 
         12   treated in determining whether a net tangible
 
         13   benefit is provided, I think you have to be careful
 
         14   because if a person has life insurance, let's say,
 
         15   from the age of 40 through 70 and they didn't,
 
         16   thankfully, have to use it, does that mean that
 
         17   they were provided no net tangible benefit?
 
         18            I would argue that that's not the case.
 
         19   And so how you determine whether the insurance
 
         20   provides a net tangible benefit is very important.
 
         21       MODERATOR SMITH:  Mr. Varga.
 
         22       MR. VARGA:  I think the terminology of net
 
         23   tangible benefit, as Bruce said, you know, it's
 
         24   like beauty is in the eye of beholder or
 
 
 
 
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          1   obscenities, we know it when we see it.  It's
 
          2   inherently an after-the-fact determination, and you
 
          3   are suggesting people to an incredible litigation
 
          4   risk similar to the inclusion in every complaint
 
          5   that we see in every case of an unfair and
 
          6   deceptive practice under a state deceptive trade
 
          7   practices law.
 
          8            It's going to be the same thing here with
 
          9   absolutely no certainty, and I think it's, I
 
         10   believe, the thing that would be the biggest cause
 
         11   of lenders staying away from HOEPA loans.
 
         12            So the more you drop the trigger, if
 
         13   you're going to have this as one of the substantive
 
         14   loan prohibition features to a HOEPA loan, I would
 
         15   think this would have great lender impact and skew
 
         16   what might have been lender effect in the past on
 
         17   the advent of HOEPA.
 
         18            I think the determination of what's a
 
         19   benefit, it's difficult.  I mean, just one
 
         20   operational question is a person could go from a
 
         21   fixed payment, fixed rate loan to a variable rate
 
         22   closed-end loan and some of these determinations
 
         23   have said, the monthly payment has to drop.  Well,
 
         24   the monthly payment might go up based on it being a
 
 
 
 
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          1   variable rate loan, and you can't have the lender
 
          2   bet against itself on the interest rate.
 
          3            So there's an awful lot of devil in the
 
          4   detail in this one, and I think it simply drags
 
          5   down the merits of inclusion of this as a loan
 
          6   feature prohibition.
 
          7       MODERATOR SMITH:  Mr. Immergluck?
 
          8       MR. IMMERGLUCK:  Thank you.  I agree.  Let's
 
          9   reduce the uncertainty.  Let's get specific.  I
 
         10   think there's a couple things the Board could do
 
         11   that I'm sure folks want to be disspecific, have
 
         12   all kinds of problems with folks on the industry
 
         13   side.
 
         14            One is that as the HUD Treasury Task Force
 
         15   report recommends that refinancings made within
 
         16   18 months of a previous loan, the Board should only
 
         17   allow points and fees to be charged on the increase
 
         18   of the advance.  You know, why should we be
 
         19   charging fees on the same amount that we're
 
         20   flipping over and over?
 
         21            If you take a loan for 50 to $70,000,
 
         22   charge it on the $20,000.  Don't charge it on the
 
         23   $70,000.
 
         24            On the other hand, if you're really
 
 
 
 
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          1   benefitting the borrower because you're lowering
 
          2   the interest rate, you're bringing some real
 
          3   benefit, then you can charge on that $50,000.  So
 
          4   say that if you lower the -- if the APR on the new
 
          5   loan is, as kind of implied in the HUD report,
 
          6   150 basis points below the existing -- the interest
 
          7   rate on the existing loan, then you can charge
 
          8   points on that part of the loan.
 
          9            It's a fairly straightforward concept.
 
         10   It's not perfect.  There's never going to be
 
         11   anything that's perfect.  But I agree, let's define
 
         12   that benefit.  Let's have some threshold.  At least
 
         13   put it out there as kind of a safe harbor, and if
 
         14   the lender wants to argue that something else is a
 
         15   benefit, the burden is on them.
 
         16       MODERATOR SMITH:  Governor Gramlich.
 
         17       GOVERNOR GRAMLICH:  Just on that point.  So you
 
         18   would -- you wouldn't have a full net benefits
 
         19   test, but you would have -- you would have an APR
 
         20   threshold or something?
 
         21       MR. IMMERGLUCK:  Yes.  Obviously an ideal kind
 
         22   of net present value test would be ideal.  If that
 
         23   could be done, that would be fine.  This thing --
 
         24       GOVERNOR GRAMLICH:  That may be
 
 
 
 
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          1   administratively costly.  So you have try to figure
 
          2   it out.
 
          3       MR. IMMERGLUCK:  Again, it says, if you meet
 
          4   this, there's no more uncertainty.  You've met the
 
          5   net benefits.  If not, you haven't met it; then,
 
          6   yes, you have to worry about whether you are
 
          7   bringing a benefit to us both.
 
          8       MR. DETELICH:  Let me first comment on two
 
          9   issues.  The first is the prepayment issue.  There
 
         10   is indeed a clear result from charging prepayment
 
         11   penalties in our portfolio and the impact on the
 
         12   reduction of the liquidation refinancing.  It's
 
         13   currently at all-time lows.
 
         14            We are in a relatively high straight
 
         15   environment partially due to that, but this has
 
         16   great benefit to lenders, that we generally match
 
         17   our funding to terms of loans.  And it's very
 
         18   helpful to have certain expectations about the life
 
         19   of loans.
 
         20            I don't want to oversimplify the issues
 
         21   that securitizers had over the last three or four
 
         22   years, but a good deal of that had to do with their
 
         23   inability to correctly forecast how long loans
 
         24   would be on the books.  So that's my first point.
 
 
 
 
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          1            Second point, I actually agree with most
 
          2   of what you described there except to the extent
 
          3   that your suggestion is you can charge points on
 
          4   what we'll call the new money.  You can charge
 
          5   point on new and old money if you had this tangible
 
          6   benefit is what I heard you say.  I think that
 
          7   still introduces this dicey concept of tangible net
 
          8   benefit.
 
          9            Instead I think a better idea is to select
 
         10   some term.  We practice today at Household
 
         11   12 months.  If a refinance occurs in the first
 
         12   12 months, we do not charge points on the old
 
         13   money.  New money only.
 
         14            I think that's more simple.  You don't
 
         15   have the net tangible benefit issue to deal with;
 
         16   and I think it's something that most lenders can
 
         17   live with.
 
         18       GOVERNOR GRAMLICH:  But both of you are saying
 
         19   in your different way not to have the tangible net
 
         20   benefit full test, but just have some simple
 
         21   concept that would be an approximate, rough
 
         22   guesstimate.
 
         23       MR. DETELICH:  It would be administered without
 
         24   a great deal of litigation.
 
 
 
 
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          1       MODERATOR SMITH:  We'll go to Mr. Bivins and
 
          2   then Mr. James.
 
          3       MR. BIVINS:  I understand having a test for
 
          4   those people that the consumer groups feel need
 
          5   protection.  I'm concerned that the test would not
 
          6   take into account those who don't need the
 
          7   protection.
 
          8            For example, my earlier comment.  Someone
 
          9   who because of their financial situation purchased
 
         10   a property and took out an adjustable rate mortgage
 
         11   because they wanted to minimize their payments;
 
         12   and, within 12 months, within 2 years, they have
 
         13   changed their financial situation.  They can afford
 
         14   a higher payment and choose to make a higher
 
         15   payment because they want a fixed rate, fixed term
 
         16   loan.
 
         17            There is no tangible benefit, but there is
 
         18   certainly a substantial benefit to them as far as
 
         19   their peace of mind of knowing what their payments
 
         20   are going to be 15 years from now as compared to 2
 
         21   years from now.  How do you measure that?   These
 
         22   aren't quantifiable things.
 
         23       MODERATOR SMITH:  Mr. James?
 
         24       MR. JAMES:  Just from a law enforcement
 
 
 
 
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          1   standpoint and in terms of the use of our
 
          2   resources, we can only address maybe 2 or 3 percent
 
          3   of the abuses we see.  There's not a week that goes
 
          4   by when we -- when I don't see a loan that had no
 
          5   benefit to the consumer who was induced to
 
          6   consummate the loan.  And certainly with respect to
 
          7   our ability to prosecute and the standards that we
 
          8   apply to analyzing a problem loan, we're going to
 
          9   bring lawsuits where essentially there has been
 
         10   very little benefit to consumers overall.
 
         11            I don't really -- it doesn't trouble me, a
 
         12   no net benefit standard.  It seems to me that
 
         13   that's something that will be worked out in the
 
         14   courts, and I don't think you can qualify or
 
         15   quantify the kinds of terrible situations that seem
 
         16   to crop up repeatedly.
 
         17       MR. RHEINGOLD:  Just to go back to the original
 
         18   point a little bit.
 
         19            The practice that we're trying to prohibit
 
         20   is the repeated flipping of loans where people get
 
         21   three and four loans over the course of three years
 
         22   which wind up skimming their equity.  A no net
 
         23   benefit test that Dan talks about is certainly a
 
         24   good idea or at least sort of a concrete way of
 
 
 
 
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          1   measuring it, and I think I agree with that.
 
          2            I think the point we made earlier today is
 
          3   another way of dealing with it, is adding the fees
 
          4   that were charged in the first one to calculate
 
          5   adding it into the second loan.  In other words, as
 
          6   that flip goes along and it's made within a certain
 
          7   time frame, then the fees that were charged in
 
          8   there will go toward whether or not the HOEPA
 
          9   trigger meets.
 
         10            And the reason why I think that's
 
         11   important, again, the point I keep bringing up, is
 
         12   the pass-through liability.  What we have -- and
 
         13   this is not an uncommon occurrence -- you will have
 
         14   a HOEPA loan flip into a non-HOEPA loan.  That
 
         15   second loan is not particularly good.  The equity
 
         16   gets stripped, but that second lender or that
 
         17   second securitizer is going to say, how did we know
 
         18   that happened?   How do we know the broker just
 
         19   took $10,000 out that of person's home, 5,000 bucks
 
         20   5,000 times -- $5,000 a second time?  And there's
 
         21   no liability there.
 
         22            So, again, it's making the marketplace
 
         23   respond.  The market -- that lender who was buying
 
         24   that loan from the broker, that securitizer who is
 
 
 
 
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          1   buying that loan from the lender will take a closer
 
          2   look at that loan that's been made to that person
 
          3   for the second time or the third time in 18 months
 
          4   and say, okay, there's some suspicious indicia
 
          5   here.  We better take a look at it and do some due
 
          6   diligence and see if, in fact, that homeowner has
 
          7   benefited from the loan.
 
          8            So I think that's an important point and
 
          9   we addressed it earlier.
 
         10       GOVERNOR GRAMLICH:  Let me ask a clarifying
 
         11   question about that.  So does that mean this --
 
         12   Adrienne asked the question earlier about whether
 
         13   the fees from the prior loan ought to be added to
 
         14   the next loan.  And so are you suggesting that,
 
         15   yes, though, with the time limit on, you know, one
 
         16   and a half years, two years something like that?
 
         17       MR. RHEINGOLD:  Yes.  That's what I am saying.
 
         18       MS. HURT:  I think we're ready now to move to
 
         19   the next subject which is unaffordable lending.
 
         20       MR. MICHAELS:  Under HOEPA, creditors are not
 
         21   permitted to engage in a pattern of practice of
 
         22   extending credit that is based on the collateral if
 
         23   the consumer's current and expected income and
 
         24   current obligations and employment status, after
 
 
 
 
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          1   being considered it was clear the consumer will be
 
          2   unable to make the scheduled loan payments.
 
          3            This raises a number of issues, some of
 
          4   which probably we can't deal with here, one of
 
          5   which is the merits of that prohibition requiring
 
          6   that there be a pattern of practice of such
 
          7   activity.  That is the requirement in the statute,
 
          8   and that's probably the question we could debate
 
          9   but one Congress would have to deal with.  So we're
 
         10   going to put that one aside not for purposes of our
 
         11   discussion this morning.
 
         12            The other question is how do you know when
 
         13   you have a pattern of practice?  What constitutes
 
         14   one?   That is also a legal question that we could
 
         15   debate in length.
 
         16            What we would like to do though is focus
 
         17   on the current prohibition and whether or not the
 
         18   Board could revise the HOEPA rules to establish
 
         19   requirements regarding the creditors' need to
 
         20   document or verify the incoming expenses in
 
         21   determining whether or not the loan is one that
 
         22   could be repaid according to the terms.
 
         23            What we have in HOEPA now is a yardstick
 
         24   for that sort of rule, and that's because HOEPA has
 
 
 
 
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          1   a rule now that prohibits the use of prepayment
 
          2   penalties under certain circumstances; and one of
 
          3   those circumstances is where, after verifying the
 
          4   consumer's income and expenses, the debt to equity
 
          5   ratio -- the debt to income ratio of the consumer
 
          6   would be in excess of 50 percent.
 
          7            So that's one of the things we've looked
 
          8   at is whether or not we ought to take those kinds
 
          9   of verification requirements that are in the
 
         10   prepayment penalty rule and use them for purposes
 
         11   of the asset-based lending rule.
 
         12            I would like to start the discussion on
 
         13   that, and I will have some more specific
 
         14   questions.
 
         15       MODERATOR SMITH:  Mr. Rheingold.
 
         16       MR. RHEINGOLD:  I am trying to be polite.
 
         17            First, I mean, I think in terms of
 
         18   regulations, I think one of the areas of the
 
         19   greatest abuse -- I mean, I think, to me, a clear
 
         20   signal that something is wrong in a loan is if it's
 
         21   a no doc loan.  If it's a HOEPA loan and it's a
 
         22   no doc loan, that screams a problem.
 
         23            If it's a HOEPA loan, documentation about
 
         24   income and assets need to be included; and, again,
 
 
 
 
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          1   that goes to liability and lender's due diligence.
 
          2   The broker does all that stuff.  And I've seen --
 
          3   some of the greatest work of fiction I have ever
 
          4   read are loan applications produced by loan
 
          5   brokers.  And when we wind up in court, the lender
 
          6   says, the loan application says they can afford the
 
          7   loan.  Client signed it.  Signed about 80 other
 
          8   documents, but they signed it.
 
          9            A lender who's making a loan that fits
 
         10   under these triggers should be obligated to go pass
 
         11   a loan obligation but also do its own due diligence
 
         12   by examining the person's actual income and
 
         13   assets.
 
         14            I think that's one crucial thing that the
 
         15   Federal Reserve should require.
 
         16       MR. MICHAELS:  Let me then follow that up
 
         17   because something you said touched on a question I
 
         18   was going to ask anyway.
 
         19            You used the phrase, if they're making a
 
         20   loan covered under these triggers.  The current
 
         21   rule says that lenders shall not make -- engage in
 
         22   a pattern of practice of making loans covered by
 
         23   HOEPA without regard to consideration of the
 
         24   income.
 
 
 
 
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          1            The question is would it make sense for us
 
          2   to expand that rule so that as a pattern of
 
          3   practice issue you wouldn't engage in that type of
 
          4   lending even for loans that fall underneath the
 
          5   HOEPA triggers?
 
          6       MR. VARGA:  I think there are many legitimate
 
          7   no doc loans and, in fact, I think -- I'm not an
 
          8   expert on this, maybe other people are, but I think
 
          9   many of them are high-end borrowers who have no doc
 
         10   loans, for one reason or another.  They're
 
         11   entrepreneurs who own their own business or who at
 
         12   in some midpoint with respect to their tax filings
 
         13   or there are sometimes personal potential divorce
 
         14   situations, and all these kinds of things that tend
 
         15   to focus on high-end borrowers utilize no doc
 
         16   loans.
 
         17            I think that expanding this outside the
 
         18   HOEPA context would really wreak havoc in that area
 
         19   where I don't think anybody here is thinking those
 
         20   are the borrowers we're needing to protect.
 
         21       MR. MICHAELS:  But doesn't that note really --
 
         22   what is the verification process going to be
 
         23   followed for those loans?   In other words, there's
 
         24   some process a lender goes through to decide
 
 
 
 
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          1   whether or not they want to make that loan, whether
 
          2   it's going to be repaid, some source of assets or
 
          3   income.  Is it really just about determining the
 
          4   right mix of what the document or verification
 
          5   requirements are rather than saying what the rules
 
          6   don't imply?
 
          7       MODERATOR SMITH:  I am going to call on
 
          8   Mr. Immergluck and then Mr. Rheingold and then
 
          9   Mr. Bochnowski.
 
         10       MR. IMMERGLUCK:  There's kind of two things
 
         11   going on.  One is verification, and the other is
 
         12   whether Mr. Michaels' 50 percent debt to income
 
         13   ratio kicks in.  You don't have to necessarily tie
 
         14   those together.  You could certainly say,
 
         15   verification should always be done.  Certainly it
 
         16   seems appropriate.  I understand there's some
 
         17   no doc programs.
 
         18            One way -- if there's concern about
 
         19   high-end lenders, the City of Chicago's proposed
 
         20   ordinance basically has an exclusion for high-end
 
         21   income lenders.  Oftentimes some people are, you
 
         22   know, income-poor, wealth-rich, then, again, you
 
         23   could carve out certain exclusions for those
 
         24   people.  But, generally, for low-, moderate- and
 
 
 
 
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          1   middle-income people, debt to income ratios over
 
          2   50 percent are very unwise.
 
          3            Secondly, you know, just to add on to what
 
          4   Ira said, you know, the fraudulent activity, if we
 
          5   call it that, of falsifying incomes will never be
 
          6   caught.  Fraud is just too easy to get away with.
 
          7   We can have all the litigation in the world.  We
 
          8   basically can't enforce some general unfair UDAP
 
          9   statutes, broad statutes.
 
         10            We need on this particular case, since
 
         11   this is the one driving foreclosure, perhaps the
 
         12   worst, we need specific language on what is
 
         13   appropriate as documentation and verification.
 
         14       MODERATOR SMITH:  Mr. Rheingold?
 
         15       MR. RHEINGOLD:  I want to get back to your
 
         16   pattern of practice point.  I think that -- to try
 
         17   to avoid a larger discussion, I think pattern of
 
         18   practice is impossible to prove, particularly in
 
         19   individual cases.  We only do individual cases and
 
         20   we do people who are in foreclosure.  So I think
 
         21   pattern of practice is an extremely difficult
 
         22   standard for us to show.
 
         23            I think that if you want to look at
 
         24   pattern of practice, you might want to say, if
 
 
 
 
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          1   you're making HOEPA loans with no doc loans, that's
 
          2   a prima facie case, that you are engaging in a
 
          3   pattern of practice of bad lending.  And I think
 
          4   that's the way you can deal with it.
 
          5            But I think it's a really difficult
 
          6   standard.  I think, how do we individualize that
 
          7   thing?  Like Dan said, taking a look at the debt to
 
          8   income ratio is crucial.
 
          9            I mean, I think the thing that I find so
 
         10   amazing is here are the people who are at the
 
         11   greatest risk and yet we're willing to go to ratios
 
         12   far beyond what we give the people who are
 
         13   bankrupt.  It's crazy.
 
         14       MODERATOR SMITH:  Mr. Bochnowski, and then
 
         15   Mr. Detelich, Mr. Bivins, and Mr. Shea.
 
         16       MR. BOCHNOWSKI:  Just addressing the comments
 
         17   for loans to fall below the HOEPA triggers.  On the
 
         18   banking side, you know, when we underwrite a loan,
 
         19   we're required to demonstrate that there is an
 
         20   ability to repay.  So I think that it would be
 
         21   redundant if we were to engage in that.
 
         22            I would also be concerned that the
 
         23   suitability question, if that's where this is
 
         24   going, is a loan suitable to a particular borrower
 
 
 
 
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          1   at the time, that again becomes a hindsight
 
          2   question on the banking side, and it's beyond where
 
          3   banking has traditionally been.
 
          4            I just would add my support to Ira's
 
          5   comment that maybe there is a prima facie case that
 
          6   can be made for some of these loans.
 
          7       MODERATOR SMITH:  Mr. Detelich?
 
          8       MR. DETELICH:  I think I would agree as well.
 
          9   I don't know that anyone would make HOEPA loans
 
         10   without documentation.  If they are, they're soon
 
         11   to be out of business.  You just can't make that
 
         12   kind of loan and stay in business long.  That's my
 
         13   first point.
 
         14            I just like to introduce just some
 
         15   difficulties though in giving guidance.  Ira, I
 
         16   think you would agree that those where there's no
 
         17   ability to pay, the uninformed loans, they just
 
         18   jump out at you.  You can tell what they look
 
         19   like.  I have seen some of these.
 
         20            That's not what we're really talking
 
         21   about.  We're talking about when we get to the
 
         22   margins, you know, the person that you described
 
         23   early, Mr. Shea, who has $900 income and $600 loan
 
         24   payment.  I think that's pretty clear what's going
 
 
 
 
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          1   on there, unless there's some effects.
 
          2            The problem is, though, when you start to
 
          3   give guidance about what is the right DIR, what
 
          4   should it be, 50, 55, 45 or what, it can get very
 
          5   dicey because you have -- you got a two-income
 
          6   family in New York City and you got a grocery store
 
          7   owner in Lincoln, Nebraska, what is the standard we
 
          8   are going to have at the federal level to give
 
          9   guidance on what is affordable and what's not?
 
         10   One of those parties is not going to get a loan.
 
         11   I'm sorry.
 
         12       MODERATOR SMITH:  Mr. Bivins?
 
         13       MR. BIVINS:  Talking about the hard money
 
         14   lending.  In 17 years of doing business in
 
         15   Illinois, I have never had a lender who would make
 
         16   a loan to an individual based on the equity of the
 
         17   property owner.  They have always expected and
 
         18   demanded documentation that that individual would
 
         19   have the ability to repay; and that's partially due
 
         20   to the foreclosure laws in the State of Illinois
 
         21   which are very cumbersome and very lengthy before
 
         22   that lender would ever have access to that
 
         23   property.
 
         24            On the opposite side of that, 20 years ago
 
 
 
 
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          1   in the State of Arizona, a lender could basically
 
          2   foreclose and have title within about 60 days.  And
 
          3   there were in fact who would have no concern about
 
          4   the borrower's ability to repay.  They were only
 
          5   concerned about what's the value of the property
 
          6   and how much is owed on it and how much do you want
 
          7   to borrow.  So I've never seen any lender in
 
          8   Illinois not expecting the ability to repay.
 
          9            The no doc program has come about because
 
         10   of technology.  FICO scores which is now the
 
         11   ability to determine somebody's expectation that
 
         12   they're going to be able to repay, FICO scores
 
         13   would have to be very high in order for a lender to
 
         14   then offer up a no doc program.  And I agree that
 
         15   I've never seen a no doc program for somebody who
 
         16   was going to get a HOEPA loan.
 
         17            That will do for now.
 
         18       MODERATOR SMITH:  Mr. Shea?
 
         19       MR. SHEA:  Well, clearly, the example I gave
 
         20   earlier was in fact a no doc loan, $700 as a
 
         21   monthly debt service on $900 income which was fixed
 
         22   Social Security.  No hope for that going up in the
 
         23   future.  The lady was 68 years old.  That was a
 
         24   no doc loan.  I looked at the file.  There was
 
 
 
 
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          1   nothing in there that tried to verify the income.
 
          2   It had been doctored.  The broker had in fact put
 
          3   something else as their income on there.
 
