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