Morning Session of Public Hearing on Home Equity Lending
September 7, 2000
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Morning Session of Public Hearing on Home Equity Lending |
Garden Conference Rooms A and B
Federal Reserve Band of San Francisco
101 Market Street
San Francisco, California
Thursday
September 7, 2000
PRESENT:
EDWARD M. GRAMLICH, Member, Board of Governors, Federal
Reserve System, Chairman, Committee on Consumer and
Community Affairs.
FOR THE DIVISION OF CONSUMER AND COMMUNITY AFFAIRS,
FEDERAL RESERVE BOARD, WASHINGTON, D.C.:
DOLORES S. SMITH, Director, (Moderator, Afternoon Session)
GLENN E. LONEY, Deputy Director (Moderator, Morning
Session)
JAMES A. MICHAELS, ESQ., Managing Counsel
JANE E. AHRENS, ESQ., Senior Counsel
SANDRA BRAUNSTEIN, Assistant Director and Community
Affairs Officer (Afternoon session)
FOR THE FEDERAL RESERVE BANK OF SAN FRANCISCO:
JOY HOFFMAN MOLLOY, Director, Community Affairs and Public
Information Federal Reserve Bank, San Francisco
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I N D E X
Opening Remarks Glenn Loney, Moderator 5
Opening Remarks Edward M. Gramlich, Governor 7
Federal Reserve System
Chairman, Committee on
Consumer and Community Affairs
SPEAKER: PAGE
PANEL NO. 1
PEGGY L. TWOHIG Assistant Director 13
Division of Financial Practices
Bureau of Consumer Protection
Federal Trade Commission
ELENA DELGADO President, 17
Irwin Home Equity Corporation
ROBERT GNAIZDA Policy Director & General Counsel 20
The Greenlining Institute
ANN CARLTON BOSE President, Estate Funding, Inc. 24
MARY LEE WIDENER Chief Executive Officer 27
Neighborhood Housing Services
of America, Inc.
DAVID H. SANDS Partner, Troop Steuber Pasich 30
Reddick & Tobey, LLP
NORMA P. GARCIA Senior Attorney, Consumers Union 34
SANDOR E. SAMUELS Managing Director, Legal 36
General Counsel & Secretary
Countrywide Home Loans, Inc.
JOHN L. BLEY Director, 40
Department of Financial Institutions
State of Washington
DANIEL J. MULLIGAN Partner, Jenkins & Mulligan 43
MICHAEL A. RANKINS President & CEO 45
Rankins Mortgage Corporation
JOHN A. COURSON President & CEO 47
Central Pacific Mortgage Company
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PANEL DISCUSSION 50
AFTERNOON SESSION
Opening Remarks Dolores S. Smith, Moderator 164
PANEL NO. 2
ALAN FISHER Executive Director 167
California Reinvestment Committee
FRANCINE MCKINNEY President 170
Home Buyer Assistance Center
CHESTER CARL Chairman, Board of Directors 172
National American Indian Housing
Council
CHRIS LAMBERTI Board of Directors 177
American Association of Retired
Persons
STEVEN HORNBURG Executive Director 179
Research Institute for Housing
America
PANEL DISCUSSION 183
PUBLIC COMMENT:
TERRY MACKEN 216
STEPHEN COGSWELL 219
BARRETT R. BATES 221
GEORGE DUARTE 224
LOUIS BRUNO 227
MILTON HODGE 231
LINNIE COBB 233
HOWARD BECKERMAN 236
SHANELLE COLEMAN 240
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P R O C E E D I N G S
9:00 a.m.
MR. LONEY: If we could begin, please. First,
let me introduce myself. I'm Glenn Loney, and I'm the
Deputy Director of the Division of Consumer and Community
Affairs at the Federal Reserve Board in Washington. I'm
going to acting as the moderator for this morning's
session.
The San Francisco hearing is the last of four
hearings that the Board is holding this summer on
home-equity lending. We had very interesting and useful
meetings already in Charlotte, Boston and Chicago. The
invited panelists and the members of the public at those
hearings offered a wide variety of views on possible ways
to address predatory lending practices in the home-equity
consumer market, and we expect the same here. We look
forward to hearing about these issues in San Francisco
today.
Like our earlier hearings, we will be discussing
the potential use of the Board's rule-writing authority
under the Home Ownership and Equity Protection Act and
also alternatives to regulations, such as consumer
outreach and consumer education.
Before I go too far, can everybody hear me? Can
you hear me, Margaret? Good.
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First, let me introduce the panel, the Federal
Reserve Panel. From the Board, to my immediate right, is
Ned Gramlich, who is a member of the Board of Governors of
the Federal Reserve System, and chairman of the Board's
Committee on Consumer and Community Affairs.
From the Board's Division of Consumer and
Community Affairs, we have Jim Michaels, Managing Counsel,
and Jane Ahrens, who is Senior Counsel, who both work on
Truth In Lending matters at the Board.
From the Federal Reserve Bank of San Francisco,
we have Joy Hoffman Molloy, who is the director of
Community Affairs and Public Information.
Let me just make a few introductory remarks
about what we are about here.
The Truth In Lending Act requires creditors to
disclose the cost of credit for consumer transactions. In
1994, the Congress enacted the Home Ownership and Equity
Protection Act -- or HOEPA, as it's called -- and HOEPA
added special protections to Truth In Lending for
consumer's who use the home as security for loans with
rates or fees above a certain percentage or amount. HOEPA
was a response to accounts of abusive lending practices
involving unscrupulous lenders who made unaffordable
home-secured loans to house-rich but cash-poor borrowers.
These cases often involved elderly, sometimes
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unsophisticated homeowners, who were targeted for loans
with high rates or high closing fees and with repayment
terms that were difficult or impossible for the homeowners
to meet.
In brief, HOEPA requires creditors to provide
additional disclosures at least three days before
consumers become obligated for such loans. It prohibits
lenders from including certain terms in loan agreements,
for example: balloon payments for short-term loans. It
prohibits creditors from relying on consumer's home as the
source of repayment without considering whether the
consumer's income, debt and employment status would
support repayment of the debt. It also requires the Board
to hold hearings periodically, to keep abreast of the
home-equity credit market targeted by the HOEPA. The
Board held hearings in 1997, about two years after HOEPA
became effective, and now it is conducting this series of
hearings.
Governor Gramlich will start us off with a few
remarks about the purpose of these hearings.
Governor Gramlich.
GOVERNOR GRAMLICH: Thank you very much, Glenn.
First off, we're happy to be here in San
Francisco, and thank the San Francisco Fed for putting on
the meeting this morning.
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The last few years has seen an enormous growth
in subprime lending. The rate of growth in subprime
lending has been roughly twice that of prime mortgage
lending. Subprime lending has gotten to be a significant
share of overall mortgage loans; and, by and large, this
is a very positive development. Indeed, the growth in
subprime lending has brought credit to millions of people
who have earlier been judged to be poor credit risks and
would not have gotten the loan. So this has enabled
millions of people to buy homes and start really going on
their piece of the American dream. But with every good
thing, there may be some bad that come along in their
wake. One of those may be subprime lending, or predatory
lending. We hear stories of abuses that have cropped up.
The basic goal of the hearings, and for every
agency that has any kind of authority for predatory
lending, is to try to, in effect, clean up the subprime
market, to make sure that the good subprime lending
proceeds and the abuses are stopped. This mixed message
symbolized the difficulty of this issue. That there are
many practices that might be good most of the time, but
end in abuse some of the time, so it's difficult simply to
ban practices. I think everyone agrees that, if consumers
really understood the properties of the loans, much of
this problem would go away. But, first off, there's the
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difficulty in getting information to the community;
secondly, there may be competition problems, just like the
market. So, as regulators, we're treading a narrow line
here, but we do what we can to stop the abuses. But we
don't want to stop the good part of subprime lending.
The Fed has some authority in this area. As
Glenn has mentioned, or might have, under HOEPA, in
addition to holding these hearings, The Fed does have
authority to change the scope of HOEPA a bit, and to
declare certain practices fraudulent and deceptive. The
basic purpose of the hearing is to try to figure out just
exactly what part of this should be used. We want to make
sure that anything we do has benefits that outweigh cost.
One thing that I should say, and probably others
will say, is that The Fed can't do it all, but there are
things that they can do and we are considering them. But
there a broad assault on this issue I think is necessary.
We are already meeting with nine federal regulators, who
have responsibility in this area. We're already meeting
with them back in Washington. In most states, there are a
number of state statutes that also have bearing. So we
want to make sure that all of the regulators are on the
same page. Purchasers of secondary mortgages can play a
role by also doing due diligence on the mortgages they
purchase. There are efforts at community education that
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are underway. The afternoon part of the hearings are
going to focus on those.
So a broad gauge approach to the problem is
presumably necessary. At the same time, the focus of
this morning's hearing are clearly on what The Fed ought
to be doing. So we will be structuring the efforts to
bring out some of the delicate issues in that hearing.
These are not the first hearings that have been
held. There were an earlier round of hearings back in
1997. Treasury and HUD has had a number of hearings on
predatory lending this year. This is now the fourth of
the hearings, or the last of the hearings, that we are
holding under HOEPA.
At this point, I'm going to quit. We'll let the
panelist talk about the issues. We're here mainly as
listeners. But, again, I would like to thank everybody in
San Francisco for having us out here and hopefully we'll
have a successful meeting that develops some sensible and
effective policies.
Thank you.
MR. LONEY: We're going to spend the morning
considering ways in which the Board might use its
rule-writing authority under the Truth In Lending Act and
HOEPA to curb predatory lending practices and home-equity
lending, while preserving access to credit for borrowers
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with less-than-perfect credit. This afternoon, we will
discuss alternatives to regulation, such as consumer
outreach and education, that might help address predatory
practices. At both sessions, we particularly hope to hear
about studies or research on subprime or equity lending
that will inform the Board in its deliberations. We're
very interested in hard data that anyone has on these
issues.
In addition, we have set aside time to hear from
members of the public. Anyone who, any of the members of
the public who want to can sign up to participate in the
open-mic session later this afternoon. The order of
appearance at the open-mic session will be based on the
list. The sign-up will also help us gauge the length of
time participants may be asked to observe in expressing
their views. The expectation, based on the experience at
the earlier three hearings, for people who have signed up
for the open-mic session can expect about three minutes.
I think the sign-up is downstairs at the lobby
where we came in, the west entrance. So, any of you who
want to sign up for the open-mic sessions, please do so.
I need to talk briefly about the rules of
procedure we're going to use at the meeting today. These
are the same rules of procedures that governed in our
preceding three sessions in Charlotte, Boston and Chicago.
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What we're going to do is: We're going to ask
the panelists assembled here and this afternoon, the
second panel, to limit their prepared remarks to about
three minutes. We have a timekeeper, sitting right there
in the middle. Raise your hand, please. Her name is
Georgette Bhathena. She is going to give you a one-minute
warning, and then a time-is-up warning. If we are going
to get through this in any orderly way, it's going to be
incumbent upon us all to observe the time constraints.
I just want to assure the panelists that, after
that, we're going to have a more open session discussing a
number of issues that the Board raised in its notice of
this hearing. We will -- there will be time for everybody
to express their views on the various issues that the
Board has expressed a particular interest in.
What we're going to do is, is we're going to
start with my friend and colleague, Peggy Twohig, and
proceed clockwise. Each panelist will present their
opening statement. Then, after all the panelists have
made their opening statements, there will be a general
discussion among the panelists and among us from the
Federal Reserve. Although, I will say that, after making
your opening statements, the Federal Reserve panelist may
want to ask questions.
During our first segment, following the opening
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statements, we'll discuss possible changes to HOEPA's
scope from 9:50 to 10:30. Then we will break for about
ten minutes at 10:30, and reconvene for the rest of the
morning session to discuss possible additional
restrictions or prohibitions for specific acts or
practices under HOEPA.
So, without further ado, I will ask the
panelists to introduce themselves, where they're from and
their title, and affiliation. So, Peggy, if you will.
STATEMENT OF
PEGGY TWOHIG, ASSISTANT DIRECTOR
DIVISION OF FINANCIAL PRACTICES,
BUREAU OF CONSUMER AFFAIRS
FEDERAL TRADE COMMISSION
MS. TWOHIG: Good morning. My name is Peggy
Twohig. I'm the Assistant Director for Financial
Practices, Federal Trade Commission.
I appreciate the opportunity to appear at this
hearing on behalf of the Federal Trade Commission and
discuss a serious problem of abusive lending practices in
the subprime market. The Federal Trade Commission is
looking at a number of ways to address these practiced,
primarily through law enforcement and consumer education.
The Commission has made halting predatory
lending practices a top enforcement priority. The
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Commission has brought action against large and small
subprime lenders for various legal practices. In the
interest of time, I will mention a few of these actions.
Other Commission actions are discussed in the full written
statement that has been submitted to the Board, and it's
available both here and is available on the Commission's
web site.
A number of these actions have involved
allegations of lenders violated the Home Ownership and
Equity Protection Act, which we call HOEPA. Last year, as
part of Operation Home Inequity, the Commission settled
cases with seven subprime mortgage lenders for violations
of HOEPA, as well as other law violations.
The HOEPA violations included failure to provide
required HOEPA disclosures, illegal asset-based lending,
and use of prohibitive loan terms. The Commission
obtained substantial remedies, including redress of over a
half-million dollars. These involved a total of several
loans. In the case of one lender, a ban against any
future involvement in high-cost mortgage loans. More
recently, the Commission settled a case of this type
against a Washington State lender. That case included an
additional allegation that the lender made direct payments
to home improvement contractors in violation of HOEPA.
That settlement required, as part of the settlement of
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the case, more than $150,000 in consumer redress.
In March, the Commission announced the
settlement, along with the Department of Justice, and
Department of Housing and Urban Development, with Delta
Funding Corporation, a national subprime mortgage lender.
The Commission alleged that Delta violated HOEPA by
engaging illegal asset-based lending.
Other cases involved different violations of
law, including deceptive lending practices. Last month,
the Commission settled a case involving deceptive
advertising and marketing practices of the now-bankrupt
First Trust Financial, which involved both claims of the
amount of money you would save against the foundation
loan. And, of course, we're still litigating our case
against Capital City Mortgage Corporation. This one
involved allegations that that company, and its owner,
deceived consumers in just about every stage in the
lending process.
I see I'm already running out of time, so I'll
just mention that we also have many consumer brochures
that address home-equity lending that are available on our
web sit. We distributed about 200,000 copies of them so
far.
While some of the predatory lending practices we
have seen can be addressed through the current laws and
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regulations, the Commission recommends that the Board make
several regulatory changes to strengthen the protections
in the high-cost market. The Commission recommends that
the Board further restrict acts and practices under HOEPA
and change the HOEPA triggers. We believe a very small
percentage of subprime mortgage loans are currently
covered by HOEPA, and the Commission has observed
problem-lending practices in subprime loans where the
rates and fees falls far below the current trigger. As a
result, this protection offered by HOEPA will help those
few borrowers unless HOEPA is expanded to cover more
loans. More particularly, the Commission recommends the
Board change the HOEPA triggers by both lowering the HOEPA
APR trigger to 8 percent, and including lump-sum insurance
premiums in the HOEPA fee trigger.
The Commission also recommends that the Board
address the problem of loan packing by prohibiting the
financing of lump-sum, single-payment credit insurance and
other products sold with HOEPA loans. The Commission
believes that a prohibition of this type is necessary
based on its long enforcement history in credit term
packing and given the nature, complexity and highly
unequal bargaining position involved in these
transactions, disclosures alone would not be adequate to
protect consumers.
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In addition, the Commission recommends that the
Board prohibit mandatory arbitration clauses in HOEPA
loans. Mandatory arbitration agreements undermine the
consumer's ability to exercise the statutory right to
protection in the credit marketplace. Consumers, in this
very high-cost market, particularly need those
protections.
The Commission's full statement include other
recommendations. And, since I've run out of time, I'll
stop here. Thank you for the opportunity to appear.
MR. LONEY: Thank you, Peggy. I'm sure you'll
get to finish some of your thoughts later. Sorry.
Ms. Delgado.
STATEMENT OF
ELENA DELGADO
PRESIDENT, IRWIN HOME EQUITY
MS. DELGADO: Good morning. My name is Elena
Delgado. Can you hear me? I'm the president and founder
of Irwin Home Equity. I'm pleased to have the opportunity
to participate in this panel.
Irwin Home Equity -- otherwise known as IE --is
a subsidiary of Irwin Financial Corporation, an Indiana
state-chartered bank holding company. IHE originates home
equity loans and line of credit which are funded by its
affiliate, Irwin Union Bank and Trust Company, an Indiana
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state-chartered, Fed member bank. IE offers its products
in 28 states and is subject to regulatory oversight in all
of these states. As you can see, we are subject to a fair
amount of regulatory scrutiny.
IE is a direct-response lender targeting
credit-worthy but underserverd borrowers. Our home-equity
loans are generally secured by a second mortgage on the
borrower's residence. We are a debt consolidation lender
and our loans enable our borrower's to pay off high-rate
debt and credit-card debt.
Our customers generally have A-plus or A credit
and are never lower than B plus. Because our borrowers
carry high-credit balances and are looking for a high LTV
loan, they are precluded from obtaining credit from
conventional banking sources. Therefore, our
products/borrower combinations are a higher risk than most
banks and we price adjust for this increased risk. We
offer applicants the option of choosing to reduce their
rate by the inclusion of pre-payment penalty or by the
payment of discount points and fees. We feel that the
ability to use these loan terms gives our borrowers the
option to choose a product that best fits their needs.
We are not in the foreclosure business. Since
the inception of our business six years ago, we have
originated over 50,000 loans and have completed the
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foreclosure process on only 34. We do make money on our
foreclosures and, in fact, our total losses due to
foreclosures approximates $370,000.
We are here because today a small number of our
loans fall under HOEPA and we want to share our
experiences on HOEPA with you. We also would like to
offer some suggestions on how to make HOEPA more
effective. We don't believe HOEPA is accomplishing its
primary objectives. Our belief is that the disclosures
required by HOEPA haven't been either particularly helpful
nor well understood by the borrowers. We are not aware of
any borrower changing their mind about a loan based on the
information contained in these disclosures.
We believe that HOEPA is having an adverse
affect on the cost of doing business and has curbed access
to credit to higher risk market segments because of the
increased risk associated with these loans. In addition,
the industry has defaulted to using HOEPA as a proxy for
predatory lending. This has created a reputational risk,
as well. Because of these risks, we believe that lowering
the HOEPA triggers will further accelerate the flight from
HOEPA loans which will further limit the availability of
credit to the needier market segment. Already we've
learned from our Wall Street financiers that there is
waning interest on the part of investors and underwriters
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in paper secured by HOEPA loans. This is because all of
the parties involved in the transaction can't guarantee
the adequacy of the process, but are forced to bear the
liability. Also, we are reading news articles daily about
lenders refusing to make HOEPA loans. If The Fed elects
to reduce HOEPA triggers, more of our loans will fall
under HOEPA. At that point, we also will need to decide
whether or not it makes business sense for us to continue
to make HOEPA loans. We have pulled out of North Carolina
due to passage of their high-cost loan legislation.
We are here to propose responsible ways to
revamp HOEPA such that it can accomplish it's purpose. We
look forward to your insights to our proposal and some
enlightened discussions.
Thank you.
MR. LONEY: Thank you, Ms. Delgado.
Mr. Gnaizda.
STATEMENT OF
ROBERT GNAIZDA
POLICY DIRECTOR & GENERAL COUNSEL
THE GREENLINING INSTITUTE
MR. GNAIZDA: Good morning. I'm Bob Gnaizda,
the general counsel for the Greenlining Institute.
Before I begin my prepared remarks, I wanted to
make just some introductory observations. Firstly,
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Governor Gramlich, all of the community groups we
represent want to thank you for your very special
commitment for this community reinvestment. We'd also
like to thank Joy Hoffman Molloy, of the Federal Reserve
Bank here, for being an outstanding counselor/adviser and
so helpful to community groups.
There are three procedural matters I want to
discuss before I go into my prepared remarks. First, the
key outside player is not here and was apparently not
invited; and that is: the investment houses responsible
for the ten-fold increase in predatory lending over the
last five years, through their $300 billion in financing.
Secondly, these hearings are far too narrow.
Ninety-five percent of the potential problems are excluded
from the coverage of these hearings.
Thirdly, the Federal Reserve is in the best
position to be the leader in resolving this problem.
These hearings are only a very partial and narrow solution
to that leadership.