          4            In terms of expanding outside the HOEPA
 
          5   definition to the other loans, we would be willing
 
          6   to go with 55 percent debt to income ratio.  In our
 
          7   experience, at least with the folks we work with,
 
          8   there is significant income that is very, very
 
          9   difficult to document.  You can do it with letters
 
         10   of baby-sitters, et cetera, et cetera, which in
 
         11   fact make up a significant part of many of the
 
         12   families we work with, make a significant part of
 
         13   their income.  So we're willing to allow that to
 
         14   expand up a little bit to maybe 55 percent.
 
         15       MODERATOR SMITH:  Mr. Rheingold?
 
         16       MR. RHEINGOLD:  I would respectfully disagree,
 
         17   and I think that's a real danger to go up that
 
         18   high.
 
         19            I think there are underwriting guidelines
 
         20   that can be followed.  FHA and VA make high-risk
 
         21   loans, and they have underwriting guidelines that
 
         22   are pretty clear.  They calculate.  They look at
 
         23   the lower income people that we are talking about.
 
         24   They look at residual income and to see what other
 
 
 
 
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          1   debt they have to pay.
 
          2            I think that if lenders follow FHA
 
          3   guidelines, there would be guidelines when they
 
          4   make these types of loans, and I think they're
 
          5   safe.  Safe.  That would be a way for them to do it
 
          6   in a safe way.  Those are the guidelines they
 
          7   should follow.
 
          8       MS. HURT:  Maybe I'm hearing what I want to
 
          9   hear, but it sounds like verification requirements
 
         10   for HOEPA loans seems to be a no-brainer for
 
         11   creditors and consumer advocates?   Is that what
 
         12   we're hearing?
 
         13       MR. VARGA:  I think we're saying that no one
 
         14   has seen or rarely seen a HOEPA loan that's a
 
         15   no doc loan.  I don't know how you can stay in the
 
         16   business.
 
         17       MS. HURT:  So a verification requirement should
 
         18   not be problematic?   Is that also what I'm
 
         19   hearing?
 
         20       MR. BIVINS:  I don't think it's problematic;
 
         21   but in addressing some of this fraud and who's
 
         22   doing it, there's a task force here in Chicago made
 
         23   up of the FBI and HUD that's put on seminars
 
         24   regularly for our industry.
 
 
 
 
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          1            At the most recent seminar that they did,
 
          2   they stated that, to their disbelief, 50 percent of
 
          3   the fraud that they were investigating is now being
 
          4   originated by the borrowers without assistance from
 
          5   any other outside party, be it a mortgage broker or
 
          6   realtor or anyone else.
 
          7            I have in the last two weeks had an
 
          8   application come in and the borrower had gotten a
 
          9   verification of employment with documentation that
 
         10   totally misstated their income after it was
 
         11   verified by the broker directly with the employer.
 
         12            We are seeing, for $32, I can go buy
 
         13   TurboTax and put it on the computer and stop by an
 
         14   office supply store and pick up some blank checks
 
         15   and create tax returns, W-2s, and check stubs and
 
         16   present that to the broker, the lender, and there's
 
         17   documentation, and everybody think it's
 
         18   legitimate.
 
         19            We are now seeing self-employed lenders
 
         20   who are now requiring that they won't even accept a
 
         21   tax return from a borrower.  It might even be
 
         22   signed by the CPA.  They are often requiring that
 
         23   we actually get copies directly from the IRS.
 
         24   There are market forces in play here that are
 
 
 
 
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          1   addressing some of these issues.
 
          2            So HOEPA loans, verifications, as I say,
 
          3   we're always getting documentation to that effect
 
          4   on any HOEPA loan.  I'm not aware of any other
 
          5   activity.
 
          6       MODERATOR SMITH:  Mr. Brown?
 
          7       MR. BROWN:  One quick suggestion.  In this
 
          8   particular instance, I'm suggesting that the
 
          9   federal government follow the state.  It appears --
 
         10   and, Mr. Darr, you can correct me if I'm wrong--
 
         11   the state has done a pretty good job on rules they
 
         12   recently promulgated with regard to the new
 
         13   predatory lending statute that this state has
 
         14   recently enacted in laying out with specificity
 
         15   what it takes to verify the ability to repay a loan
 
         16   in a HOEPA environment.  It's very -- to me, it's
 
         17   very clear.  And, again, I would direct you to go
 
         18   there.
 
         19       MR. DARR:  If you are asking me to verify that
 
         20   we did a good job, I will verify it.  You may get
 
         21   some differences of opinion from the other people
 
         22   on the panel.
 
         23       MR. MICHAELS:  Well, I'm not going to quote
 
         24   Mark Twain.  I'm going to quote a well-known
 
 
 
 
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          1   economist:  When it comes to unaffordable loans, it
 
          2   seems that foreclosure is the hammer.
 
          3            I noticed in reading the state's
 
          4   regulatory proposal that one of the ways they deal
 
          5   with this is to try to assist the law enforcement
 
          6   agencies by creating data on where the foreclosures
 
          7   are.
 
          8            So the question is would that work at the
 
          9   federal level?   Would that make sense to create
 
         10   some sort of data bank on -- at least for HOEPA
 
         11   lenders or HOEPA loans on where the foreclosures
 
         12   are and -- we'll leave it go at that.  Does that
 
         13   make sense?
 
         14       MODERATOR SMITH:  Mr. Immergluck?
 
         15       MR. IMMERGLUCK:  It would be great.  Right now,
 
         16   the kind of foreclosure data that we have is
 
         17   private data that's collected from partially
 
         18   accurate court records that has very limited
 
         19   information and also only has the current
 
         20   mortgagee.
 
         21            So we cannot trace that loan back, as
 
         22   Mr. Bivins talked about.  We really need to be able
 
         23   to trace the chain of title of the loan; and if we
 
         24   can't do that, it's not going to be of a lot of
 
 
 
 
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          1   use.  That's a real key component.
 
          2            One of the things that we hope that
 
          3   Fannie Mae and Freddie Mac will bring to this
 
          4   business -- and we basically pushed HUD to require
 
          5   it -- is that they will be able to establish that
 
          6   chain for at least the loans that they purchase.
 
          7       MODERATOR SMITH:  Mr. Rheingold?
 
          8       MR. RHEINGOLD:  I pass it over to Tom.
 
          9       MR. JAMES:  I know there's been discussion at
 
         10   the state level of appending the original note, a
 
         11   HOEPA note to the foreclosure papers so that we
 
         12   could trace it.  And I think it's essential that we
 
         13   begin to develop a system that's going to tell us
 
         14   who's originating the foreclosures.
 
         15       MR. MICHAELS:  Does the Illinois rule have some
 
         16   sort of device like that?
 
         17       MR. JAMES:  No.
 
         18       MR. DARR:  No.  Our rule was really for our own
 
         19   benefit, not for the law enforcement, although
 
         20   obviously if it has some benefit to law
 
         21   enforcement, I am happy to provide that.
 
         22            But our goal in collecting the data was so
 
         23   that we could see where there were deviations from
 
         24   norms in foreclosures so that we could pinpoint
 
 
 
 
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          1   who, as has been called, the bad actors in the
 
          2   business were and then zero in on them through our
 
          3   own internal enforcement capabilities.
 
          4            Personally I think that's the single most
 
          5   important piece of the rules that we put out for
 
          6   review.  And, I might add, they're still out for
 
          7   review.  They have not been submitted for approval
 
          8   yet.
 
          9       MR. MICHAELS:  The public comment period ends
 
         10   when?
 
         11       MR. DARR:  We haven't submitted rules, period.
 
         12   So there's no deadline on this at this point.
 
         13       MODERATOR SMITH:  Mr. Bochnowski, and
 
         14   Mr. Varga.
 
         15       MR. BOCHNOWSKI:  Just a question, Jim.  The
 
         16   purpose of this is for enforcement, law enforcement
 
         17   on that side.  Would this be just for HOEPA loans
 
         18   or would this be for all loans?
 
         19            You know where I am going on this.  Don't
 
         20   give us anymore bureaucratic red tape that goes
 
         21   somewhere and we don't know what happens to it.
 
         22       MR. MICHAELS:  That's the way I phrased it.
 
         23       MR. DARR:  If I just might add, in the rules
 
         24   that you reference, the HOEPA thresholds were the
 
 
 
 
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          1   trigger point for that.  Well, the data collection
 
          2   was for those high-risk loans.
 
          3       MODERATOR SMITH:  Mr. Varga?
 
          4       MR. VARGA:  I just want to say the Department
 
          5   of Financial Institutions' rules, which is who my
 
          6   members are subject to, are slightly different than
 
          7   the OBRE ones, but they provide a mechanism as well
 
          8   to report foreclosures.
 
          9            But you have to be -- you have to be very
 
         10   precise about terminology here.  You know, what's a
 
         11   foreclosure?  If you're using it as, let's say,
 
         12   something indicative of who's a bad actor, just
 
         13   because somebody files a foreclosure doesn't make
 
         14   them a bad actor, and there can be legitimate
 
         15   reasons for deviations from the norm of a
 
         16   significant number of foreclosures.  There could be
 
         17   a plant closing or a layoff in a particular area
 
         18   that sends foreclosures through the roof.  There's
 
         19   nothing non-legitimate about that.
 
         20            But I think we said that you need precise
 
         21   terminology so that you're comparing apples to
 
         22   apples from one lender to another.  You need to
 
         23   look at not just the initiation of the foreclosure,
 
         24   but does that mean in case that goes to judgment or
 
 
 
 
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          1   how about one that gets worked out some way in
 
          2   between?  You can't broad-brush treat them.
 
          3            Those are the kind of comments that we
 
          4   have made to the DFI in connection with the
 
          5   proposal.  But I don't think anyone is objecting to
 
          6   reporting of data because when you get the
 
          7   terminology down right, then maybe it gives us a
 
          8   basis of making decisions about some of the other
 
          9   things that are being talked about here and figures
 
         10   that are thrown around.
 
         11       MODERATOR SMITH:  Mr. Bivins, and then back to
 
         12   you.
 
         13       MR. BIVINS:  On my earlier comments about
 
         14   registration, lenders make credit decisions based
 
         15   on the repositories of the credit bureau services
 
         16   that exist in this country.
 
         17            Technology is bringing us to the point
 
         18   that it should not be burdensome to create a
 
         19   registration of loans and track all of the
 
         20   information that you're talking about.
 
         21            The 1003 Fannie Mae application is used
 
         22   today, not only the borrower and their information,
 
         23   but also who the broker is, who the loan officer
 
         24   is; and, obviously, once the loan gets made, all
 
 
 
 
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          1   the documentation is there and the transfer of
 
          2   that.
 
          3            Once again, I agree.  This has to be
 
          4   documented, tracked, and then you can identify
 
          5   where the problems are.
 
          6       MR. MICHAELS:  We already talked a good deal
 
          7   this morning about credit insurance and
 
          8   particularly the question of whether the premium
 
          9   should go into the points and fees trigger.
 
         10            I wanted to bring it up again for a few
 
         11   minutes anyway under this segment of the program in
 
         12   terms of specific practices that can be regulated,
 
         13   and the reason is because it seems to us that more
 
         14   might be able to be done in the area of
 
         15   disclosure.  And we talked about post disclosure
 
         16   notice, but I want to talk for a little while
 
         17   anyway about the current disclosure scheme and
 
         18   whether improvements could be made to that.
 
         19            Currently, under HOEPA, if it's a loan
 
         20   that exceeds the HOEPA triggers, the consumer is
 
         21   going to get a disclosure three days before the
 
         22   loan closing, and that disclosure is going to have
 
         23   a monthly payment or periodic payment amount in the
 
         24   disclosure and the consumer knows what they'll be
 
 
 
 
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          1   paying on this loan.
 
          2            If at that time the consumer has not
 
          3   requested or purchased credit insurance, then any
 
          4   part of the monthly payment that's going to be paid
 
          5   through the credit insurance, for the financing of
 
          6   the credit insurance is not going to be in that
 
          7   disclosure.  Then they get the closing; and then if
 
          8   they're purchasing credit insurance at that time,
 
          9   their monthly payment is going to change.
 
         10            It seems to us that what that means is
 
         11   that the HOEPA disclosure that was given three days
 
         12   before the closing is now not accurate in terms of
 
         13   what the monthly payment is.  There's going to have
 
         14   to be a new HOEPA disclosure and three more days
 
         15   we'll have to go by before closing.  So that's one
 
         16   scenario where the insurance is sold at closing.
 
         17            If, on the other hand, the insurance is
 
         18   sold prior to closing, then there is time to put
 
         19   the monthly payment amount for the insurance in the
 
         20   HOEPA disclosure.  And the total monthly payment
 
         21   should certainly reflect the amounts paid for the
 
         22   insurance.
 
         23            So then the question becomes, should the
 
         24   HOEPA disclosure given before closing break down
 
 
 
 
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          1   the monthly payment based on what the payment would
 
          2   be without the insurance and then what the
 
          3   additional increment is, this added because of
 
          4   either the insurance or some other product that's
 
          5   sold -- we've been told that other products are
 
          6   sold, auto club and things that don't have anything
 
          7   to do with home loans -- but whether or not the
 
          8   pre-closing disclosure could be itemized in a way
 
          9   so the consumer can see what it adds to the total
 
         10   cost of their loan?
 
         11       MR. BUTLER:  I don't know what the sequence of
 
         12   events the lender makes as far as these loans go.
 
         13   I mean, do you have the information at the time
 
         14   that you're going to be selling credit life
 
         15   insurance so that these disclosures can be made?
 
         16   Because we routinely do it.  We disclose what the
 
         17   additional payment is for the insurance.  I mean,
 
         18   we would have no problem with that.
 
         19            I think you should -- we should disclose
 
         20   the amount, and we issue a certificate that shows
 
         21   the amount, and I have no problem disclosing what
 
         22   the additional -- the addition to the monthly loan
 
         23   payment is for insurance.
 
         24            But what I don't know, and that's what the
 
 
 
 
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          1   lenders are going to have to answer, is how does
 
          2   that impede the sale of the product?
 
          3       MR. COLUMBUS:  Are you talking about only
 
          4   making the disclosures in case where the insurance
 
          5   is required or a voluntary situation?
 
          6       MR. MICHAELS:  No.  It would be voluntary.
 
          7       GOVERNOR GRAMLICH:  It was a little somewhat
 
          8   complicated question, but I think in the end Jim is
 
          9   asking about itemization, and it really is an issue
 
         10   that goes beyond the insurance.  I mean, that would
 
         11   be one of the things itemized, but all things could
 
         12   be itemized.
 
         13            I mean, I guess one question that occurs
 
         14   to me is if the total amount is there, surely there
 
         15   can't be much cost in itemization, right?   I mean,
 
         16   you know how it adds up and so you just print that
 
         17   out.  Is that a big problem?
 
         18       MR. BUTLER:  Not when the insurance is sold,
 
         19   no.  We know all the factors.
 
         20       MR. BIVINS:  Credit life, accident and health
 
         21   insurance on the small second mortgage, there are
 
         22   so many variables as to what product would be sold,
 
         23   what product the consumer would want to purchase
 
         24   that if you just did it in a documentation and go
 
 
 
 
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          1   down the checklist there could be 20 options.
 
          2            Although brokers rarely sell it, I'm
 
          3   familiar with it, and it's a matter of is this net
 
          4   credit life insurance?   Is it for 3 years?   Is it
 
          5   for 5 years?   Is it for 15 years?   Is it just for
 
          6   the primary borrower?   Is it for both?   Is it
 
          7   credit life and disability?   Is it disability
 
          8   only?   It's something that literally gets
 
          9   discussed and worked out with the borrower.
 
         10       MR. MICHAELS:  But is the answer on the
 
         11   disclosure, it's just what they purchased?  I mean,
 
         12   those are all the options and things they could
 
         13   purchase; but for purposes of disclosure, you are
 
         14   just going to put down what they actually did
 
         15   purchase.
 
         16       MR. BIVINS:  In the pre-disclosure, that
 
         17   wouldn't be an issue.
 
         18       MR. MICHAELS:  I was going to ask Mr. Detelich
 
         19   this:  In terms of selling credit insurance in
 
         20   connection with HOEPA loans, how they handle them,
 
         21   do they wait the extra three days after closing?
 
         22       MR. DETELICH:  First of all, we re-disclose.
 
         23   So if we sell insurance -- let's go to your first
 
         24   scenario.  You've already disclosed.  Now you sold
 
 
 
 
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          1   insurance, we would disclose.
 
          2       MR. MICHAELS:  And wait three days before
 
          3   closing?
 
          4       MR. DETELICH:  And wait another three days.
 
          5   And if the customer changes their mind and now
 
          6   wants a different kind of insurance, we re-disclose
 
          7   and wait another three days.  We re-disclose until
 
          8   we get it right.  That's number one.
 
          9            Now as far as adding and itemization of
 
         10   the premium to the pre-disclosures.  I think the
 
         11   issue there is really a broader issue, and that is,
 
         12   what was the original purpose of HOEPA?
 
         13            Having worked with Congress in 1994, our
 
         14   understanding was to give the consumer a brief,
 
         15   simple statement that describes the cost of the
 
         16   loan.  Not another TILA statement.  Not another HUD
 
         17   one.  A full loan closure.
 
         18            So the direction we're going is towards
 
         19   another full disclosure of all the facts of the
 
         20   loan that are going to occur at the time the loan
 
         21   is signed prior to another three-day waiting
 
         22   period.  I'm not sure that's our objective here.
 
         23       MR. RHEINGOLD:  Two thoughts.  One, is it a bad
 
         24   idea?   No, it's a good idea.  Do I think if the
 
 
 
 
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          1   disclosure said this is the cost of your loan if
 
          2   you bought credit insurance, this is the cost of
 
          3   your loan if you didn't buy credit insurance or
 
          4   something to that effect, fine, great.
 
          5            Disclosures don't work.  I mean, we can
 
          6   talk all we want about disclosures.  Disclosures
 
          7   don't work.  And the three days before the closing
 
          8    -- I mean, I see -- do you know how many
 
          9   disclosures I see in every loan file I see?  A
 
         10   signed document by the person on the date of
 
         11   closing saying, I got this disclosure three days
 
         12   before closing.  That's what we see.  Whether or
 
         13   not they got it or not, they got a document that
 
         14   says they got it three days before closing.  Nobody
 
         15   knows.
 
         16            I mean, I wish that we lived in a world of
 
         17   the informed consumer who, three days before the
 
         18   loan, they got this document, they understood that
 
         19   in fact they were getting a high-fee cost loan and
 
         20   this was going to jeopardize them.
 
         21            I guess -- I mean, I don't think what I'm
 
         22   saying here is novel.  I think most would agree
 
         23   with me.  You know, fine.  Take it with the
 
         24   disclosures, but that's not going to happen at
 
 
 
 
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          1   all.
 
          2       MODERATOR SMITH:  Mr. Shea, and then
 
          3   Mr. Columbus.
 
          4       MR. SHEA:  When we met last month with
 
          5   Mr. Gramlich in Washington, some other federal
 
          6   officials, Mr. Gramlich asked us, of all the
 
          7   various issues with subprime lending, predatory
 
          8   lending, which are the most important and where do
 
          9   you see the greatest abuses?
 
         10            And I must say that one of the two areas
 
         11   that we see the greatest abuses is in the sale of
 
         12   single premium credit insurance.  People are
 
         13   routinely told that they have to take this
 
         14   insurance if they want the loan.
 
         15            ACORN Housing Corporation's national
 
         16   president, George Butz, got into some problems with
 
         17   medical bills, went to Beneficial, refinanced his
 
         18   house with Beneficial.  His loan officer was told
 
         19   that his chances for getting that loan were greatly
 
         20   increased if he took the single premium credit
 
         21   life.  It cost him 3800 bucks.  It got added onto
 
         22   the loan.  This is what the abuse -- this is what
 
         23   happens all the time.
 
         24            Disclosures, yeah, they're great.  We
 
 
 
 
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          1   negotiated some additional disclosures through
 
          2   AmeriQuest and some other lenders we're working
 
          3   with.  I showed them to our loan counselors who are
 
          4   on the cutting edge of the field working with
 
          5   folks.  They laughed at them.  They said, look,
 
          6   this is nice stuff, but this doesn't work.
 
          7            We see folks that come in all the time on
 
          8   prepaid penalties that have signed various forms
 
          9   that says they understand it, but they don't
 
         10   understand it.  So on this issue, you have to get
 
         11   rid of it.
 
         12       MODERATOR SMITH:  Mr. Columbus?
 
         13       MR. COLUMBUS:  Our position is we're in favor
 
         14   of disclosures.  We don't want to sell the product
 
         15   to anyone that doesn't want to buy it.  And if the
 
         16   issue is whether or not the purchase is truly a
 
         17   voluntary one, whether the consumer is misled or
 
         18   not, then I think that Draconian measure of
 
         19   prohibiting the practice is unnecessary and can be
 
         20   more effectively and reasonably -- the same
 
         21   solution can be brought about by the post-closing
 
         22   notice.
 
         23            And in the situation where the consumer is
 
         24   misled or lied to, the purchase no longer is a
 
 
 
 
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          1   voluntary one and so must be disclosed under TILA
 
          2   and HOEPA because it becomes part of the finance
 
          3   charge, and so the disclosures had to have been
 
          4   made which presumably were not made because there
 
          5   was a misleading that was going on, and then you
 
          6   can avail yourself of the TILA, the three-year
 
          7   right to rescission and recoup all the interest and
 
          8   the fees paid and the penalties which include
 
          9   another recoupment of the interest and the fees
 
         10   paid, not to mention common law action for fraud.
 
         11            So there are plenty of remedies for those
 
         12   kind of situations.  But I think the real answer is
 
         13   the post-closing notice, coupled with the 30-day
 
         14   rule.
 
         15       MODERATOR SMITH:  Mr. Bochnowski?
 
         16       MR. BOCHNOWSKI:  In my written submission
 
         17   today, we talked about field testing some of these
 
         18   ideas.
 
         19            I admitted to some of the panelists here
 
         20   of being a lawyer, although I tell my friends that
 
         21   I make an honest living now as a banker, but when I
 
         22   first started practicing law 25 years ago, when I
 
         23   had my very first closing, I decided I was going to
 
         24   let me client know what those documents were all
 
 
 
 
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          1   about.  And they went from there all the way around
 
          2   to the end of that table, and it probably was
 
          3   26 linear feet.
 
          4            Disclosures don't work because of what we
 
          5   say.  There's got to be a new way to do this.  And
 
          6   I think particularly when you've got vulnerable
 
          7   populations who are the ones who are getting this
 
          8   disclosure who don't necessarily react well perhaps
 
          9   -- and I don't mean to be judgmental here -- but
 
         10   maybe they don't react too well to mail in the
 
         11   first place, some of these disclosures are
 
         12   mystifying.  We need to de-mystify this process.
 
         13            So whatever you come up with, I encourage
 
         14   you to try it on folks first and maybe make it a
 
         15   little bit better.
 
         16       MODERATOR SMITH:  Mr. Detelich?
 
         17       MR. DETELICH:  I just want to say I couldn't
 
         18   agree more with you on that statement.  If any of
 
         19   you sat through a mortgage loan closing in the last
 
         20   12 months, I can understand how a customer would
 
         21   walk out and say, I didn't know I had a prepayment
 
         22   penalty, because it was indeed one of 15, 20, 30,
 
         23   you name it, number of things they agreed to in
 
         24   that transaction.  It's very difficult.
 
 
 
 
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          1            Sitting in just a non -- a prime loan
 
          2   mortgage closing is no better.  They're all the
 
          3   same.
 
