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