And now my prepared remarks.
I'd like to make brief substantive observations.
The first is Wall Street. Wall Street must be brought to
the table. In the last five years, they have provided
financing of $300 billion in the subprime lending, which
is an increasing amount for predatory lending. They have
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failed to exercise due diligence, and they must be forced
to do so. The first solution is for the Federal Reserve
Chairman, Alex Greenspan, to call that to Washington, much
as he called that to New York, to save the multi-million
dollar hedge fund.
Secondly, we must recognize that up to half of
all persons securing subprime loans are actually eligible
for prime loans. Fannie Mae and Freddie Mac are in a
leadership position in doing that conversion.
Thirdly, there is no substitute for honest
competition. Predatory lending will continue unabated
unless there is effective regulated, scrutinized
competition that cares for the consumer. And the Federal
Reserve is in the best position to make that happen.
Fourthly, the Federal Reserve can begin that
process by refusing to permit any mergers where there is
predatory lending. That will send a message immediately.
Five. The Federal Reserve can require or
encourage corporate codes of responsibility, what I would
call a consumer bill of rights for regulated institutions.
That's the way to encourage them, by providing incentives,
by giving them additional CRA credit, since there should
be a moratorium on foreclosures. HUD has begun that
process in LA, New York, with FHA loans.
I'm now going to move to my ninth and tenth
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points because my time is almost up. We cannot address
this problem without at least looking back a few years.
There must be restitution for victims. There is none in
any form.
Lastly, and probably the most important,
leadership by the Federal Reserve. It has been absent.
The Federal Reserve should be the leader for protecting
the consumers while encouraging, as you have said,
Governor Gramlich, competition in subprime lending. And
that is why we have given, in our report card, the Federal
Reserve a C minus.
And, lastly on leadership, Governor Davis,
governor of the seventh largest economy, has three
government agencies that have responsibility in predatory
lending, banking, corporations and real estate. They are
totally absent, and I note they are not here. I
congratulate the state of Washington for sending their key
regulator.
I want to just end with this because we don't
have enough time. Greenlining and the former banking
commissioner from California, and Fannie Mae and CRC, will
be holding a press conference at 10:30 in the next room.
Thank you very much.
MR. LONEY: Thank you.
Ms. Bose.
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STATEMENT OF
ANN CARLTON BOSE
PRESIDENT, ESTATE FUNDING, INC.
MS. BOSE: My name is Ann Bose, and I'm probably
the only person sitting at this table that originates
these types of loans we're talking about: the subprime
loans. I'm a mortgage broker. I own Estate Funding.
My credentials are, just so you know: I was
president of the LA County Association of Mortgage
Brokers. I sat on the California Association of Mortgage
Brokers for more than five years. I'm currently the
director of the National Association of Mortgage Brokers,
since 1995, and was the treasurer of that group last year.
I have been honored by my peers as Mortgage Broker of the
Year in 1994 and 1991. I also was a member of the
California Mortgage Bankers Board for two years.
In 1981 I was a teacher. I taught high school
history and government. I got a divorce. In 1983, I
founded this business. I was the mother of four and eight
-- not four children, a four-year old and an eight-year
old. Teaching wasn't going to do anything for me. I had
no alimony or child support. I found tremendous
opportunity in the mortgage broker industry. Within two
years, I was able to support my family they way we were
living before the divorce.
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There is no glass ceiling in this business. And
it is a business of tremendous opportunity for people that
come to it with a sense of integrity and want to learn it
and want to work hard. I think brokers make a tremendous
difference in the lives of the people with whom they
interact. I think we help more people realize that deal
of home ownership than any other segments of this
industry. We listen to our customers' long- and
short-term financial goals and construct loans that meet
their specific needs. We educate them to their options.
We have tremendous options.
As mortgage brokers, we have a tremendous
opportunity to support for 100 percent financing. We have
five or six different loan options. We have subprime. We
have government. We have first-time home-buyer options.
We have lines of credit. How about 80 percent to a
million dollars? We have no-income documentation loans,
and subprime as well.
Brokers help keep prices down. There are a lot
of us. We're a highly competitive business. Because we
keep prices down, we help keep the competition honest.
Subprime is becoming almost the same level of commodity as
the first-risk C business and the conventional business.
Because subprime has been securitized, it is very close to
becoming the same type of commodity that the conventional
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loans are. Which means you have standardized underwriting
procedures and much less opportunity to abusive practices.
If prices are closed, what do we sell? We sell service,
education, integrity and options. We are an efficient
marketing channel for a variety of loan products for the
lenders.
Regarding proposed regulations, I'd like to
suggest that we enforce the regulations we have on the
books before we assume that the legislation that we have
now is not working. I don't believe there is sufficient
enforcement to make that evaluation. I think that the
current HOEPA regulations have, in effect, eliminated an
entire class of loans that, from my experience as a broker
and originating loans, I cannot find small second trustees
for subprime borrowers. I can't find lenders that want to
do them due to the fact of the high cost to lenders in
terms of regulation, disclosures and risk, and there is no
profit to do all that. It's a narrow profit for me
because I can't make enough money on $10,000 or $20,000
loans to do the loans. So we've already eliminated a
class of loans. I can't find comfort in that.
I think industry self-regulation is very
important. The best business practice is a proposal that
has been put forth by the NBA and NAMB to register all
originators, not just brokers. To isolate problem
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originators, you need to register all originators. If you
charter your brokers by themselves, then the bad eggs will
just go to work for banks, and they have enough bad eggs
themselves. So I think industry self-regulation and more
enforcement and consumer education is where we belong.
Lastly, I believe, as Senator Graham said in his
hearings that he is not sure what predatory lending is. I
think you need to define that before you try to control
it.
MR. LONEY: Thank you, Ms. Bose. Sorry I
mispronounced your name. I'm sure it's not the first
time. I hesitate to call you Ms. Widener, but go ahead.
STATEMENT OF
MARY LEE WIDENER
CHIEF EXECUTIVE OFFICER
NEIGHBORHOOD HOUSING SERVICES OF AMERICA, INC.
MS. WIDENER: My name is Mary Lee Widener, Chief
Executive Officer of Neighborhood Housing Services of
America. We are a special-purpose, nonprofit, secondary
market for the community loans bank in the Neighborhood
Network.
We applaud these hearings, both for their
content and the message. The Board is the preeminent
point of guidance with regard to financial practices in
America. So the message of these hearing is very
28
important.
The Board asked for comments on a number of
specific items. I'd like to submit as my response the
model statutes against abusive home loans, as developed by
the Community Center for Self-Help, in Durham, North
Carolina. We've tried to establish whether or not these
have been submitted, but I really want to be sure they are
on the record, and they are all the specifics called for.
With regard to the details, I support all of them.
In addition, I'd like to comment on and support
the report the Greenlining Institute's 10 Point Plan. I
think the expansion of looking at where the investment
dollars come from, in particular, to support predatory
lending. It's an extremely important point. You've just
got tto cut this off, and should be adopted by the Board.
The other objective that I feel should be
included in my primary remarks would be that there does
need to be a clear and more expansive definition of
"predatory lending," so that the whole industry,
non-profit and for-profit, know what we're trying to
avoid. And some very good work was done by the National
Association of Consumer Advocates on this point. And I'd
like to provide that to the Board, as well.
Another objective should be to establish the
legal right of non-profits to protect the hard-fought
29
gains in improving the financial condition of low-wealth
borrowers. The best example are work of Habitat for
Humanity and the Neighbor Works Network. When these
groups pull together as volunteers and partners around the
country to help families who otherwise wouldn't have
opportunity to see which way runs the risk of making this
a way to continue to get the kind of support that we're
able to provide to low-wealth borrowers. And we should
not have to include those protections in these
restrictions, because so much of that work has already
been done ahead of this predatory lending kind of
experience. And it would be impossible to check all that
work in these restrictions. So we feel encouraging the
general legal right in some form, whether by regulation or
by statute.
And, then, finally, I think it's very important
that the Board succeed in sending a solid message to the
financial industry that, with regard to predatory lending,
it's bad to be a part of the problem, and it's good to be
a part of the solution. And I would really encourage the
most stringent use of regulatory power, especially in
mergers and acquisitions to send this message.
With regard to concerns about subprime lending
and damages in that market, I have to say that I applaud
your concern there, but our -- my impression is that --
30
MR. LONEY: Your time is up, but finish your
thought.
MS. WIDENER: My impression is, to a large
degree, people who need subprime lending, to the point
that it is unclear whether or not it is moving over into
predatory, probably need to stay out of the game. And
there needs to be a great deal more pressure on the
non-profit sector, the for-profit sector, local government
sector, and the conventional market to try and regulate
borrowing.
MR. LONEY: Thank you. Mr. Sands.
STATEMENT OF
DAVID H. SANDS, ESQ., PARTNER
TROOP STEUBER PASICH REDDICK & TOBEY, LLP
MR. SANDS: Thank you, Mr. Loney.
My name is David Sands, and I'm a partner in the
law firm of Troop Steuber Pasich Reddick & Tobey. My
practice principally involves representation of lenders,
servicers and the investment community, like companies of
some who are here. And they're big organizations, clients
in corporate matters.
I'm honored to be invited to speak here and to
share my perspective through my practice over the years.
I hope I can contribute a little bit to the Board's
deliberative process on these very important issues.
31
I want to open my remarks by noting that, much
of what I read in the other hearings and transcripts of
those hearings, and I read in the press, it clearly
troubles me. Because, as Governor Gramlich said, we
really need to base our decisions in the process on what
the facts are and what the studies show. Clearly, the
anecdotal evidence shows -- and I'm sure the studies show
-- there are many situations where unscrupulous brokers
and lenders have taken advantage of borrowers, and
misrepresented them, mislead borrowers.
This predatory lending activity, and I would say
the predatory lending and not subprime lending, is clearly
deplorable. And, on the other hand, subprime lending has
been extremely beneficial. Nobody can argue -- I don't
think anybody is arguing that. As Governor Gramlich
correctly pointed out that subprime lending has greatly
increased the flow of credit into communities that have
been typically underserved or not served. In many cases,
may be served by payday-advance companies. That's
probably the last place they want to go to for a loan.
So, hopefully, if you think about all these
discussions and, again, as Governor Gramlich has pointed
out, I hope we always keep in mind the fact that, whatever
we talk about, whatever we do, we try to keep in mind that
we want to keep more credit available, for the lowest
32
cost, for as many people as possible.
Turning to specific issues to be discussed
today, which are principally three: Whether the Board
should consider lowering the triggers; whether to change
the various elements points, indeed to test; and whether
it should prohibit certain practices. I think we have to
ask ourselves, before we think about the isolated issues,
has HOEPA had the effect of reducing predatory lending
practices? Based on anecdotal evidence and discussions, I
don't know, but it sure seems to be that these have,
perhaps, increased. I'm not sure why, in the last six
years, HOEPA has had the effect that is hoped, that people
hoped it has, and why changing a law that may not prohibit
the practice people are concerned about is the right thing
to do.
One thing I did want to talk about, at least in
my practice, is not so anecdotal, but at least based on
actual practice, we have been involved in abusive lending
cases. Those are cases really that we are suing brokers
and lenders for violations of contracts, for violations of
law, because they were engaged in abusive lending
practices, making loans that my clients didn't realize
they were buying. As a result of them buying the funding,
once they did their diligence -- which, in hindsight, may
they should have done earlier -- but once they've done
33
their diligence, they turned around and took the loans
back to the lenders or brokers and often made restitution
to the borrowers. Meaning: There are effective
enforcement mechanisms out there. Things are happening.
There are three points I'd like to make for the
Board to think about, which I think everybody agrees upon
what we need to do, at least at a minimum, for the time
being. And, again, this is based on what I've been
involved with.
Education --
MR. LONEY: Your time is up. If you can finish
that thought --
MR. SANDS: This will be quick. No. 1 is
education and counseling. An educated consumers typically
is a consumer we don't see a problem with. Secondly is
simpler notices. I'm not going to go into that. It's
been talked about a lot at this hearing. And, three, is
enforcement. I'm very happy to hear that the Federal
Trade Commission has been active in enforcement. There
are a lot of laws on the books right now, including Fair
Lending Laws, elder abuse statutues in California, which
will go very far to prohibit the practice people are
concerned with. I hope we can keep these issues in mind
as talk today.
MR. LONEY: Thank you. Ms. Garcia.
34
STATEMENT OF
NORMA P. GARCIA, SENIOR ATTORNEY
CONSUMERS UNION
MS. GARCIA: Good morning. I'm Norma Garcia,
Senior Attorney, with Consumers Union's West Coast
Regional Office in San Francisco. Consumers Union, as you
know, is a non-profit publisher of Consumer Reports
Magazine, incorporated in the state of New York in 1936.
Thank you very much for this opportunity to be
here with you this morning. I appreciate the fact that
the Board of Governors has called this hearing and has
gathered all of these interesting individuals at the same
table to discuss these very important issues.
In the interest of time, I want to second the
comments offered by Ms. Twohig, by Mr. Gnaizda, and Ms.
Widener, and offer a few of my own observations.
I heard a comment made earlier that one of the
things we want to do to preserve subprime lending because
it has provided a valuable service to the public by
increasing the number of people who have been able to buy
homes with subprime loans. I want to narrow the focus
here a little bit, because my understanding of this
problem -- and we have studied this extensively -- is that
the issue is not about purchase money mortgages. The
issue and area of abuse comes more in the
35
home-equity-based mortgage lending. So, to the extent
that the subprime lending industry has assisted more
people to become home owners, I applaud the industry for
that. But to the extent that the industry has been
involved in abusive lending that has undermined the home
ownership dream for many homeowners, on that note, I want
to say that there is a lot of work to be done.
I want to emphasize that if self-regulation were
effective, we wouldn't be here today. There wouldn't have
been the multitude of hearings that has happened in the
last three years on this issue. If self-regulation were
working, we wouldn't have increasing numbers of stories of
homeowners who have lost their home, and all of their
American dreams, to fraudulent and abusive lending
practices.
I think consumer education is a necessary
component to attacking the problem; but, yet, cannot be
looked at alone as a solution, or as an alternative to
more enforcement and better regulation. We need to be
very careful about this. I don't think it's the answer.
It doesn't stand alone as a solution, just like
self-regulation doesn't stand alone as a solution.
Very briefly, I want to say that Consumers Union
supports the notion of adjusting the HOEPA trigger, to
lower the trigger to extend HOEPA's protections to a
36
broader class of transaction and borrowers. We also think
that the points and fees triggers should be adjusted so
that more fees are added to the calculation, particularly
credit insurance, prepayment penalties and points when the
same creditor finances a loan.
We have given further comment in our written
testimony about the other points you've asked us to
address, so I will pass the mic on now. Thank you very
much. We look to forward to the discussions with you.
MR. LONEY: Thank you, Ms. Garcia.
Mr. Samuels.
STATEMENT OF
SANDOR E. SAMUELS
MANAGING DIRECTOR, LEGAL; GENERAL COUNSEL & SECRETARY
COUNTRYWIDE HOME LOANS, INC.
MR. SAMUELS: Thank you.
My name is Sandy Samuels. I'm the general
counsel for Countrywide Home Loans.
I would like to begin my remarks by looking at
what I believe to be the root causes of predatory lending:
Lack of choice, lack of knowledge, and lack of
enforcement.
The past year has seen a dramatic increase in
the amount of attention focused on predatory lending
practices, not unlike 1994, when Congress enacted the Home
37
Ownership and Equity Protection Act in responce to similar
press articles on abusive lending in Atlanta and Boston.
For that matter, it's not unlike 1968 when Congress
enacted the Truth In Lending Act to safequard the consumer
in connection with the utilization of credit by requiring
full disclosure of the terms and conditions of credit.
Interestingly, the problem seems to be the same every
time: Bad actors engaging in deceptive, if not
fraudulent, behavior that exploits the consumer's lack of
knowledge and lack of choice. The fact that we are
meeting on this topic 32 years after enactment of TILA
only serves to highlight that it's something outside of
the federal box.
Disclosures, in and of themselves, are
meaningful tools for many consumers. But disclosures do
not stop bad actors from preying on consumers on consumers
who either don't understand the information conveyed, or
who never received disclosure in the first place. These
bad actors engage in a variety of fraudulent practices.
Examples of fraud upon consumers have been documented in
the various articles and hearings this past year. From
home contractors, who have lied to consumers, to lenders
who have affirmatively used Truth In Lending Act
disclosure terms to mislead consumers about the true terms
of their loan. Yet every state the union has statutes
38
that address fraud. Most, if not all, have statutes that
address unfair and deceptive practices that fall short of
common law fraud. What seems readily apparent is that
there are many fraudulent acts being committed that are
already clearly illegal under existing state and federal
law -- usually TILA and its HOEPA provisions. In other
words, no new law or modification to existing law is
needed to address what is already illegal.
When a neighborhood reports an increased number
of burglaries, the first response is not simply to pass
tougher burglary laws. The response is to increase the
police patrolling the beat. And we believe that that must
be the fist step taken now. Congress and the states must
increase financial support of the agencies charged with
enforcing these laws so that lenders, brokers and
contractors that engage in this sort of activity will know
that there is real risk of detection and punishment.
Funding must also be increased to agencies, such
as legal aid services and counseling organization, to give
those most often preyed upon accessible resources to call
upon before one of these tragedies occurs.
The Board has asked us to address whether there
are regulatory and/or statutory changes to HOEPA that
would more effectively curb predatory lending. Let me
make clear that we do not believe lowering the HOEPA APR
39
trigger is an effective way to enforce the law. We
believe that enforcing the HOEPA provisions, and other
applicable law -- I'm sorry. We believe that enforcing
existing HOEPA provisions, and other applicable law, is an
effective way to stop predatory lending.
Most of the recent testimony has reported
striking increase in the amount of subprime lending in
recent years. One of the most important and positive
developments in subprime lending has been the emerging of
some of the largest national lendings in this market,
lenders in this market. This has clearly increased the
availability of credit to many Americans and has, in turn,
lowered the cost of subprime credit because of increased
competition.
I've got much more to say, and I see my time is
up. Let me just say that we believe that increased
competition is the key. We think that the lowering of the
HOEPA triggers will have the opposite effect. It will
reduce competition, it will reduce choice, and I'll have
more to say during the discussion.
MR. LONEY: Thank you. Mr. Bley.
//
//
//
//
40
STATEMENT OF
JOHN BLEY, DIRECTOR
DEPARTMENT OF FINANCIAL INSTITUTIONS
STATE OF WASHINGTON
MR. BLEY: My name is John Bley. I'm the
director of the Department of Financial Institutions in
the state of Washington.
We think the way to effectively address
predatory lending is, first, simplify disclosure,
establish prohibitive practices, and enforce the two.
I want you to think about Ms. Bose's comments.
Among other things, she said that she sells trust. In our
view, based upon our years of experience in regulating
mortgage lending for a non-bank, predatory lending is the
use of deceptive or fraudulent sales practices in the
origination of the loan secured by real estate.
The federal disclosures are too complex for many
borrowers and borrowers turn to loan officers to explain
the terms of their loan. Thus, predatory lending is an
abuse of misplaced trust. Predatory lending becomes
possible when a borrower trusts the loan officer to
explain the terms of the loan and the loan officer commits
deception by abusing this trust. The deception may
include hiding the high fees or points; variable rate loan
instead of a fixed-rate loan; unneeded insurance, or
41
prepayment penalty, and may take the form of selling a
consumer a subprime mortgage loan when they could qualify
for a lower-cost loan.
I have attached as Exhibit A of my comments a
memorandum authored by the Department's chief mortgage
investigator, Chuck Cross, which describes the deceptive
practices we have observed in the state of Washington.
Mr. Cross has spent the last five years on the front lines
fighting predatory lending practices. We believe that his
memorandum provides a comprehensive discussion of the
practices that are causing the problem.
I know you have asked us to address a series of
questions regarding the Federal Reserve System's authority
to make certain amendments to the regulations enforcing
HOEPA, enforcing the Home Ownership and Equity Protection
Act amendments to the Truth In Lending Act. I am afraid
that our experience in Washington is that the HOEPA
amendments have had very little impact on predatory
practices in mortgage lending, and that any amendments the
Board of Governors might make to those regulations are
also unlikely to have a significant impact on the problem.
Over the last three years, the Department has
brought, among the hundred other administrative action,
administrative cases against Nationscapital Mortgage
Corporation and First Alliance Mortgage Company. In both
42
of those cases, many consumers told us that they received
high-rate, high-fee, variable-interest rate loans when
they thought they were getting fixed-rate loans and did
not know about the high fees. In most if not all of these
cases, it appears that consumers "received" their Truth In
Lending Act disclosures to no substantive effect.