          4            These disclosures need to be improved for
 
          5   all of us.  Not just HOEPA loans.  All loans need
 
          6   to be simplified so that the customer can walk out
 
          7   so that disclosure will work.  Here is what my loan
 
          8   costs and I can easily understand it.  It's on one
 
          9   sheet of paper.
 
         10       MODERATOR SMITH:  I just want to make one
 
         11   observation before recognizing Mr. Shea, and that
 
         12   is that we did several years ago look at this
 
         13   question of all the various types of disclosures
 
         14   because we were -- our Consumer Advisory Council
 
         15   looked at the issue, and there was something like,
 
         16   I don't know, 50 something different disclosures or
 
         17   documents that people were receiving.
 
         18            The council in its review did note that
 
         19   there were only five or six that were required
 
         20   under federal law, whether it was Truth in Lending
 
         21   or some other disclosures; and that all of the
 
         22   others were in place either because of state law or
 
         23   because the lender needed to build up its own level
 
         24   of comfort with a particular transaction and was
 
 
 
 
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          1   asking for signed documentation that its own
 
          2   lawyers perhaps were encouraging, but that was not
 
          3   something that was required under federal law.
 
          4            So I want to make sure that we have some
 
          5   understanding of the fact that all these
 
          6   disclosures, the 26 linear feet, are not federal
 
          7   law.  Thank you.  End of speech.
 
          8       MR. SHEA:  I just wanted to make one point that
 
          9   the abuses we are seeing with single premium
 
         10   insurance are not confined to the subprime world;
 
         11   that most of the large financial institutions,
 
         12   Wells-Fargo, West Mortgage, Bank America, BankOne,
 
         13   most of those companies in fact try to paddle and
 
         14   push single premium credit life routinely.  And we
 
         15   see several abuses where brokers who are peddling
 
         16   those products oftentimes tell their clients that
 
         17   in fact you have to get this insurance to get the
 
         18   loan.  This is not confined to subprime.
 
         19       MODERATOR SMITH:  Mr. Brown?
 
         20       MR. BROWN:  I want to go back to the point with
 
         21   regard to disclosures.  And, Ms. Smith,
 
         22   notwithstanding your great disclaimer, I think we
 
         23   are really focusing on the wrong end of that whole
 
         24   question.  I don't believe it has to do with the
 
 
 
 
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          1   disclosures because, actually, you are right.
 
          2   We're putting the key in the hand of the fox going
 
          3   to the chicken coop to agitate the chickens on why
 
          4   they should comply, and that just doesn't work.
 
          5            I think what we have to do is to go back
 
          6   to a more fundamental point which is to educate the
 
          7   consumer on exactly what it is that they're getting
 
          8   involved in.
 
          9            And, you know, like David said, you have
 
         10   to field test some of this.  And my comment, I
 
         11   truly believe that education is the way.  The only
 
         12   footnote that I would provide is that it's a
 
         13   question of what is the actual cost that you would
 
         14   have to incur in order to bring the educational
 
         15   level up as it relates to this -- to a transaction,
 
         16   so that once they are exposed to the transaction
 
         17   and all the elements of it, they're in a position
 
         18   to develop the understanding and close the
 
         19   transaction and live with it and everybody be
 
         20   comfortable with it.
 
         21            It's very important, though, that the
 
         22   Federal Reserve, the state and the City of Chicago,
 
         23   et cetera, do spend some time on figuring out how
 
         24   maybe funds can be made available to assist in that
 
 
 
 
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          1   educational effort because I believe, without it,
 
          2   we will spend countless time talking about
 
          3   disclosures and their effectiveness or
 
          4   ineffectiveness.
 
          5       MODERATOR SMITH:  We will be talking about
 
          6   consumer education and consumer outreach this
 
          7   afternoon.  So we'll address some of these issues.
 
          8            Mr. Baker and then Mr. Butler.
 
          9       MR. BAKER:  One excellent suggestion I've heard
 
         10   Mr. James make in other forums is that the amount
 
         11   financed box in the Truth in Lending disclosures
 
         12   does not genuinely reflect the amount financed.
 
         13            And if you were to change that rule, which
 
         14   is certainly within your power to do, that would go
 
         15   a long way towards removing one of the tools that
 
         16   unscrupulous loan originators use to obfuscate what
 
         17   they're building in, what they're packing in.
 
         18       MR. MICHAELS:  I will take that one step
 
         19   further.  That change can be made on the Truth in
 
         20   Lending form if they can get a loan closing.
 
         21            One of the questions we raised in
 
         22   Charlotte and in Boston was whether or not when the
 
         23   consumer gets disclosure under HOEPA three days
 
         24   before closing whether it's sufficient to have the
 
 
 
 
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          1   monthly payment amount without knowing how that
 
          2   relates to the total loan amount.  So they know how
 
          3   much it is they're borrowing for that payment, and
 
          4   that would show them how much more than the amount
 
          5   they requested they're paying for fees that they're
 
          6   financing.  Does that make some sense?
 
          7       MR. JAMES:  I would say that's critical.  We've
 
          8   uncovered types of fraud where the present
 
          9   disclosure -- well, first of all, the amount of the
 
         10   loan never shows up on the Truth in Lending form.
 
         11   So there's great difficulty there.
 
         12            If the consumer is relying on that form
 
         13   for all the material elements of the transaction
 
         14   and the loan amount is not staring them in the
 
         15   face, there's a real potential that they'll be
 
         16   misinformed to believe that the amount financed is
 
         17   the amount of the loan.  And, in fact, we've seen
 
         18   that manipulation very effectively used to create
 
         19   hundreds of billions of dollars in bad loans.
 
         20   Hundreds of millions.
 
         21       MODERATOR SMITH:  Mr. Butler?
 
         22       MR. BUTLER:  Yeah, I want to challenge the fact
 
         23   that credit insurance is a poor buy.  I mean, it
 
         24   provides valuable coverage.  We all agree it should
 
 
 
 
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          1   be voluntary and it should not be forced on the
 
          2   client.
 
          3            And Dan Immergluck mentioned that
 
          4   46 percent of the people felt that they were
 
          5   coerced into buying the insurance.  And the Purdue
 
          6   study included a high percentage of people who
 
          7   voluntarily chose not to buy the insurance.  And
 
          8   the conclusion of the author was that only
 
          9   3 to 4 percent felt pressure to buy the insurance.
 
         10            So I think the facts are being tainted.
 
         11   They're not true.  Two, we think the post-closing
 
         12   letter will ensure that's the case.  And it's
 
         13   valuable.  It's really a valuable product.  Ask the
 
         14   people who were paid benefits and families who were
 
         15   protected.
 
         16       MODERATOR SMITH:  Mr. Rheingold?
 
         17       MR. RHEINGOLD:  My card fell down.  One last
 
         18   shot.  If it's a valuable product, then sell it as
 
         19   part of the separate transaction.  It doesn't need
 
         20   to be part of the loan.  It hides -- it hides the
 
         21   cost from the people.  And if it's so good, then
 
         22   sell it separately.
 
         23       MR. VARGA:  And how are they going to pay for
 
         24   it?   The reason it's not sold separately is
 
 
 
 
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          1   because it's financed.  You're not going to sell it
 
          2   separately and then take out a second separate
 
          3   non-real estate loan from the mortgage lender.
 
          4   That's not the way it's done.
 
          5       MR. RHEINGOLD:  Pay it like PMI.  If they don't
 
          6   pay it, they lose it.  I would much rather them
 
          7   decide they're having trouble with that loan, and
 
          8   the part of the problem that they're having is they
 
          9   can't make that monthly insurance payment, then the
 
         10   hell with the monthly insurance payment.  At least
 
         11   they can save their home.  And then they don't lose
 
         12   their home if they don't make their insurance
 
         13   payment.  They lose their credit insurance.  Fine.
 
         14   As opposed to a system where it's imposed upon them
 
         15   and makes the loan unaffordable and they lose their
 
         16   home.  This way they have the option.  If they
 
         17   don't want to pay it.  Good-bye.  You don't have it
 
         18   anymore.  They make a conscious choice.
 
         19       MR. COLUMBUS:  Thank you.  Requiring the
 
         20   insurance purchase and financing transaction to be
 
         21   separate from the mortgage transaction is an
 
         22   unacceptable proposition because of the reality of
 
         23   the transaction itself.
 
         24            If you're going to have a separate loan
 
 
 
 
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          1   for the insurance collateralized by the home, then
 
          2   you're going to have to redo all the loan
 
          3   documents.  You are going to have to recalculate
 
          4   the amount financed, the monthly payment,
 
          5   everything like that, and no lender is going to do
 
          6   that.  And no borrower wants to sit through a
 
          7   second closing.  That's not what they want to
 
          8   either.
 
          9            If they are truly purchasing it in
 
         10   voluntary fashion, they want to do it all at the
 
         11   same time.  And so in terms of cancelling the
 
         12   product, the certificate says that you can cancel
 
         13   the product any time and get a complete, you know,
 
         14   refund of the unearned premium; and if the consumer
 
         15   chooses to do so midway through the insurance
 
         16   coverage there, they can do so.
 
         17       MODERATOR SMITH:  Why does it have to be
 
         18   collateralized?
 
         19       MR. COLUMBUS:  Because they're a subprime
 
         20   borrower.  They may not qualify for extension of
 
         21   credit that is not collateralized.
 
         22       MODERATOR SMITH:  It's insurance.
 
         23       MR. COLUMBUS:  Well, if they --
 
         24       MR. BUTLER:  It's a question of affordability.
 
 
 
 
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          1   I have no problem having it sold on a monthly
 
          2   basis.  We just want the single premium option
 
          3   available because it makes it affordable.  It
 
          4   spreads out the payment over a longer period but
 
          5   makes the debt to income ratio lower and allows the
 
          6   product to be sold and afforded.
 
          7       MODERATOR SMITH:  Mr. Immergluck?
 
          8       MR. IMMERGLUCK:  We're again talking about a
 
          9   highly vulnerable population who is now being told
 
         10   you can have access to insurance which nobody else
 
         11   has to put their home up for.  It's as if I'm
 
         12   putting my home up for my life insurance, car
 
         13   insurance or for anything else.
 
         14            We're targeting a population that is
 
         15   disproportionately minority, disproportionately
 
         16   elderly, a disproportionately low-educated
 
         17   segment.  If you want insurance, if you want
 
         18   affordable insurance, we know there's lots of
 
         19   evidence of price discrimination based on race in
 
         20   the insurance industry, but if you want affordable
 
         21   insurance, we want your home.  That's what is being
 
         22   forced to borrowers.
 
         23       MR. BUTLER:  I would disagree with that.  We're
 
         24   selling the product to all income levels.  We're
 
 
 
 
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          1   not picking out any one segment of the population
 
          2   and focusing our sales on it.  This product is
 
          3   available to anybody.  It's voluntary.
 
          4       MR. IMMERGLUCK:  I think the other gentleman
 
          5   just said that a subprime market is the market that
 
          6   needs to have a collateralized insurance.  The
 
          7   subprime market, as we have shown, is heavily
 
          8   minority, heavily --
 
          9       MR. DETELICH:  As a lender, I can tell you that
 
         10   we don't take any comfort in having that portion of
 
         11   the loan collateralized, collateralized simply
 
         12   because it's part of the loan because it makes it
 
         13   the most affordable way for the borrower to obtain
 
         14   single premium insurance.
 
         15            The other options suggest to make it
 
         16   separate.  I can assure you those consumers who
 
         17   want credit insurance will be left with financing
 
         18   it at a high interest rate, credit card rates.  I
 
         19   could see a cash advance on a credit card as a
 
         20   means of funding single premium insurance.  I don't
 
         21   think that's a good idea, a separate unsecured loan
 
         22   which is going to have a high interest rate.  In
 
         23   the subprime market, as you know, unsecured loans
 
         24   have interest rates in the 20s and 30s.
 
 
 
 
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          1            Another option is I will just do without
 
          2   insurance because I can't afford it.  I don't
 
          3   qualify for one.  I don't think that's a good
 
          4   option.  That customer doesn't have other access to
 
          5   other insurance products.  We're not
 
          6   collateralizing it because now we're going to
 
          7   foreclose on the customer who doesn't make their
 
          8   insurance payments.  That's ludicrous.  It
 
          9   incorporates into the loan so that it gives the
 
         10   customer the lowest monthly payments.  It's as
 
         11   simple as that.
 
         12       MR. MICHAELS:  Thank you.  I would like to
 
         13   leave the subject of credit insurance because we
 
         14   had a lot of time to talk about it this morning.
 
         15            There's one thing we didn't get a chance
 
         16   to talk about in terms of the Board's authority to
 
         17   declare certain practices unfair and deceptive and
 
         18   prohibit them.  That's the question of whether or
 
         19   not it would do any good for the Board to have a
 
         20   rule that would declare unfair and deceptive
 
         21   practices which are already unfair and deceptive
 
         22   under state laws.  We clearly have the authority to
 
         23   do that.
 
         24            I have heard different arguments as to why
 
 
 
 
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          1   that wouldn't be an additional benefit in terms of
 
          2   enforcing the law.  It would be very difficult to
 
          3   try to define in rules every conceivable practice
 
          4   that might be deceptive or unfair.
 
          5            As I understand, some state laws don't
 
          6   make that effort.  Some state laws are just
 
          7   general.  In other states, there's a laundry list,
 
          8   I suppose, of specific facts and practices with the
 
          9   ability to then go case by case and find other
 
         10   practices.
 
         11            So that option is one I think we're going
 
         12   to examine since we have an unfair deceptive
 
         13   rule-making whether we should try to define
 
         14   specific acts of practices or create a general
 
         15   standard that would rely on state law.
 
         16       MR. BAKER:  We would disagree -- it accounts in
 
         17   virtually every contested foreclosure.  Again, if
 
         18   we go back to the matter that it's after the fact,
 
         19   second-guessing of what occurred.
 
         20            We can certainly understand a laundry list
 
         21   that may not be all inclusive.  You may have to add
 
         22   to it as your experiences tell you; but what we're
 
         23   looking for are bright line standards that we can
 
         24   operate under.
 
 
 
 
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          1       MR. MICHAELS:  I guess my question is to the
 
          2   extent that we're piggy-backing on state law, to
 
          3   the extent there is such a standard under state
 
          4   law --
 
          5       MR. BAKER:  Our understanding in Illinois is
 
          6   simply unfair and deceptive practices.
 
          7       MR. MICHAELS:  So if a federal rule piggy-backs
 
          8   on that, it wouldn't make any additional practices
 
          9   unlawful.  It would just say, if you violate state
 
         10   law, then you have violated HOEPA as well.  What
 
         11   that does it brings the remedies of HOEPA and
 
         12   brings --
 
         13       MR. BAKER:  And that's exactly my point.  It
 
         14   just creates more uncertainty in the very important
 
         15   area of HOEPA and the remedies of HOEPA and the
 
         16   prohibitions of Section 32 or whatever may come
 
         17   from that.
 
         18            With that lack of clarity and the hammer
 
         19   at the other end, there's going to be an incredible
 
         20   chilling effect on any enrollments made over the
 
         21   trigger points.
 
         22       MODERATOR SMITH:  Mr. Varga and Mr. James.
 
         23       MR. VARGA:  The other thing it would do would
 
         24   essentially give a federal private right of action
 
 
 
 
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          1   for what is now a state law UDAP deceptive trade
 
          2   practices claim.  And from a litigator's
 
          3   standpoint, what that would do would turn every one
 
          4   of these claimed unfair practices into a suit in
 
          5   federal court on a nationwide class action.
 
          6   Because what it does is put the plaintiff's counsel
 
          7   in federal court on an alleged nationwide class
 
          8   action.
 
          9            Right now, if you bring in that kind of
 
         10   claim -- it's difficult now to deal with lenders,
 
         11   and I think it would truly drive lenders out of
 
         12   HOEPA because of the litigation costs of that.
 
         13            Right now, at least if you bring a claim
 
         14   under a state law deceptive trade practices claim,
 
         15   there's a pretty good argument as a lender because
 
         16   of the variations in state law on deceptive trade
 
         17   practices, it's difficult to have a nationwide
 
         18   class of a generalized deceptive practice.
 
         19            This would, by essentially giving federal
 
         20   sanctions to this, both move it into federal court
 
         21   and lenders would be flooded with nationwide class
 
         22   actions on these garden-variety claimed unfair and
 
         23   deceptive practices.
 
         24            That's a thing that under the authority of
 
 
 
 
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          1   the FEC Act there is no private right of action for
 
          2   plaintiffs' attorneys to bring unfair claims under
 
          3   Section 5 of the FTC Act.  It's reserved for the
 
          4   government.  Here you would be significantly
 
          5   expanding it.  You would be significantly driving
 
          6   up the litigation costs, and I think it's
 
          7   significantly going to push people completely out
 
          8   of HOEPA.
 
          9       MS. HURT:  Can I just ask you, do you think
 
         10   that with regard to UDAP problems you'd have a
 
         11   class action?
 
         12       MR. VARGA:  Well, from a lender standpoint, we
 
         13   would say, clearly, these are individualized
 
         14   situations.  As many people have said here, they're
 
         15   after-the-fact determinations of whether something,
 
         16   you know, was unfair or not.  That's not the way
 
         17   the lawsuits are going to be brought, and they will
 
         18   be brought, and they'll be brought in federal court
 
         19   as alleged nationwide claims.
 
         20       MR. MICHAELS:  Have class actions been
 
         21   successful on UDAP claims generally?  Because the
 
         22   fact is different in every case.
 
         23       MR. VARGA:  I would like to have you as my
 
         24   judge.
 
 
 
 
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          1            There are many cases that are brought and
 
          2   they go to judgment or they go to significant class
 
          3   settlements.  The core of the claim is the state's
 
          4   unfair and deceptive trade practices claim.
 
          5            But here you would be federalizing it and
 
          6   having it be uniform across the land, and every one
 
          7   of the things that we've been taking issue with
 
          8   here or in, for instance, the Chicago ordinance
 
          9   that says after the fact this was an unfair
 
         10   deceptive practice, that would be claim on a
 
         11   class-wide basis on a nationwide basis, and you
 
         12   would have facilitated that by essentially giving a
 
         13   private right of action for it where there isn't
 
         14   one now.
 
         15       MS. HURT:  Could I just narrow the question?
 
         16   Would there be any benefit to legal aid attorneys
 
         17   or would there be any problem from the creditors if
 
         18   the Board used its unfair and deceptive authority
 
         19   to declare specific acts like blank, it's unfair
 
         20   deceptive to falsify information on an application
 
         21   or to have a consumer sign blank documents,
 
         22   something that's clearly unfair and deceptive?
 
         23       MR. RHEINGOLD:  As the legal aid attorney here,
 
         24   I guess I should answer.
 
 
 
 
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          1            I think the thing that drives us -- and,
 
          2   again, we can't drive -- we don't do class action
 
          3   lawsuits.  We can't.  We don't.  So I know nothing
 
          4   about that.  I won't respond to the class action
 
          5   driven, but I will agree that the Consumer Fraud
 
          6   Act doesn't seem to be a place to do that.
 
          7            Nonetheless, what HOEPA gives us and what
 
          8   it needs to give us is the right of rescission.
 
          9   That's the ball game for us, is we can say, hey,
 
         10   you screwed these people.  They can rescind the
 
         11   loan.  And if you identify classes of behavior,
 
         12   that if they're violated, we can go to the lender
 
         13   and say, we're rescinding.  That's what's important
 
         14   to us.
 
         15            And so, you know, as far as I'm concerned,
 
         16   if you are making UDAP violations so that there's a
 
         17   UDAP violation, we don't have to go to state court,
 
         18   we just say, under federal law we can rescind that
 
         19   loan, I think that's a good thing.
 
         20            I think if we want to narrow it down and
 
         21   list certain behaviors that are deceptive
 
         22   practices, I think that would be enormous help as
 
         23   long as that rescission right runs with it.
 
         24            We talked about some things earlier.  I
 
 
 
 
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          1   would throw out another notion on a HOEPA loan.  I
 
          2   think that a balloon payment on a HOEPA loan should
 
          3   be an unfair practice.  We think it's a signal.  I
 
          4   have seen it time and again, and it's a signal for
 
          5   refinancing.  And it's a way to get people
 
          6   flipped.  People don't know that they have balloon
 
          7   payments.
 
          8            I have heard the arguments a million times
 
          9   that there's a legitimate marketplace in the prime
 
         10   lending market.  I am not going to argue with
 
         11   that.  That's one thing for them.
 
         12       MR. JAMES:  From the law enforcement
 
         13   standpoint, that would be manna from heaven.
 
         14   There's a real need to make our enforcement power
 
         15   in this area parallel under HOEPA and under our
 
         16   uniform deceptive trade practices.
 
         17            I think the federal rules with respect to
 
         18   class actions accommodate or prevent the abuse that
 
         19   I hear talked about with respect to bringing --
 
         20   trying to broaden a class into a country-wide
 
         21   application a state UDAP law.  I don't think the
 
         22   courts are going to go for it, and I think there's
 
         23   plenty of protection in the courts against that.
 
         24   There's currently a case pending downstate on this
 
 
 
 
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          1   issue, and I think it ought to be resolved as a
 
          2   matter of state law.  So I think it's a tremendous
 
          3   idea.
 
          4       MR. BAKER:  This discussion, once again,
 
          5   underscores the critical nature of the analysis of
 
          6   the trigger points because if, like Ira suggested,
 
          7   we were to ban balloon payments from high-cost
 
          8   loans, we would be eliminating the revolving home
 
          9   equity market for that sector of people who are
 
         10   only eligible for high-cost loans.  Do we want to
 
         11   do that?
 
         12            I mean, that's -- if you set a low trigger
 
         13   rate, you're going to be carving out the revolving
 
         14   home equity market in this nation from a
 
         15   significant element of the population.
 
         16            So, again, these components are all
 
         17   interrelated.  Balloon payments aren't bad,
 
         18   per se.  I would submit they shouldn't be
 
         19   considered bad for high-cost borrowers.  Maybe
 
         20   they're a warning signal and should receive
 
         21   stricter scrutiny; but we have to be very careful
 
         22   about throwing these provisions around in the
 
         23   context that are critical.
 
         24       MODERATOR SMITH:  Mr. Bochnowski?
 
 
 
 
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          1       MR. BOCHNOWSKI:  Your suggestion is helpful for
 
          2   states like Indiana where we don't have it.  The
 
          3   legislature is just working on it.
 
          4            I think that, you know, to have hard, fast
 
          5   and bright lines may become problematic.  Perhaps
 
          6   presumptions is better than strictly outlawing it.
 
          7            Again -- and I would echo the comments
 
          8   that were made by Bruce -- that these activities,
 
          9   these terms in and of themselves are not
 
         10   necessarily predatory.  The context in which they
 
         11   are used defined in the context makes the
 
         12   difference as far as all of our understanding.
 
         13       MR. RHEINGOLD:  Just a quick response.  I'm
 
         14   kind of confused because I hear a mixed message
 
         15   here.  I hear, one, we can't have broad language
 
         16   because then we won't know what to do.  But we
 
         17   can't have bright line rules because we're going to
 
         18   throw some stuff out if we have bright line rules.
 
         19            I think if we want -- we've offered both.
 
         20   Net tangible benefit is a concept that I think is a
 
         21   good concept in taking a look at flipping.  Balloon
 
         22   payments, how bright -- or if you want to go the
 
         23   bright line rule, no balloon payments, no mandatory
 
         24   arbitration clauses, no prepayment penalties.  Then
 
 
 
 
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          1   the rules of the game are clear; and if that's what
 
          2   the lending market wants, then the ground rules are
 
          3   clear as opposed to sort of these nebulous
 
          4   concepts.
 