Our view in Washington is that the problem of
predatory lending should be dealt with surgically,
I see my time is up. I'll -- we recommend
simplification of the disclosure. Attached as Exbibit B is
an example of how we think TILA should be simplified. We
think that prohibited practices should be established.
And, in terms of enforcement, this Department encourages
harsh penalties for acts of predatory lending. Such
penalties should include should include restitution,
monetary fines, permanent injunctions from lending, and
criminal convictions for individuals. In cases egregious
enough to convince a prosecutor to accept them, violators
should be constitutionally deprived of their personal
liberty.
Thank you.
MR. LONEY: Thank you.
Mr. Mulligan.
//
//
43
STATEMENT OF
DANIEL J. MULLIGAN, ESQ., PARTNER
JENKINS & MULLIGAN
MR. MULLIGAN: Thank you. Can you hear me?
Since we've been given a limited time, I'd like
to first endorse two of the statements, written
statements, made to the Board. The first was by the
American Association of Retired Persons. The second, that
presented by the National Association of Consumer
Advocates. We, as litigators, support both of those
comments and the statutes.
I'd like to state that my experience here and my
comments are based on what Mr. Sands called "anecdotal
evidence," that is ten years, or more, of experience
litigating against lenders, foreclosure companies on both
an individual and class basis. I've also had the
opportunity to lecture and meet with litigators around the
country and gathering more anecdotal evidence.
I'm going to have a comment on what would in
another arena, the medical arena, be called, I guess,
clinical evidence, and there's a tendency to ignore these.
Because we know that there were cases, but we really end
up representing those patients that have died in the hands
of these lenders. So we have some method by comparing
around the country, now at least, to see what is going on,
44
on a general basis.
Given that, I'd like to focus on four areas that
we see. I'd like to first agree with Mr. Samuels -- this
may be a first for me and Countrywide. But I would like
to say that disclosures, all of these disclosures, at
least by themselves, are completely ineffective in our
experience. It's constantly amazing to us that we can
have two people running for the presidency and campaigning
primarily on education reform. And, yet, when you go
into object or litigate or any of these issues, everyone
ignores the fact that a good percentage of the people
simply can't read a simple form, let alone complex forms,
that are given. I have some examples, but, since I don't
have much time here, I'll go on.
Secondly, as far as the point is concerned of
what we would like to see, among other things, is the
correction of data. We really don't know what is going on
in the marketplace. For example: We do not know what the
differential is, really, in a foreclosure between subprime
and prime lending. We have no idea on a nationwide basis.
The result of this is: We cannot even know, the Board
cannot know, if, in fact, these increased rates and cost
charges to the so-called subprime group has any economic
justification. The default rates are not higher. If the
default rates are not higher, why are the costs higher?
45
Third, I've been urged to say this. I'm not
directly banning anything. But I have to say, from our
experience, we'd love to see you place an absolute ban on
repayment penalties, which are the curse of God among the
elderly and the minorities that we see. There is no
economic justification for it.
Lastly, I'd like to endorse the FTC's comments,
that the biggest single impetus to enforcement is
arbitration agreements. We also ask not to observe the
ban.
Thank you.
MR. LONEY: Mr. Rankins.
STATEMENT OF
MICHAEL A. RANKINS
PRESIDENT AND CEO,
RANKINS MORTGAGE CORPORATION
MR. RANKINS: First of all, I would like to say
that it's a privilege and an honor to be here before you,
Governor Gramlich. The Federal Reserve is to be commended
for its national efforts to ultimately enhance all
consumers. Additionally, I'd like to thank Jane Ahrens,
who is requested all this data from our office. Lastly, I
would like to thank Rod Howard, of the Mortgage Bankers
Association -- he's doing a great job -- which includes
all mortgage bankers like -- I don't think I can go
46
through them in three minutes.
MR. LONEY: That'll be nice.
MR. RANKINS: Secondly, I'd like to endorse Ms.
Delgado, for all her experiences. We've experienced the
same thing.
Rankins Mortgage is located in Oklahoma City.
We're four-years old, the only African-American prime
mortgage banker/lender in the state of Oklahoma. A lot of
brokers are minority, African-American brokers, but we're
the only pure lender. We're located in Oklahoma City,
Tulsa, Fort Sill, Lawton. All these offices, all three,
are located in the heart of the African-American
community. Rankins Mortgage customer base is 90 percent
African-American. For four years, we have loaned and
brokered over $18 million to individuals in these
communities. Seven out of ten of our clients have been
turned down by national or state banks, or federal and
state chartered credit unions prior to coming to us. The
other three, out of ten, are just intimidated by banks and
credit unions. In other words, these people feel their
credit is so poor, so derogatory, that they will not go
into the banks. Rankins Mortgage is a high-cost mortgage
lender. We are high cost. We are high cost.
Rankins Mortgage would encourage the Board to
approach the new regulations very carefully. Lowering the
47
trigger and/or new regulations could result in less
participants in the subprime market. Last year, when Bank
of America bought a bank who had been one of our original
investors, they changed the rules and decided they didn't
want to be what they call a high-cost investing arm. That
investor had very, very good rates. Seventy percent of
those customers that we were brokering, or in the case of
corresponding loans, we lost that investor. We don't use
that investor anymore.
I think, if the Board does consider new
regulations and lowers the trigger, it's going to result
in -- we dominate in our market right now; but we will
become a monopoly. We don't think that's in the best
interest of the citizens of Oklahoma, or any other
citizens. We don't want to be a monopoly. We want to be
a good competitive mortgage banker. But it will dominate
the market and brokers will get out of the business,
investors will get out of the business.
MR. LONEY: Thank you, Mr. Rankins.
Mr. Courson.
STATEMENT OF
JOHN A. COURSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CENTRAL PACIFIC MORTGAGE COMPANY
MR. COURSON: Good morning. My name is John
48
Courson, and I am the president and chief executive
officer of Central Pacific Mortgage Company. We are a
mortgage company that has 93 retail originating branches
in 24 states. I also serve as the vice president elect of
the Mortgage Bankers Association. What was advertised as
a one-year job has turned into a three-year career of
chairing their mortgage reform task force.
I must say that I certainly applaud the hearing
we're having today, and, in particular, working with the
Federal Reserve, as we did with the Department of Housing
and Urban Development in the effort of comprehensive
mortgage reform that we dealt with as part of the mortgage
reform working group over the last two years.
Obviously, it's been said before, and I would
echo the thought that HOEPA, as it exists today, begs the
issue that, if it's effective, why are we here today? And
it has not been effective. It is not the tool that
clearly has solved the practices that we're here to
discuss, the predatory lending, in the different venues
throughout the country.
As we all know, there are many legislative
proposals, both federal and state, that have been actively
pursued, both currently on the federal level and in state
legislatures throughout the year; and, in addition,
regulatory efforts, now even at the city level, being
49
pursued to combat the predatory lending. However, in all
these efforts, the same approach is to tinker, if you
will, with the terms and conditions of HOEPA loans. And I
would submit to you that tinkering will not solve the
practice. Predators will be predators. If, in fact, we
tinker with terms and conditions that are already
confusing to consumers, if in fact we continue to have
unintended consequences by having the tinkering, what
we're going to find is that all we've really done is make
the process much more confusing for consumers today who,
albeit, do not understand the process.
I would submit to you that the answer lies not
just nibbling around the edges of one piece of the
predatory piece, but it lies in comprehensively looking at
the entire mortgage loan process. How can you combat
predatory lending by legislating or regulating terms and
conditions without, in fact, looking at reforming the
entire process, the disclosures that they get. An
opportunity for consumers to shop for the right mortgage.
Being told in simple terms, albeit, the annual percentage
rate is one of the great mysteries of life for consumers.
One of the great mysteries of life for lenders. Let's
make it simple.
MBA has put forth a comprehensive reform plan
that we're working on diligently now. It has seven points
50
-- and I'm sure we'll have the opportunity to discuss it
later -- to look at the entire picture as opposed to just
one piece of a much larger problem.
Thank you.
MR. LONEY: Thank you, Mr. Courson.
There were a number of issues that the Board
specifically asked for the participants to address. One
of those had to do with the issue of changing the HOEPA
trigger. Jane Ahrens will lead the discussion on
examining possible changes to these triggers.
Jane.
MS. AHRENS: HOEPA has two independent triggers.
One is based on the annual percentage rate, and the other
is based on cost paid by the consumers. Let's discuss the
rate trigger first.
A loan is covered by HOEPA if the APR is paid by
more than 10 percentage points, the rate for Treasury
securities, with the comparable maturity. And HOEPA
authorizes the Board to adjust that 10 percentage point
differential up to 2 percentage points. Do any of you
have any data on the number of loans that are covered now
by HOEPA and would be covered, for example, if the Board
lowered the trigger to 8 percent?
When asked this question at other hearings, one
large creditor said that its portfolio is about 10 percent
51
HOEPA covered now, and would go to 20 percent if we
lowered the rate to 8 percent. And we've also heard that,
really, the rate trigger changes is kind of much ado about
nothing because the points, the fees that capture loans
under HOEPA, not the rates. So moving from 10 to 8
wouldn't make much difference.
Do any of you have any -- have you done any
analyses?
Ms. Delgado, had your company?
MS. DELGADO: Well, we do have analysis. I am
just somewhat concerned because the issues are sensitive,
in particular because we pay our financing to Wall Street.
MR. LONEY: Would you get near a mic?
MS. DELGADO: The issue is very sensitive one.
We do know what percentage of our loans fall under HOEPA
right now. It's a small number. That number would
increase significantly if the triggers were lowered. I'm
just reluctant to disclose information publicly. I would
make it available confidentially.
MS. AHRENS: Anybody else?
MR. GNAIZDA: Two observations: One, the
National Committee, the Investment Coalition, has
estimated that, by lowering your trigger, you would cover
change from one percent, with a subprime loan to five.
And they base that on the Treasury-HUD Report. My
52
question is this: Why has the Federal Reserve failed to
gather that information?
There's no way for community groups to gather
that information. Every mortgage broker contends it's
confidential. The Federal Reserve should gather it
confidentially for each company, but not confidential
overall. Then we could understand the scope of the
problem. On it's face, it sounds like a good idea, to
lower the trigger. I'm not sure that is is, and I'm not
sure that, if we do that, it will make that much
difference.
Greenlining would tend to side with the
regulators in Washington in terms of their suggestions
about how to address the problem. It may be, by focusing
on this trigger, the narrowness of that, that we are
losing sight of the larger problem.
MS. TWOHIG: Let me a disclaimer out of the way
before we proceed here. The statement that was submitted
to the Board by the Commission is the Commission's
statement. And the remarks I gave earlier where a summary
of that statement. Anything I say in response to
questions are my own views and do not necessarily reflect
the views of the Commission, or any individual
Commissioner. With that said --
MR. LONEY: That's okay, Peggy. We like your
53
views.
MS. TWOHIG: I can't tell you that in our
enforcement experience, we don't believe that there that
many loans that are covered by HOEPA now. It's a very
small percentage. We don't have specific data. We have
limited resources, and, so, we do what we can do in the
enforcement area. But based on what we have seen to date,
it's a very limited percentage.
I will say that, because of the other reasons
I've mentiond, we do think that the APR trigger should be
lowered as much as the Federal Reserve has reported to do,
combining with that more substantive prohibitions. It's
also the case, though, that most of the times we do HOEPA
loans, it is because of the trigger. So that is a very
important part of the task. We also, as I said in my
comments, think that more fees should be included in that
trigger, particularly if there is a lump-sum credit
insurance premium.
MR. SAMUELS: I agree with Mr. Gnaizda and Mr.
Bley, in that lowering the triggers we believe will not
have any benefit. But, in addition, we also believe that
it will have a significant detriment. Because one of the
things, as I said, that we are looking to is the increased
competition. And we have very specific examples of banks
who are worried about two things: reputational risk and
54
compliance risk. And because of the severe penalties,
even an inadvertent HOEPA violation.
There are a number of companies who are just
saying: I'm not going to do it. We're going to get out
of the business. And we heard from Mr. Rankins about
that, and that is not just anecdotal. That's documented
all across the country. So, what we're trying to do is,
we want to increase competition, we want to increase
choices for the consumers. This is not the way to do it.
MR. MICHAELS: Can I follow up with a question?
Because you've heard from a number of companies,
let me put this directly to you. In terms of
Countrywide's own experience, do you make HOEPA loans?
MR. SAMUELS: Yes.
MR. MICHAELS: So what percentage of your
funding is HOEPA covered?
MR. SAMUELS: It's small, very small.
MR. MICHAELS: What percentage would it be?
MR. SAMUELS: We are actually looking at that
issue. It's hard to come up those, those numbers, for a
lot of reasons. No. 1, it is not clear, you know. A lot
depends on what happens with these, whether they're going
to covered by the fee issue. I would agree with you that
the fee issue is probably more important than the rate
issue. But both of them are important, again, in terms of
55
covering the loans under HOEPA.
However it's extended, what you're going to find
is that different lenders are going to make different
decisions. Some are going to say: Okay, we have the
systems. We have the technology, and we have the
willingness to bear this risk. It may be that after we
have some experience in their bearing this risk, we may
decide it's not worth it and we're going to get out. We
don't know at this point. So far, you know, we've had
little problem with HOEPA.
We're concerned that, as it expands, we could
have significantly more problems with HOEPA. But, more
importantly, we're concerned that there are other
institutions who are just going to say that, expanding
HOEPA, we're going to get out of that business as well.
MR. MICHAELS: Let me follow up with two
questions. One, without trying to pin you down to precise
figures, which I understand your reluctance to do, but
orders of magnitude, were you talking double digits,
single digits?
MR. SAMUELS: I would hate to give you that.
It's not huge because that's just not our business. But,
obviously, we are mostly a prime lender. We do have a
subprime unit that we deal with both in our retail and
wholesale division. But HOEPA is not a large part of
56
that. Certainly, depending on how low it goes, then one
of the issues that we also have in terms of these we will
get to. If you open the door for it, we are concerned
about our having to include affiliate fees. When we have
an appraisal company, a credit reporting company, and
title company, we have to include those fees. So our
triggers are a lot lower than, say, another company who
uses third-party fees even though, when we combine those
fees, we can give a better deal to the customer, both in
terms of cost and in terms of efficiency. But it operates
to our detriment.
GOVERNOR GRAMLICH: I wonder if I could jump in
on this? The numbers that we have seen, as were mentioned
by the Federal Trade Commission, indicate that HOEPA loans
are actually a pretty small share of subprime loans,
whether single or double digits, whatever. And if you
just look at the kinds of disclosures and prohibitions,
and so forth, under HOEPA, they don't seem all that
onerous. And, so, one wonders what is the problem? Is
the problem really in the stigma of HOEPA? I mean, is
that why everybody is shying away from the trigger? What
is the problem with HOEPA?
MR. RANKINS: Governor Gramlich, let me try to
expand and respond to some questions, several of the
questions that Ms. Ahrens asked.
57
Ninety percent of the loans that we make are
under HOEPA. We act merely as a broker in our community.
And it's based upon who we broker, the investor that we
sell the loans to. For the most part, to try to respond
to that question, we are overly disclose to the client.
The client, why am I signing all these papers? Well, it's
because of the documentation, disclosures, the points, the
fees. We overly, overly, overly disclose.
GOVERNOR GRAMLICH: You don't think the points
and fees, things like that, should be disclosed?
MR. RANKINS: Yes. We overly disclose. That's
not an issue with us. Our issue is if the trigger is
lowered, we're going to have investors that are -- right
now, we have good, competitive rates. Those investors are
probably going to get out of the business and subprime
lenders --
GOVERNOR GRAMLICH: That's what I'm asking:
Why? If all that is going on is that they can't give the
balloon payments for the first five years, and reverse
amortization mortgages, and they have to disclose the
points and fees, what is the problem?
MR. RANKINS: The stigma of high cost.
GOVERNOR GRAMLICH: So it is the stigma?
MR. RANKINS: It is the stigma.
MS. AHRENS: Ms. Bose, then Mr. Bley.
58
MS. BOSE: As an originator, we have done three
loans in the last two years. And the reason that we don't
do them is that (a) the lender discourages us from doing
it. They don't like the regulatory burden and they don't
like the risk. It has nothing to do with the fact that
it's a high-cost loan. It's simple for us, but for them
it's not possible. We can't make enough money to cover
our costs. And I know profits are a word you don't hear.
But I need to pay my mortgage, too. So if I can't make a
profitable loan, and the investor has to spend so much
time and effort with disclosures and the regulatory
burden, and the potential that they may rescind this thing
in three years because they made a ten dollar mistake,
they're not going to do the loans, period.
So it's not just one thing. The point is that
what you are doing is eliminating the whole class of loans
for credit-challenged people who need them. And we can't
do it for a variety of reasons. But the point is we'll be
eliminating a source of financing for people in an area
that can't go anywhere else.
MR. BLEY: We asked this question several times,
and I think we made an interesting observation. First of
all, when the test is created, it has to be applied to all
refinancing and second-mortgage transactions to determine
the section has been triggered. We don't think that
59
lowering the trigger point, it does not create a greater
cost. And making the test on the margin, you already have
tests. You have to test each of the loans. The
calculation is the same with the changed variable.
There is another interesting observation that
our field examiners have made, which is that many subprime
lenders appear to automatically make HOEPA disclosures --
just talking about the disclosure now -- on all of their
loans. They do see that it is cheaper and safer, and
we're talking about regulatory risk, that to make the
disclosure rather than taking the time to check and
risking the possibility of having erred on the test.
Giving that it is cheaper to comply on all loans, rather
than test all loans, lowering the trigger should have no
greater cost or less availability.
MR. COURSON: I'd like to respond to Governor
Gramlich's question. We're talking about a small slice of
the market. And I don't think there's any data that
really determines at what rate level abusive and predatory
lending practices take place. There seems to be this
assumption that predatory lending is somehow ties to HOEPA
loans. I would submit to you that moving the rate
trigger, if you will, or any of the terms or conditions in
HOEPA, is not going to. If it's that small a piece of the
market, the predators out there, the abusive practices,
60
are much more widespread than just that slice of the loan.
And the issue there, therefore, as the gentleman
from Washington said, is to really look at prohibitive
practices and try to zero in on those, as opposed to terms
and conditions.
GOVERNOR GRAMLICH: But that is essentially a
part of the point. Because there are some practices that
are prohibitive by HOEPA, and not prohibited for
non-HOEPA. So, if you change the trigger, then some
practices become prohibited. I mean, that's exactly the
point of all of this.
MR. COURSON: I understand that, but the
prohibition, I mean, those are prohibited today. Yet we
still have -- we're here talking about predatory lending
practices, and those have been prohibited since HOEPA has
been around, and it hasn't solved the problem. So I don't
think it's a prohibition.
GOVERNOR GRAMLICH: That's actually what we're
asking. Within the HOEPA sector, I mean, everybody is
worried about the changing of the trigger because more
loans will come under it. What we're trying to figure out
is that, within the HOEPA segment where some things are
prohibited, are those prohibitions effective?
MS. TWOHIG: I would just encourage the Board to
be very careful about overreacting to the notion that,
61
well, we can't lower the trigger because that means more
people would leave the market. I think that there are
practices -- our enforcement experience shows that there
are practices going on out there that are very troubling.
We have found HOEPA violations. In our law enforcement
actions, we have found lenders that had loan provisions
that had increased, an illegal increase, after default and
clear asset-based lending, had short-term balloons and
direct payments to home contractors. We have seen just a
about everyone of those conditions violated, but it's a
very small slice of the market. We believe that more
coverage of HOEPA is appropriate to get at a few more
loans. We don't think that increased coverage, so that
those very important protections and prohibitions that
really are just inappropriate for this segment of the
market, with these variable consumers, are or would -- we
think it would do much more benefit than harm.
And I'll just stop there.
MR. SAMUELS: I'm glad reasonable minds can
differ on this issue because there are a couple of things.
As a national lender, we have to look at, we have been
looking at, federal, state and even local attempts to
regulate this area. One of the things that we have seen
when we take a look at the triggers is, okay, we see the
triggers, what's the impact of that? And I'll give you a
62
couple of examples. And I do need to disagree with my
colleague regarding repayment penalties, because that's a
big issue for us.