          5       MR. BAKER:  If I could just jump in, I do think
 
          6   there is a middle road to take between left field
 
          7   and right field, between banning balloon payments
 
          8   and not providing any bright lines.  There are
 
          9   other options that ought to be considered.
 
         10            For example, the industry standard for
 
         11   balloon payments is seven years.  If you see
 
         12   anything less than seven years -- maybe five, you
 
         13   know, for some lenders, but certainly nothing under
 
         14   five -- that's going to be a flashpoint for you.
 
         15            We could have -- I just throw it out for
 
         16   purposes of discussion, I'm not advocating it --
 
         17   but a seven-year floor for balloon payments on
 
         18   high-cost loans would not carve that option out of
 
         19   the specific market, but it is a bright line.
 
         20   There is something other than total banishment of
 
         21   prepayment penalties or balloon payments or other
 
         22   things like that.
 
         23       MR. JAMES:  I'll just add one other thing which
 
         24   is always a concern as I represent a state, and
 
 
 
 
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          1   that is that whatever is done in the rule-making
 
          2   process, be sure not to preempt our present
 
          3   authority because we need everything we have and
 
          4   our arsenal is very thin.
 
          5       MODERATOR SMITH:  Okay.  I think that with that
 
          6   we will bring to conclusion this morning's
 
          7   session.
 
          8            I thank you very much for sharing your
 
          9   views with us and making the contributions that you
 
         10   did this morning.  I encourage you to submit
 
         11   written statements that may elaborate on some of
 
         12   your views.
 
         13            With that, again, thank you very much.
 
         14   And we will reconvene at 1:30 in this room for the
 
         15   afternoon session.
 
         16                      (Whereupon, recess taken at
 
         17                      1 o'clock p.m.)
 
         18                      (Whereupon, the Afternoon
 
         19                      Session is bound under separate
 
         20                      cover.)
 
         

          1                  FEDERAL RESERVE BOARD
 
          2                      PUBLIC HEARING
 
          3                  ON HOME-EQUITY LENDING
 
          4                     August 16, 2000
 
          5                    AFTERNOON SESSION
 
          6
 
          7            STENOGRAPHIC REPORT OF PROCEEDINGS had in
 
          8   the above-entitled matter held at the Federal
 
          9   Reserve Bank of Chicago, 230 South LaSalle Street,
 
         10   Chicago, Illinois, MS. DOLORES S. SMITH, Moderator.
 
         11
 
         12       PANELISTS:
 
         13            MS. GALE CINCOTTA, National Training
 
         14                 Information Center
 
         15            MS. LINDA CRANE, John Marshall Law School
 
         16            MS. BETH LLEWELLYN, Partnership for
 
         17                 Homeownership, a Foundation of the
 
         18                 Illinois Association of Realtors
 
         19            MR. JACK MARKOWSKI, City of Chicago,
 
         20                 Department of Housing
 
         21            MS. ROCHELLE NAWROCKI, Neighborhood
 
         22                 Housing Services
 
         23            MR. DAVID VOSS, First Bank of the Americas
 
         24
 
 
 
 
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          1                      (Whereupon, the following
 
          2                      proceedings commenced at
 
          3                      1:45 o'clock p.m.)
 
          4       MODERATOR SMITH:  I believe we're ready to
 
          5   start.  I will start by welcoming you to the
 
          6   session; and for those of you who were not here
 
          7   this morning, I will just go through some
 
          8   information.
 
          9            My name is Dolores Smith.  I'm the
 
         10   Division Director for Consumer and Community
 
         11   Affairs at the Federal Reserve Board.  I will be
 
         12   the moderator for this session.
 
         13            We had a very interesting morning.  I know
 
         14   we will have an interesting afternoon, and so I
 
         15   will start by introducing our panel.  I might
 
         16   mention for those of you who were not here this
 
         17   morning that we did have with us Ned Gramlich, who
 
         18   is a member of the Board of Governors and who is
 
         19   the Chairman of Oversight Committee on Consumer and
 
         20   Community Affairs.  He was not able to stay for the
 
         21   afternoon, but he will be receiving a report and
 
         22   then also will, I'm sure, be looking at the summary
 
         23   of the afternoon's presentations.
 
         24            We have, starting with my left,
 
 
 
 
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          1   Adrienne Hurt, who is Assistant Director, and
 
          2   Jim Michaels who is Managing Counsel.  Adrienne and
 
          3   Jim are the two who are primarily responsible for
 
          4   managing Truth in Lending matters of the Board.
 
          5            To my right, I have Sandy Braunstein, who
 
          6   is Assistant Director for Community Affairs and our
 
          7   Community Affairs Officer for the Board.  And then
 
          8   next to her, Alicia Williams, Vice President from
 
          9   the Federal Reserve Bank of Chicago.
 
         10            The rules of procedure that we'll be
 
         11   following this afternoon:  The invited panelists
 
         12   will have three minutes for introductory remarks.
 
         13   We have time keepers who will be letting them know
 
         14   when they have one minute to go and when their time
 
         15   has expired.
 
         16            The opening remarks is really just the
 
         17   beginning session, section here.  We will have an
 
         18   opportunity for dialogue, so it's not the last
 
         19   opportunity for people to make their contributions
 
         20   to our discussion here this afternoon.
 
         21            We will at the conclusion -- after we have
 
         22   the opening statements, then we will start our
 
         23   panel discussion.  We will continue -- we will come
 
         24   to a break some time in about an hour, I'd say, and
 
 
 
 
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          1   then after the break we will go to the open mic
 
          2   session.  So those of you in the audience who have
 
          3   an interest in presenting an oral statement, please
 
          4   sign up if you have not already done so.  You do
 
          5   this at the registration desk out in the lobby area
 
          6   here.
 
          7            So with that -- I might say that this
 
          8   morning we focused on some of the more technical
 
          9   questions about how might the Board use its
 
         10   rule-making authority to address concerns about
 
         11   predatory lending practices.
 
         12            There was discussion this morning of the
 
         13   fact that -- well, at least some people suggested
 
         14   that disclosures which is what our regulations
 
         15   primarily provide are not and cannot be the entire
 
         16   answer to preventing vulnerable consumers from
 
         17   getting into a situation where they are subjected
 
         18   to predatory lending practices.
 
         19            And so this afternoon, we will be talking
 
         20   about ways in which consumer education and consumer
 
         21   outreach might help along with whatever disclosures
 
         22   and other -- and substantive protections might be
 
         23   put in place.
 
         24            So with that, I will ask Ms. Cincotta to
 
 
 
 
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          1   start us off, and we will be going in a clockwise
 
          2   direction.
 
          3       MS. CINCOTTA:  Thank you very much.  Glad you
 
          4   are holding these hearings.
 
          5            For those of you not familiar with NTIC
 
          6   and NPA, National People's Action is a national
 
          7   network of neighborhood groups across the country;
 
          8   and the National Training Information center is the
 
          9   group that works with getting information, getting
 
         10   research, training staff and being involved in all
 
         11   these kinds of meetings, bringing in data,
 
         12   et cetera.
 
         13            We fought for FHA reforms and we've been
 
         14   dealing with the amount of foreclosures year by
 
         15   year.  We have just won again some reforms.  And so
 
         16   far we have got 56 of the mortgage bankers that
 
         17   were doing these foreclosures cut off, you know,
 
         18   one by one by one.  So it's up to 58.
 
         19            We won CRA nationally.  And in just
 
         20   Chicago alone with four banks that we've been
 
         21   working with for 15 years, we got out a billion
 
         22   dollars.  What I'm trying to say by that is we're
 
         23   dealing with all the different portions of funding,
 
         24   et cetera, what's happening in the market.
 
 
 
 
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          1            What we've been hit with so hard is the
 
          2   number of foreclosures which have tripled in the
 
          3   Chicago area in the last five years.  Subprime
 
          4   lenders caused the explosion.  Their share of
 
          5   foreclosures went from 3 percent in 1993 to
 
          6   38 percent in 1999.
 
          7            So what we're trying to say is we're
 
          8   trying to deal with the banking, the red lining,
 
          9   any of that, FHA foreclosures.  We have this thing
 
         10   now that is hit.  Lenders who would never lend
 
         11   money in the area before, now that they found a way
 
         12   to come up with horrendous interest rates, points
 
         13   and fees, are like in droves.  The amount of, as I
 
         14   said, companies that are coming into Chicago or
 
         15   into the state are unbelievable.  So where you had
 
         16   a couple companies locally, they're all coming in.
 
         17            Couple things we think the feds could do
 
         18   is modernize HMDA so that we can prove loans are
 
         19   predatory.  Disclose points and fees, interest
 
         20   rates, credit score.  Prevent financial
 
         21   institutions from getting CRA credit for subprime
 
         22   loans.
 
         23            43 percent of Bank America's loans in
 
         24   Chicago in 1998 were subprime.  Most of the
 
 
 
 
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          1   subprime in minority neighborhoods.
 
          2            And the changes in HOEPA that we see are
 
          3   need to stop predatory lending:  No credit
 
          4   insurance premiums included in the loan.  No
 
          5   prepayment penalties.  No flipping.  No balloon
 
          6   loans.  Make whoever owns the loan responsible for
 
          7   it.  And lower the APR trigger to 5 percent.
 
          8            And, finally, one caution.  While we're
 
          9   meeting here and while this is going on and we
 
         10   debate with the industry and the Chicago city
 
         11   ordinance, the state legislature, et cetera, the
 
         12   industry has a bill in Washington called the Ney
 
         13   bill, N-e-y, that if they get it through, it will
 
         14   prohibit any city or state from doing anything.
 
         15            So while they -- some of the industry
 
         16   might come here and talk friendly, they're pushing
 
         17   an industry bill that would stop us from doing
 
         18   things.
 
         19       MODERATOR SMITH:  What does that mean?  What
 
         20   does it stand for?
 
         21       MS. CINCOTTA:  That's the name of the person
 
         22   sponsoring it, N-e-y, the Congress person.
 
         23       MODERATOR SMITH:  Thank you.  Mr. Voss?
 
         24       MR. VOSS:  Thank you.  I appreciate being
 
 
 
 
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          1   invited here this afternoon and being asked to
 
          2   comment on the latest threat to our community,
 
          3   predatory lending.
 
          4            First Bank has been operating for almost
 
          5   three years, and we have refinanced many predatory
 
          6   loans made by unscrupulous mortgage brokers and
 
          7   lenders.  Moreover, while home equity lending has
 
          8   received the most recognition, I'm here to tell you
 
          9   that predatory lending goes well beyond mortgages
 
         10   and it includes consumer loans and life line
 
         11   financial services.
 
         12            At First Bank, we're reminded every day
 
         13   that the practices of predatory lenders places a
 
         14   tremendous burden on decent and hard-working
 
         15   people.
 
         16            First Bank was formed in the fall of 1997
 
         17   and began operations in one office approximately
 
         18   ten minutes southwest of the Chicago central
 
         19   business district.  We served the predominantly
 
         20   Mexican/American Chicago communities of Pilsen,
 
         21   Back-of-the-Yards and Little Village.
 
         22            We are an FDIC-insured, for-profit bank.
 
         23   We are also one of the four depository community
 
         24   development financial institutions or CDFIs
 
 
 
 
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          1   designated by the U.S. Treasury in the Chicago
 
          2   area.  In fact, the U.S. Treasury is one of our
 
          3   shareholders.
 
          4            As a CDFI, First Bank's mission is to
 
          5   provide financial services and to make loans and
 
          6   investments to the underserved families and
 
          7   businesses in our community.  We have obviously
 
          8   faced substantial obstacles in achieving our
 
          9   mission.  The Hispanics are distressed or, in many
 
         10   cases, they're are unfamiliar with banks.
 
         11            In a study done by the Metropolitan
 
         12   Chicago Information Center, MCIC, 25 percent of the
 
         13   Hispanics felt that their banking needs were not
 
         14   being met at all or not too well.  This compares
 
         15   with 16 percent for African/Americans and 7 percent
 
         16   for whites.
 
         17            In addition, approximately two-thirds of
 
         18   Hispanics compared to 40 percent of whites used
 
         19   currency exchanges and check-cashing centers, in
 
         20   effect, making them their financial institution.
 
         21            Life line transactions are check cashing,
 
         22   money orders, bill payment and money transfer.  We
 
         23   found that there were some companies in our
 
         24   community that were charging outrageously high
 
 
 
 
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          1   prices for these services.  By charging fair and
 
          2   reasonable prices, we were able to establish
 
          3   ourselves in the community and gain the trust of
 
          4   potential customers.  That is how we introduced
 
          5   them to mainstream banking.
 
          6            From September 1999 to now, we have
 
          7   refinanced over 150 mortgages, home equity loans
 
          8   and consumer loans.  Some of these mortgages had
 
          9   interest rates as high as 12 percent when market
 
         10   rates were 8 percent.  The borrowers are decent,
 
         11   hard-working people, but they do not understand
 
         12   personal finance.
 
         13            I have got a couple of examples here, but
 
         14   I know I am going to run out of time, so I will
 
         15   just move along.  If you want to talk about the
 
         16   examples of some of the loans that we've
 
         17   refinanced, I will be happy to do so.
 
         18            While predatory practices around mortgage
 
         19   and home equity loans have received major focus in
 
         20   the past few months, I'm here today to tell you
 
         21   that a significant problem also exists in consumer
 
         22   loans.  Shall I stop?   My time up?
 
         23       MODERATOR SMITH:  We'll get -- we'll come
 
         24   around to you again, and then you can continue.
 
 
 
 
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          1   Ms. Nawrocki.
 
          2       MS. NAWROCKI:  Thank you for the opportunity to
 
          3   speak today on an issue that is dismantling years
 
          4   of positive reinvestment.
 
          5            I represent Neighborhood Housing Services
 
          6   of Chicago.  We are a non-profit, community-based
 
          7   lender and certified community development and
 
          8   financial institution.  We were formed in 1975.
 
          9   NHS brings about community reinvestment through a
 
         10   partnership of residents, business and government.
 
         11            Last year, NHS originated 15 million and
 
         12   leveraged an additional 19 million in home
 
         13   improvement and home mortgage loans.  We also
 
         14   provide hands-on homeownership counseling and
 
         15   training through our Neighbor Works Homeonwership
 
         16   Center, and we provide a comprehensive mortgage
 
         17   delinquency program to help families remain in
 
         18   their homes in times of financial difficulty.
 
         19            NHS has becoming increasingly aware of
 
         20   predatory lending and its negative effects on
 
         21   families and neighborhoods over the last year as we
 
         22   begin to see a dramatic increase in the number of
 
         23   clients seeking assistance through our Foreclosure
 
         24   Intervention Program.  Through this program, we
 
 
 
 
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          1   offer mortgage delinquency counseling and
 
          2   intervention and, in some cases, NHS is able to
 
          3   provide small, low interest loans to help customers
 
          4   become current.
 
          5            Approximately 50 percent of all client
 
          6   intakes are due to predatory lending.  This year,
 
          7   NHS will receive over 1200 requests for foreclosure
 
          8   intervention services.  The need for such services
 
          9   is increasing at an alarming rate, and we are
 
         10   struggling to keep families in their homes and
 
         11   prevent others from obtaining financing from
 
         12   predatory lenders.
 
         13            Today, clients seeking assistance from the
 
         14   NHS's Foreclosure Intervention Program are
 
         15   radically different from clients of several years
 
         16   ago.  Today, the majority of clients have obtained
 
         17   home refinance or home equity loans from subprime
 
         18   lenders with excessive interest rates and fees.
 
         19            Upon further examination of loan documents
 
         20   by NHS staff, predatory lending practices such as
 
         21   charging excessive yield spread premiums, balloon
 
         22   payments, flipping and packing of unnecessary
 
         23   credit insurance have been identified.  The
 
         24   widespread use of these practices has become so
 
 
 
 
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          1   apparent that NHS staff now regularly requests to
 
          2   examine all mortgage documents of potential
 
          3   customers even if they are interested in obtaining
 
          4   a home improvement loan with NHS.
 
          5            Today, NHS staff is spending approximately
 
          6   a quarter of their time providing assistance to
 
          7   clients who have fallen behind on their mortgage
 
          8   due to predatory lending.
 
          9            Predatory lending has and will continue to
 
         10   dismantle 25 years of positive reinvestment by the
 
         11   community, banks and government if it continues
 
         12   unchecked and unregulated.
 
         13            To put this into perspective, in the
 
         14   Back-of-the-Yards neighborhood where we have one
 
         15   office, just in the last year, there were
 
         16   102 foreclosure cases initiated in an area that
 
         17   measures 12 by 17 blocks.  At least, 75 percent of
 
         18   the foreclosures were direct results of financing
 
         19   by predatory lenders.  Most likely the majority of
 
         20   these homes will end up vacant and further erode
 
         21   the positive investment that has occurred to date.
 
         22            Industry efforts to push mandatory
 
         23   counseling, consumer education and increased
 
         24   disclosures as a solution to predatory lending are
 
 
 
 
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          1   simply too little, too late and, frankly, are
 
          2   unfair to the consumer.  While counseling and
 
          3   education can be very important tools to prevent
 
          4   borrowers from obtaining predatory loans, NHS of
 
          5   Chicago believes that counseling is only part of
 
          6   the solution.
 
          7            NHS's long history of working in
 
          8   underserved neighborhoods convinces us that until
 
          9   predatory lending practices are made illegal and
 
         10   exorbitant fees and profits are restricted, lenders
 
         11   will continue to engage in abusive lending
 
         12   practices with or without mandatory counseling at
 
         13   the expense of the homeowners and the neighborhoods
 
         14   in which they reside.  Thanks.
 
         15       MODERATOR SMITH:  Thank you.  Mr. Markowski?
 
         16       MR. MARKOWSKI:  Thank you.  I am
 
         17   Jack Markowski.  I'm the Commissioner of the City
 
         18   of Chicago, Department of Housing; and along with
 
         19   the people that you've heard already testify here,
 
         20   we're concerned very much about the effect of
 
         21   predatory lending on Chicago neighborhoods.
 
         22            We're interested in this issue not only as
 
         23   a consumer issue but for the impact it's having in
 
         24   our neighborhoods, as Rochelle said, to reverse the
 
 
 
 
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          1   25 years of progress that good lending and good
 
          2   community development has made in our
 
          3   neighborhoods.
 
          4            We're interested in this because of the
 
          5   vacant buildings that are the remnants of predatory
 
          6   lending that destroy the good work in the community
 
          7   and destroy the value of the properties of the
 
          8   folks who don't even have the predatory loans but
 
          9   just live next door and pay their mortgages on the
 
         10   properties, and they see buildings throughout their
 
         11   neighborhood becoming vacated and properties
 
         12   destroyed being sites for crime as a result of
 
         13   predatory lending.
 
         14            In spring of this year, the Mayor
 
         15   announced a threefold initiative to combat
 
         16   predatory lending.  We call it our Foreclosure
 
         17   Prevention and Community Stabilization Initiative.
 
         18            The first part of this is to prevent abuse
 
         19   by mortgage brokers and lenders.  That was what --
 
         20   the panels before me talked about this and you said
 
         21   that was your topic this morning.  This is about
 
         22   regulations and legislation to regulate the
 
         23   practices surrounding this abusive lending
 
         24   activities.
 
 
 
 
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          1            We are strongly in favor of those
 
          2   initiatives, however, at the Federal Reserve Bank,
 
          3   at the State of Illinois and with the federal
 
          4   government.  We are not ourselves in a position as
 
          5   a city to regulate financial practices.  We are in
 
          6   a position to be able to state who we will and
 
          7   won't do business with.  And we've been developing
 
          8   a series of criteria to state what we think abusive
 
          9   lending practices are that says who the city won't
 
         10   do business with.
 
         11            But even if we -- when we get that passed,
 
         12   most of the bad lenders are not doing business with
 
         13   the city anyway.  So we really need this strong
 
         14   regulation and legislation at the state and federal
 
         15   level.
 
         16            The other two parts of our program are
 
         17   assisting homeowners at risk of foreclosure and
 
         18   expediting the acquisition and rehab of vacant
 
         19   buildings.  As I said, vacant buildings are what's
 
         20   left behind, the ultimate result of the predatory
 
         21   lending.
 
         22            We've announced get-tough policies on
 
         23   vacant building owners to make it less attractive
 
         24   to own a vacant building in the city.  Owners now
 
 
 
 
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          1   have to register their building with the building
 
          2   department; purchase liability insurance for damage
 
          3   the building may cause to other properties; and
 
          4   they need to board it up in accordance with
 
          5   standards promulgated by the building
 
          6   commissioner.
 
          7            We also are setting in place with
 
          8   community organizations programs to obtain those
 
          9   vacant buildings through forfeiture from the
 
         10   parties that end up with them and expedite the
 
         11   rehab of those so we can have a fast-track rehab.
 
         12            Finally, we want to assist the consumers
 
         13   with consumer education.  We both are going to
 
         14   intervene, and I will talk more later with regard
 
         15   to Department of Consumer Services about class
 
         16   action lawsuits that she will initiate; and we're
 
         17   also with -- a number of lenders, brokers,
 
         18   community organizations, religious institutions,
 
         19   government officials throughout the city are
 
         20   developing an aggressive public education campaign
 
         21   to inform consumers about their credit options and
 
         22   about the dangers of predatory lending and to
 
         23   educate them on their consumer decisions.  And I
 
         24   would like to talk more about that later.
 
 
 
 
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          1       MODERATOR SMITH:  Ms. Llewellyn?
 
          2       MS. LLEWELLYN:  I'm a little nervous.  I hope I
 
          3   can speak up here.
 
          4            We're evidently a little bit different.
 
          5   We are a non-for-profit foundation.  We write
 
          6   mortgage programs and then go out and get them
 
          7   funded.  We provide homeowner counseling.  We
 
          8   pre-screen the applicants ahead of time.  When they
 
          9   come to the class, they're given a certificate.
 
         10   The money, according to what they're qualified for,
 
         11   is removed theoretically from that dollar amount so
 
         12   that they have a large period of time to shop, to
 
         13   buy wisely.  They're not encouraged to go in a fast
 
         14   pace because the money is going to sit there for
 
         15   the duration until that program ends.  That's
 
         16   usually five to six months although we have had
 
         17   them as long as a year.
 
         18            I told my board of directors yesterday
 
         19   that evidently we are subprime lenders and that we
 
         20   deal with very, very low-income people who have
 
         21   either no credit history or who have had credit
 
         22   problems in the past.
 
         23            We look at two years of acceptable credit,
 
         24   three years after a discharge of a bankruptcy.  We
 
 
 
 
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          1   use no FICO scoring in our credit reports at all.
 
          2            We have 18 counseling centers across the
 
          3   state.  Everyone uses the same material.  Credit is
 
          4   reviewed the same way.  Local lenders are
 
          5   participating in these programs -- and I am glad to
 
          6   see some people here who have helped my
 
          7   participants in a big way.
 
          8            We have, according to what they reported
 
          9   yesterday, a .14 percent default rate.  It's pretty
 
         10   darn good I guess.  Excuse me.  I will get control
 
         11   here a little bit.  We just are finishing about
 
         12   50 million that we have done in the last year and a
 
         13   half.  It's a 5 percent interest rate with a
 
         14   thousand and one percent down payment, whichever
 
         15   was higher.
 
         16            Now I will say something that we're really
 
         17   firm on -- and I have to argue this every time we
 
         18   go to get funding from either the mortgage
 
         19   insurance companies or from another entity.  We
 
         20   keep our debt ratios at 36 percent.  Flat out.
 
         21   36 percent.  In five years, we've made two
 
         22   exceptions to that rule.  That took a conference
 
         23   call between the mortgage insurer, the funder as
 
         24   well as myself and the lender who was originating
 
 
 
 
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          1   that loan.  We've only done that twice.
 
          2            1 percent.  We have found that a down
 
          3   payment is not indicative of default.  We try to
 
          4   make sure that there is 5 percent more residual
 
          5   income left at the end of each month that will take
 
          6   care of necessary expenses and emergencies.
 
          7            We also find that the majority of these
 
          8   people -- Mary Backus is 73 years of age.  She made
 
          9   $11,000 a year.  We find that they have no medical
 
         10   insurance; and, if they have any at all, they're
 
         11   paying it monthly.  Most of the collections I see
 
         12   are medical collections.  We look at how long it
 
         13   took them to repay that.  Any collection has to be
 
         14   repaid, but we kind of wink at medical so to
 
         15   speak.
 
         16            I am a little bit alarmed at things I am
 
         17   starting to see on credit reports.  A lot of them
 
         18   are very, very high cellular phone bills, and it's
 
         19   coming from our younger people.  And I will talk
 
         20   maybe later a little calmer.
 
         21       MODERATOR SMITH:  Ms. Crane?
 
         22       MS. CRANE:  Thank you very much.  I have been
 
         23   working since at least 1996 on the MCAP Chicago
 
         24   steering committee which stands for Mortgage Credit
 
 
 
 
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          1   Access Partnership, one of six such programs put
 
          2   together by various regional Federal Reserve
 
          3   Banks.
 
          4            I am a law professor at the John Marshall
 
          5   Law School here in Chicago where I teach property
 
          6   law and commercial law.  And I think I was invited
 
          7   to join MCAP after someone at the fed saw me
 
          8   purchase their program where I was talking about
 
          9   some research I'm doing and had been doing, looking
 
         10   into the history of mortgage lending generally as a
 
         11   way of trying to get a handle on why it's so
 
         12   impervious to -- at least discrimination in the
 
         13   mortgage lending practice is so impervious to
 
         14   attempts to ameliorate it.
 
         15            I found that actually the history of
 
         16   mortgage lending is one of exclusion right down to
 
         17   the letter, and not one of inclusion; and,
 
         18   therefore, it's perfectly consistent for it to
 
         19   continue to be one of exclusion in the present
 
         20   day.
 
         21            When we started the MCAP and we picked the
 
         22   four task forces, subjects to the task forces that
 
         23   we're going to paying attention to in Chicago, one
 
         24   of them was Professional and Consumer Education.  I
 
 
 
 
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          1   raised objections to its inclusion because I
 
          2   thought that it seemed to ignore the problem of the
 
          3   role of racism and other motives that remains
 
          4   unaddressed to some extent while we focus such
 
          5   scarcely available energy on educating the public,
 
          6   once again, producing another brochure.
 
          7            It also seems to suggest that the public
 
          8   was being harmed because it was uninformed,
 
          9   slightly stupid.  It was just too much like
 
         10   blending the victim for my taste, and I objected.
 
         11   It was included, and it was probably a good thing
 
         12   that it was.  But I would like to lend my voice and
 
         13   say things that other people aren't saying.  That's
 
         14   what continuing to be a law professor allows you to
 
         15   do.
 
         16            When those original task forces completed
 
         17   their work, the steering committee created a fifth
 
         18   task force, Credit Scoring and, beginning in
 
         19   December of '98, a sixth, Predatory Lending.
 
         20            Credit scoring is still a huge problem and
 
         21   clearly contributes to the development and
 
         22   continuation of predatory lending practices.  I'd
 
         23   love to see some additional work done in that
 
         24   area.
 
 
 
 
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          1            Because I am satisfied with the focus on
 
          2   developing new regulatory restrictions during this
 
          3   morning's program, I am willing to engage in
 
          4   discussion about consumer education.  And, in fact,
 
          5   upon reflection, I find myself in favor of devoting
 
          6   a lot more attention to the matter of consumer
 
          7   education in this context of predatory lending than
 
          8   I was in the context of mortgage lending
 
          9   discrimination generally.
 
         10            Why?   I think I'll have to wait until
 
         11   discussion if you guys actually go in to that; but,
 
         12   without overstating the point, I am a little
 
         13   uncomfortable with some of the hint of internalism
 
         14   because some of it means to attacking predatory
 
         15   lending head-on.  Consequently, education has
 
         16   greater substantial value and appeal to me in this
 
         17   context to the extent that a more well-informed
 
         18   consumer can potentially make better choices from
 
         19   among a larger, not smaller, pool of borrowing
 
         20   options.
 
         21       MODERATOR SMITH:  Thank you very much.  I will
 
         22   ask Sandy to start our dialogue on this session.
 
         23       MS. BRAUNSTEIN:  Okay.  I heard a lot of
 
         24   interesting things in people's opening statements
 
 
 
 
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          1   today, and it's good to have -- we got a mix of
 
          2   folks on the panel, some of whom deal with the
 
          3   consumer education, some of whom also deal with new
 
          4   products for the subprime market or to serve
 
          5   customers that are currently being served by
 
          6   subprime markets.
 
          7            But I thought I would start out and I
 
          8   would like to discuss some -- all of that; start
 
          9   out with some questions about the consumer
 
         10   education piece of it.  And, in particular, for
 
         11   those of you that are doing consumer education and
 
         12   counseling, I would like to hear some thoughts on
 
         13   what techniques have been particularly useful in
 
         14   outreaching the appropriate targeted populations
 
         15   that the predators target.  You know, are there
 
         16   certain kinds of materials, media?  What has been
 
         17   most effective?   What do you find has worked?   Or
 
         18   if you find something definitely hasn't worked, I
 
         19   would like to hear about that, too.
 
         20       MR. MARKOWSKI:  I think the first thing to
 
         21   realize is we're at the front end of this, so that
 
         22   when we're talking about outreach campaigns, I
 
         23   don't think there's across the country -- and maybe
 
         24   Boston is perhaps the furthest ahead in terms of
 
 
 
 
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          1   having a well-established campaign in their Don't
 
          2   Borrow Trouble; but across the rest of the country,
 
          3   most of us came into this last year or so as
 
          4   recognizing a problem and then beginning to deal
 
          5   with it.
 
          6            At the city, at least, we have a wide
 
          7   ranging group of maybe up to 50 people from all
 
          8   these various sectors that are coming together to
 
          9   develop a comprehensive public education campaign;
 
         10   and we're going over these same questions that you
 
         11   are talking about:  What is the best way to --
 
         12   who's reaching these people now from the predatory
 
         13   side, from the abusive side, and how do you
 
         14   counteract on the other side?
 
         15            There's people like NHS and like Bank of
 
         16   the Americas, David Voss, in the streets on a
 
         17   day-to-day basis are reaching out to their
 
         18   customers in the neighborhoods.
 
         19            And what I think is that there has to be
 
         20   embodied in a campaign -- we're developing an
 
         21   overall campaign, but we're going to have large
 
         22   scale media advertising, but it has to be
 
         23   complemented by local messages and local messages
 
         24   involving local approaches, local delivery vehicles
 
 
 
 
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          1   of the message whether it's in utility bills,
 
          2   whether it's through their churches and religious
 
          3   institutions, whether it's through centers for the
 
          4   Department on Aging for senior citizens.  There has
 
          5   to be many, many different ways in the community to
 
          6   reach people.
 
          7            But also, I think, it's the kind of thing
 
          8   it seems to me that not only you have to reach once
 
          9   and many times with the message, you have to make
 
         10   it so that it's something that they think about
 
         11   when they're approached by the predatory lender
 
         12   that they know, oh, this is the time I'm supposed
 
         13   to call so and so.  This is the time I am supposed
 
         14   -- this is what they were warning me about.
 
         15   Somehow that has to click and then they have to
 
         16   have an alternative place to go for advice.
 
         17            And we think as part of the overall
 
         18   outreach campaign, one of the things we're going to
 
         19   have with it, too, is an 800 number that we think
 
         20   has to be manned and end up serving as a central
 
         21   reference point to give people alternative advice.
 
         22       MR. VOSS:  That's a great idea.  Financial 911.
 
         23       MR. MARKOWSKI:  Right.  Maybe that's the
 
         24   message.
 
 
 
 
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          1       MS. BRAUNSTEIN:  Are you -- as a follow-up
 
          2   question, are you participating with the
 
          3   Freddie Mac expansion of Don't Borrow Trouble?
 
          4       MR. MARKOWSKI:  Freddie Mac is working with us
 
          5   as is Fannie Mae, both supporting this, and we're
 
          6   now approaching other institutions to participate
 
          7   in the campaign.
 
          8            We think that Don't Borrow Trouble --
 
          9   we're not convinced that that is the message for
 
         10   Chicago.  We think it's a very good message, and I
 
         11   have been very impressed with the materials I have
 
         12   seen from Boston; but I think our opinion right now
 
         13   is we want to be a little more explicit about what
 
         14   the problems are.
 
         15            I think, in my own opinion, it's a
 
         16   sophisticated message and it might be too
 
         17   sophisticated; and I think we want to be a little
 
         18   more explicit about what the problem is and what
 
         19   you have to watch out for and then what the
 
         20   alternatives are.
 
         21            But, yes, we're working closely with them
 
         22   and we're basing it on that experience.
 
         23       MS. NAWROCKI:  I would like to add to what Jack
 
         24   said.  Certainly, we are at the front end of the
 
 
 
 
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          1   public awareness and the consumer education
 
          2   campaign.
 
          3            NHS, we have taken a lead in trying to get
 
          4   the word out to consumers in our neighborhoods.  We
 
          5   participate in community meetings.  We're going to
 
          6   be providing information to NHS loan customers
 
          7   telling them what to watch out for.  And we have
 
          8   also incorporated a predatory lending module within
 
          9   our home buyer education courses.
 
         10            But I just want to be clear that there's
 
         11   no way that an organization like NHS can compete
 
         12   with the marketing efforts that are ongoing by
 
         13   predatory lenders.  People are being inundated by
 
         14   mailings, phone calls, and I'm a little bit wary of
 
         15   even what a public awareness campaign can do when
 
         16   the predators are out there day in and day out just
 
         17   inundating people with materials.
 
         18       MS. LLEWELLYN:  I would like to add that
 
         19   there's a trust issue here, too, that when you are
 
         20   doing counseling and you have spent a good deal of
 
         21   time with them even before on the phone talking
 
         22   credit, working out particular issues with them and
 
         23   then following them all the way through to the
 
         24   closing of that transaction, they do tend to trust
 
 
 
 
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          1   you more, but there has to be a voice at the other
 
          2   end of this phone.
 
          3            You know, when you call up a number and
 
          4   you're told to push 1 if you want this and 2 if you
 
          5   want this, it's pretty frustrating for these
 
          6   people.
 
          7            It's a difficult thing for people to
 
          8   discuss credit.  Credit is still a very private
 
          9   issue with people.  It can be caused because of a
 
         10   divorce.  It can be caused because of a
 
         11   relationship with a boyfriend or girlfriend.  It
 
         12   could have been absolute stupidity.  It could have
 
         13   been an error.
 
         14            But for them to come forth and actually
 
         15   sit down and talk one on one with a strange person
 
         16   that they've never seen before on credit issues and
 
         17   things that happen to them in the past -- and
 
         18   they're all related to emotional things -- it's
 
         19   pretty difficult for them.
 
         20            Now you're talking about solicitation by
 
         21   mail, solicitation by door.  That's difficult.  And
 
         22   those guys have to be pretty darn good to build
 
         23   that level of trust when they knock on that door
 
         24   and convince these people that they need to turn
 
 
 
 
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          1   over their life savings which is generally the
 
          2   equity in the home.
 
          3       MR. VOSS:  Trust is extremely important, and
 
          4   one of the things that has to be done, at least in
 
          5   the communities that we serve, Pilsen, Little
 
          6   Village and Back-of-the-Yards, is to develop a
 
          7   trusting relationship.
 
          8            That takes time.  You have to work one on
 
          9   one with the people and you have to bring the
 
         10   people into your bank or into your business,
 
         11   whatever that is, for some reason.  Maybe it has
 
         12   nothing to do with banking.  To pay a utility bill,
 
         13   to get their blood pressure checked, to buy their
 
         14   rapid transit tokens, whatever it takes so that you
 
         15   can get them accustomed to walking into your
 
         16   business so you have an opportunity to talk to
 
         17   them, so that over a period of time you can gain
 
         18   their trust.
 
         19            It's a very difficult issue.  Traditional
 
         20   marketing methods don't work in our community.
 
         21   We've tried radio, TV, door stuffers and every kind
 
         22   of thing you can think of.  Mailers, contests.
 
         23   People get their information in our community by
 
         24   word of mouth.
 
 
 
 
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          1            So you got to get to the people and you
 
          2   got to get them to trust you, and you got to give
 
          3   them a comfort level in integrity in dealing with
 
          4   them so they will come back to you and talk to
 
          5   you.
 
          6            Because the information in our
 
          7   neighborhood spreads by word of mouth that that's
 
          8   where the predators are really getting ahold of
 
          9   these people.  You can look down some streets in
 
         10   our neighborhoods and see where the predators have
 
         11   been because there will be a whole string of loans
 
         12   that were done on a predatory basis because they
 
         13   talked to somebody who said, I think you should
 
         14   call my friend, my relative or whoever it is who
 
         15   took care of me, and they do.  And they're very
 
         16   unsuspecting, very trusting, and they end up
 
         17   getting ripped off.
 
         18            So you got to do -- you got to turn the
 
         19   predators into prey; and the only way we've been
 
         20   able to do that, and we've done it successfully, is
 
         21   to go one on one with the people by whatever means
 
         22   it takes to gain their trust.
 
         23       MS. BRAUNSTEIN:  Do you actually, David, do
 
         24   people from your bank actually go door to door in
 
 
 
 
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          1   the neighborhoods?
 
          2       MR. VOSS:  Absolutely.  Not door to door in the
 
          3   neighborhoods, but I'll tell you what we do, to
 
          4   give you an example.
 
          5            In the month of June and July, we opened
 
          6   60 ETA accounts which are electronic transfer
 
          7   accounts; and I understand from some of my spys
 
          8   here at the feds that that's about 10 percent of
 
          9   the total that were opened nationwide.
 
         10            But we didn't open those accounts by
 
         11   putting a sign in the lobby or taking out a
 
         12   newspaper ad or going on the radio.  We took actual
 
         13   staff people and put them in our neighborhood
 
         14   Social Security offices certain days of the weeks
 
         15   to talk to the Social Security recipients --
 
         16   remember, those are the people who are coming in
 
         17   with the problem -- and converting them to ETAs.
 
         18            So you got to do that.  You got to go to
 
         19   the people, in many cases -- not door to door --
 
         20   but you got to go to Oxione (phonetic) Chicago, the
 
         21   De Sosa security offices, to the churches, where
 
         22   you can get before people.
 
         23            And the second thing you have to do is get
 
         24   them to come in your door to do some kind of
 
 
 
 
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          1   business with you.  It may have nothing to do with
 
          2   financial services.  It may simply be to pick up
 
          3   their light bulbs when they pay their utility bill
 
          4   or to have their blood pressure checked or to talk
 
          5   to a health care practitioner about wellness.
 
          6            All of that stuff works.  Ultimately, the
 
          7   predator becomes the prey.
 
          8       MS. BRAUNSTEIN:  One of the things that's been
 
          9   suggested to us sometimes when we talk about
 
         10   amending HOEPA is that maybe everybody who gets a
 
         11   HOEPA loan should be required to see a housing
 
         12   counselor so many days before closing.  I would
 
         13   like to get some reaction from that.  Do you think
 
         14   would that work?   Would that -- you know, what do
 
         15   you think of that idea?
 
         16       MS. CINCOTTA:  I think counseling is a mixed
 
         17   bag.  I think there is good counseling, there's bad
 
         18   counseling, in between; and there are people who go
 
         19   through it who believe it or don't believe it or
 
         20   get it but it doesn't translate when something
 
         21   happens in their life.
 
         22            And using an example of our group in
 
         23   Cincinnati who did hands-on counseling with the
 
         24   people to get them ready to buy homes, built the
 
 
 
 
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          1   homes, got them in there.  They went through all
 
          2   this for a good length of time, but if they didn't
 
          3   have to sign off before those new homeowners took
 
          4   another loan or did anything, they were prey to
 
          5   predatory lenders.
 
          6            It just was incredible where they have
 
          7   gone through all this, but it took having that
 
          8   where I can't get a bad loan from him without
 
          9   signing -- him signing off on it.  They got the
 
         10   counseling.  They know, but the allure or the sales
 
         11   pitch on it is beyond that.
 
         12       MR. MARKOWSKI:  I think along those lines, I
 
         13   think counseling is good, but if those of us have
 
         14   ever been in any kind of consumer education program
 
         15   or classes or anything we've learned, it's totally
 
         16   different when you're actually in the midst of a
 
         17   transaction.
 
         18            I mean, whatever you know theoretically,
 
         19   it's a different situation when you're being given
 
         20   a pile of papers and being told to put your
 
         21   signature in 15 different places in a loan closing,
 
         22   and there absolutely has to be trust in that
 
         23   scenario.
 
         24            I mean, it's impossible, if anybody would
 
 
 
 
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          1   think that they would sit down and actually read --
 
          2   it's not expected in a loan closing that you're
 
          3   going to sit down and read through all those papers
 
          4   and understand everything that's there.  That's
 
          5   totally not expected and it can't be done in the
 
          6   normal course of business.  So, instead, there has
 
          7   to be a trust that what's in there makes sense.
 
          8            Now I myself, I don't need counseling, but
 
          9   I would never go to -- I have enough counseling to
 
         10   know that I would never sign a transaction like
 
         11   that if I didn't have legal representation.  So I
 
         12   have my legal representation in the room with me if
 
         13   I was going to enter into that transaction.
 
         14            So if we're not going to provide that for
 
         15   every person -- we could provide that for every
 
         16   person so they have -- you need representation or
 
         17   counseling right then in that instance.  That's one
 
         18   alternative.  Or you have a framework where that's
 
         19   not necessary because they have been protected by
 
         20   the regulations.
 
         21       MS. NAWROCKI:  First of all, I don't believe
 
         22   that counseling alone is going to stop any
 
         23   predatory lending.  I think that you got to couple
 
         24   counseling with real prohibitions against abusive
 
 
 
 
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          1   lending practices such as flipping, improvident
 
          2   lending.
 
          3            Second, the volume of subprime lending
 
          4   that's occurring, I don't know how counseling is
 
          5   going to help all those people.  Today I think I
 
          6   know of four counseling organizations within the
 
          7   City of Chicago where one of them was completely
 
          8   under water.
 
          9            There's not enough funding for counseling
 
         10   organizations.  Who's going to pay for the
 
         11   counseling?   Is the cost going to be borne by the
 
         12   consumer?   Is it right that this burden should be
 
         13   placed on the consumer without placing any
 
         14   responsibility on the lenders or the brokers?
 
         15            And, thirdly, when is that counseling
 
         16   going to occur?   If it's going to occur after a
 
         17   person has already been sold a loan or told that
 
         18   this loan will definitely be in their best
 
         19   interest, how good will the counseling -- how much
 
         20   good will the counseling do?   And who is going to
 
         21   perform the counseling?
 
         22            We've seen proposals put forth where the
 
         23   lender or the broker could provide the counseling.
 
         24       A VOICE:  That's a good conflict of interest.
 
 
 
 
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          1       MS. NAWROCKI:  Definitely.
 
          2       MR. VOSS:  You got to get to the people before
 
          3   applying for the loan.  I mean that's when the
 
          4   counseling has got -- and the help and the trust
 
          5   has to develop.  It's too late once they've applied
 
          6   for the loan because they probably got somebody
 
          7   they know that got them the deal.  You can trust
 
          8   them, right, because that's my first cousin.
 
          9       MS. LLEWELLYN:  And if they think that someone
 
         10   says to them, well, the loan is approved, but you
 
         11   have to go to this class and have counseling prior
 
         12   to coming, and they know that this is it, you get
 
         13   down there to the end and they say, you either take
 
         14   the counseling or you don't get the loan, and they
 
         15   want the loan.  That's all they know is that they
 
         16   want the loan.  So they'll go ahead and it's
 
         17   already after the deal is approved.  So you have
 
         18   already put the carrot out there.
 
         19       MS. BRAUNSTEIN:  I should clarify that what I
 
         20   was thinking of was counseling that would include
 
         21   having somebody, a third party, go through the deal
 
         22   with them.
 
         23       MS. LLEWELLYN:  In a right of rescission?
 
         24       MS. BRAUNSTEIN:  They haven't signed yet.
 
 
 
 
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          1       MS. LLEWELLYN:  They paid an application fee.
 
          2       MS. BRAUNSTEIN:  Probably.
 
          3       MS. LLEWELLYN:  Probably.
 
          4       MS. CRANE:  What I wanted to try to add is that
 
          5   I certainly do see the sort of problems associated
 
          6   with giving counseling of certain sorts after a
 
          7   certain point and the transaction has already past;
 
          8   but, at the same time, I mean, if we're about the
 
          9   business of sort of deconstructing this, figuring
 
         10   out exactly when it's too late, then we should also
 
         11   be able to figure out when it's not too late and --
 
         12   or if we're able to say who won't be able to get
 
         13   through to the consumer, we should also be able to
 
         14   figure out who could get through to the consumer
 
         15   and when they might be able to be successful at
 
         16   it.  I don't have an answer to those questions.
 
         17       MS. BRAUNSTEIN:  That was going to be my next
 
         18   question.
 
         19       MS. CRANE:  But I do think that given the level
 
         20   of expertise and the understanding of these issues
 
         21   that is present here including -- and I probably
 
         22   could come up given time -- that these are not
 
         23   insoluble problems if we treat them the same way we
 
         24   treat other problems that they are successors to.
 
 
 
 
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          1            When we look at the unlawful
 
          2   discrimination against persons in this very same
 
          3   context using other means, we have, you know, DOJ
 
          4   settlement agreements coming from left and right.
 
          5   We have imaginative applications of existing law as
 
          6   well as private initiatives to try to address them,
 
          7   and I think that we could do the same thing here.
 
          8            Now as far as it goes -- one of the things
 
          9   I had prepared to say, been prepared to say was
 
         10   that I think we should have mandatory education for
 
         11   consumers for certain categories of loans; and
 
         12   perhaps we even impose the duty to make those
 
         13   disclosures on the lenders themselves, not
 
         14   necessarily on the handful of consumer education
 
         15   agencies that are outgunned who are trying to do it
 
         16   now.  And that even if it may be that,
 
         17   logistically, the point in which this information
 
         18   is shared might not be ideal, that doesn't in my
 
         19   mind mean that we don't add that to the list of
 
         20   things that are used as attempts to address the
 
         21   problem.  And there are some people, maybe not all,
 
         22   maybe not half, but a bunch of people might, having
 
         23   this information shared with them, even at late
 
         24   stages of a transaction, may decide, whoa, you
 
 
 
 
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          1   know, I didn't know that.
 
          2            Also, I think with respect to the content
 
          3   of education, in my experience here, the content of
 
          4   the disclosures being referred to primarily as
 
          5   information about credit worthiness, readiness and
 
          6   financial understanding, you know, issues, things
 
          7   like that, so that they're more savvy borrowers
 
          8   about the economics of the transactions and so
 
          9   forth or a preparedness for going into certain
 
         10   types of transactions.
 