We think it's a very, very good thing to give
the consumer a choice because it allows us to think that
they are going to stay in the house for five years. They
get a fair rate and we think that's a very good thing.
Now, are there abuses with prepayment penalties? Of
course. I'm not going to say that there aren't. But we
have, in our experience, a lot of people who are very
happy with prepayment penalty because they get a lower
rate, and that's what we are about. We are about lowering
costs and giving consumers choices. If the consumer
thinks he's only going to be in the house for three years,
we don't them to take a prepayment penalty for five years
because, then, they are going to have to pay it. But it
gives the borrower a lower rate, and it also gives the
investor some degree of certainty that that loan is going
to be around.
So, if you're going to talk about lowering
triggers, the lowering of triggers, in and of itself, we
have to look at them to see what comes along with it. If
you're going to prevent us from being able to offer
prepayment penalties and we're not --- we are very
careful. We want the industry to be very careful about
63
providing a choice along the lines of Fannie Mae come out
with last April. We think that that's a good thing, not a
bad thing. We think that that's fine.
We are not in favor of asset-based lending. We
are not in favor of the predatory practices that has
somebody pay $500 a month for their mortgages, and have
them have a monthly paycheck come in for $500. That is a
predatory practices and those people should be strung up
by their thumbs. We have no issue with that. What we are
trying to prevent is we do see legitimate choices for
consumers and keeping the good guys in the business to be
able to make these kinds of loans available.
GOVERNOR GRAMLICH: Could I just -- so, I think
you're saying that you don't have any problem with the
current prohibitions under HOEPA. But you don't want us
to expand those.
MR. SAMUELS: Frankly, we prefer not to have
some of those prohibitions, again, on prepayment penalty.
Many of the prohibitions we have no issue with at all,
absolutely. But extending them, again, the reputational
risk -- and it's there, because we've heard it -- and also
the compliance risks, it's there. We are concerned about
increasing costs that result from a lot of these
compliance concerns. Resulting from inadvertent
violations of HOEPA.
64
MS. AHRENS: Let's have --
MR. MULLIGAN: Two quick points. One as to
competition. It seems to us that the largest generator of
HOEPA in the last four years, First Alliance, who is now
in bankruptcy, absolutely no problem in getting funding
out of Wall Street for its loans, for years, until the
moment they filed. Lehman Brothers was buying their stuff
day in and day out.
Second point is, in fact -- on the triggers now
-- if, in fact, lenders are willing, as everyone seems to
be, fees up front, discounts for interest rates, and that
prepayment penalty is the cost of that loan. There's no
way around it. Even if you could justify the prepayment
loans, on some economic grounds, you have to include it in
the cost of the loan.
MS. AHRENS: Prepayment penalties. Just let me
say that we can go back to it.
MS. DELGADO: Can I make a point about the
triggers? Part of the problem that we see is that, again,
in the disclosures. We don't believe the disclosures are
well understood by our borrowers. We don't seem to pass
the connection. That's one thing. Lowering the triggers
is only going to subject more borrowers to a lower
threshold. We're just lowering the threshold.
I wanted to speak to the compliance issue,
65
because it can't be taken lightly. Some of us, the
financial institutions that rely on secondary markets for
financing, the secondary markets don't want to assume the
pass-through liability because they have no way of
controlling whether those disclosures are sent out on
time; and, yet, they bear the full liability. So it's
really difficult for us to go out there and obtain
financing from these sources if they're just reluctant to
proceed with us.
MR. GNAIZDA: Could I just add something on the
trigger? I don't think we're dealing with the real world.
The attorney general in California submitted to the
California Public Utilities Commission, in the case we're
involved in, the following statements. Twenty to
twenty-five percent of all Californians are functionally
illiterate. Now, if that's even close to the case, that
means, for predatory lending, you're talking about 50
percent or more. That's why we have to go back to what
John Bley has talked about, which is effective, powerful
enforcement.
That's why we also commend Dan Mulligan and his
law firm for what they're doing with Lehman. Lehman
Brothers, they shouldn't have to do it. It should have
been done by the regulators, including the SEC.
MS. AHRENS: Turning now to the point of fee
66
triggers. A loan is covered by HOEPA if the point of fees
paid by the consumer exceed the greater of 8 percent of
the loan and the dollar figure, which is adjusted annually
at $451. For this purpose, points and fees include all
items that are included in the finance charge, all
compensation paid to mortgage brokers, and it specifically
excludes reasonable closing costs paid to unaffiliated
third parties. HOEPA also authorizes the Board to add
such other charges that we may deem appropriate.
The Board's notice of this hearing talks about a
couple of fees: prepayment penalties paid on loans
refinanced by the same creditor, and single premium credit
insurance for couples. Let's start with prepayment
penalties on loans refinanced by the same creditor and
affiliates. We've heard, in prior hearings, that some
people never impose prepayment penalties. Yet, we hear
from consumer advocates that it happens all the time.
Would someone like to address the effectiveness
if the Board proposed keeping the financing by the same
creditor affiliate so that -- is it a common occurrence or
does HOEPA's restrictions really make it a minimal --
MR. MULLIGAN: My experience is twofold: One is
the state law is now becoming ineffective, and any lenders
are hiding behind that. We have commented to the OTS
about that. California has the experience. For example,
67
Texas moved in prepayment penalties. There's an open
question as to whether or not those have all been
preempted by the OTS regulations.
Second point is: Many lenders do waive, in
fact, prepayment penalties on their own loans. I know
that Household, Beneficial, Associates often does, not
always. I've never seen Countrywide. So that doesn't
occur. Where it occurs is in the attempt to refinance out
of loans for people, and there is something that they
really didn't remember, didn't know about in the first
instance.
And interesting practices come up. We
understand the term in the industry called "biking." That
is biking, where a lender does not even send out demand
statements on loans in the refinancing because they know
that the old lender will come in and offer a better deal
and want a new loan, and, surprisingly, they'll close.
All of this time they thought they were paying off taxes,
credit cards and suddenly they can't be covered because
they forgot to add in the prepayment penalties. That's
becoming more common, as well.
MS. AHRENS: David.
MR. SANDS: On prepayment penalties, and we're
really talking about the prepayment penalties for loans by
the same lender. It would include prepayment penalties in
68
that situation and the points and fees. I guess what I
don't quite understand this, because we're talking about
situations where, as Mr. Mulligan said, where there's
biking. Where a new lender comes in and basically
refinances the borrower out with the penalty you're
suggesting, which includes the prepayment penalties,
points and fees in that situation. The new lender, the
existing lender, comes in, as Mr. Mulligan said, and wants
to make a better deal, but knowing they can't, because
they have to put the prepayment penalties in there, but
the new lender doesn't. So the borrower gets these two
statements, one says that the new lender, you're going to
charge me X, and the old lender is charging me X plus Y
because old lender has to include the prepayment
penalties. So the borrower says: I don't really
understand these disclosures, but one looks a heck of a
lot more expensive than the other. I didn't realize that
one gets to include the prepayment penalties and one
doesn't. So I'm going to take the new lender's loan, even
though it's vague and more expensive.
So, I don't know why including the prepayment
penalty, which creates an uneven playing field and unequal
disclosures would make a lot of sense on the surface.
MS. AHRENS: We're running out of time for this
portion, but I do want to touch on premium credit
69
insurance and similar products. Why should these fees be
added to the point fees? Anyone have any comment on that?
MR. RANKINS: I just want to make one point on
penalties. For Rankins Mortgage, that's a dichotomy. We
want the benefit of this, as Mr. Samuels said; but, on the
other hand, we bring our borrowers to our credit. They
have to live with the 12 percent interest rate. Then, in
two years, we bring them back to 9 percent. That's the
dichotomy. We experience -- we don't know. We're right
in the middle.
On credit insurance, we would say that that
should probably be added into the fees. We don't sell it.
We think it's a terrible product. We think it's a
disservice to our consumers.
MR. BLEY: If I can make a comment?
First of all, I think you know our theme is that
predatory lending occurs when as a result of the manner in
which loans are originated, that there's a breach of
trust, and that the consumers don't understand the
disclosures because they're too willing, too complex, and
they turn to the loan officer and say: What does this
mean?
In that context, I think we need to make an
observation about what we hear in consumer complaints. We
hear about prepayment penalties. Far and away the
70
greatest consumer complaint we hear about prepayment
penalties is that they were unknown. Not that they exist,
but that they were unknown and there was no opportunity to
include that in the consumer's decision. So the
bargaining part goes away, along with the prepayment
penalties.
So the key here I think is clear disclosure of
the prepayment penalties but in a simple one-page
disclosure which, again, we have attached to our comments.
I hope you get a chance to read Mr. Cross' memo. I can't
emphasize that enough. Again, it has significantly
influenced me on this issue and has really turned my mind
around, not focusing on terms, which I think are
inherently neutral if they are understood, but to the
manner in which these loans are made.
MS. AHRENS: Dan, and then Norma.
MR. MULLIGAN: Prepayment penalties and credit
insurance is probably the worst products that was ever
involved, at least in the way it is sold. And rather than
including them in the trigger, we would recommend that it
simply not be allowed to be sold at the time the loan is
originated. I know the Board, or anyone else, says we
can't sell credit insurance. But if you make the lender
come back after the fact, and in that way let the borrower
exactly see what they're buying or paying for, some of it
71
is unbelievably bad. At least that throws it all in the
pot at the same time and hiding those costs.
MS. WIDENER: I would absolutely agree that it
should not be allowed. I think there should be some
special effort to clarify between private mortgage
insurance and credit insurance. Because I think some
consumers are being confused about that. We really want
to say credit life insurance, and all those credit
products, absolutely should not be allowed. I'm aware of
-- sorry, we don't have studies -- totally aware of
borrowers being forced to take the credit product as part
of doing the loan. It's just ripping off their equity.
I'd like to also say that, in general, on all of
these issues, I did not say it in the testimony, as
represented in the model statute, I think the trigger
should be lowered, the prepayment should not be allowed.
All of these types of things, anything you can do to
communicate the message that this behavior has to stop.
It needs to happen, it just needs to happen.
If the Board is going to err, it should err on
the side of protecting this very vulnerable client group
that's really suffering from predatory lending. People
who absolutely can't read, don't understand what's going
on.
I have to agree that the disclosures have very
72
little effect, even though you have to have them. What we
have to is get at solving the problem of low-wealth
borrowers having their equity totally gone.
MS. GARCIA: Two quick comment, if I may, very
quickly.
One of the things I want to highlight here is
that the assumption is that, in good loan, prepayment
penalties will lower the cost of borrowers by giving them
better interest rate and lower fees. But what we're
seeing with high-cost loans is that the borrowers aren't
getting lower interest rates and they're certainly not
getting lower fees. In fact, the prepayment penalty is
one of several things in a package that makes a loan
extremely unfavorable for the borrower. So I first want
to get to that initial assumption.
The second is that one of the reasons why
Consumers Union believes that prepayment penalties should
be included in the cost factor is because there is a cost
associated with that restriction on the loan. There's a
cost to the borrower and it's, and it has to be in the
cost factor because all of the prime lenders will allow
the borrower to buy down or trade out of the prepayment
penalties by paying a higher fee, paying higher interest
rates. And the point is to discourage lenders from
loading up unfavorable terms onto borrowers in order to
73
create an impossible situation for the borrower, which
will cause the borrower to refinance; and, therefore, get
deeper into their equity to pay another set of fees. And,
perhaps, even a higher interest rate to refinance the
loan.
With respect to credit insurance, Consumers
Union believes that it is a total rip off for consumers.
We issued a report in 1999 that chronicles our findings
where we believe the consumers group were ripped off to
the rate of $2 billion a year for credit insurance. I
support the comments of my other colleagues who said that
credit insurance had no place in the lending role,
particularly at the point of sale of the loan.
MS. AHRENS: Thank you.
MS. DELGADO: As long as we are on prepayment
penalties remains alive, I want to talk a little bit about
it and take a little different position, because
prepayment penalties do have a practical application for
the consumer. It will cost the consumer anywhere from 3
to 4 thousand dollars to originate a loan. No one seems
to talk about that very much. And the prepayment penalty
is a way to buy down that loan. Because just to -- for a
lender, to make money on a loan, or recoup his acquisition
costs, is going to take from 3 to 4 years on average. So
the prepayment penalty is a way to ask the borrower were
74
they planning to keep the loan on their books for 3 years,
or so, and actually buy down rates significantly by one
percentage point a year, or more than that. Actually,
it's a really good feature.
It seems that we should be focusing on bad
practices. Features, by themselves, are good things.
They're very, very good negotiating tools for both the
borrower and the lender.
MR. LONEY: Okay, Jim.
MR. MICHAELS: Just before we close, I want to
make sure that we gave everybody the same opportunity
here. Mr. Rankins is the other lender on the panel. I
didn't get ask the question and I want to make sure you
have an opportunity.
If you can give us, if you have some idea of
what percentage of your loans are not just subprime, but
also covered by HOEPA and how that would change if the
triggers are lowered by 2 point?
MR. RANKINS: Many percentage of ours are HOEPA
loans. We strictly are all subprime, no prime lending.
Our position is unique because we're the only
African-American mortgage banker. The consumer comes in
and, as a consequence, we do home-equity loans that have
been turned down.
MR. MICHAELS: They're all HOEPA, virtually?
75
MR. RANKINS: They're all HOEPA, with lots of
disclosure.
MR. LONEY: And we're glad to hear that.
We will take a ten-minute break, please, and, by
my clock, be back at 10 minutes to 11:00.
Off the record.
[Recess.]
MR. LONEY: Can we get started? Well, I guess
we can proceed, and the other panelists can trickle back
in as they will.
The next session of this morning's meeting,
we're going to examine possible additional restrictions or
prohibitions for specific acts and practices.
Under HOEPA, the Board is authorized to prohibit
acts and practices in a couple of ways: In connection
with mortgage loans, if the Board finds the practice to be
unfair, deceptive or designed to evade HOEPA; and in
connection with refinancing of mortgage loans, if the
Board finds that the practice is associated with abusive
lending practices or otherwise not in the interest of the
borrower.
The Board's notice announcing these meetings
raises several topics for discussion, and, because we have
limited time, I'd like to focus on four of those topics:
Loan flipping, unaffordable lending, regulating credit
76
insurance, and improving disclosures. We'll start out by
talking a little bit about flipping and getting the
panelist views on some of the issues related to that.
Flipping is the, in common parlance, the first
of the frequent refinancing of home-secured loans,
particularly where the customer derives little or not
economic benefit from the refinancing, and where the
lender receives significant income through fees. These
fees are typically added to the loan amount, thus reducing
the homeowner's equity in the property.
What we'd like to talk about, in a couple of
respects, is what regulatory approach the panelists
believe would effectively curb these kinds of refinancing
that do not benefit borrowers without impairing
transactions that do help borrowers. And, so, it's
important that we kind of make that distinction.
In recent reports submitted to Congress by the
Department of Department of Housing and Urban Development
and the Treasury Department, it was suggested the Board
should prohibit refinancing within a specified time
period, unless there is a tangible net benefit.
What would give the Board, in particular, a
basis for deciding what a particular time period should
be? Should it be 12 months, 18 months, 36 months? What
number should we do, could we use? And how would we
77
measure the notion of "benefit" to the consumer? For
example: Would lowering the payment amount and extending
the number of payments actually work out to be a benefit
to the consumer?
So, to start this discussion off, I would be
interested in knowing any responses you have to the
general question of what regulatory approach would
effectively curb these refinancings that do not benefit
borrowers without impairing transactions that help them.
And, then, if you could address the question of how would
we come up with the time period, if that seems like an
appropriate approach, and how to measure the benefits to
the consumer in any flipping.
So, if anybody has any thoughts on this, I'd
certainly like to hear it.
Yes, Ms. Bose.
MS. BOSE: I don't think it should be the
frequency of refinances that should be regulated by the
Federal Reserve. The idea of flipping is most lenders now
put into their broker contracts that, if we refinance the
loan within 12 months, we give them back our profit. And
because this is very detrimental to the industry as a
whole, I believe the industry has taken very strong steps
to discourage loan flipping throughout the industry, and
it varies on how the penalty works. But basically, if the
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borrower refinances within a year, and they don't go back
to that same lender, the lender penalizes the originator.
And I think the industry takes that very seriously.
I hate to see the Federal Reserve start to
regulate how frequently someone can refinance their house,
or when it would make sense, or when it wouldn't make
sense. I think that's just not the purview of government.
MR. LONEY: Anybody over here?
MR. BLEY: I guess I'll get in my comments in my
prepared remarks, as you predicted.
I guess we think the greatest value of
regulation isn't in micro management terms, as you might
guess with my previous comments. But I think the greatest
value in regulation is its deterrent effect. So how do
you deter a predatory lending?
One observation is that we, at DFI, remain
perplexed at the existence of federal criminal penalties
for any consumer who defrauding a lending institution,
while the penalties against lenders for defrauding
consumers are, for the most part, administrative and
financial in nature. A general worst-case scenario for a
lender receiving a consumer, or deceiving a consumer, is
disgorging the profits associated with the violation, and
an admonishment not to do it again. We know that some
lenders see no downside to the undertaking of mortgage
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fraud. At worst, the penalty is to stop enriching
themselves.
So, we believe that the best approach to this is
to deter predatory lending by establishing certain
prohibited acts. I won't go through those. There's about
8 or 9. I'll just point out that they're attached as
Exhibit C to our comments -- by the way, we're making more
copies of this -- on page 7, and it lists what's in the
state of Washington's Mortgage Broker Practices Act, and
lists out what the prohibitive practices to be in the law
and enforced. Again, it focuses on manner, not on
prohibitive terms.
MR. LONEY: Go ahead.
MR. SAMUELS: Again, I have to applaud Mr. Bley.
He's the kind of regulator we like. Because, because it
really is a manner as opposed to a practice issue here.
And I absolutely agree with Ms. Bose. As a lender, we
hate brokers coming back to us and refinancing loans.
Because, then, we don't -- we've paid a premium for these
loans, and we're going to lose that premium.
I have to say, in my own case, I guess it was in
'93 or '94, I believe I refinanced my loan with
Countrywide twice because I didn't hit the bottom of the
interest rate cycle. And, what we really don't want to do
is inhibit people from benefiting themselves when there is
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a down-interest-rate market.
Now, when we talk about benefit to the borrower,
I mean, I hope -- and I talk to my people about this all
the time -- that every loan we make is a benefit to the
borrower. Because that's what we're in the business to do.
So that, when we talk about a loan that only puts fees in
the pocket of the lender, that's a predatory act unless
you see that there is something that is beneficial to the
borrowers.
So I'm not sure that time frames are relevant
here. Because, as I said, I think that what we need to
look at is to make sure that what is happening is the
borrower is given choices to achieve the borrower's
economic objectives. Whether it's taking cash out, or
medical, educational, home-improvement needs, or taking
advantage of a down-interest-rate cycle, or whatever, the
benefit that they see to themselves, we want, we don't
want to put stumbling blocks in the way to be able to
accomplish that refinance.
One of the things I've seen that troubles me
greatly is a proposal that another lender can refinance
your loan, but you can't refinance it within a certain
period of time. "A Miracle on 34th Street" was a great
movie, but, you know, the Macy's, Gimbels' thing doesn't
work in this situation. We want to be able to refinance
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our borrowers, and we think we could do it in a way that
is more beneficial to the borrower because we can do it in
a more efficient and less costly manner than some of our
competitors. We certainly would not want to be faced with
a law or regulation that prohibits us from doing that.
MR. LONEY: Mr. Courson.
MR. COURSON: We, as part of the process of the
mortgage reform group over a two-year period, debated this
topic extensively, both time periods, net benefit,
measuring benefit. That group included not only lenders
but service providers and consumer groups, and frankly
found ourselves in a quagmire. It was a circular argument
that could never identify all the unintended consequences
when you get into trying to identify the specific acts by
either regulation or legislation that would, in fact,
prevent flipping, and it totally broke down. And,
therefore, I think, when you try to get into that, you
really find yourself never ever able to capture those
precise elements that will stop the flipping. And I think
the answer is, as the other panelists have said, you have
to really look, therefore, at the predatory practices
themselves.
MR. LONEY: Did you --
MR. MULLIGAN: Yes. We've also seen a lot of
flipping, and even though our associates are not here
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today. But we have tried and tried as well to come up
with something that could be regulated in that area and
none of it makes any sense in terms of the ability of the
individual consumer to determine. So we also don't urge
any prohibition on that, or any attempt to regulate, but
rather to increase the enforcement. Perhaps he single
largest issue from our point of view is to eliminate the
pattern and practice requirement for abusive practices
under the code. It becomes a monster to litigate. In
fact, it becomes almost impossible to either bring a
class-wide claim or your own. If that could be removed,
then, the ability to go after the lender for predatory
conduct would be increased enormously on an individual
basis.