         11            Why can't the content of the education
 
         12   also be about HOEPA and Truth in Lending?  Why
 
         13   can't we tell people, look, there are laws that are
 
         14   -- regulations that are in existence that you may
 
         15   not know about, your lawyer may not know about, and
 
         16   that are serious; and if your transaction looks
 
         17   like this, then those laws apply.
 
         18            So that even though we sort of separated
 
         19   out this discussion from the morning discussion
 
         20   where there was more focus on regulation changes to
 
         21   law this morning, I think that there could still be
 
         22   -- you know, there's no need to totally divorce
 
         23   this discussion from that idea as well, and I am
 
         24   thinking we want to get tough because they are
 
 
 
 
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          1   tough issues.
 
          2       MS. WILLIAMS:  If I could ask a question about
 
          3   counseling because sometimes you often hear there's
 
          4   a question about the quality of that counseling
 
          5   that people will receive.
 
          6            And so along those lines, should there be
 
          7   like minimum guidelines or standards that are set
 
          8   so that when you are counseling an individual, you
 
          9   know exactly what it is you are getting into?  So
 
         10   some reaction to that.
 
         11       MS. NAWROCKI:  Well, I think if we're going to
 
         12   talk about counseling, we should put forward
 
         13   regulation on high-cost loans; and that one way of
 
         14   ensuring the quality of the counseling that
 
         15   somebody receives is that you would -- a counselor
 
         16   would go through the loan and, according to HOEPA,
 
         17   according to hopefully new regulations against
 
         18   high-cost loans, they would determine whether or
 
         19   not somebody is getting a loan that they cannot
 
         20   afford to repay.
 
         21            So what are the guidelines for improvident
 
         22   lending, looking at what a debt to income ratio
 
         23   ought to be and using guidelines such as that.
 
         24   Look to see if they have been a victim of loan
 
 
 
 
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          1   flipping as determined, and using those sort of
 
          2   guidelines to mandate the standard of education
 
          3   that somebody would receive.
 
          4            Otherwise I don't know without -- you
 
          5   know, without any sort of prohibitions against
 
          6   those practices, how will you determine what
 
          7   counseling they'll receive?
 
          8       MS. BRAUNSTEIN:  Gale?
 
          9       MS. CINCOTTA:  We don't just counsel people who
 
         10   drive cars.  We have rules, regulations, stop
 
         11   lights, stop signs, jail terms, et cetera.  And I
 
         12   think we've taken homeownership which is so
 
         13   important, such a big debt, and just say,
 
         14   counseling.
 
         15            Counseling is a mixed bag.  Some is very
 
         16   good.  Some isn't.  And other people, even if it's
 
         17   good, they'll listen to it.
 
         18            So I think there has to be -- like when we
 
         19   talk about rules to stop predatory lending, no
 
         20   credit insurance premiums included in the loan, I
 
         21   don't have to look for it.  They're breaking the
 
         22   law if they do it.  No prepayment penalties.  No
 
         23   flipping.  No balloon loans.  Make whoever owns the
 
         24   loan responsible for it.  You know, lower the APR
 
 
 
 
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          1   figure to 8 percent.
 
          2            When you set rules, rather than we tell
 
          3   everybody here, now you could get screwed over, so
 
          4   maybe you go to a counselor, who has to hurry out
 
          5   for a date, to help you with this most -- maybe one
 
          6   of the most important decisions you make
 
          7   financially in buying a home.
 
          8            I think you have to build, I mean, these
 
          9   kinds of rules to protect the people.  Because, as
 
         10   I said, we have it on stop signs.  We have it on
 
         11   all kinds of other places, but somehow here we're
 
         12   going to go to these magical counselors.
 
         13       MS. LLEWELLYN:  Let's put the burden on us.
 
         14            I would like to say that in doing
 
         15   counseling, I do -- we do primarily pre-purchase
 
         16   counseling -- the APR is the easiest thing to
 
         17   explain.
 
         18            When I sat here this morning listening to
 
         19   what we would do with TILA, what we would do with
 
         20   everything else, I thought what in the world -- how
 
         21   would I explain this?   What would I do?
 
         22            Well, the APR is the easiest thing to
 
         23   explain to a consumer.  They can understand that.
 
         24   They can compare that, and they understand that.
 
 
 
 
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          1            For us who do counseling -- here I am
 
          2   taking sort of the easy shot out, but that is
 
          3   true.  But in doing the research for this and
 
          4   reading the documents that you two put out in the
 
          5   letter to us, I noticed that there's a high
 
          6   percentage of these people who are in the predatory
 
          7   issue that are elderly and minority.
 
          8            Well, now how do you get to those
 
          9   people?   You get to those people through their
 
         10   churches, and the only way you can get invited into
 
         11   their house is through television because almost
 
         12   everybody has a television.
 
         13            So you would have to have some sort of way
 
         14   of communicating to them an exact replica almost of
 
         15   somebody coming to your door, beware, this is what
 
         16   would happen to you.  Many of our elderly, it's
 
         17   difficult for them to read, but they can hear and
 
         18   they watch television, and often that's the only
 
         19   company that they have.  I think that might be a
 
         20   good avenue for you guys to look at.
 
         21       MS. BRAUNSTEIN:  One of the things -- I wanted
 
         22   to change tracks a little bit to some of the
 
         23   alternative products that I heard mention here
 
         24   today.
 
 
 
 
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          1            Because one of the things, just to kind of
 
          2   close out this counseling or piece of it, is that
 
          3   we heard from some housing counselors who are in
 
          4   the business is that when a borrower, consumer
 
          5   comes in, even if they come in before they have
 
          6   entered into what would be termed a predatory deal,
 
          7   and if the counselor sits down and goes through the
 
          8   paperwork with them and explains this is really not
 
          9   a good deal, it's not in your best interest, that
 
         10   oftentimes the counselor gets frustrated because
 
         11   the consumer will go ahead the next day and sign
 
         12   the deal anyway because they need that $600 or
 
         13   whatever it is to pay a medical bill and there's no
 
         14   alternative.  At least, they feel at that point
 
         15   there's no alternative and this is the only way
 
         16   they're going to get that money.
 
         17            So I was just wondering.  I have heard
 
         18   today -- and we've heard this expressed in some
 
         19   other cities and the lack of alternatives, and I
 
         20   hear today that it sounds like there are some
 
         21   alternative kinds of products and programs around
 
         22   the table, and I would be interested in hearing a
 
         23   little bit more about that, especially David.  And
 
         24   I know, Beth, you mentioned you are doing loans
 
 
 
 
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          1   and, Rochelle, and you are actually refinancing
 
          2   some of these deals.
 
          3       MR. VOSS:  Well, as an alternative product, I
 
          4   think you got to find ways to bring people to you
 
          5   or go up to them one on one such as we do with the
 
          6   Social Security office on ETAs.
 
          7            But let me give an idea that you might
 
          8   want to think about.  I think the ultimate solution
 
          9   is to create more community bank offices in these
 
         10   communities.  I mean, I have not -- I don't know
 
         11   any community bank that started in our neighborhood
 
         12   except for us.  Yet there are more currency
 
         13   exchanges, more car title loan places, more Payday
 
         14   Loan places opening every week, and they're the
 
         15   financial institution of our community.
 
         16            If the Federal Reserve Bank could create
 
         17   some kind of an incentive because it cost a lot --
 
         18   we did this.  We opened a 1200 square foot branch
 
         19   in no man's land; and the idea would be that it
 
         20   wasn't -- would not be intimidating and yet it
 
         21   would give the mainstream banking services; but it
 
         22   takes years of doing life line banking services to
 
         23   people to get them to come to be bank customers.
 
         24   You are losing money over this period of time and
 
 
 
 
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          1   we're for-profit banks.  Shareholders don't like
 
          2   that.
 
          3            But if the Federal Reserve could guarantee
 
          4   perhaps with a letter of credit a large deposit,
 
          5   say, $3 million because the insurance of the
 
          6   accounts will only go up to 100,000, if you would
 
          7   give some kind of letter of credit so that a
 
          8   community bank would establish itself in these
 
          9   communities and automatically have this large
 
         10   deposit that would be fully insured because of the
 
         11   backing of the Federal Reserve System or a letter
 
         12   of credit at a below market rate, that would cover
 
         13   these four or five years it takes you to bring this
 
         14   branch to the main line of banking as a profitable
 
         15   operation.
 
         16            That would encourage other banks and
 
         17   financial institutions to open up offices in these
 
         18   communities as rapidly as the Payday Loan Stores
 
         19   and title loan companies and the currency exchanges
 
         20   that are expanding today and provide an alternative
 
         21   for people to go to.
 
         22            I also think that the Federal Reserve Bank
 
         23   could be kind of a conduit in putting together
 
         24   large deposits that would be put into these branch
 
 
 
 
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          1   locations or perhaps even from CDFIs, working with
 
          2   other community development financial institutions
 
          3   to make this happen, and there may be other ways.
 
          4            But I think that's a way that you can
 
          5   develop some products and things and get banks and
 
          6   savings and loans and other credit unions to open
 
          7   up offices in these communities where they're not
 
          8   doing it today.
 
          9       MODERATOR SMITH:  Gale?
 
         10       MS. CINCOTTA:  I think it's going in the -- it
 
         11   should in that direction, more like S & Ls on every
 
         12   corner; but what's happening, ATMs, people are
 
         13   encouraged not to even go in the banks that exist,
 
         14   to go outside and use the machine.  People are
 
         15   being charged five bucks if they walk in the door
 
         16   to see a live person and talk to them.
 
         17            So everything we're saying to get the
 
         18   hands on so people have a relationship, everything
 
         19   is moving to you don't -- what they're saying, you
 
         20   don't have a lot of money.  We don't want to bother
 
         21   with you.  Work the machine outside or pay five
 
         22   bucks or don't come in at all.
 
         23            It's the opposite of what you really need
 
         24   for people to have access, you know, to credit and
 
 
 
 
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          1   not get into this trouble which is -- it's almost
 
          2   hostile to the people.
 
          3            So that when they see an ad or a predatory
 
          4   lender knocks on their door, hi, I like you.  Gee,
 
          5   you look like you need a break.  There's comes -- a
 
          6   personal touch comes out, even though they're going
 
          7   to scam them.  They at least have that beginning of
 
          8   we like you, we're going to help you that they
 
          9   don't get from a regular bank who won't hurt them,
 
         10   just won't do business with them.
 
         11       MS. CRANE:  That's where we see, at least, in
 
         12   my view, where predatory lending really has
 
         13   originated.
 
         14            In at least, you know, my own maybe
 
         15   somewhat cynical way of looking at things, we've
 
         16   made it too tough for the lenders to refuse to do
 
         17   business with certain communities.  You know, the
 
         18   heat was on.  You could not just discriminate
 
         19   openly as you had in the past and just refuse to do
 
         20   business with someone because they were black or
 
         21   because they were Latino or because they were
 
         22   elderly.  They couldn't do it.
 
         23            And so that I think that what has
 
         24   happened, the evolution of the predatory lending is
 
 
 
 
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          1   the result of new ways to continue to oppress
 
          2   certain groups; and this is, I think, signified in
 
          3   large part as well by the banks who have moved away
 
          4   from providing personal service and so forth.
 
          5       MS. LLEWELLYN:  I think predatory lending
 
          6   starts further back.  I think you got to step
 
          7   another step back.  Some people heard me speak on
 
          8   this before.
 
          9            This credit scoring is just nuts.  I just
 
         10   pulled up an article.  I think I sent it to you
 
         11   guys from the U.S. Public Interest Research Group
 
         12   in March of '98 that said nearly 30 percent of all
 
         13   credit reports have serious errors that could cause
 
         14   unfair denial of a car loan, a mortgage or even a
 
         15   job and often go undetected.
 
         16            That's pretty good because before you pass
 
         17   the Fair Credit Reporting Act, it was 48 percent or
 
         18   44 percent, as I remember.
 
         19            But if 30 percent -- now if one out of
 
         20   three of you have an error on your credit report --
 
         21   how many of you look at your credit report every
 
         22   year?  Once every year at the same time every
 
         23   year?  How many of you look at your credit report?
 
         24            Well, you should.  It's like
 
 
 
 
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          1   housekeeping.  It's good business.  You should.
 
          2   Usually about March after all the new credit cards
 
          3   are taken out for the Christmas holidays, you get
 
          4   10 percent off of everything you buy.  And you
 
          5   should do that.
 
          6            Of 35 people -- seriously -- of 35 people
 
          7   in each class, I will have only one that has ever
 
          8   seen her credit report or his credit report and
 
          9   they didn't understand how to read it.  So that's a
 
         10   moot point.
 
         11            We do pull their credit reports, put them
 
         12   in a sealed envelope, give it to them at the
 
         13   beginning of the class when they come in and the
 
         14   lenders are there to talk to them about their
 
         15   credit.  I have already talked to them or some of
 
         16   the others have on the phone before they even get
 
         17   there.
 
         18            I can't believe that we're using credit
 
         19   scoring or any other kind of FICO, any kind of
 
         20   scoring to determine whether somebody has a
 
         21   willingness or an ability to repay because it
 
         22   doesn't really --
 
         23       MS. BRAUNSTEIN:  You said you don't use FICO
 
         24   screening?
 
 
 
 
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          1       MS. LLEWELLYN:  We do not.  Absolutely do not.
 
          2       MS. BRAUNSTEIN:  And you have 36 percent debt
 
          3   ratio.  Is that front or back?
 
          4       MS. LLEWELLYN:  That's back.  When we're
 
          5   running their debts before they even -- when
 
          6   they're filling out their application, if they got
 
          7   more than 20 percent commercial debt, 20 percent
 
          8   monthly commercial debt, then we sit down.  We
 
          9   don't deny them into the program, but we sit down
 
         10   and talk to them about how to dump some of this
 
         11   debt.
 
         12            With 5 percent interest rate, we've never
 
         13   done more than 6 and a quarter percent interest
 
         14   rate, but the last -- we did about 50 million at
 
         15   5 percent interest rate.  For every 25 bucks a
 
         16   month they dropped off their debt a month, they
 
         17   jumped five grand on the purchase price of a home.
 
         18   For every 50 dollars they dumped off that
 
         19   commercial debt, they jumped $10,000 in the price
 
         20   of a home.
 
         21            So we spent a lot of time working with
 
         22   them on debt reduction.  And that's why we have to
 
         23   take the money out at the beginning and hold it for
 
         24   them because it takes a little while to do it.
 
 
 
 
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          1            These are people who sell boats.  They
 
          2   sell motorcycles.  They sell stereo equipment,
 
          3   anything they could come up with to come up with a
 
          4   thousand dollars or 1 percent to put down on this
 
          5   house.  They have to have some sort of down
 
          6   payment.
 
          7            Now I'd give them the house with no money
 
          8   down.  I really would.  I have a lot of confidence
 
          9   in these people.  But the other people who
 
         10   participated with us in this program are adamant
 
         11   that there has to be some cash in there.  But
 
         12   sometimes it takes them quite a bit.  These are
 
         13   people who consider this not just a house, but this
 
         14   is a refuge.  This is their home.
 
         15            I brought with me -- we just had a survey
 
         16   out to our buyers.  And Sandy Tipes.  She works at
 
         17   Hardy's.  She has four kids.  And we asked her how
 
         18   has owning your new home changed your life?  She
 
         19   was in Section 8, living in government housing.
 
         20   How would you describe the difference?
 
         21            The kids are the same but, otherwise,
 
         22   everything has changed.  I feel like a new person
 
         23   again.  Before, people looked down on us because we
 
         24   were poor and in subsidized housing.  We're still
 
 
 
 
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          1   in the same school district.  We're within town
 
          2   limits so that we can walk to the store if the car
 
          3   breaks down.  We are off Public Aid.  I learned how
 
          4   to budget and take care of ourselves.  It gives me
 
          5   a reason to go to work.  Before, the more money I
 
          6   made, the more my rent would be.  There was no
 
          7   incentive because we could never get ahead.
 
          8            I plan on staying in this house forever.
 
          9   It's our home.  The kids always wanted to have a
 
         10   family dinner together.  We finally have a place
 
         11   for a dining room table -- they ate in shifts
 
         12   before -- where we can say grace and be thankful
 
         13   for our new home.
 
         14            I want to be helpful to others in the
 
         15   program to answer some of the questions they may
 
         16   have and be a support for others.
 
         17            Well, one of the things she liked about
 
         18   our program was that there was somebody there on
 
         19   the end of the phone and that somebody would give
 
         20   her a call within ten minutes.
 
         21            And she did have some difficulties.  That
 
         22   one was a little bit tough, but we were really
 
         23   proud of that.  She got a really nice home, and
 
         24   she's got great kids.
 
 
 
 
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          1            So I think you have to look at the credit
 
          2   issue when you make your determination as to
 
          3   whether you're going to move them into a A minus, a
 
          4   B, a B minus, a C, whatever you are going to move
 
          5   them into, and then you jack the interest rate.
 
          6            I don't think that is -- I don't think
 
          7   that that shows definitely their intent or their
 
          8   willingness to repay.  It could be medical issues.
 
          9   It could have been a divorce.
 
         10            We need to have a class on the proper way
 
         11   to get a divorce.  These kids come out of a divorce
 
         12   and they assume that the divorce decree is law and
 
         13   that when the divorce decree says he or she was
 
         14   responsible for this and she was responsible for
 
         15   that that he's going to pay that bill, she's going
 
         16   to pay that bill; and often they have left where
 
         17   they were living and gone back home where support
 
         18   was.  They have no idea that these creditors who
 
         19   can't find them are filing collections against them
 
         20   until we run a credit report.
 
         21            The other one is young people who come to
 
         22   class and have never discussed their financial
 
         23   history before with each other; and, all of a
 
         24   sudden, they're going to buy a house and a credit
 
 
 
 
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          1   report is run and she didn't know what it shows on
 
          2   that credit report.  He didn't know.  They never
 
          3   discussed it.
 
          4            So education has to start a lot earlier
 
          5   than where we are in the marketplace, but also
 
          6   credit scoring.
 
          7       MR. MARKOWSKI:  On that credit scoring problem,
 
          8   I acknowledge what Beth is saying about the credit
 
          9   scoring as an issue.
 
         10            But I also want to say that whatever
 
         11   method you use to score, to rate your borrower with
 
         12   respect to credit, there has to be an underlying
 
         13   principle, too, that a borrower is entitled to the
 
         14   best credit.  They will get the best credit for
 
         15   which they're entitled.
 
         16            That is not an accepted principle in the
 
         17   industry, and I think the Federal Reserve bank can
 
         18   join with others and push that as a principle.  To
 
         19   anybody that hears that, it's outrageous to think
 
         20   that responsible lenders would steer somebody
 
         21   toward a lesser credit or, alternatively, if they
 
         22   come to a subprime lender and they really qualify
 
         23   for a better loan, in terms that they don't push
 
         24   them upstream.
 
 
 
 
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          1            So I think that the Federal Reserve Bank
 
          2   could help us in establishing that as a principle,
 
          3   that you get the best credit for which you
 
          4   qualify.  You're entitled to that.  That's a
 
          5   borrower's -- one of their rights.
 
          6            The other thing I would say is that -- and
 
          7   I don't know if Rochelle wants to talk a little bit
 
          8   about this -- with NHS, the Department of Housing
 
          9   in the city, we do have an alternative financing
 
         10   pool.  It's not at the front end, although NHS has
 
         11   a number of products at the front end for people to
 
         12   rehab their homes.  But we have one at the back end
 
         13   for people that are in danger of foreclosure due to
 
         14   predatory loans that they have gotten themselves
 
         15   into.
 
         16            This is a loan pool that NHS has developed
 
         17   with the series -- with a number of banks in the
 
         18   area that are investors, and the City of Chicago is
 
         19   providing money both for NHS administration of the
 
         20   program and for something of a loan insurance
 
         21   funds.  We have 6 percent loan insurance fund, that
 
         22   that's basically what's inducing the banks.  The
 
         23   banks bear 94 percent of the risk, but that has
 
         24   been enough to get them in the program, and we have
 
 
 
 
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          1   this pool that we're calling the normal loan pool
 
          2   to refinance people out of predatory loans.
 
          3            I don't know, Rochelle, if you want to say
 
          4   anything anymore.
 
          5       MS. NAWROCKI:  I would just like to add,
 
          6   there's 15 participating institutions in the loan
 
          7   fund.  It's a $2 million loan fund.  It's a pilot
 
          8   program, and we hope to do 20 to 25 loans this
 
          9   year.  So it is very small.
 
         10            But, basically, the idea is -- or the
 
         11   concept behind it was that we needed a way to
 
         12   refinance people that had been victims of predatory
 
         13   lending.  Through our work with the Legal
 
         14   Assistance Foundation, we were getting settlements
 
         15   for people who had been victims of predatory
 
         16   lending, and we needed to refinance them and we
 
         17   didn't want to refinance them with that same lender
 
         18   that had ripped them off previously.
 
         19            This normal program is a result of that
 
         20   need.  We closed on one loan to a woman, 78-year
 
         21   old woman who paid nearly $10,000 in fees to get a
 
         22   70,000 finance loan.
 
         23            We have a loan committee meeting tomorrow,
 
         24   and we have eight loans to be presented.  I just
 
 
 
 
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          1   spoke with one of our neighborhood directors this
 
          2   week and, in a week, she has six new clients for
 
          3   this program.  So I'm sure that we're going to be
 
          4   able to use up the money.
 
          5            I guess I should say, that is, if we're
 
          6   able to negotiate a settlement with the predatory
 
          7   lenders because that is one of the key components
 
          8   of the program is that we have to get a settlement
 
          9   from the lenders so that we're not using the
 
         10   investments in this fund to pay off the bad
 
         11   lender.  So that is one thing.
 
         12            Another product that we have --
 
         13       MS. BRAUNSTEIN:  I'm sorry.  When you say
 
         14   settlement, you mean they agreed to take a lesser
 
         15   amount?
 
         16       MS. NAWROCKI:  Exactly.
 
         17            And another product that we have is with
 
         18   Freddie Mac and Harris.  We call it our refi/rehab
 
         19   product.  It's a slightly alternative refinance
 
         20   product where we'll be able to refinance people,
 
         21   allow them to do a small amount of rehab, if they
 
         22   need that.  And we have more flexible underwriting
 
         23   guidelines as far as credit history.
 
         24            And then we also have a home improvement
 
 
 
 
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          1   product as well although I will say, due to the
 
          2   overmarketing of predatory lenders, we are finding
 
          3   it difficult to get to people on our own home
 
          4   improvement loan product.
 
          5       MS. BRAUNSTEIN:  I know we're running out of
 
          6   time, and I want to ask a question for us at the
 
          7   fed.
 
          8            We would like to know, aside from the
 
          9   regulatory fixes which were discussed this morning
 
         10   in great detail and were mentioned also this
 
         11   afternoon, in the consumer education community
 
         12   outreach field, what is it -- what role would you
 
         13   see that the fed could play that could help what
 
         14   you are already doing or what others are doing?
 
         15            Is it developing materials?   Is it
 
         16   marketing?   Is it either delivery systems?   What
 
         17   is it that the fed could do to be helpful in
 
         18   that?
 