MS. WIDENER: I think what the Board -- oh.
MR. LONEY: Go ahead.
MS. WIDENER: I don't have, I can't offer any
specifics with regard to how one might regulate what the
problem is and prevent it specifically. But I think, in
general, the Board has the power of its CRA examination
authority to discourage the feeding of those who do the
flipping. And that is that I believe the CRA credit is
given for the purpose of purchase of subprime loans. And
to the extent that is true -- and I don't know how that
exactly works. I just keep hearing that they are given
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credit.
To the extent that's true, I would encourage the
Board to withdraw from giving credit for the purchase of
subprime loans in the CRA process until there can be a
clearer definition with regard to what is predatory versus
what is subprime. And right now, I think that we're
treading too lightly on the issue of subprime in an effort
to not close down a flow of credit to a certain client
group. But I think, in that process, we're allowing a lot
of low-wealth borrowers to get ripped off.
So, again, I'm suggesting that the situation has
gotten to the point, and I don't have the ability to do a
study, but I know through what we're looking at in the
NeighborWorks Network. I know what I'm hearing through
Habitat for Humanity, folks that I work closely with, that
too many people who have been helped are simply having
their equity ripped off.
It's become an issue of the Congressional Black
Caucus, it's so big, that low-wealth borrowers are
increasingly unable to pass on wealth to family members,
to future generations. And it's getting to a point that
we just need to say, Halt!, and let's see what we can do
to just back off the whole situation of subprime to the
extent it cannot be clarified as not predatory.
MR. RANKINS: May I make a comment?
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MR. LONEY: Sure.
MR. RANKINS: With respect to some of the issues
that Ms. Widener addressed, these borrowers are not as
unsophisticated as some people would contribute they are.
I'd say 30 percent of the homes that we refinance, these
homes are paid for. These people come in for various
reasons: weddings, buy campers. A great deal of them
are seniors who want to buy a RV. They want to put a
grandchild through college. That's what they do with this
equity, and that's what they want 20, 30 years,
respectively, in order to do that.
So, we don't want the Board to be placed in the
position to try to impede some of that, called economic
growth for us. And some of these people, who are on fixed
incomes or retirement, I agree with Ms. Twohig, there
should not be asset-based lending; but there should be, in
many respects these people should be given an opportunity,
if they qualify and there is an ability to repay, they
should have that opportunity to utilize that asset, their
homes.
MR. LONEY: Yes.
MR. SANDS: Just a couple of points on
prohibited practices, generally, and flipping,
specifically.
First of all, it's obivous that time frames
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really are a problem because it really doesn't address the
emergency. You will find a lot of borrowers, who are
credit-impaired, may have emergencies that come up,
medical emergencies. They are suddenly impaired from the
financing and taking money out of their equity to pay for
medical emergencies, and they're left with no choice, or
maybe a worse choice.
Secondly, I think as John Courson pointed out,
coming up with these safe-harbor minimum standards is
probably impossible. In coming up with a amorphous
standards means you're going to end up with as many
different standards as are judicial districts. And I'm
not quite sure why that benefits anybody but me, as an
attorney. So I'm not quite sure how that benefits anybody
else, though.
Just a couple of points on safe harbors as poor
excuses for prohibitive practices. First of all, I'd like
to suggest, and people think about, whether if the
borrower obtains truly independent counseling as part of
any prohibitive practice or term, or whatever it is that
the Board considers safe harbor for truly independent
counseling -- I'm sure what that means, necessarily, in
each case.
I do have a client that sells credit life
insurance and requires the borrower to go to legal aid
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organization in Los Angeles and get independently
counseled before they place insurance. But they don't
have a safe harbor for that. I really think they should
in that circumstance. Secondly, they consider -- and that
was part of the HUD, I can't remember which report, but
have a part up for credited Investors.
One thing which certainly makes me, which I find
most foreign in my practice, is wealthy borrowers who --
and the SEC has, for example, one standard of what a
credit means for very wealthy borrowers who have their
loan negotiated by an attorney, and they come back and
say: Well, you know what? You missed something. We
don't like the loan. We want to do something. And there
will be, in fact, credit investors, even falling under
HOEPA, who may be going through a divorce, have their
credit ruined, and are going through difficult times.
And, in fact, get a Section 32 loan, and then try to take
advantage of the fact that they were sophisticated: they
had been represented by counsel. It's a very small group,
but it's a troublesome group. I'm not quite sure that the
laws would benefit that group. I'd like to consider
whether that makes sense.
MR. LONEY: Governor Gramlich, you wanted to ask
about enforcement.
GOVERNOR GRAMLICH: We'll do that last.
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MR. LONEY: Last?
GOVERNOR GRAMLICH: After we do the next
portion.
MR. LONEY: Okay. One of the things that has
come up in the context of this is the issue of balloon
payments. And we understand that, to avoid HOEPA's
restrictions on balloon payments, some lenders may include
payable-on-demand clauses in HOEPA loans. Is this, in
your experience, prevalent where flipping occurs, this
notion of payable on demand? And should the Board
consider restricting payable-on-demand clauses?
Does anybody have any thoughts on that?
MR. MULLIGAN: We don't really see it as a
problem. The use of balloon payments is very limited. It
does have its pockets, but it's very small, small segment
of the market. And payable on demand is really sort of a
term, which, to me, doesn't make much sense, because
you're paying off, you're flipping anyway. It really
calls into question the disclosure element behind the
problem. There's nothing wrong with balloon payment if
you know it's there. If you don't, it's a real killer.
MR. LONEY: Anybody else want to say anything on
payable-on-demand loans or flipping, generally, before we
move on?
(No response.)
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If not --
MS. WIDENER: Could I comment on flipping
generally? I think, again, I want to emphasize that it's
really important to define the term in a way that
everybody is meaning it the same way. The work done by
Consumer Advocates, for example, on the definition of
flipping, gave the example that was in the Wall Street
Journal on April 23, 1997, where there had been a number
of loans in a four-year period representing in the fees,
in the flipping process, being $29,000 for a $26,000 loan.
So I think that, you know, we've just got to get to
defining what we're talking about here in graphic ways
that everybody can understand what we're trying to stop,
and not inadvertently feed this activity without knowing
it.
MR. LONEY: Thank you. Any other thoughts on
this before we move on to the next item?
(No response.)
We're going to change the focus now to talk
about ways to address unaffordable lending. Jim Michaels,
here, will lead this discussion.
MR. MICHAELS: Thank you.
Under HOEPA currently, creditors may not engage
in a pattern or practice of extending credit that's based
on the collateral loan so that, given the consumer's
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current and expected income, current obligations and
employment status, a consumer will not be able to make the
scheduled loan payments. For purposes of this hearing,
there are a couple of questions we're not sure that we
would be able to cover or do justice to, and the first is
the question of whether there ought to be a pattern or
practice requirement that is the clear requirement of the
current statute. It's one that dealing with that issue is
one that's more appropriate for the Congress. It's not
something the Board could deal with by regulation, and so
it's something we have to live under now.
And there is a second issue of how do you know
when you have a pattern or practice? It's a difficult
issue. It rises under a number of different statutes,
including HOEPA. It's one that the courts have struggled
with, but it is primary a legal question. We can
certainly debate it at length here, but we're not quite
sure. We don't know if that would be useful.
So, assuming we do have this law that is not
wonderful, but to engage in a pattern or practice of
lending where the consumer cannot make the scheduled --
I'm sorry -- where the creditor has not considered whether
or not the consumer can make the scheduled repayments. We
want to move to some very specific issues. And that
simply is how do you deal with this prohibition in terms
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of enforcing it.
Currently, and there is a requirement in our, in
HOEPA, that, if there is a prepayment penalty, it's
allowable, and there are several conditions of HOEPA from
where you might allow a prepayment penalty. But there is
a yardstick for verifying that consumers have some
repayment ability, an additional 50 percent debt-to-income
ratio test. There is a documentation requirement that
they have the ability to make the payments on the loan
before you impose a repayment penalty.
So what we are considering is whether or not it
would make some sense to have some additional yardsticks
in HOEPA regulations for when a lender has failed to
consider the consumer's ability to repay. There's a
couple of ways we can do this. But the one that comes to
our minds is simply having a verification or documentation
requirement to show that lenders did, in fact, consider
the consumer's ability to repay by looking at credit
reports, by looking -- by verifying employment income, by
looking at current obligations.
So the first question I want to ask is whether
it makes sense to have some sort of verification or
documentation requirements in connection with this
prohibition under HOEPA? When we proposed HOEPA
initially, we had a lot of comments from industry
91
suggesting that we not do that, so the current rule is to,
in fact, not do that. The question now is whether the
Board should reconsider that and impose such documentation
and verification requirements.
Let me open the discussion on that. So, Peggy,
first.
MS. TWOHIG: Part of the Commission's statemenet
addresses this issue. And the Commission believes that
documentation requirements would be extremely helpful.
We've seen very poor documentation by lenders. At the same
time, it doesn't appear that they're adequately
considering income. It's extremely hard, as an
enforcement matter, to sometimes figure that out, and then
we face the possible defense that, oh, we considered it;
we just didn't write it down.
What we have seen in our cases so far, even
where there was very poor documentation, for instance,
where there was no income recorded at all. Income was
clearly not verified or was pretty clearly suspicious.
We've seen instances where no credit report was pulled.
Sometimes the credit report was pulled and the
debt-to-income ratio that was calculated ignored clear
obligations in the credit report. So we've seen all
manner of problems in terms of lenders not really
considering ability to pay fully.
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We think it would be extremely helpful, both
from an enforcement perspective, and also making sure the
lenders, who do need to comply with the HOEPA asset-based
lending provision, are forced to specify what they are
considering. We think it would have a deterrent effect in
that regard.
MR. SAMUELS: We talk about this issue, I think,
at some length in our written comments. But let me just
say, very briefly, that we think this is a very dangerous
area to get into. Because the reality is that, in many
communities, including the many minority communities and
immigrant communities, sometimes it's difficult to
document income. And there are a lot of jobs that carries
with it the difficulty of documenting income.
Again, what we're trying to do is to walk that
very fine line between making sure that people who can --
who apply for loans, can pay it back. Not just out of the
equity in their homes, but out of their sources of income.
And the issue of not restricting people who are involved
in trades or occupations where they're in cash businesses,
where income documentation is difficult, we don't want to
restrict those people from qualifying for home loans.
GOVERNOR GRAMLICH: The obvious question is: If
you can't document the income, how do you know the income,
and how do you know they can pay the loan back?
93
MR. SAMUELS: Right. And I would say that there
are certain reality checks, let's just say. And I'll
take, you know, sort of a waiter in a restaurant. If a
waiter in a restaurant puts down that he or she is making
$300,000 a year, we're going to ask what kind of a
restaurant they're working at, and, you know, whether
that's real.
There are some ranges that we have to, you know,
consider. We have stated income loans. We have, you
know, other kinds of loan products where people -- and
I'll say doctors and lawyers are probably at the top of
the list of people who want to qualify for these loans.
They don't want to show us all of their verification for
the income that they may have. And, so, there are
programs where we do check that they can repay the loans
under certain guidelines, but there are -- it is difficult
to have the same kind of verification that you would if
some -- if the entire nation worked on a W-2 system, where
you'd have to do is, you know, call the payroll department
of a company and say how much is a person making.
So it is a more difficult -- it's a more
difficult task. It's a difficult underwriting challenge,
but it's one that we don't want to have to worry about
meeting every time we have a difficult borrower to verify
their income. We don't want to be faced afterwards with a
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challenge that, oh, you didn't take into account the fact
that I couldn't pay this loan.
GOVERNOR GRAMLICH: Are there are a lot of
high-income doctors and lawyers who presumably may be
playing some games with the IRS, or somebody in he HOEPA
segment?
MR. SAMUELS: I don't want to impugn a segment
of our borrowing base. I'm not going to suggest that.
Let's just say that some don't want to be as forthcoming
as others.
MR. MICHAELS: Let me just clear some of your
assumptions. First of all, if we're talking about
documenting income and current debt, and we're talking
about only HOEPA loans, and we're talking about making
sure that the rule -- making sure that it's documented as
a pattern and practice, as opposed to going to individual
cases. Is that still prone to saying, as a pattern and
practice, you must generally document income and expenses
for HOEPA loans? Doesn't that give you enough flexibility
that you need for individual cases?
MR. SAMUELS: Well, I'm not sure where we would
end up. If you're going to impose, for example, a certain
percentage on the lending industry, which we very much
would not want to see happen, and you say: Well, in an
individual case, you might exceed the 50 or 55 percent;
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but, as a pattern and practice, you're not. I'm nervous
about that. Because, again, I can't necessarily get to a
50 percent -- I can't, with any certainty, say that person
falls within a 50 percent, you know, ratio, where I can't
necessarily verify that this is what this person is
making. Now, what I may have to do is, I may have to go
down 45 percent, you see? Because, if I can't verify it
and I have to worry -- and, by the way, we're very much
opposed to what Mr. Mulligan suggested before, and this
eliminating the pattern and practice requirement -- as you
can imagine.
Because, you know, we don't -- you know, people
do make mistakes, sometimes, and there are anomalous
results sometimes, that don't make you a bad actor, you
know? It makes you -- you need to rectify that situation;
but it doesn't mean that you violated the law. I mean, to
the extent that you are on a -- that you are engaging in a
practice of making loans to people who can't afford to pay
them back, yes; that's a violation.
What I'm saying is: There are industry standard
guidelines that legitimate lenders utilize in trying to
make as many loans as we can. That's what we're in the
business of doing; and that's a very good thing, we think.
What we don't want to do is to impose restrictions on us
to eliminate a class of people whose income is difficult
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to develop.
MR. MICHAELS: Well, let's suppose, let's
suppose we were not talking debt-to-income rations, per
se. That the only requirements we're talking about is
just the lenders who, as a pattern and practice, document
that they consider any common expenses, without having any
specific ratio that was required to be met. And did that
as it applied HOEPA loans.
MR. SAMUELS: That's called underwriting.
MR. MICHAELS: Right. That's why I'm having a
hard time saying --
MR. SAMUELS: No, no. We have no problem with
underwriting. But, again, I have to say that my CEO,
Angelo Mazzolla, who some of you may know, often talks
about the days when he sat across the table from, you
know, borrowers and, you know, these people were saying to
him, you know, "I want this home. I will work two jobs in
order to get this, you know, this home." And he would
make that loan everyday of the week.
MR. MICHAELS: But is that really relevant? As
a pattern and practice, you don't make a high-cost HOEPA
loan that way without at least documenting these things.
MR. SAMUELS: Is that -- I'm not sure.
MR. MICHAELS: In other words, as a pattern and
practice, you don't make high-cost loans covered under
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HOEPA, isn't that right?
MR. SAMUELS: As a practice, we do not make any
loans where the individual, you know, where we can't have
some degree of certainty that the person is going to repay
the loan. I mean, that's, as I said, that's called
underwriting, and that's what we do. We don't just say:
Let's take a look at that appraisal, okay? Is there
enough money in that, in the value on that house, for us
to make loan? No. I mean, we don't do that. And the
lending industry does not do that.
MR. BLEY: Predatory lenders may, and I think
the context of this unaffordable loan discussion needs to
be in the context where there's high equity in the home,
and that the loan may be for something -- and I'll just
pick an arbitrary number -- 40 percent of the loan to
value, or 60 percent of the loan, where there is equity
after foreclosure. And the issue is: Will that loan ever
be foreclosed on because the consumer can't afford the
loan. I think the biggest concern here, and one thing
that we've identified, is that most of the loans that we
would consider coming from predatory lenders, are variable
rate loans. So the cost of the loan is going to
accelerate through the terms of the loan, especially in a
rising interest rate environment, which we've been in.
Now, it's our understanding that Section 32
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requires the consideration of the consumer's current and
expected income, but only the current obligations. So
that's best-case scenario from the point of view of the
lender. That's what needs to be considered.
We would suggest that, really, what public
policy should require is the opposite of that. That the
borrower's income should be fixed at the point of
origination because there is much less a guarantee that a
borrower will retain employment or receive raises than to
guarantee that the rate will increase, and use the
worst-case payment stream calculated at the maximum the
creditor could move the rate. If that is determined to be
unaffordable, then you run a real danger that that lender
is going to -- will make that loan. A predatory lender
will make that loan knowing that, knowing that the loan
will, or a high probability that the loan will go in
default, but that there's high equity and they can make
money off it.
MR. LONEY: Anybody else?
MS. DELGADO: I actually -- I have a question
for Mr. Bley.
Mr. Bley, how do you implement that? How do you
enforce it? And let me give you an example, since we are
in the business. Let's say that we underwrite a loan at 2
percent above prime, 11.5 percent. How would you do the
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debt-to-service ratio calculation? I mean, assuming --
would you assume that prime rises 10 points? I mean, that
could actually disqualify the borrower from obtaining
financing. I don't know how you would implement that
proposal such that the borrower is still eligible for the
loan. Am I misinterpreting what you said?
MR. BLEY: I --
MS. DELGADO: It's not a bad idea. It's just
that --
MR. MULLIGAN: Let me ask it this way. Let me
rephrase the question to you. How do underwrite that loan
now?
MS. DELGADO: You underwrite the loan based on
the current prime.
MR. MULLIGAN: And given that the interest rates
are going up or down, and, in fact, I haven't seen anybody
without a 4 on their notes in recent years, so they
actually go up and don't go down, what is your assumption
for the future?
MS. DELGADO: Well, I mean, at what point do you
assume payment shock occurs and the borrower can't make
the payment?
MR. MULLIGAN: Exactly. So you're underwriting
is really loan to value, isn't it?
MS. DELGADO: Our underwriting is not loan to
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value.
MR. MULLIGAN: I understand. I mean, not your
company; but, in reality --
MS. DELGADO: We're a lender.
MR. MULLIGAN: Yes. But in reality, what's
you're looking at in these types of loans, especially with
no-doc or income-stated loans, is, with all due respect,
is just loan to value. That's all your looking at.
If you've got a borrower sitting in the
inner-city, or wherever, that is qualified under these
standards, and you're taking an income-stated or no-doc
loan, that's about all you're looking at is the equity.
That's all you've got. And I'll tell you what you get in
terms of the package -- and I've seen a lot of them --
handwritten statements saying, gee, I run a babysitting
service, I make -- I've seen $5,000 dollars a month by a
woman who is fully employed, they had the W-2s. Or, gee,
doesn't your son live here? He could probably pay rent of
X. Or, you know, golly, you can probably rent that part
of your house out for this. Write that down for us, and
that goes in the loan package, and there is no
verification.
So, if you're looking at verifying, be careful
of what you're looking at. Because, the moment you turn
around and turn on the lender and say: I want some relief
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from this borrower. The counterclaim is that you
defrauded us in the loan application. Look! It's in your
own writing, right here.
And to finally answer your question, Mr. Bley, I
don't know how you would actually consider the variable
rate. I don't know how you do it now, and I don't know
how you would do it if you were doing it now. I agree
with it, but I don't know how to do it.
MR. BLEY: I think I'll give a lawyerly answer.
I think it depends on the facts and circumstances.
[Laughter.]
But I think, but I think, I think it states the
point, that there's a tendency in these areas to find
absolute objective criteria. And that, in my opinion, is
not the real world. My constant theme this morning has
been prohibiting acts or practices and enforcement.
Inherent in that there's lot of discovery, a lot of
interviewing, a lot of, in some cases, a lot of
confrontational, adversarial type deposition processes.
And I think part of the burden of the state in this area
is that maybe this is the prima facie elements of a case.
But, then, I think the state would have to prove some sort
of -- in deference to Dan -- pattern or practice, maybe in
an individual case, but some form of intent that really at
the base of this transaction it wasn't to make a loan at
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all. It was to steal the equity.
So, to answer your question, there is no silver
bullet. It's based on facts and circumstances, and
probably it's the state's, it's got to be the state's
responsibility to prove that.
MS. DELGADO: And, so, maybe the way to regulate
this type of activity, making unaffordable loans, is to
force lenders to submit, to disclose foreclosure and
repossession activity. And that can very easily be done.
MR. BLEY: That's a good regulatory technique to
determine whether that pattern or practice may be made.
MS. TWOHIG: On the documentation point, I just
want to state that I don't think we're asking for a whole
lot. As has been pointed out, HOEPA does require that
current, that income and expected income and employment,
and at least current obligations be considered. And all
we're asking for is that the lender be required to record
what that is so we can then evaluate it and do our job.
And, right now, it's not a requirement. So we have seen
it.
Mr. Samuels said that they do some kind of
verification. That's fine. Just note what it was.
Because we have seen many instances where that's just not
noted, and they'll come back and say: Oh, we did this, we
did that. But it's very hard to know, for sure, really
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what was done, and to investigate whether that really was
done, when it's not even noted.
MR. GNAIZDA: If I might ask a question
regarding foreclosures. I'd like to ask it of you, Mr.
Michaels. Does the Federal Reserve, or anyone else, have
that data by state, and then by companies? Wouldn't that
-- and then my second question would be: If you don't
have it, wouldn't that be highly useful, given what we've
heard today? I'm not sure what you've heard in Chicago,
in Boston or North Carolina.
MR. MICHAELS: I'm not sure anybody came here
today to hear my opinions.
MR. GNAIZDA: I'm very curious.
MR. MICHAELS: It's my understanding that we do
not have any data. But I think it would be helpful.
MR. GNAIZDA: Could I ask how helpful? Because
I'd like to make a recommendation, if you think it's
highly helpful, that we get it. And I would think that
among the various regulators, nine of them who are working
with you -- including yourself, you had nine major
regulators -- you should be able, with your jurisdiction,
to be able to get a good cross-section, particularly, if
you call upon the leadership, such as the state of
Washington and a few other major states.
So I'd like to make a request that that, the
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effort, be made within the next 30 days to gather the
information, and, hopefully, we can have a report within
six months.
MR. MICHAELS: I will tell you the issue came up
in some of the other hearings, as well. It's obviously
something we're going to consider.
MS. WIDENER: Could I comment? I just want to
go on record supporting Peggy's comments about
documentation. That is about the minimum that we can
require with regard to a practice. I mean, the minimum.
There has to be evidence that the lender made a judgment
that the person could pay back the loan. If they did not
make a judgement that the person could pay back the loan,
they have violated the law, and I think that should be
clear.
MR. MICHAELS: Let me, let me take this
discussion one different step; and that is: HOEPA now
currently says that it's a violation to engage in pattern
and practice in asset-based lending, but that applies only
for HOEPA loans. What if that prohibition were extended
to non-HOEPA loans? I want to consider that question
separate from the question we were discussing about what
you do in terms of adding documentation and verification
practices. Assuming, for a second, that we're not talking
about additional verification and documentation
105
requirements, what if we just extended the prohibition on
asset-based lending to non-HOEPA loans, as well? The idea
is that it's probably no better a practice to engage in
that type of activity at interest rates just below the
HOEPA trigger on loans that are at the HOEPA triggers, or
above the HOEPA triggers.
MS. TWOHIG: Would you define what you mean
before I answer it?
MR. MICHAELS: Yeah. I'm now using that as
shorthand for the whole -- the HOEPA prohibition says you
don't engage in some pattern or practice in making the
loans where you don't consider the consumer's ability to
meet the scheduled payments.
MR. RANKINS: Since we admittedly admit that we
do many 8 percent HOEPA loans, we do use the stated-income
program. That's a good product that we've used over the
last four years. There are an array of contrators,
beauticians, different people will are self-employed
that stated-income program mostly applies to. We have
never made a loan that we haven't used bank statements or
tax returns. Okay? The tax returns -- I think
beauticians are the ones. That's a cash cow business.
They'll maintain, well, I make $30,000, with respect to
the revenue. But then they'll bring me a bank statement
with $100,000, because there's some savings account.
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So we have ways of being able to protect the
investment, and that's not looked upon as an asset-based
loan. I think that has been the documentation that I've
used. To date, I've never used the program, when I had a
program implemented, where it was just we wrote a
statement. It was some verification of some kind.
MR. MICHAELS: I guess -- I take it, then, that
the current prohibition doesn't affect your 98 percent.
Expanding it isn't going to be a problem for you, either.
MR. GNAIZDA: I'd like to make a comment along
that line.
MR. MICHAELS: Go ahead.
MR. GNAIZDA: As you know, we have an
underground economy in the Unites States. No one knows
the extent of of it. It's estimated to be at least 155
percent. In many minority communities, it's 25 percent.
I've been told that, in California, like Calexico, on the
border, it's 50 percent. We can't deny people
opportunities to get credit because they're participating
in the underground economy. And what I think would be
interesting is using Mr. Rankins as an example. Because I
have a feeling you're doing very good work. You have to
get back to what John Bley has talked about, the whole
trust relationship. And one of the things I would look at
is: What's the percentage of foreclosures?
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I'm not asking you to give that.
MR. RANKINS: I will.
MR. GNAIZDA: Okay.
MR. RANKINS: I came here to disclose.
MR. GNAIZDA: Right.
[Laughter.]
MR. RANKINS: I most definitely am doing
disclosing.
MR. GNAIZDA: Okay.
MR. RANKINS: From my recollection on the stated
loans, and that's what we call them in the industry, the
stated loans, to date, the ones that we've made, I can't
recall a default.
MR. GNAIZDA: Congratulations.
MR. RANKINS: I can't recall one default. But I
was just telling Dan, a minute ago, why would an investor
make a loan that has the inability to repay? We're not in
the real estate business. And trust me, whenever even the
broker or the correspondent makes a loan and it goes into
foreclosure, it all comes back to him. It becomes an
issue, all the issues associated with making this loan.
You're looked upon making laws, bad laws. It's a domino
process. So, we want to be very, very careful of what
type of loans we make.
MR. SAMUELS: If I can address the foreclosure
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issue, for a minute, because I think that it's very
important. Again, I think that we do not, we shouldn't
fall into the trap of saying foreclose equals a predatory
loan. In fact, we looked at this.
We've looked at this in some parts of the
country, in particular, because we were concerned about,
you know, some statistics that we saw. And we analyzed
every single one of the foreclosures that we did in a
particular Zip Code. It was interesting that I think one
of the 26 that we looked at was a subprime loan. The
others were I think FHA or conventional. But what we saw
in each case was a tragedy of some sort: a divorce, a
death, a medical, a serious medical problem. Every case
was one of those. Our big problem in connection with
foreclosures was the fact that the borrower would not call
us, or return our calls, or answer the door when we sent
people to, you know, to the door.
We have a, we have a SWAT Team, a loss
mitigation SWAT Team, that we send into areas because we
don't want to foreclose on people. That is a bad thing.
We lose money, the investor loses money. I see all the
lenders, sitting around the table, nodding their heads.
And that is the fact.
And, so, when we sit and hear: Oh, you are
making -- you know, directed at us -- the industry is
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making predatory loans so that they can foreclose. We're
saying: What are they talking about? Because it is a
lose-lose situation for all of us. And I will tell you
that it's difficult sometimes for us to get people to call
us when they are in dire straits. Embarrassment, hoping
it'll go away if they don't deal with it. I mean, there
are a lot of reasons why people don't address these
issues.
We have an excellent track record when we are
able to sit down with the borrower, who is in default, and
work something out with them so that they don't lose their
homes. I mean, we have some tremendous statistics in that
regard. But I think it's very important that, when we
talk about bald foreclosure statistics, we don't say: Ah,
there's a lot of foreclosures here. It must mean there's
predatory lending. I'm not saying that it doesn't go on.
But I have to say that, in our experience, and I would
venture to say in the experience of everyone who is
sitting at this table, that a foreclosure is a bad thing
not just for the borrower, but also for the lender.
MR. GNAIZDA: I want to make a comment. I don't
think that's the case with many of the lenders. I want to
get into the circumstances. I know it is for you, but I
want to ask a question that I think is very relevant. You
gave me a statistic, basically, only 15 percent of those
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that were involved in the foreclosure respond to you. And
I'd like -- it gets back to Mr. Bley's point about trust
and understanding.
Mr. Rankins, when you have a problem, what
percent of the people you make loans to respond?
MR. RANKINS: With respect to foreclosure?
MR. GNAIZDA: Not even foreclosure. Just
generally problems. Do you find that --
MR. RANKINS: The payments, things of that
nature?
MR. GNAIZDA: Yeah.
MR. RANKINS: I would say that we get a pretty
good -- I would have to say, you know, I would probably
have to get with one of my branch managers who handles the
delinquencies. But delinquencies that we experience is
probably that we get a pretty good response. We call and
we even go to the home, as Mr. Samuels said. But in our
community, we personalize a lot of that. So we get a
pretty good response. I would say 90 percent. Very few
-- and, if we don't get a response, there is a problem, a
death, they're out of town, or something like that.
MR. GNAIZDA: I wasn't intending to say anything
to be critical because you told me that you're trying to
improve your ability to communicate. But what it does
indicate is that there is a fundamental problem that we
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can't get around unless we directly address it, and that
is the relationship of the lender to the borrower. Now
some lenders take advantage of that, as Dan Mulligan
discussed regarding First Alliance, and their predatory
practices. But you have Countrywide, which is taking
advantage of it in a positive way.
MR. MICHAELS: We have several people who still
want to -- we want to try and wrap this part of the
discussion up in a couple of minutes. So I'm going to
call on everybody, with the understanding that we're going
to try to keep it short. So, you first, Mr. Courson
second. Was there somebody else?
MS. GARCIA: Very briefly, I want to say that
foreclosure information is very, very helpful and useful
for us to see if there is a trend there. Foreclosures
don't always equate to predatory lending. But a high
percentage of foreclsoures might be some sort of indicia
that there is a problem there. I think you heard the
gentleman at the end of the table, Mr. Rankins, say that
he lets to HOEPA borrowers. HOEPA borrowers don't
necessarily equate with poor borrowers. They're
performing borrowers. So it is possible to make HOEPA
loans and have performing borrowers and do this
successfully.
It is very interesting that such a large portion
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of your business is HOEPA, but you have a very low rate of
foreclosure. I think that's fascinating. I mean, I think
that's something that the industry should study and find
out what is it that Mr. Rankins does that other people
aren't doing? How can he make HOEPA borrowers successful
borrowers?
MR. COURSON: I want to quickly address the
point. You asked the question about extending the
asset-based restrictions, stated-income restrictions, to
non-HOEPA loans. And I don't want to, I don't want to let
the moment pass saying that I think that is fraught with
problems in terms, again, going back to the same type of
discussion we had on flipping, of capturing all of the
elements that might, in fact, make that a very legitimate,
bona fide loan.
So, I have to tell you, I was laughing with
Sandy coming in today. You are now looking at one of
those, as of yesterday. I just bought a condominium, and
just bought the company from City Group. And I was told
that, well, now, since you're a sole proprietor, we can't
trust your income going forward, so you are now a stated
income. So, I are one.
[Laughter.]
I think there are circumstances and it just goes
to point out that, when you drop that back into the total
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population of mortgage loans, there are going to be
undetermined circumstances that we really need to be
involved in and aware of.
MR. SAMUELS: I gave him my card, though. I
won't give him disclosure.
[Laughter.]
MR. COURSON: So did Mr. Rankins.
MR. RANKINS: I are too. I have a mortgage,
too. It's stated.
MR. MICHAELS: Was there one more.
MR. SANDS: Yes. Just one other thing. I think
it's really critical and just want to reiterate the point
that Sandy made, and some other people made. It is
critical that underwriting standards be kept flexible.
You know, every client I know that I have does some sort
of income verification review. Can the person repay that
loan? But the loan is based on character, collateral and
credit. And, so, it's disingenuous for anybody to say
that don't look at collateral. They absolutely look at
collateral. And, you know, I don't want anybody to think
that's not the case, but just make sure it's kept as
flexible as possible.
Secondly, the big problem, and we are on the
other side of some cases, as is -- the same side as Mr.
Mulligan on some cases involving a company he mentioned.
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These are sales tax issues. Every single one was a sales
tax problem. They were misleading, fraudulent sales
taxes. So I'm not quite sure, by anything we discussed
today, that, unfortunately, would address that.
Thirdly, I do want to reiterate this point: I
really hope the Board puts, in some way, that allows a
creditor to correct Section 32 problems.
MS. WIDENER: I'll be very brief. On the point
of the cash economy, let me just suggest that, as a
direction, we work very hard to push borrowers to document
their income. That the value of forcing them to do that so
that they create the type records, that they need to be
solid borrowers in the future, is very, very important.
Not only in terms of fairness to the country and them
paying their taxes, but in fairness to themselves and
getting brought under the Social Security System, for
their own future. So I just think that everything that we
can do to push people in the right direction to have a
sounder society is what we should do.
MR. MICHAELS: Thank you.
We have two or three topics we still want to
cover, and we have about an hour left. So, with that
understanding, we can cover them in 20, 30 minutes, we'll
try. The next issue we're going to bring up may engender
a much longer debate, so that's why I'm telling you.
115
It's the issue of credit insurance. We touched
on it a little earlier in the limited context of whether
or not the premiums for credit insurance should be put
into the HOEPA points and fees trigger. I'd like to
broaden the discussion as to talk about credit insurance.
We have heard a number of recommendations during both in
the HUD-Treasury Report and the hearings we've held. The
clearest of these has been the suggestion that we just,
that HOEPA just ban or forgive the sale of credit
insurance in connection with HOEPA loans. The other
suggestion is that we prohibit the sale of credit
insurance at that time and allow the sale to be delayed to
post closing.
MR. SAMUELS: Can I ask are you just talking
about single premium?
MR. MICHAELS: Single premium.
MR. SAMUELS: Single premium, right.
MR. MICHAELS: Single-premium credit life for
those who are -- it's the practice of a selling credit
insurance policy with a premium for the entire term of the
policy, which is due and payable at that time of purchase;
but, then, the entire cost is put into the loan amount and
financed. So the consumer is, in fact, paying the credit
insurance every month as part of their loan payment. The
alternative to that is to have a policy where you pay the
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premium monthly for as long as the insurance lasts. The
practical difference is, if it's a -- let's say it's a 15-
or a 20-year loan, the credit insurance policy may only
last 5 years. So it's a difference about whether you pay
the premiums divided up over 5 years, as you pay monthly;
or whether you pay it up front and finance it and pay a
little bit over the entire life of the loan, which is 15
or 20 years, which reduces the amount of the monthly
payment for the credit insurance, but then you do also
have to pay the interest on the amount you borrowed up
front. So it's a complex issue.
We've heard these suggestions. What we're
looking for is whether there are other suggestions that
might also work. One of the things that had occurred to
us is that, under HOEPA, you get a disclosure three days
before loan closing. That disclosure has in it the amount
of your monthly payments. If you have not purchased
credit insurance at that time, that monthly payment should
only be the amount of the loan, the amount that repays the
loan principal and interest. If you go to closing, and
then you purchase credit insurance, and you finance it
with this lump-sum premium, your monthly payment is going
to up and there should be, at that point, a redisclosure
under HOEPA of what the new monthly payment is going to
be, and an additional 3-day waiting period before closing.
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That's the way we believe our current rules work.
The question is whether or not there needs to be
a better disclosure at closing in situations where the
insurance may be part of the transaction prior to closing,
or whether there needs to be better disclosures at
closing, or whether there needs to be better disclosures
after closing.
After closing, the issue is, and I use the
phrase, "packing," where the loans automatically include
insurance. The consumer is told very little, if anything,
at the closing. Is given a stack of documents where
insurance is clearly in there, but the consumer never has
a chance to focus on it. And, then, the question would
be: What additional disclosure, after the closing, might
help the consumer focus on that insurance purchase, and
whether or not the consumer might have some right at that
time to cancel the insurance and get a rebate of the
premium?
That's a lot. I know I've rambled on a bit.
Those are some of the things we've talked about at our
other hearings, so I want to open it up for discussion as
to what we should do under HOEPA about credit insurance.
MR. SANDS: I can't say I know a heck of a lot
about credit insurance, but I do have a couple of points
to offer.
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You know, obviously, the one issue is
disclosure. I think everybody at this table, and probably
everybody in the room, is aware that adding a disclosure
is always of questionable substantive value to anybody. I
mean, it would be nice to have a disclosure which says:
Here's your loan, with credit insurance; here's your loan
without it. Here's the differences. Please review and
initial it. If you really want it, that's fine. And, in
a perfect world, that'd be great. I'm not sure if that's,
if that really is going to work.
I guess what I mean, what one of my clients
actually suggested, and I might have mentioned earlier,
and I think it is a good idea, is to simply say: If you
want to offer single-premium insurance, you have to get
counseling. You have to have somebody else, go outside,
get somebody else to look at it, and get somebody else to
sign off on it; and, then, come back, away from the
lender, away from any affiliates of the lender, and, if
you still want it, you can have it at that point.
MR. MICHAELS: Peggy.
MS. TWOHIG: At the risk of being slightly
repetitive, as I said in my opening remarks, the
Commission's position on this is clear. The Commission
believes that, given the abuses it's seen in the sale of
credit insurance packing, there should be a prohibition on
119
the financing of single-premium credit insurance.
And, by the way, it's not just credit insurance.
There is also insurance that's sold with the loans that's
not related to credit at all. It's just extra insurance.
We've seen auto club memberships. We've seen other
membership type things sold. We've seen auto club
memberships sold to people who don't even have cars.
There's all kinds of extra products that are sold with the
loan. So I just want to make sure that that's understood.
But even with that ban, the Commission's
statement also says that, for any sale of credit insurance
that's on a monthly basis, we think that there should be a
further requirement that the Board should require that
each billing statement disclose the cost of the monthly
credit insurance, and that the insurance is optional and
can be canceled at any time.
If a prohibition is not mandated, of the type
that I've just talked about, then, as a second
alternative, Plan B, the Commission suggests that the
transaction should be -- the credit insurance sale should
be separated or unpacked as much as possible from the sale
of the credit. I believe that consumers are vulnerable to
the packing of credit insurance, and other extras, at any
time before the loan is closed, and even before they get
the money, because they just are too susceptible to
120
thinking that they have to buy it, to go through with it.
It's a highly unequal bargaining position. It's very
complex. There's high pressure. We've seen either -- and
with little opportunity to read a huge stack of documents,
and it's very -- it's so rife with overreaching that we
think that very strong remedies are warranted.
MR. MICHAELS: Do you address -- could you
address the issue of pressure and sales tactics by sending
the consumer a separate letter after the closing saying:
By the way, you've purchased credit insurance. This is
how much you purchased, this is how much you pay for it
every month as a result. And, if you want to cancel it,
here's you call. This is how much we're going to have to
pay you back.
MS. TWOHIG: My own view is that that is way too
little, too late. There really needs to be stronger
remedies that address the problem up front.
MS. WIDENER: I'd like to say that, until you
get stronger remedies, do the letter and making it crystal
clear what they can get back and how.
MS. GARCIA: I agree with Ms. Twohig that
providing the consumer disclosure after the fact is of
little value to the consumer. In fact, what we need to do
is to prevent the abuses on the front end, because many
consumers don't even realize they've been taken advantage
121
of. So they may have legitimate claims, or legitimate
reasons to get out of that credit insurance; but you're
asking them to proactively respond to an abuse in the
first place. And that's not fair to the consumer.
MR. MICHAELS: If the Board is not going to
consider banning, I would agree with Mr. Sands and Mr.
Bley and join them together. The only way to stop the
practice and avoid the sales pressure tactics is take the
profit out of it. So if there aren't any better penalties
than you have to refund the premium, there's no reason to
do it.
MR. RANKINS: I used to sell credit life
insurance; but, for the past four years, I have not sold
the product. We don't sell it, and you don't want to sell
it after the loan has closed. We advise the client that
this is not a good product, this is not in their best
interest, and that's what we do. That's a dichotomy
because I've lost 2 or 3 loans from clients who wanted
credit life insurance because their daddy had credit life,
their grandfathrer had credit life. So that's the thing
that I have to combat.
I also, with my colleagues, they may not charge
the points to be charged, and they may use the credit-life
portion of the business as a means of income. So, I
support my colleagues that can sell the product. I don't
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sell it because I don't think it's a good product. I
think that, in my opinion, there should be -- that is one
thing I will say, that I think the Board should put in the
fees: It should be disclosed within the fees. That's a
corporate decision we made. We don't sell it and probably
never will.
MR. BLEY: Jim, I think this gets to the issue
of improving disclosures. So, in my comments, that's one
of the topics. But, in my comments, I said that we need
to simplify disclosures. Referring to my prepared
remarks, Exhibit B, we take a stab at rewriting Truth In
Lending, and try to make a one-page disclosure out of it.