         19       MS. CRANE:  I think that one area -- again,
 
         20   going back to the credit scoring.  I'm not sure if
 
         21   the fed has any kind of authority in this regard,
 
         22   but I assume it can say whatever it wants to, at
 
         23   the very least, and that is with going back to the
 
         24   ground work that was laid for predatory lending to
 
 
 
 
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          1   be able to be so successful when we have people --
 
          2   everyone wants a home.  There is --  it's part of
 
          3   the human condition to want a home.  The leverage
 
          4   that it provides you and all those other kinds of
 
          5   things.
 
          6            And, yet, there's a scarcity of land, as
 
          7   we know.  And there are lots of incentives to
 
          8   discriminate against people who are able to be
 
          9   preyed upon with the goal in mind to prevent them
 
         10   from achieving that homeownership.
 
         11            With credit scores, not only is there not
 
         12   a fundamental kind of a philosophy to give people
 
         13   the best scores that they might be entitled to
 
         14   under -- after the score is calculated, but we know
 
         15   from the work that we tried to do in credit scoring
 
         16   that there are lots of factors that go in to the
 
         17   score that bear no resemblance whatsoever to
 
         18   anything relevant to credit worthiness or credit
 
         19   readiness.  Absolutely nothing.
 
         20            In fact, there are many things that can go
 
         21   in to scores that are in fact proxies for rates in
 
         22   the class and lots of other kinds of things which
 
         23   then result in a lower score that are proprietary
 
         24   so that we can find out what they were, but then
 
 
 
 
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          1   lead to borrower to being unable to qualify for
 
          2   conventional loans; and then, of course, they
 
          3   continue, because they do want a home like
 
          4   everybody else, to look for money and they end up
 
          5   in the hands of predators.
 
          6            So that, again, as I said in my opening
 
          7   statement, I think credit scoring has laid a big
 
          8   part of the foundation for predatory lending, at
 
          9   least in the mortgage area.  God knows, it's not
 
         10   only in the mortgage area where it's a big
 
         11   problem.
 
         12            But to the extent that the fed could in
 
         13   fact do something to unbundle this credit scoring
 
         14   mystery, the immunity that the credit scorers and
 
         15   the institutions when they put together their
 
         16   factors that go in to how they calculate their
 
         17   credit scores, that would be very helpful.  It
 
         18   would be a start because you run into a wall -- and
 
         19   I've been a part of the group here at the fed and
 
         20   elsewhere of people who are really serious about
 
         21   trying to unbundle this, and we ran into a wall.
 
         22            Then we found ourselves, lo' and behold,
 
         23   focusing on predatory lending which, again, was by
 
         24   no means a coincidence considering the fact that
 
 
 
 
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          1   nothing had been done about credit scoring which
 
          2   historically has never even been used in the
 
          3   mortgage lending context; and why is it being used
 
          4   in a mortgage lending context as soon as we make
 
          5   greater strides toward eliminating discrimination
 
          6   and mortgage lending and conventional loans I think
 
          7   is because it's so useful for continuing and it's,
 
          8   again, for some reason, apparently immune to that.
 
          9            So to the extent that the fed could in
 
         10   fact look in a comprehensive way at what is
 
         11   involved with how institutions that do listen to
 
         12   the fed calculate their credit scores and
 
         13   scrutinize them and give them some guidance and
 
         14   some demands on how they should not be used in
 
         15   improper ways, I think that is one thing that could
 
         16   be gone over.
 
         17       MS. LLEWELLYN:  I agree with her.  And also,
 
         18   again, as I said, I deal mostly in rural
 
         19   communities which Illinois primarily is rural.
 
         20            I would like to point out that in my small
 
         21   rural towns -- and this comes up in 90 percent of
 
         22   the cases -- many of the rural businesses in small
 
         23   towns don't report to a credit bureau.
 
         24            So these people who come up with, it shows
 
 
 
 
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          1   no credit history at all.  You sit down with them
 
          2   and you say, well, have you ever had any account
 
          3   any place else?  Well, I got an account at the gas
 
          4   station down here.  It's not a Shell.  It's not an
 
          5   Amoco.  It's just a gas station.  And he goes in
 
          6   and pays it off every month.  He's got an account,
 
          7   over a couple years, different times at a local
 
          8   furniture store, and it doesn't show up on a credit
 
          9   report.
 
         10            And I was thinking about this when you
 
         11   sent out the information to us.  If credit is a
 
         12   determining factor in moving a consumer from a
 
         13   prime loan to a subloan, then a copy of that credit
 
         14   report and scoring should be given to that
 
         15   applicant for review prior to processing a loan,
 
         16   before it gets anywhere, at the very onset.
 
         17            If that is what you are basing your
 
         18   decision on moving them into a subprime product,
 
         19   then they should be aware that that's the cause.
 
         20   They should have time to review that.  Often they
 
         21   got to go home and talk to their wife, their
 
         22   mother, their father, somebody, to figure out how
 
         23   to read the thing.
 
         24            There should be some sort of an
 
 
 
 
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          1   instruction and also a sheet in there that tells
 
          2   them these are the avenues to correct.  Something
 
          3   that gives them some information.
 
          4            These people are sometimes just caught
 
          5   totally unaware.  Totally unaware.
 
          6       MR. VOSS:  Since we're on credit reports, why
 
          7   don't you make a regulation that says that lenders
 
          8   have to report good credit payments?  Because I
 
          9   think there's a tendency to report those that don't
 
         10   pay.  But, oftentimes, there's little effort to
 
         11   report --
 
         12       MS. LLEWELLYN:  Or there's gaps.  They look and
 
         13   they report it every three months or every four or
 
         14   every five.
 
         15       MR. MARKOWSKI:  I agree with that.  So you're
 
         16   going to have -- you talked this morning about
 
         17   regulations.  Now we're talking about stuff beyond
 
         18   regulations.
 
         19            I would say beyond the regulations,
 
         20   wherever you end up going here, best practices and
 
         21   standards is I think one of the roles for the fed
 
         22   to play; that those things, whether it's about
 
         23   credit reporting, whether it's about credit
 
         24   scoring, whether it's about, what I said earlier,
 
 
 
 
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          1   about consumer being entitled to the best loan for
 
          2   which they qualify, those are the kinds of best
 
          3   standards and principles that the fed could help
 
          4   promulgate for member institutions.
 
          5            And with respect to consumer education, I
 
          6   mean I think consumer education, this is such a big
 
          7   task to go on so many different levels; and, on one
 
          8   hand, when I think about consumer education
 
          9   campaigns, I know we have some friends from
 
         10   Fannie Mae here, but I think of the Fannie Mae
 
         11   commercials that I see, the public interest
 
         12   commercials at the Super Bowl that you see from
 
         13   Fannie Mae about the family owning their home.
 
         14   There needs to be that equivalent, I mean, of this
 
         15   issue at a national level.
 
         16            Now that's not going to come from the City
 
         17   of Chicago or from local banks here, but there
 
         18   needs to be a campaign that ends up being
 
         19   underwritten at both -- and carried out.
 
         20            And it's got to be coordinated in a sense,
 
         21   too.  The other thing I think about a PR campaign,
 
         22   I mean, we need assistance and support for our
 
         23   local campaign here.  But I think we also need
 
         24   coordination with everybody, whether it's the
 
 
 
 
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          1   Fannie, Freddie or the fed or local banks or big
 
          2   banks, that I think we all have to work together to
 
          3   be part of -- develop themes that hold everybody
 
          4   together on so that you can carry it out with your
 
          5   name on it, but it's still part of an overall
 
          6   effort for this consumer education and, as I said,
 
          7   so the fed can be involved in that national kind of
 
          8   advertising.  It can be local support.  It can be
 
          9   -- but we're going to have to have the
 
         10   responsibility primarily through us or maybe
 
         11   through your member institutions of carrying the
 
         12   message locally and door to door in the
 
         13   neighborhoods.
 
         14       MS. WILLIAMS:  If I can go back and ask Beth a
 
         15   question.  You talked about education and it should
 
         16   start a lot earlier.  How early were you thinking?
 
         17       MS. LLEWELLYN:  Thank you for that segue.  I
 
         18   got cards out there, stack of cards out there.
 
         19            We have gotten funding that was funded by
 
         20   Freddie Mac.  We did a web site called
 
         21   www.Credit-Power.  A friend of ours at Microsoft
 
         22   out in Redmond, Washington, gave us the name of a
 
         23   company called Management Group that developed
 
         24   this, and they hired a man named Bill Nye, The
 
 
 
 
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          1   Science Guy, who helped write the script for this.
 
          2            It's for junior and high school.  The site
 
          3   itself is done.  It's a very large site.  It's very
 
          4   interactive.  It's a game.  It's an E-Mail out to
 
          5   the future for 15 years.  There's a little envelope
 
          6   up here flying.  You can click on it.  It goes out
 
          7   15 years and tells you all the stupid things you
 
          8   did and allows you to go back and make better
 
          9   choices.
 
         10            And at the end of that, there's a multiple
 
         11   choice question and answer, and seniors can enter
 
         12   into a thousand dollar cash scholarship.  We give a
 
         13   thousand dollars to a high school senior on the
 
         14   first workday of every month.  And those E-mails
 
         15   are then dumped to my site to my office and a name
 
         16   is drawn.
 
         17            So it's easy to get funding for that.
 
         18   Dog-gone-it.  I wish it was easier to get funding
 
         19   for counseling.  It's easy to get funding for
 
         20   scholarships.
 
         21            But it's part of a program that's being
 
         22   converted to Spanish right now.  We'll have that
 
         23   done in eight weeks.  It's part of the program that
 
         24   will be introduced into the school systems, we
 
 
 
 
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          1   hope, and also in other states as well.  It will be
 
          2   classroom material on credit responsibility and bad
 
          3   choices you make and how it affects what you do in
 
          4   your future.  And it's pretty serious, but it's got
 
          5   a good tone to it.
 
          6            My mother was aghast.  I had to
 
          7   demonstrate this at the Freddie Mac both last fall,
 
          8   and my mother was with me, and she was going
 
          9   through it.  I was practicing.  I was just as
 
         10   nervous then as I am now.  And, at one point, she
 
         11   was just aghast.  She said, oh, my gosh, she was
 
         12   living with this young man and he ran off with her
 
         13   car.  I said, I know, Mom, but it works out okay.
 
         14   Watch this.
 
         15            It's a good -- it's a good piece of work.
 
         16   I'm really proud of it.  I think that people that
 
         17   worked on it did a marvelous job.  I think it's
 
         18   going to get better.  When we are done with this
 
         19   one, we're going to do a fair housing one.
 
         20            You know, you look back on your life and
 
         21   you say, what did you do that really made a
 
         22   difference?  I think this thing is great.  I think
 
         23   it's great.
 
         24            So pick up a card out there.  Give it to a
 
 
 
 
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          1   high school senior.  Tell him to dial in and learn
 
          2   something.
 
          3       MR. VOSS:  Great idea.  I'll just take it back
 
          4   one, even to a lower -- we've opened up banks in
 
          5   grade schools and in high schools here in Chicago.
 
          6   And these are just not banks that are run by us.
 
          7   They're run by the kids.  They elect their own
 
          8   board of directors, their own president.  They hire
 
          9   their own tellers.  The only thing we do is train
 
         10   and mentor and audit.
 
         11            That's one way that you can get the kids
 
         12   -- I mean, the one grade school we're in, their
 
         13   board of directors voted to open it up all the way
 
         14   down to the third grade this year.  So you're
 
         15   getting kids whose parents probably have never been
 
         16   in a bank or wouldn't use a bank.  At least they're
 
         17   going home and talking about it.
 
         18            Let me give you an example.  I had a
 
         19   16-year old girl come in the other day and wanted
 
         20   to know if I would lend her $1600.  She works at
 
         21   our high school bank.  And I said, I don't think
 
         22   so.  You have to get somebody to cosign for you.
 
         23   And I said, what do you want the money for?  She
 
         24   said, well, my dad has been studying to be an
 
 
 
 
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          1   electrician for two years or whatever, and he has
 
          2   to get his license, and to join the union, it's
 
          3   $600.  I said, why don't you go get your dad and
 
          4   bring him back over here?
 
          5            We were able to give him -- the dad was
 
          6   going to go to one of these Payday Loan Stores to
 
          7   get the $600; but because she worked in our school
 
          8   bank here in Chicago, she said, gee, dad, why don't
 
          9   you go talk to this guy in the bank, and even
 
         10   though he had never been in a bank, I'm sure, he
 
         11   did; and instead of paying, I don't know,
 
         12   200 percent for the loan, he paid 12 percent for
 
         13   the loan.
 
         14            So those kinds of things really work when
 
         15   you get out there and get in there, even at the
 
         16   grade school levels, certainly at the high school
 
         17   level.
 
         18       MS. BRAUNSTEIN:  Gale?
 
         19       MS. CINCOTTA:  I think of getting information
 
         20   out, warnings, people who need to get paid and
 
         21   don't want anybody to go into foreclosure.
 
         22   Ameritech, People's Gas, Bell Telephone, all these
 
         23   places that send you bills, real estate, county
 
         24   assessor, any of those places that depend on you
 
 
 
 
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          1   owning your home and being solvent, you get
 
          2   mailings all the time.  Mailings from banks,
 
          3   whatever.  Credit companies.  There are envelopes.
 
          4   All you need is maybe another piece of paper.
 
          5            Eventually, you know, if you get enough of
 
          6   those, you might start to warn them.  Some of the
 
          7   papers that you get from there have hardly anything
 
          8   on them.  You can turn them over and put the
 
          9   warning on them.
 
         10            But I think there's constant things that
 
         11   touch people that you forget you can stick another
 
         12   piece of paper in it and get it.  Eventually it
 
         13   gets to folks.
 
         14       MODERATOR SMITH:  Is there anything else you
 
         15   would like to add before we --
 
         16       MR. KAYAM:   Let me just jump in real quick.
 
         17   My name is Jason Kayam.  I'm with the TIC here with
 
         18   Gale.
 
         19            David, in his -- and I'm going to put you
 
         20   on the spot here, Dave -- in his testimony offered
 
         21   some profiles of people that they have been able to
 
         22   refinance.  And I, for one, would be kind of
 
         23   interested.  I don't know if we have time in this
 
         24   forum to hear that because it's surprising that
 
 
 
 
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          1   there aren't more banks stepping up to the plate
 
          2   and beyond the NHS pool; but here, I think there
 
          3   are sorts of profiles or stories of folks.  Do you
 
          4   have time for that?
 
          5       MR. VOSS:  Well, we had a customer who is now
 
          6   our mortgage customer who had come in and paid
 
          7   12 percent for a mortgage in our neighborhood.  His
 
          8   credit score was north of 700 which is very good.
 
          9   He paid 3 points to close and $2000 in
 
         10   miscellaneous processing fees.
 
         11            We refinanced that loan for 8 percent,
 
         12   charged $200 for processing and no points, and
 
         13   we're saving that family $300 a month in their
 
         14   payments.  That $300 a month is getting spent back
 
         15   in our community and recycled many times creating
 
         16   community wealth.
 
         17            We've got a whole -- many more instances
 
         18   of that.  Jack knows some of these because he came
 
         19   out to our bank and took a look at some of the
 
         20   files one day.
 
         21            Especially in the consumer loan area where
 
         22   these people are paying just on consumer debt for
 
         23   furniture or for appliances 48, 50 percent.  We've
 
         24   been able to refinance at bank rates for 12 to
 
 
 
 
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          1   15 percent.  These are people with good credit
 
          2   rating, and we can show you these files.
 
          3            That money, again, is saving them maybe
 
          4   $300 a year on a small $2000 consumer loan, maybe
 
          5   900 or a thousand dollars over three years.  That
 
          6   money stays in the community.  It gets spent in the
 
          7   community, and it gets recycled.  That's what
 
          8   creates household wealth.  That's what creates
 
          9   community wealth.
 
         10            That's something -- the key to that is to
 
         11   get to the people before the predators get to them
 
         12   because you can't get the points back.
 
         13            And the other thing -- and that's through
 
         14   education and all of the things that we talked so
 
         15   much about here today.  But the people that we've
 
         16   been able to do that for are also telling the
 
         17   people down the street and across the street and
 
         18   their other friends and relatives.  That's how
 
         19   we're starting to build our business is by word of
 
         20   mouth because we were able to help some people save
 
         21   money every month.  It's just as simple as that.
 
         22   How much more money do they have every month to
 
         23   spend or save or do whatever they want with.  And
 
         24   they tell their friends and they tell their
 
 
 
 
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          1   neighbors and they tell their relatives and they
 
          2   come in.
 
          3       MS. WILLIAMS:  I have just one more question.
 
          4   We were asking a little bit about things that we,
 
          5   the fed, could do in relation to education.  And I
 
          6   heard a little bit about the credit scoring and
 
          7   some of the best practices.  But is there anything
 
          8   that you can offer up that we can do in a very
 
          9   short-term to make some real impact in regards to
 
         10   education?
 
         11       MR. VOSS:  I think you could do an awful lot
 
         12   because you have the resources to take on the very
 
         13   sophisticated marketing techniques and repetition
 
         14   of the predatory type organizations.
 
         15            But, more than that, I think you could
 
         16   start getting into, for instance, sponsoring some
 
         17   of these school banks that are being set up or by
 
         18   creating some incentives for other financial
 
         19   institutions to start opening branches or community
 
         20   banks in these neighborhoods.
 
         21            They will do this because you could make
 
         22   money in these communities charging fair rates, if
 
         23   you can get the people to come in and use your
 
         24   organization that they traditionally don't use.
 
 
 
 
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          1            So there's a lot that I think the fed can
 
          2   do.  But especially I would start with
 
          3   co-sponsoring some of these school banks and
 
          4   developing some programs to incent community banks
 
          5   to either start up or to open offices in these
 
          6   communities where there are no banks other than
 
          7   currency exchanges and Payday Loan Stores.
 
          8            And, certainly, if you can with your
 
          9   resources do media advertising that's as
 
         10   sophisticated and as repetitious as what the
 
         11   predatory organizations do, that will help.
 
         12            I think Jack's idea of having some kind of
 
         13   a financial 911 or Gale's idea of a warning, you
 
         14   know, enough times so people will -- you know, it's
 
         15   like if you feel faint when you are walking down
 
         16   the street.  Maybe some time you will think if you
 
         17   see it often enough times on the TV that you can go
 
         18   to the doctor, somebody to talk to and get that
 
         19   treated, you will.  If that's what it takes.
 
         20            That's where I think the fed can have a
 
         21   good role and positive impact not only for our
 
         22   communities but for the citizens that live there
 
         23   and for the Federal Reserve System which is totally
 
         24   misunderstood by the people of our community.  They
 
 
 
 
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          1   don't have a clue what the Federal Reserve System
 
          2   does.
 
          3       MODERATOR SMITH:  One of the things that I
 
          4   would like for you to maybe think about is I think
 
          5   that there are a lot of -- people look at the fed
 
          6   and they think a lot of resources; but, in the end,
 
          7   I wonder the extent to which you might be able to
 
          8   achieve some of the same benefits by reaching out
 
          9   to your colleagues in the banking industry.
 
         10            There seems to be considerable interest on
 
         11   the part of major financial institutions in doing
 
         12   something to counteract predatory lending abuses
 
         13   without regulation.  So it seems that the time
 
         14   might be quite right for making suggestions to what
 
         15   the industry can do in supporting some of these
 
         16   efforts.
 
         17       MR. VOSS:  The major institutions would be
 
         18   happy to put 2 or 3 or $4 million into the branch
 
         19   of a community-based bank that would like to serve
 
         20   and open in these communities.
 
         21            The Federal Reserve -- but they won't do
 
         22   it because they have this $100,000 insurance of
 
         23   accounts limitation and they are obviously,
 
         24   regulatory wise and from a pure business
 
 
 
 
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          1   standpoint, concerned about going over it.
 
          2            So if there would be some way to get a
 
          3   letter of credit, it wouldn't cost the fed a dime,
 
          4   or some kind of other guaranty that would ensure
 
          5   those deposits.  That would be one way without
 
          6   spending a lot of resources you could get other
 
          7   banks to make deposits and make it possible for
 
          8   branches to be open in those communities.  It
 
          9   wouldn't cost you.
 
         10            Or you could also be an consolidator
 
         11   putting together a hundred thousand dollar amount
 
         12   from major different organizations so that one
 
         13   could be opened in these communities, and it would
 
         14   have that four- or five-year period to develop its
 
         15   own book of business as it's providing these life
 
         16   line banking services to the community.
 
         17            We've got an office.  We've set up a model
 
         18   office to do that.  I could tell you exactly what
 
         19   it costs us to run it every year.  We've been at it
 
         20   two years.
 
         21       MODERATOR SMITH:  It may be that we can -- that
 
         22   you can help in setting this up as one of the best
 
         23   practices that a bank could undertake, and we can
 
         24   go on from there.
 
 
 
 
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          1            Well, I want to thank you very much for
 
          2   being here this afternoon and sharing your views,
 
          3   and we will take what you have said and take it
 
          4   where we can from here.  But we really thank you.
 
          5            Now we were scheduled to take a break and
 
          6   then go into the open mic session.  What we would
 
          7   like to do is go directly to the open mic session
 
          8   if people don't mind.  I understand we need a
 
          9   separate mic.  We can start with one of the mics
 
         10   until we get the separate mic.
 
         11            So we will move along.  Thank you very
 
         12   much.  By all means, if you have written statements
 
         13   now or if you can give us written statements in the
 
         14   very near term, we would very much like to receive
 
         15   them.
 
         16            The order which people signed up,
 
         17   Mark Lavery -- and forgive me if I am
 
         18   mispronouncing your names, but you will be able to
 
         19   say them correctly when you introduce yourselves.
 
         20            Samuel Penczyk.  Mark Reynolds.
 
         21   Daisy Thompson.  Onetta Cole.  Eddie Clark.  Laura
 
         22   Stevenson.  Lawrence Luther.  Dan Edelman.  And
 
         23   John Lukehart.  So we'll start with Mr. Lavery.
 
         24   And here we have our mic.
 
 
 
 
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          1            We are going to ask the time keeper to
 
          2   move over here so that you will be able to see when
 
          3   you have one minute remaining, when your time is
 
          4   expired.
 
          5       MR. LAVERY:  Good afternoon, ladies and
 
          6   gentlemen.  My name is Mark Lavery.  I'm a lawyer.
 
          7   I represent consumers, and I have come here today
 
          8   to ask members of the Federal Reserve Board when
 
          9   they sit down and make the rules that will be a
 
         10   very important way to protect consumers in America,
 
         11   that you remember that the rules are being made for
 
         12   the borrowers, for their protection.
 
         13            HOEPA was not passed as a way for the
 
         14   credit industry to continue to avoid regulation.
 
         15   They were given a very generous grant of
 
         16   deregulation in 1980 when basically the usury laws
 
         17   in this nation were destroyed.
 
         18            So HOEPA is what we have today to protect
 
         19   them.  And it's a modest means of protection.
 
         20            However, one way you can put some real
 
         21   force into the law is by banning and prohibiting
 
         22   deceptive and unfair practices.  That's the rule
 
         23   that you can make, just like it is here in Illinois
 
         24   under the Consumer Fraud Act, that if a lender
 
 
 
 
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          1   commits an unfair, deceptive practice, and they are
 
          2   found liable for that, the remedies of HOEPA would
 
          3   apply.
 
          4            And what that does in the strongest and
 
          5   most real way is it gives people who are honest
 
          6   victims of crime in the context of the home repair
 
          7   fraud phenomenon which is taking over the country
 
          8   in many areas a way to protect themselves in
 
          9   foreclosure court.
 
         10            We represent clients who are often victims
 
         11   of home repair fraud; and the secondary lenders who
 
         12   buy the paper are basically the market makers of
 
         13   this destructive force.
 
         14            You're going to hear later from
 
         15   Eddie Clark and some members of his family.  He was
 
         16   solicited by a loan originator whose family member
 
         17   was the home repair fraud artist.  And it's not too
 
         18   unlikely.  They work hand in hand.  And what they
 
         19   do is they promise you services that they're never
 
         20   going to deliver on.  They get a loan secured by
 
         21   your home.  They really never often give you any
 
         22   kind of real services.  And then they sell the
 
         23   loan.  You can't pay it because it's too high to
 
         24   begin with and you didn't get the services, and
 
 
 
 
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          1   they take your house.
 
          2            You got another client, Mary Clifton, who
 
          3   couldn't make it today, and she's also threatened
 
          4   to lose her house right now.
 
          5            If you give us the plaintiff's attorney --
 
          6   who aren't the enemy here.  Don't let the defense
 
          7   industry tell you that we're the enemy here, that
 
          8   we're just out there to make a profit.  We're just
 
          9   there to help our clients try to save their homes
 
         10   and let them live.
 
         11            So please consider that when you make
 
         12   these rules.  Thank you very much.
 
         13       MODERATOR SMITH:  Thank you.  Samuel Penczyk?
 
         14            Mark Reynolds?
 
         15       MR. REYNOLDS:  Good evening.  I am
 
         16   Mark Reynolds with Chicago Loan Shark Task Force
 
         17   and the Illinois Coalition.  I got involved in the
 
         18   predatory loans because there were neighbors coming
 
         19   to my location with predatory loans, one of which
 
         20   is now in foreclosure.
 
         21            The Chicago Loan Task Force and the
 
         22   Illinois Coalition, we came to the point that we
 
         23   wanted to bring attention to these kind of things
 
         24   across the state.  Not only across the state, but
 
 
 
 
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          1   across the nation.  We were working with Chicago,
 
          2   the ordinance of -- the Chicago ordinance
 
          3   predatory.  We were also working with legislation,
 
          4   state legislation.  And may I say we've worked with
 
          5   state regulations which some of us felt that they
 
          6   were weak.
 
          7            We want to stop these predatory loans
 
          8   because they're deteriorating our community.  These
 
          9   kinds of loans are certainly increasing
 
         10   foreclosures around this nation.  They started out
 
         11   with a certain small amount of foreclosures.  Now
 
         12   they're up in the thousands, and all of these homes
 
         13   are closed down.
 
         14            We want HOEPA to stop prepayment
 
         15   penalties.  You were asking about what can be
 
         16   done?   These banks that are going on, doing these
 
         17   loans, a letter could be submitted to these banks
 
         18   asking them to make recommendations to stop these
 
         19   kind of practices even though the regulation has
 
         20   not been earmarked.
 
         21            You can write letters to the community:
 
         22   Stop prepayment penalties, stop flipping.  Stop
 
         23   these balloon notes.  Stop giving loans where
 
         24   people cannot pay because sometimes -- thank you.
 
 
 
 
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          1   The time has expired, but we want you to know --
 
          2       MODERATOR SMITH:  You have one minute.
 
          3       MR. REYNOLDS:  One minute.  Thank you.
 
          4            We want HOEPA to understand that you must
 
          5   pass strong regulations, strong guidelines and set
 
          6   enforcement so that the people who are not
 
          7   following these guidelines are placed in some kind
 
          8   of penalties.
 
          9            Because here's what's going to happen:  If
 
         10   we set forth some weak guidelines, we are only
 
         11   licensing predatory lending to be a legal
 
         12   practice.
 
         13            So I'm going to ask you to take the
 
         14   leadership, not only for this state, but for the
 
         15   nation so that the nation will adhere to what
 
         16   you've done.  Thank you kindly.
 
         17       MODERATOR SMITH:  Thank you very much.
 
         18   Ms. Thompson?
 
         19       MS. THOMPSON:  My name is Daisy Thompson, and
 
         20   I'm a member of the Chicago Loan Shark Task Force,
 
         21   and I'm here to represent the homeowners of
 
         22   Chicago.
 
         23            I went to refresh my mortgage for $15,000
 
         24   to improve my home.  A friend told me about
 
 
 
 
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          1   Unlimited Financial Services.  Unlimited Financial
 
          2   Services was supposed to make me a loan -- a
 
          3   mortgage of $44,000.  Instead, the mortgage was for
 
          4   $55,000.  The fees was -- they give me fees on my
 
          5   loan for 6000 -- over $6000.
 
          6            I signed the papers, and when -- after I
 
          7   signed the papers, I was told to go out and sit in
 
          8   the lounge.  And while I was sitting out there, the
 
          9   loan officer came out and told me the bank had --
 
         10   the mortgage company had phoned and said I wouldn't
 
         11   get that much money.  Instead, I received $2,300.
 
         12            They sold my mortgage to Aim Capital.  I'm
 
         13   fighting to stay out of foreclosure.
 
         14            I ask that you stop the practice that
 
         15   forces homeowners out of their home.  Make
 
         16   regulations now that stop the practice.  Make loans
 
         17   that people can afford.  Make lenders responsible
 
         18   for their loans.  And also make payments that will
 
         19   only take up half of their monthly payments that
 
         20   they receive of their monthly -- like me, which I
 
         21   only get $488 a month with a payment of 600 some
 
         22   dollars for Aim Capital.  Thank you.
 
         23       MODERATOR SMITH:  Thank you very much.
 
         24   Onetta Cole?
 
 
 
 
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          1       MS. COLE:  Good afternoon.  My name is
 
          2   Onetta Cole, and I'm a relative of Eddie Clark.
 
          3   And basically what I want to say is just quick and
 
          4   to the point.
 
          5            Eddie's situation was that he had received
 
          6   a solicitation by phone.  We can help you with home
 
          7   improvement.  Nothing wrong.  Okay.  Fine.  We'll
 
          8   redo the porch.  Redoing the porch, $3000.  Loan
 
          9   balance on the home, 60,000.  Mortgage was
 
         10   refinanced for 89.  He got 3 in hand, 3 for the
 
         11   porch; and, again, the construction worker was a
 
         12   relative of the mortgage person.  So the porch
 
         13   never was done.  Began, but not finished.
 
         14            At the time, didn't know, but the mortgage
 
         15   note had a three-tier prepayment penalty in it for
 
         16   the first ten years of the loan with a 15-year
 
         17   balloon payment of 89,000 plus.
 
         18            So we do need assistance.  It's just
 
         19   curious to me that with the HMDA recording
 
         20   practices that we do have in place, why isn't it
 
         21   being looked at to see why are the developers or
 
         22   why are these people just centralizing on these
 
         23   type of people who are elderly, retired in certain
 
         24   areas?  Because once the homes are foreclosed upon,
 
 
 
 
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          1   who ends up owning the property?   And then what
 
          2   happens when those properties are foreclosed on?
 
          3   The property is put into a certain condition that
 
          4   is unliveable, torn down.  The lots are then
 
          5   there.  Developers are on the lots.
 
          6            You see what I'm saying?  It could be
 
          7   looked at as a conspiracy type of situation or just
 
          8   totally desolation of the neighborhood.  So we do
 
          9   some need regulation on that.
 
         10            And then absolutely I am looking at the
 
         11   credit scoring.  I personally work in the banking
 
         12   industry, and there is a very big mystery with
 
         13   credit scoring.  That needs to be regulated across
 
         14   the board just so the consumer has basic knowledge
 
         15   of where they stand when they do try to get a
 
         16   loan.  Thank you.
 
         17       MODERATOR SMITH:  Thank you very much.
 
         18   Eddie Clark?
 
         19       MR. CLARK:  Good evening, ma'am.  I come by my
 
         20   own.  They charged me $7,000.  Tore my porch down.
 
         21   Left it like it was for two months.  We didn't have
 
         22   no porch to get out in the front.  We had to go out
 
         23   the back way.
 
         24            So we called them.  She said, nothing to
 
 
 
 
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          1   do about it.  You have to wait until your time
 
          2   come.
 
          3            So they came and harass my wife, harass my
 
          4   wife.  She got sick.  She called Onetta, told
 
          5   Onetta, I'm tired of people harassing me.  I said,
 
          6   can you do something about this?  She said, wait a
 
          7   minute.  She said, I will do something about it.
 
          8            So she comes out there, and they called
 
          9   the same night and harassed.  Onetta said, who are
 
         10   you?  She said, never mind who I am.  I said, I am
 
         11   tired you harassing people because they owe.  My
 
         12   wife got sick behind there.  She had to go to the
 
         13   hospital, and she had a slight heart attack.  And
 
         14   that was it.  Thank you.
 
         15       MODERATOR SMITH:  Thank you, Mr. Clark.
 
         16   Laura Stevenson?
 
         17       MS. STEVENSON:  Good afternoon, everybody.  My
 
         18   name is Laura Stevenson.  I live at 5819 South
 
         19   Fairfield.  We had a pretty little home.  And not
 
         20   only they appraise the loan, the lady that sell us
 
         21   the house, get the loan for us, we bought the house
 
         22   from, they don't want to fix the house.
 
         23            My ceiling is coming in.  The foundation
 
         24   is falling in, in the basement, and they said
 
 
 
 
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          1   they're not going to fix my house.
 
          2            I just move in there in November the 19th,
 
          3   and we had a lot of problems.  We had squirrels
 
          4   come in the house.  I have a five-year old child.
 
          5   She can't sleep in her bed.  Water come on her.
 
          6            We need your help.  And it's a good credit
 
          7   loan from EquiCredit.  I talked to EquiCredit.
 
          8   They said, nothing they can do.  We talked to the
 
          9   lady lawyer.  He said, that's the way we get the
 
         10   house and that's the way we take it.
 
         11            I just give some pictures -- I mean, some
 
         12   tapes to the young man up there and the document.
 
         13   The house is a $60,000 house.  The house don't even
 
         14   worth $25,000.  I had CWSC come in and they see the
 
         15   house.  They said it don't worth it.  We had
 
         16   contractor come in there and see the house.  They
 
         17   said, it going to cost $85,000 to fix the house.
 
         18   The house have to tore all the way down.
 
         19            We got a violation already from the city.
 
         20   They're supposed to come out next month again.
 
         21   They said, if they come out, they're going to tore
 
         22   the house down.  If they tore the house down, we
 
         23   still got to pay the loan.
 
         24            So we need your help.  Thank you.
 
 
 
 
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          1       MODERATOR SMITH:  Thank you.
 
          2   Lawrence Luther?
 
          3       MR. LUTHER:  My name is Lawrence Luther.  I do
 
          4   electrical contracting in log homes.
 
          5            I got some pictures and some verifications
 
          6   on things that took place that I would like to show
 
          7   you.
 
          8            This is pictures on advertising.  I had a
 
          9   log home that was -- it was to be supposedly
 
         10   financed by MidCity Mortgage out of Green Bay; and,
 
         11   when they came out, I was -- it was a second that
 
         12   went for resale for -- for a home, and it was a log
 
         13   home.  It's an old-time log home out of Tennessee,
 
         14   Nashville, and they're a HUD-rated log home.
 
         15            What happened is that I started out in
 
         16   February of doing it as a spec and had contractors
 
         17   that worked with me without charging nothing until
 
         18   it sells.  But when I got so far along, Adam that
 
         19   worked at MidCity Mortgage, he worked at TitleTone
 
         20   in Green Bay, when he switched me, he said, hey, we
 
         21   got some loans that you can work with that's no doc
 
         22   because I couldn't show a profit in my electrical
 
         23   contracting business because of union targeting.
 
         24            So I says, okay.  When I come along, he
 
 
 
 
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          1   said, you need about 85 percent done, according to
 
          2   what his boss said.  And his boss's name was B. J.,
 
          3   and she was a lady.
 
          4            Well, when I got about 80 percent done,
 
          5   she comes along and she comes out to the site, and
 
          6   she says, for us to require you to have -- for me
 
          7   to move in, that the septic system is in and the
 
          8   well is working, and by May 19th I would have
 
          9   financing.
 
         10            Well, I get it done, get it all there.
 
         11   And I took out an extra $5,000 on my insurance
 
         12   policy because the cash value was worth that much
 
         13   to be it because that was $65,000 coming in.  I
 
         14   walk in there.  Where is Adam?  No Adam is in
 
         15   there.  Well, he's out there.  They get him on the
 
         16   phone.  How come you're not here?  He says, well, I
 
         17   hate to tell you this, but the loan fell through.
 
         18   How come?  Because it's a log home.
 
         19            And here it was nothing else but -- they
 
         20   put all the advertising that they're going to
 
         21   finance it.  And then I had an open house two weeks
 
         22   later on Memorial Day, and I had another guy put in
 
         23   an application in for it.  We had 15 people on that
 
         24   open house I did.  They collected.
 
 
 
 
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          1            And you said about putting out phone
 
          2   numbers like for lenders and that, that's what they
 
          3   do.  They have it out there that they're lending,
 
          4   but where is the fair market for log homes on the
 
          5   lending part?   Is there any -- why is there
 
          6   restrictions on log homes?  This company was a
 
          7   HUD-approved home, why did they deny the loan?
 
          8            And also, here, I will give you that
 
          9   picture -- and here is the Midwest City Mortgage.
 
         10   It gives you the size of the home, everything
 
         11   that's involved in it.  And also I will give you a
 
         12   little helpful information why I cannot make a
 
         13   profit in the housing market.  Here I will show you
 
         14   the housing stats in the Green Bay/Brown County
 
         15   area.  It's a big drop.
 
         16            I will read to you what's -- this is what
 
         17   the union activity is doing out in the Green Bay
 
         18   area and the Appleton area.  They take 2 percent
 
         19   off the guy's wages and private independent
 
         20   contractors.  I was offered a contract in 1994, and
 
         21   I rejected it because it took 2 percent off the
 
         22   guy's wages to put out independent contractors.
 
         23            It reads, and this is how they do it.  It
 
         24   says, when a project is selected for the target
 
 
 
 
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          1   program, an estimate will be made of the number of
 
          2   hours of electrical work to be performed on the
 
          3   job.
 
          4            Based on this estimate, calculation will
 
          5   be made of a total amount of money which will be
 
          6   designated by the target program.  For the
 
          7   particular project, the union will then make an
 
          8   announcement that with respect to this project it
 
          9   will make cash payment from the target program's
 
         10   fund in the amount calculated to any contractor who
 
         11   is awarded the work for the project and who has
 
         12   either signed a contract with the union.
 
         13            The cash payment will be made on the
 
         14   perspective of whether they are party to a contract
 
         15   with Local 577 at the same time they submit their
 
         16   agreement with Local 577 or payments, the
 
         17   determination to which projects are going to be
 
         18   included in the target program; and the amount of
 
         19   money to be granted for specific projects will be
 
         20   surely developed by the employee.
 
         21            You can read that over yourself.
 
         22       MODERATOR SMITH:  Thank you very much.
 
         23       MR. LUTHER:  The thing is what I'm saying about
 
         24   this 2 percent is that it's in the residential
 
 
 
 
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          1   contracting area.  Here it is.  10 percent
 
          2   difference.
 
          3            Instead of targeting an independent
 
          4   contractor, we can put it towards housing.  In
 
          5   Green Bay, they got the packet referendum.  They're
 
          6   voting on 2 percent of $295 million.  That's
 
          7   $5 million to put out contractors.  Why couldn't
 
          8   they put it into low cost housing?  Take a look at
 
          9   that.
 
         10       MODERATOR SMITH:  Thank you very much.
 
         11            Mr. Edelman?
 
         12       MR. EDELMAN:  Good afternoon.  My name is
 
         13   Dan Edelman.  I am an attorney.  I bring a lot of
 
         14   Truth in Lending and related lawsuits on behalf of
 
         15   borrowers.
 
         16            I would like to bring to your attention a
 
         17   number of technical issues which are necessary, I
 
         18   think, to accomplish some of the reforms you want
 
         19   to accomplish.  I wasn't planning on speaking, but
 
         20   some of the discussion -- I made some notes while
 
         21   people were discussing various points.
 
         22            First, credit insurance.  Under current
 
         23   law, there is no requirement that the creditor
 
         24   forbear while a claim is made under a credit
 
 
 
 
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          1   disability or life policy.
 
          2            I have seen multiple instances in which
 
          3   the creditor will immediately declare a default,
 
          4   accelerate the loan knowing full well that the
 
          5   borrower is dead or disabled and probably has a
 
          6   legitimate insurance claim, cancel the credit
 
          7   insurance, because they have a security interest in
 
          8   it, apply the premiums to the loan balance, the net
 
          9   effect of which the credit insurance is utterly
 
         10   worthless.
 
         11            There is no requirement under current law
 
         12   that the credit insurance actually protect the
 
         13   borrower against anything.
 
         14            I've taken this issue to the state
 
         15   Appellate Court.  They refused to imply such a
 
         16   duty.  I think the Federal Reserve Board ought to
 
         17   at least as a condition of excluding the credit
 
         18   insurance premiums from the finance charge.
 
         19            Credit insurance industry suggested it
 
         20   might be a good idea to send a letter out
 
         21   describing the coverage and give you 30 days to
 
         22   cancel.  Does that do you any good?   Only if the
 
         23   check upon cancellation has to go to the borrower.
 
         24   Most loan documents are written so that it goes to
 
 
 
 
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          1   the creditor and is applied to the loan balance.
 
          2   In effect, they got the money one way or the
 
          3   other.
 
          4            The duty of the broker to give -- the duty
 
          5   is to give the best terms for which somebody
 
          6   qualifies.  Current compensation systems for loan
 
          7   brokers tend to do the exact opposite.  If the
 
          8   broker can be compensated, can receive additional
 
          9   compensation in the nature of a yield spread
 
         10   premium directly tied to an increase in interest
 
         11   rate, the incentive is to get the highest rate that
 
         12   the borrower can be sold upon, not the lowest
 
         13   rate.
 
         14            Something needs to be done to change that
 
         15   compensation scheme even if you want a no-point
 
         16   loan and the broker's compensation is funded out of
 
         17   the payments.  It should not be tied directly to
 
         18   increased interest rates.
 
         19            Loan advertising.  A certain very large
 
         20   subprime lender advertises on a web site that it
 
         21   will not -- the law requires us to get income
 
         22   information from you, but we won't verify it.  I
 
         23   don't know what legitimate purpose is served by
 
         24   this.  It appears to be an invitation to submit
 
 
 
 
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          1   inflated and bogus applications so you can get a
 
          2   loan.
 
          3            Home improvement.  Let me just finish the
 
          4   one thought.  Home improvement financing.
 
          5   Section 32 loans require either the borrower's
 
          6   signature on a check or a completion certificate.
 
          7   That requirement, at a minimum, should be extended
 
          8   to any loan known to be used for home improvement
 
          9   purposes.
 
         10            In addition, it is all too easy to get a
 
         11   borrower's signature on a completion certificate or
 
         12   a check when in fact the work is not completed.  I
 
         13   had a case where somebody put a second story on.
 
         14   The structural members were half the size required
 
         15   by code.  Nobody paid any attention to this until
 
         16   the poor woman tried to sell the property and, of
 
         17   course, it wasn't salable.
 
         18            In home improvement financing, there
 
         19   should be some requirement of certification of
 
         20   compliance with local building requirements, any
 
         21   required inspections by local authorities; and if
 
         22   it's a significantly sized transaction, independent
 
         23   inspection before the lender can disburse the
 
         24   funds.  I thank you for your time.
 
 
 
 
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          1       MODERATOR SMITH:  Thank you very much.  I
 
          2   understand that Mr. Lukehart is not here.  Is there
 
          3   anyone else -- oh, you are here.  No?   Yes?
 
          4            But if there's anyone else that would like
 
          5   to make a presentation -- are you --
 
          6       MR. CULVER:  Yes.
 
          7       MODERATOR SMITH:  Please.
 
          8       MR. CULVER:  Good afternoon.  Something today
 
          9   occurred --
 
         10       MODERATOR SMITH:  Would you state your name?
 
         11       MR. CULVER:  I'm sorry.  Todd Culver, for the
 
         12   record.
 
         13            County Mortgage, in which they pretty much
 
         14   did a refinancing of my Godparent's house.  Now one
 
         15   question that I came up with is if they are on a
 
         16   fixed income, the debt to ratio shouldn't be too
 
         17   high to even qualify for this loan.  And if you are
 
         18   on a fixed income getting $500 a month, how is it
 
         19   possible that you can afford a thousand dollar
 
         20   mortgage?   And I think there should be some
 
         21   regulations on that.
 
         22            And, second of all, you prey on
 
         23   illiteracy, there should be some regulations on
 
         24   that.  I'm not saying you could determine whether
 
 
 
 
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          1   or not an individual can actually read or write or
 
          2   understand; but you are looking at a person that --
 
          3   I'm not discriminating -- are ages 65 and 70, they
 
          4   don't know the legal terminology.
 
          5            Me, I'm in the collection field.  I'm a
 
          6   collection manager.  So the FDCPA regulates us.  We
 
          7   got to abide by the rules.  So I think they should
 
          8   have to do the same.  No way you can afford a
 
          9   mortgage at $500 a month when what you are getting
 
         10   in and your outtake is over $1500.  It's not
 
         11   possible.  And, again, I don't even know how the
 
         12   loan officer can even approve a loan in that
 
         13   standard.  Yet it's still being done, and these
 
         14   poor innocent people are losing their homes.  Thank
 
         15   you.
 
         16       MODERATOR SMITH:  Thank you.  Is there anyone
 
         17   else who would like to have a turn at the mic
 
         18   whether or not you have signed up since you have
 
         19   not signed up?
 
         20            If not, then I thank everyone who
 
         21   participated.  I also thank those of you in the
 
         22   audience who have come to this because of your
 
         23   interest.  And so I thank you again, and we will
 
         24   just take it from here.
 
 
 
 
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          1            Our next hearing, as I mentioned, is in
 
          2   San Francisco and then I'll close by encouraging
 
          3   you, if you have comments that you would like to
 
          4   submit for the record, if you would get them to us
 
          5   by -- what date did we way say? -- by September the
 
          6   1st.  And you can get -- the address is in the
 
          7   notice that was published.  It also can be made
 
          8   available at the registration desk if you would
 
          9   like to have it.  So with that, we are adjourned,
 
         10   and I thank you again.
 
         11                      (Whereupon, the Public Hearing
 
         12                      of the Federal Reserve Board
 
         13                      adjourned at 3:41 o'clock p.m.)
 
         14
 
         15
 
         16
 
         17
 
         18
 
         19
 
         20
 
         21
 
         22
 
         23
 
         24
 
 
 
 
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          1   STATE OF ILLINOIS  )
 
          2                      )   SS:
 
          3   COUNTY OF C O O K  )
 
          4
 
          5            ANNA M. MORALES, being first duly sworn,
 
          6   on oath says that she is a court reporter doing
 
          7   business in the City of Chicago; and that she
 
          8   reported in shorthand the proceedings of said
 
          9   public hearing, and that the foregoing is a true
 
         10   and correct transcript of her shorthand notes so
 
         11   taken as aforesaid, and contains the proceedings
 
         12   given at said public hearing.
 
         13
 
         14                 ______________________________
 
         15                 Certified Shorthand Reporter
 
         16
 
         17   SUBSCRIBED AND SWORN TO
 
         18   before me this______day
 
         19   of________________2000.
 
         20
 
         21
 
         22   _______________________
 
         23       Notary Public
 
         24

August 16 hearing on home equity lending | Morning session | Afternoon session

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Last update: February 14, 2002