If you notice that it gets rid of the concept of APR.
Also, I'll refer you to the cover of that, which
suggests that the 20-minute video be created, possibly
using a sports star to help educate consumers on what an
equity transaction is, which would become part of the
disclosure early on in the transaction. It would be a
bulky thing with the video in there, so it would be
difficult for somebody to just throw it away as junk mail.
But within that, on one of the -- there's two
alternatives. We couldn't agree in the Department, so we
put both of them in there. But, in one of the
alternatives, there is a small paragraph in here that says
who gets the money, break it down where the money goes. I
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guess it might remind you of the movie that was out a year
ago, or so: Show me the money, but who gets the money.
And that may be a simple way at least to show that a
certain amount -- especially when that single premium is
financed, a certain chunk of that loan is going to go for
credit life purposes or disability, whatever.
MR. MICHAELS: Well, one of the ideas we talked
in our other hearings was that, no matter when the
insurance is sold, you're going to have to have a
disclosure under HOEPA that's three days before closing.
If it's a lump-sum premium that's been financed, your
monthly payment is going to show, including not just the
required amount to repay the loan and the interest, but
any amounts for, whether it's auto club, or credit
insurance, or any other products or services that were
added in.
So what we talked about is: Should the HOEPA
disclosure be broken down into the monthly payment to pay
this loan, and the portion of the monthly payment -- they
could list anything that's optional, and the consumer
knows right there that, maybe they don't want to pay that
portion of the monthly payment. Maybe that's the part
that there not interested in. Would that help? You know,
you can do that without complicating the whole the
insurance thing.
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MR. BLEY: Well, we're suggesting that you try
to get it down to one disclosure. I'm not so sure, on the
margin, the value of that. I understand that reasonable
minds may differ.
MR. SAMUELS: I'm going to be speaking
theoretically, because don't offer it either. But there
are a lot of issues involved with the single premium.
When the loan is canceled, how much money gets refunded?
Do they use actuarial methods? You know, things like
that, those are big issues. I know I'm talking to a lot
of my colleagues, who are representing consumer groups,
that those are very big issues. We all know about the
packing and not disclosing that the loan amount does have
that hanging in there. That's a despicable practice.
I think we come back down to the issue of
whether this is a product that is neutral on its face, but
horrible in its implementation. Or is it a horrible
product, you know, and should be banned from the face of
the earth?
I had a discussion with a fellow who is working
in our subprime group, and, in a prior life, a company
that he worked for, he told me exactly the same story that
Mr. Rankins mentioned, but it wasn't two or three. It was
a vast majority of people who he dealt with who said: I
want single-premium credit life insurance. And he would
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try to talk them out of it, and they would say: No, this
is what I want, because I can't get any other insurance,
for whatever reason. And this is an easy way for them to
get it.
So, I would say, done properly, I guess there
are situations in which it is a benefit to the consumer.
Perhaps there's so many incidents of abuse that, you know,
maybe we do want to throw the baby out with the bath water
in this kind of a situation. But it's not, I think, as
cut and dry. There are people who feel that that this is
a benefit to them. But, again, you know, we, like Mr.
Rankins' company, made the decision of not to offer it.
MS. TWOHIG: I just want to make sure there's no
misunderstanding. We are not talking about prohibiting
the product. We're talking about prohibiting the
financing of single-premium insurance.
MR. MICHAELS: Right.
MS. TWOHIG: So, in the instance you're talking
about, yes, definitely; that consumer could be sold the
insurance on a monthly basis, with full disclosure every
month of how much is for credit insurance; if optional,
can be canceled. That would be no problem.
MR. SAMUELS: But they might want to finance it,
and they might want to finance. And I would say that I
can envision a situation where, if they canceled the loan,
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they get, you know, the appropriate amount of money back,
and that, you know -- so that they made a decision, an
informed decision. Okay?
MS. TWOHIG: My response to that would be:
fine. If they say, I don't want to pay so much every
month. I really want to pay for it all at once, and I
want to pay interest on it, and I want you to charge me
points on that. That's fine. They can do that as long as
it is well after the closing of the loan, perhaps after
the three-day decision period, where they actually have
their funds in hand. For those who don't want it, and who
are subject to coercision, then you can, if that's really
what consumers want.
MR. MICHAELS: It seems that we've already sort
of sequed into the disclosure issue, so I'm going to take
us there intentionally.
We've asked for comment in our published notice
on the number of disclosures issues, including credit
insurance. Also asked about official disclosures, the
nature of referrals of consumers to counseling for HOEPA
loans, who discloses balloon payments, improving the HOEPA
disclosures themselves that are given three days before
the loan closing, improved disclosures dealing with
foreclosure situations.
Let me start this out, because we opened up --
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in the opening statements, I think Mr. Bley and Mr.
Courson, both, raised this issue of simplifying
disclosures. And this issue keeps coming up. I was part
of the team of folks who were involved in the Mortgage
Reform Process that went on for several years, and the
Board -- there is obviously a lengthy report on where our
view are on reforming Truth In Lending disclosures
generally.
The thing about HOEPA is that the HOEPA
disclosures themselves come three days before closing. In
my view, they're relatively simple disclosures. The
complexity comes from the disclosures at closure. The
question is, that I would ask first of all: What can we do
-- we have to report on things we can do to simplify the
lending disclosures at closing -- what can we do to
improve disclosures for HOEPA borrowers, particularly to
HOEPA disclosures? The idea behind those disclosures is
you get them at a time when you're not in the closing
table, you're not in a pressured environment, you still
have some time to think about, for the next three days
before closing at least, if not more, and during the
rescission period, about whether this is the transaction
that makes sense for you. What can we do to make that
HOEPA disclosure more effective? And is it really too
complex now?
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So I just want to open up with that.
MR. COURSON: Since my name was mentioned, I'll
respond.
I think that the issue with the disclosure is
that it's not early enough. The whole -- I'm going to go
outside of HOEPA, because HOEPA is a piece of this -- but
the entire disclosure scheme is fair today. Good-faith
estimates, Truth In Lending, APR, and so on, is not, is
not consumer friendly. So, even though you may have
another opportunity on a HOEPA loan, three days before
funding, to take another look, I'm going to suggest to you
that much earlier in the process we need to streamline
these disclosures down to a one-page, and tell the
consumer what they want to know in simple terms so they
can have the opportunity to shop. You can't shop APR.
You may think you can, but I'm going to guarantee you that
no consumer -- if somebody came into our office as a
consumer and said, What's your APR?, we would think
they're either an auditor, a regulator, but they aren't a
consumer. And, people, that's not the comparison. It's
what's my loan amount? How much cash do I have to bring
to closing? What's my interest rate and what's my
payment?
So I think it's starts much earlier to give
someone the opportunity to shop. Then, when you come down
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to the HOEPA, the simplification, if they've got that very
simple, one-page disclosure, looking at the transaction,
again, it really becomes much more relevant. Because
they're lost in the morass. They're already there.
They're already with the predator, and they are in their
clutches, and they're not going to -- that disclosure and
the question of how many people see that and truly say,
oh, I better go call another lender, has to be a very
small number of those loans.
So I think you've got to capture the disclosure
much earlier in the process, at the time of the initial
contact.
MR. MICHAELS: Anyone else?
(No response.)
Let's talk about -- we did talk about the credit
insurance. Before we leave the HOEPA disclosures, one of
the other things we talked about is what the consumer gets
on a HOEPA disclosure, which is APR and a monthly payment,
and some general friendly advice about you could lose your
home if you don't repay this loan. But in terms of
specifics, one of the things they don't know from that
disclosure is how they're going to be borrowing. There's
a monthly payment there, but they don't know what the loan
amount is that leads to that monthly payment. My
understanding is that, given the amount of fees that might
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be financed, they may be surprised to learn how they got
to that montly payment. If they knew part of that might
be optional because it includes credit insurance, they
might be surprised to learn they could lower their monthly
payment. Just the loan amount itself might give people
pause as to whether this was a transaction they really
wanted to enter into.
Would that additional information help consumers
before closing?
MR. BLEY: I think, Jim, I think that's very
consistent with what our staff has found. We have two
problems with HOEPA disclosure. I kind of have to chuckle
with this. It's content and timing. What else is left?
[Laughter.]
We've identified five terms, five key terms the
borrower's decisions are based on: Loan amount, loan
type, note rate, all costs, and actual payment of them.
But nowhere does the regulation require these variables to
be disclosed.
In terms of timing, the problems we've had in
the examination side is that the following terms are
nowhere to be found: make, provide, deliver, place,
furnish, application and consummation. And, do, we're
constantly embattled about the interpretation of those
provisions. And I think, in some cases, we've been
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forced to provide some more clarification on that state
law. We cite one single sentence in 226.19 (a)(1) with
the following undefined terms are used: make,
consummation, deliver, place and application.
So, to the extent that it's deemed the
disclosures should be made, I think you may want to look
at clarifying, adding some of the key variables that
borrowers want to know, and not just wrapped up into an
APR. Also the terms I talked about in terms of timing,
when is something actually delivered. Is it dropped in
the mail? Is that delivered? Or is it actually received?
Constant debates about that.
GOVERNOR GRAMLICH: We think that the HOEPA
disclosure needs to be concise, but complete; simple and
thought provoking. We looked at the draft that you have
suggested and came up with an idea that actually combines
some of our own ideas, and came up with a proposal for
HOEPA disclosures. It's on page 11 of my testimony.
What we're saying to the consumer here is
they're getting an important notice about fees and
interest rates.
"You are receiving this special notice because
the fees or interest rate this lender wants to
charge you are much higher than normal. They
are so high that they greatly increase the risk
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that you will end up losing your home. You
could lose your home if you take this loan and
can't afford the payment. You are borrowing
X-number of dollars. Your loan requires you to
pay X-amount of dollars per month. Your
incomes is X-number of dollars per month.
Before you sign this contract, you should look
for a cheaper source of credit. There may be
other creditors that offer other choices. You
have the right not to go through with this
loan, even though you signed a loan application
or received this notice. Call this toll-free
number: 1-800- etc. Housing counselors can
help for free."
We think it's concise, complete, to the point,
and simple. We offer that for your consideration.
MR. MICHAELS: You raised a point there that I
raised earlier, which is: Do consumers need to have,
particularly HOEPA borrowers, better information about the
availability of counseling and where it is available? The
issues of how to make counseling available, those are
topics we can talk about this afternoon, because that's
what we scheduled the time for. But in terms of would it
be effective to include counseling as part of the
disclosure?
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GOVERNOR GRAMLICH: In out experiences with
consumers, who have reported cases of predatory lending,
overwhelmingly they have said: If we had known that this
is what we were getting into, we would have looked
elsewhere.
In our consumer education campaign that we had
here in the Bay Area, the five Bay Area counties, one of
the things we did was we told consumers about alternatives
for borrowing. For example: If someone was interested in
borrowing money because they needed to make their home
wheelchair accessible, we let them know about programs
available in their city or county that provided low-cost
funds in the form of a loan, or in some cases grants, in
order to make those improvements. This very same person
could have gone to a lender to try and get money for this
purpose when, in fact, they may have qualified for
lower-coast credit through one of these alternatives.
This is the kind of information that an objective,
qualified counselor can provide to a consumer before the
fact. And this is information that's extremely valuable.
In addition, if a consumer decides that they
want to go through with the loan that is expensive, they
still have that option, but at least you know you have an
informed borrower. And in my discussions with lenders,
they always say that informed borrowers are better
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borrowers.
MR. RANKINS: I think that we have to be very
careful. The client that walks in my office, the typical
client, for instance, this 3-day rescission, the average
client wants to know why he can't get his money right
then. Then, we proceed to explain that, under HOEPA
federal regulations, they can't. It's for their own
protection. Well, a lot of them leave the office mad.
I think if we look at the possibility of trying
to put additional counseling and say you have to go in and
receive counseling prior to closing, we're going to have
some problems with some of those clients.
Yes, I think that some of that is good. But I
am responding now to what the clients say to us. The
rescission, I'll tell you, that's a nightmare to the
clients. They want their money right then. But I do
agree that I think the rescission period is good. Because
we've had some at midnight that decided they didn't want
to do that. I think we need to be very careful about
that.
MR. MICHAELS: I was trying to be careful that,
too, I just thing that mandatory counseling -- I mean,
manadatory notice, that counseling services exist and
here's how you find one, and here's what they might be
able to do for you, but it's up to you. You know, either
135
way are approaches we've heard discussed.
MR. RANKINS: Who is going to pay for this?
[Laughter.]
MR. SAMUELS: I'm glad you raised that. Because
we are -- I second Mr. Rankins' comments. And I want to
talk about two things: (1) is we very much favor good
disclosures, making available notices and just making
accessible counseling, legal services. You know, those
kinds of services to people are very, very important. On
a mandatory basis, we've had exactly the same experience
that Mr. Rankins has talked about. I'm going to take that
one step further and talk about this three days.
You have to furnish to the consumer these
disclosures three days before the closing. And if
something changes, even at the request of the consumer,
you have to say: No, I'm sorry. We can't close on that
day. It's going to take another three days. I'm too much
of a gentleman to repeat some of the things that have been
said to us, or to our branch people, to give a response to
that; but I think that, again, seeing a lot of the lenders
around the table nodding their heads yes, it's a real
problem.
It's a real problem because people need the
money right now, for various purposes. And having to say
to them we have to extend this period for three days, and
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we don't have any choice. Because, again, the zero
tolerance for making a mistake, and making a misstatement.
And we would even be liable if we can't prove that we
didn't, that we didn't furnish it three days ahead of
time. Even if the disclosure was absolutely accurate,
we're still liable, see. And, again, this is part of the
regulatory burden that we've been talking about in
connection with HOEPA. So that's another issue that is --
it's good to talk about theoretically from a regulatory
standpoint; it's far different when you have to sit across
the table from a borrower who is expecting certain things
and you can't meet those expectations because of
regulatory burdens.
MS. BOSE: In the few HOEPA loans I've done, my
experience has been that they want their money right now.
That's the nature of the beast, and that disclosure is a
problem. We had to do that twice on one of three that I
did. It was very tough.
What I want to talk about, very briefly, was the
importance of consumer education. I think we all agree
that it's important, but -- one of the things that I do
with my customers, because I'm a broker and there's so
many option, is I spend quite a bit of time educating them
as to their options. And I do it because it empowers them
to make a decision, and it also enables them to see if I'm
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giving them a good deal or not.
So that's what I do. I'm not saying other
people do it, but I know that I do a good job. I want
them to understand I do a good job. I want them to come
back. I work strictly on referral. But it seems to me
that consumer education would go a long way to empowering
these people to protect themselves. And it seems like the
consumer organizations sitting at this table would be the
ones to provide that counseling to people, if they wanted
it, at an affordable rate.
But I just think, of the three things that I
said at the very beginning, which was increased
enforcement, industry self-regulation, and consumer
education, it's a very, very important part of consumers
protecting themselves, and empowering them to feel they're
in control of the transactions.
MR. MULLIGAN: Basically, just to give you our
experience with counseling, along with Consumers Union and
VOSP, we worked for about five years on programs,
especially for seniors and minorities in San Francisco,
even to the point of providing some seed funds to set up
800 numbers. You could call in and get a lawyer for free
to review their loan documents, Saturdays, at various
senior centers, Norma, and so on, all free. And the
response rates averaged less than two calls a month. It
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just was not something that was effective.
I'm not really found of mandatory counseling. I
don't think that works very well, either. I don't have a
real solution to that problem because that's there with
the voluntary program that we set up, or help set up,
rather. It was fully funded, but was totaly ineffective.
MR. MICHAELS: Why was that?
MR. MULLIGAN: People would not call in. They
would not --
MR. MICHAELS: Because it wasn't well known?
Because it was --
MR. MULLIGAN: I'll tell you. They advertised
it in Norma's group, VOSP. They went out to the churches,
they went to the senior centers. They went to the
neighborhoods, they went to the brokers. Put out flyers.
And short of doing TV ads, which gets a little expensive,
and we did radio ads. I don't know how you could have
advertised it any better. And it was, as I said, totally
free under the Bar Associations program.
I guess what we come back to is Ms. Bose said
today: The only way to really handle the really nasty
players to to increase the enforcement. We do this day in
and day out, receive letters every day at the door. I've
never seen state funding. I've never seen Rankins. I
haven't seen Countrywide in five years. But you do see
139
the same players over and over. As Mr. Bley said, if the
result of an action, whether it's by the FTC or private
action, is: Gee, you have to pay back fifty cents on every
dollar that you stole, and that's the result, you'd be
have to be pretty stupid not to go into that business.
MR. COURSON: Two points: We see borrowers
coming into our offices, consumers, and there are certain
loan programs that we participate in that do require
counseling. And when told that, for that particular, to
be eligible for that particular loan product, which they
want, that they have to have the counseling. They really
resent it. I don't have the time. I don't want it. I
don't need it, and I trust you. You can tell me
everything you want. Now that's the sheep and lion in
some cases, also. But I think it's a recognition from the
consumers that the reality that they don't necessarily
perceive that they need that, that they're looking at the
lender.
We have -- part of our comprehensive reform
effort that we're working on and we've had discussions,
both with The Fed and with HUD, we believe that there
needs to be a very, plain-English, simple mortgage
information book that is given to every consumer at the
first contact with any settlement service provider, any
settlement service provider. It can be written in simple
140
language. It can clearly have information in there
characterizing flipping, characterizing packing, talking
about voluntary counseling, and so on, that's very plain
English, that's give to that consumer right up front.
Now, granted -- back to the example -- if they
choose to utilize it, at least they have it. Now they're
getting it in bits and pieces. It's only as good as the
settlement service provider they're talking to, but at
least they won't have one, well-thought-out, cooperative
effort coming from the regulators that they have, that
gives them the information.
MS. WIDENER: I'd like to support that final,
that comment, to put together something that everyone
gets. It's, again, reinforcing the issue of definition
and educating people as broadly as you can in every
settlement situation, every single one.
With regard to counseling, I don't know how you
make it mandatory and have it mean what you want it to
mean. But I feel the value of it is very clear.
Counseling is valuable. And in the NeighborWorks Network,
we require it. The consumers don't always want it, but it
makes them better borrowers if they are made to understand
what it means to own and care for a home and the type
expenditures beyond the loan and repair and maintenance of
the home, that they will have to be prepared to meet.
141
Good counseling includes budget counseling, so they are
forced to look at their own income and expenses.
Sometimes, they like to bury their heads in the sand, as
well, and just let me get this loan and somehow I'll make
it work. Well, if you can't make it work on paper, it's
very hard to make it work otherwise.
So I think counseling has a real value. I would
encourage that you encourage it. Through incentives,
encourage lenders to use it. I don't know how you
regulate it. I don't know how you make it law.
MS. DELGADO: I'm in favor of counseling, and
I'm also in favor of writing simple disclosures that get
to the point and that are better written in English. But
I actually have another question, and I don't know exactly
where to stick it in. And that has to do with at what
point do we, or should we -- we think we should -- be
treating second mortgages and junior liens differently
than we do for a senior.
We don't know why HOEPA doesn't have different
triggers for a junior lien loan and senor lien loan. They
carry with them very, very different risks. The cost of
underwriting are relatively the same, but the loans carry
with them a very, very different risk, and they're priced
very differently than market rates. So by comparing, by
treating all high-cost loans as subprime is just not
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accurate, and you're lumping in second mortgages in there.
We think that there should be different disclosure
requirements, different triggers, that actually explain
the differences between the products and the lien
positions.
MS. TWOHIG: On the HOEPA disclosure, generally,
and also where counseling gets into that, I'd guess I'd
just like to make a few points.
One, I think it's important to keep the
disclosure as simple as possible.
Going back to something you asked awhile ago,
though, Jim, I think it would be worthwhile to add a
requirement that it be disclosed how much the borrower is
borrowing. Because, often, that is confusing and the
borrower just simply doesn't know. That's particularly
true with the huge points and fees that are added in some
of these loans. I think the Commission's statement also
recommends that the Board consider something if prepayment
penalties are allowed, that there be a disclosure about
prepayment penalties. Because, also, that could be a
surprise because they are allowable in HOEPA loans under
certain conditions.
In terms of counseling, I think, I guess, I have
my doubts about whether a disclosure that counseling is
encouraged would do much good. But I think it might do
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some good in some instances; and, so, I think it might be
worth adding that sentence. You know, in addition to you
could lose your home, we encourage you to seek counseling.
I think if the consumer does find counseling, then another
issue is whether there is such counselors are available
out there. But I think it might help capture the front
end, which is extremely important to catch some of the
deceptive practices we see going on out there. Things
where they're being sold alone, that's adjustable rate,
and comparing it to a current fixed rate. Things like
where they're being compared, a non-escrow loan to an
escrow loan monthly payment. Things where they're being
told that they will save money when, in fact, they might
lower their monthly payments; but, over the long term,
they are not saving money.
So it could be that the answer would spot those
sort of misrepresentations, or misunderstandings they
might have at the front end. That's why I think it would
be helpful. I do think it's an important part of the
solution to these problems.
MR. MICHAELS: I wanted to cover, quickly, one
more disclosure, then I want to talk about enforcement a
little bit. That has come up several times.
One of the other areas where we question whether
there could be additional, better disclosures is the area
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of foreclosure. Where consumers have HOEPA loans and
there are actually HOEPA violations, consumers need to
know that they're being foreclosed on and that they may
have a defense.
We understand that state law and local practices
generally govern foreclosure process procedures that are
followed. Most states require actual notive to the
consumer before initiating a foreclosure. We also
understand that there are some cases in some states where
the consumer does not get actual notice that a foreclosure
is being initiated. It's done by publication. And even
when consumers do get notice, they may not get the right
information in that foreclosure notice about what their
legal options are at that point.
So we've asked for comment on whether or not the
Board should consider adopting some sort of minimum
federal standards for actual notice to consumers before
foreclosure in HOEPA cases, so that consumers, who have
been treated unfairly or are subject to predatory
practices, do have the opportunity to raise any defenses
they have on seeking advice of counsel.
And I'll open that discussion now. Do we have
any comments?
MR. SANDS: I'm just sort of confused about the
notice. Because, in most states, I mean it's probably
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governed by every state, the HOEPA foreclosure process,
and even the substance of the notice. So how is it that
you promulgate by regulation? I mean, you're looking to
preempt state law. I'm not even sure how you could do
that.
MR. MICHAELS: Well, we can do that. No, the
question is -- we're aware that --
[Laughter.]
MR. SANDS: No, but on the other side, you have
to figure how does it work with the state notice, and what
is conflicting with the state notice. How does it work
with the timing? I mean --
MR. MICHAELS: Those are all key issues. I
think we started out with the question of whether or not
it makes sense -- most states do have a foreclosure
process where there is notice to the consumer. It just
seems that in those few states where the consumer is not
getting actual notice that there should be some basic
level of minimum standards where we'd say: Look! These
are HOEPA loans. You have to at least give the consumer,
you know, at least attempt to notice them that you are
actually foreclosing on them.
If the state has a process that works and it's
in place, that's fine. The next question would be whether
or not, even in states that already have that process of
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actually notice. whether or not there's some minimum
standard that's not being met in terms of, you know, if
you do have a right to redeem the property, if you do have
a right to cure the deficiency, does that notice clearly
state that and tell you what your deadline is for doing
so. I presume in a lot of states that is true: when you
have those rights, you're told that. But if you're not,
the question is: Should you be?
MR. SANDS: I guess, theoretically, it sounds
great, but obviously the issue is another notice. And it
really, in my practice, you know, typically we see loans
when they're problems on the front end we're trying to
fix. Not so much at the foreclosure time. But if we're
dealing with foreclosure issues, I don't think that that
would have made a heck of a lot of difference. Probably,
I'd just turn it over to the consumer representatives and
ask them whether it makes a difference. I just don't see
that it would make a difference in the type of -- in the
phone calls I've been through, the transactions I've been
through, that it wouldn't have made a difference one way
or the other.
MS. WIDENER: I'd certainly like to encourage
you to, in whatever way you can, pull off the
establishment of a minimum standard. In addition, I think
the foreclosure -- and I may not be understanding you; but
147
I'am assuming that you're saying that you would require a
foreclosure notice to the borrower in a timely fashion
that covered basic information that's considered to --
MR. MICHAELS: Right.
MS. WIDENER: Okay. And in addition to all of
that, I think the foreclosure notices should have to go to
second, to other main holders. There are, for example,
deed restrictions on property when borrowers have been
recipients of nonprofit and local government benefit
programs. And at present, not every state has to notify
those lien holders. And if, for example, the NeighborWorks
Network is one of those that has a great deal of those,
and, when the states don't have to -- when the lender does
not have to notify us, it's too late. The property has
been sold, foreclosed on, it's gone, and these lien
holders are wiped out. Whereas, if there were
notification and we knew the property was in trouble, it
would give us an opportunity to go in and help the
borrower.
MR. MICHAELS: I want to ask you about that.
That's interesting that you bring that up. Because the
question is: Is that lien holder receiving less notice
than the consumer? Or is the same problem and neither one
of you is receiving notice?
MS. WIDENER: I don't know what the consumer
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necessarily got. We don't always know. Sometimes, we
can't get the consumer to talk with us partly because
they're so embarrassed that this really happened. So I --
but we get nothing in some of these cases.
In a recent case that I've tried to pursue in
Texas, we were told unequivocally by the lender the law
did not require them to notify us, and they refused to
give us any information.
MR. MICHAELS: Mr. Bley.
MR. BLEY: Of course, we are much more
interested, in the state of Washington, in dealing with
the issue of predatory practices, rather than imposing
additional requirements on those who may have HOEPA loans.
But in that context, what I understand is that a borrower
in the foreclosure process, may not even be foreclosure
process, but if they can show deception or abuse at
origination, there's a right of rescission in the three
years.
In the real world, predatory lenders are going
to conduct their practices for about a year or a year and
a half before the regulators even get an idea that there
might be a problem. It just takes that long to go through
the examination process. And then it takes, at a minimum,
another half-year, or a year at the minimum, to build the
case, another two-and-a-half years. Then, we're just
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starting the administrative procedure action. So these
cases are difficult, they're confrontational, they're
complex. What's very frustrating for us is that we can
get through to the process of finally being able to prove
the case from the three-year right of rescission.
So we would strongly advocate an extension of
that three-year right of rescission. And, incidentally, I
would suggest -- I think it was Robert who brought up the
issue of imposing some discipline on the securities
markets that are buying these securitized loans. I think
that would be some self-regulation effect if that
rescission period was long enough that it made a
difference in their decision to buy those loans. If there
was exposure on predatory loans that those loans, those
loans could be rescinded.
MS. DELGADO: Mr. Bley, the secondary markets do
pay attention to them. I just thought you would want to
know that there's a list of things that they have to
comply with, and one of them is a rescission period.
MR. BLEY: And I'm suggesting to you that, from
a practical standpoint, three years is not long enough
because of the difficulty it is to put these cases
together.
MS. DELGADO: Right. And it may not.
MS. WIDENER: I agree. Three years is not long
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enough.
MR. RANKINS: Let me make another comment here.
Once again, in my opening statement, if we go
beyond that three years, we're going to have a problem
with investors staying in this subprime market. That
three-year rescission period is part of the reason a lot
of people have exited from this market. It's going to
have an adverse effect upon the consumer. Three years is
a lifetime in this industry. I would not like to see it
expanded at all. I think we've got to be very careful.
There are a lot of good things we can do, but we've got to
be very careful what we impose on investors and lenders.
Because, if they exit the market, there's going to be only
a few of us that remain in the market.
Now, those things that we impose on those
consumers, some of those things I can control, some of
those things I can't. If I offer 9.5 interest rates
because I am of investors, and those investors exit, and
I have to start offering 12.5, that's adverse to the
consumer. So we've got to be careful on expanding the
three-year rescissions, and things of that nature.
MR. COURSON: We, going back to the foreclosure
issue, we have -- it was discussed as part of the mortgage
reform and with consumers groups, and we have, in our
package, our comprehensive reform package that we're
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preparing to come forward with, a provision in there that
talks about -- the concern in many cases of foreclosure is
the loss of equity, where we have substantial equity and
the lender is coming in, the creditor comes in and tries
to grab that equity. So we have a provision that says
that, if, in fact, a loan-to-value is less than 80 percent
where there is some substantive equity in the property to
the consumer, that they would be given, there would be, in
this federal statute, a notice given at the time of the
default, saying your loan is in default. We're proceeding
with foreclosure. You have the opportunity to sell your
home, dispose of your home, to satisfy your debt, and
given some specific period of time to do that, no longer
continuing on with the foreclosure process. Obviously,
moving forward through the foreclosure process, but
noticing and giving the borrower an opportunity to protect
that equity.
MR. MICHAELS: All right. I'd like to spend the
rest of the time we have this morning talking about
enforcement. The subject comes up over and over again
about improving enforcement. Because, really, the
question is how? What specifically can be done? And more
particularly, what specifically can the Federal Reserve
Board do to enhance or improve enforcement efforts?
MS. BOSE: All I can tell you is that the
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enforcement is so inadequate that there's not even the
ability to audit what's going on, on a day-to-day basis.
That's why I said in the very beginning I don't see how we
can impose more stringent laws until we're able to at
least have an adequate enforcement procedure.
But one of the things that I wanted to emphasize
was that, when I said industry self-regulation, I was
talking specifically about our best business practices
initiative that NBA and NAMB have been working on, which I
think will quite interesting and very effective. Part of
it involves the proposed registration of all originators
to isolate the problem of originators. So that all
originators, everyone who originates loans, will be
registered. If there are problems associated with those
loans, they will be able to create a history. And we will
be able to identify those and do something about it. But,
right now, we can't even identify them. They just move
from company to company. And I think it is in the
origination, a great deal of the problems are at the
origination table.
The other comment I wanted to make is the
plethora of disclosure forces us, as originators, to
interpret them. People say: I don't understand these.
Would you tell me what they mean? I've got 20 pieces of
paper here and I have to explain it to them because they
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can't even begin to shuffle through it all. So you're
imposing on originators certain responsibilities that they
shouldn't have, and opening opportunities to misrepresent
those things.
Thank you very much.
MR. BLEY: I've been talking about this all
morning, so I don't want to repeat myself. But, again,
I'd refer you to our comment to the ANPR of the OTS. I
would be very concerned, so far, in the area of the OTS,
the Office of Thrift Supervision and the Office of the
Comptroller of the Currency, who have been very aggressive
in interpreting federal laws that preempt the states.
Whether I'm going to get into public policy next, I won't.
But, for now, most of those preemptions have been in the
area of eliminating terms.
I very much hope that federal agencies will not
get into the area of preempting states' ability to enforce
the manner in which these loans are made. I think you'll
see a very significant diluted effect in the ability of
the states to regulate this. We've done 100 enforcement
actions in the last year, and we're a small department.
We can get it done. We think there's less predatory
lending in the state of Washington as a result of it.
How you do that? Again, I'll refer you to page
7 of our comment to the OTS, where we list what's in our
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Mortgage Broker Practices Act. It isn't perfect, but it's
a good start. A comment on that, I'll give you, again, is
that these are heavily fact specific. These are difficult
cases. They take a long time to prosecute, and it costs
money. For those of you -- I've heard unanimous opinion
of the industry that says that, you know, this is the way
to do it. Understand that it's you that pays for the
enforcement actions. So you'd have to be willing to come
to the table in your states and say we're willing to fund
more FTEs, more full-time equivalents, for the states to
pursue these actions.
MR. SANDS: John, let me just ask a quick
question. Do you guys post your enforcement action
somewhere publicly, like on-line. Often, in cases, we
have clients that say so-and-so wants to do business with
us. We do business in the state of Washington, how do we
go about finding out if you're not taking enforcement
action against, or you haven't taken enforcement action?
MR. BLEY: Yes or no, Mark?
MR. THOMSON: They can call us. It's not posted
on the net, but they can call us.
MR. BLEY: It's not posted on the web yet, but
they can call us. Maybe that's a good idea.
MR. MICHAELS: I've got Peggy, and if you hadn't
raised your hand, I was going to call on you anyway.
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Which is, from the FTC's perspective, what will help the
FTC in its enforcement efforts? Is there some additional
data that they need to have, a public data source, a
non-public data source, that would help tie down where the
problems are?
MS. TWOHIG: I guess I can say a couple of
things on enforcement. Can you give us more money?
[Laughter.]
MR. LONEY: We can't give you any money.
MS. TWOHIG: Given that, but there are some
things that would be helpful. It is very difficult for us
to know, because it's not required to be reported under
HMDA or anywhere else, where the lenders are that are
making the higher cost loans, and to the extent that is
associated -- not always, but sometimes -- with problem
practices. That is something -- if we had more
information on that, that would be very helpful.
In addition, the Commission, a couple of the
recommendations in the Commission's statement I think go
to this. I mentioned already, and I won't repeat it, in
terms of the documentation that would be helpful to be
required for, on asset-based lending issues.
In addition, the Commission's statement talks
about mandatory arbitration. That's not Commission
enforcement, but I think that's very much in recognition
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of the fact that our resources are limited and we can only
do so much. It's very important for consumers to be able
to protect their rights themselves. And we think
mandatory arbitration limits that too much, at least for
HOEPA loans.
And beyond that, I think some of the other
recommendations also go to things that would help, like
clarifying what the pattern or practice is. We think that
the appropriate standard for pattern and practice would be
something along the lines of the Fair Housing Act, and
other civil rights statutes, and not the standard that has
been interpreted by one court that would make that
standard hold. The Newton Case would make our enforcement
job extremely difficult.
So there are some of the recommendations of the
Commission has made do go to things that we think would be
helpful to make our job easier. But that's just from the
Commission's perspective. I'm not sure if there's anyone
here who could speak to some of the private plaintiff's
ability to go after deceptive practices. Because we have
the FTC Act. So we can, if we see deceptive practices, we
do have the authority we need now to go after that. And
I'm not sure that's the case for private plaintiffs in all
states. I'm not an expert on that, so I just put that out
there as one idea.
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MR. MICHAELS: Did you qualify that with "if we
see"? The question is: When you have the opportunity to
see those, what helps you focus in on them?
MS. TWOHIG: Well, there's a variety of ways we
target lenders for investigation. I think it's very
important for the lenders out there to know also that we
sometimes look at lenders, not necessarily because we know
there's a problem. It's more like in the nature of an
examination, and we have to explain that to lenders
sometimes when we start doing an investigation.
With that said, there are some things that cause
us to look sometimes at certain lenders. That can be
consumer complaints. That can be information we get from
some state regulators or other enforcement entities. We
had, for example, a very good, cooperative relationship
with the Kentucky State regulators that told us about some
of the problems that led to at least two of our HOEPA
cases and Operation Home Equity. So we obtain information
from various sources and it's very, you know -- I don't
know if hit or miss is the right word; but it's not, it's
certainly not complete information. There is information
where we can find it in consumer complaints and by talking
to other people who are in the field. But there isn't any
data we can use, right now, to try to better target our
enforcement efforts. And I think, if there were reporting
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required of the cost of the APRs, for example, under
HOEPA, it would help us.
MR. MICHAELS: Does there need to be some better
information sharing, or some formal network for
information sharing, among state regulators who regulate
and license mortgage lenders, non-bank mortgage lenders
particularly, since they're the ones who are being
examined?
MS. TWOHIG: There already is, I think, quite a
bit of information sharing. We try to talk to the state
regulators as much as possible. And I'm not sure whether
a more formal setting would help that. It might. I mean,I
think that information sharing is very beneficial, and I
think it can help leverage resources, combine resources,
in a way that it does help with the problem.
MR. MICHAELS: Can I ask a question on that?
You mention mandatory arbitration a couple of times. Are
you talking about all mandatory arbitration, or are you
talking about abusive mandatory arbitration? And, when I
say "abusive mandatory arbitration," I would give as an
example arbitration clauses that have choice of form
clauses, being the hometown of the lender, or, you know,
things like that, which I, which I consider to be abusive.
But are -- you're not talking about getting rid of all
mandatory arbitration clauses, are you?
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MS. TWOHIG: The Commission has recommended that
mandatory arbitration provisions be prohibited in HOEPA
loans, and it's for a number of reasons. But it's, in
large part, because we think that mandatory arbitration
can have the effect of essentially very much limiting the
consumer's ability to assert their rights. There's
sometimes very high cost to arbitration. There's
sometimes the inability to obtain attorney's fees, which
we think they can't get counsel in the first instance.
There's limitations on class actions. There's no review
of arbitrator's decisions that's required, or very limited
review, is my understanding. And, so, it doesn't really
help set a precedent and law in this area for other
consumers that might be taken advantage of in abusive
lending practices.
So we think there's a lot of problems with --
and we're talking about mandatory arbitration.
MR. MICHAELS: I understand.
MS. TWOHIG: Not talking about where the
consumer is given the option at the time the dispute
arises to pursue arbitration. We think that's fine, you
know, for voluntary arbitration to settle disputes is
probably a very good thing. But mandatory arbitration
agreements in the kinds of circumstances I'm talking about
-- we're talking about the consumers where it is very
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unequal bargaining position. They sometimes desperately
need the money. And your talking a bout a provision that
would require them to look ahead for an uncertain,
possible future event, and try to analyze that in the
context of whether to walk away from the table and not
take that money. And we think it's unrealistic to expect
consumers to shop if, indeed, they have any market power
in that market based on that kind of provision.
So those are some of the reasons why the
Commission has recommended that mandatory arbitration
provisions be prohibited in HOEPA loans.
MR. SAMUELS: If I may respond just briefly, and
I know I'm not going to make any friends with the private
lawyers sitting at the table. But our experience has been
very different with regard to mandatory arbitration.
Sitting on our side of the table, I will tell you that we
spent a lot of time and money on court actions, on issues
that I'm going to say, without fear of being contradicted,
are frivolous. And we find that arbitrations -- again, I
want to make clear that I'm talking about non-abusive
arbitration provisions, where, really, the only thing that
is limited is where the dispute is litigated, is
arbitrated, I should say, where we do not limit damages,
we do not limit causes of action, et cetera, et cetera.
But it tends to be a very, a much more inexpensive
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process. Also, it does deter, in our experience, some of
the more frivolous actions. And, even though we get out
of the frivolous actions with no liability, the attorney
fees that we are forced to pay in a regular court action
are really quite onerous for us. And, frankly, it causes
our overall costs of lending to be, you know, to be
higher.
So I would ask if there is a study on
arbitration clauses to look at it from both sides, because
I think the lending community would have a very different
view. Again, we would want them to be fair arbitration
clauses, but I think that they do have some benefits both
to the consumer and also to the lender.
MR. MULLIGAN: Well, from the private lawyers
perspective, we started to listen to that argument. I
mean, start, the moment that these lenders, and other
consumer-oriented firms, not just lenders, to start
reporting the results of their arbitrations. Until that
happens, all we've got is our experience, and that's
really bad.
MR. LONEY: If we may have to, we have to have
the last comment.
MR. BLEY: I think it will be. You're talking
about enforcement action. You're talking who is
accountable for doing the enforcement action. And let's
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be frank about it. I think the primary way to
accountability on enforcement action falls to the states,
and falls with the FTIC, FTC. I'm not here to I'll let
the FTC's records speak for itself. And I'm not here to
defend or talk about -- I'm not here to defend the states'
actions, either. I'll give you, I'll raise one issue,
though.
I frankly do not think that the states'
enforcements actions in this area are inadequate. I think
there's two reasons for that. I think one of them is
performance. They're simply some states that abhor
confrontational aspects of enforcement. But it cannot
just stay there. Part of the accountability has to rest
with the industry itself for not going into the state
governments and supporting those agencies for greater
resources to do enforcement actions. I think the will is
there for many states, but the funding needs to be there.
But I have told my division director that we have to be
more like warriors and less like pencil nicks, when it
comes to enforcement actions on this issue.
Thank you.
MR. LONEY: Pencil nicks?
[Laughter.]
Well, we'll have to let that be the last
question.
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[Laughter.]
First of all, I want to thank all of you folks
that have participated, for the energy and intellect and
experience you've brought to the table. I think that
we're clearly going to find it useful in the deliberations
that we face going forward.
I want to thank my colleagues on the panel up
here. I think it's been a very useful morning.
Let me just say that we are going to take -- I
think half hour? -- a half-hour only for lunch. So we're
going to have to be back here around 1:30.
If any of you in the audience want to sign up
for the open-mic, I remind you that the sheet is down in
the west entrance. So you might take this opportunity to
do that.
Again, thank you all very much, and we'll be in
recess for about 30 minutes.
(Whereupon, at 1:05 p.m., the meeting was
adjourned, to reconvene at 1:30 p.m., this same day.
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|
September 7 hearing on home equity lending |
Afternoon session |
Complete transcript
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