FRB: Federal Reserve Bank of Chicago - June 7, 2006 - Transcript

Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of Chicago
230 South LaSalle Street, Chicago, Illinois 60604
June 7, 2006

Agenda | Transcript

Pages 1-25 | 26-50 | 51-75 | 76-100 | 101-125 | 126-150 | 151-175 | 176-200 | 201-225 | 226-250 | 251-267

Transcript	Line	Page
transaction, do they not?	1	51
MR. JAMES: Yeah, but the losses are insured	2	51
over. So they are distributed through the	3	51
investment network and they are not felt.	4	51
GOVERNOR OLSON: I see, okay. I'd love to	5	51
pursue this a little bit also.	6	51
Does your figure, Geoff, regarding	7	51
foreclosure, does that -- it's a fact of life that	8	51
appreciating values is the best antidote to	9	51
foreclosure. Because if you have an appreciating	10	51
value, that is a product that can be rewritten or	11	51
adjusted.	12	51
Do your figures account for that in	13	51
terms of where you find the foreclosures?	14	51
MR. SMITH: In terms of the impact of the	15	51
foreclosure on property values, we only looked at	16	51
one year. But it was clear to us from our data	17	51
that low and moderate income neighborhoods are more	18	51
significantly effected in terms of the effect of	19	51
foreclosure have on property value. I think that	20	51
is directly tied to the nature of the real estate	21	51
market.	22	51
GOVERNOR OLSON: Let me move to this side of	23	51
the table, and let me begin by making a statement.	24	51
The one of the real advances that --	1	52
I'm now speaking in macro terms as a Fed Governor,	2	52
one of the important advances we have seen in the	3	52
marketplace is the growth of the secondary market.	4	52
And one the good parts about the secondary market	5	52
is that it has in fact significantly dispersed risk	6	52
exposures. So we don't have the same	7	52
concentrations of risk exposure that we had in the	8	52
financial markets years ago.	9	52
So single events in the economy,	10	52
like, for example, the problems of the oil patch in	11	52
the southwest that brought down several banks,	12	52
don't in much the same way because of the fact that	13	52
the risk is dispersed.	14	52
That does raise a question -- and,	15	52
Mike, you were anxious to get to that question --	16	52
is how that dispersement of that access to the	17	52
market and the dispersements of risk, what does	18	52
that do to the foreclosure process?	19	52
MR. WILLIAMS: Thank you, Governor Olson.	20	52
Well, I would like to start out by saying there is	21	52
a misperception about what happens when these loans	22	52
are made. And if you didn't look at the	23	52
financials, you would believe that every loan that	24	52
was ever made in the subprime market is actually	1	53
sold, right? And that's not the case. So you	2	53
don't have 100 percent turnover of these loans	3	53
going in. Some loans are actually held in	4	53
portfolio. HOEPA loans are still made. People	5	53
make them, but they hold them in portfolio. And	6	53
even the ones that are non-HOEPA loans that are	7	53
under the trigger, they may be eventually sold, but	8	53
it's not an immediate turnover. So that is the	9	53
first part of it.	10	53
So you're talking somewhere in the 50	11	53
to 55 percent now, and that number has been	12	53
increasing now of loans that are actually sold to	13	53
the subprime market in a short time frame.	14	53
GOVERNOR OLSON: Jim, from the initiator's	15	53
point of view, is there a distinction that you find	16	53
between mortgages that you think will end up as a	17	53
portfolio product as opposed to a mortgage that you	18	53
think will be sold in the secondary market?	19	53
MR. NABORS: I don't think so.	20	53
And just to go back a quick second,	21	53
in the 30 years I have been in the business I've	22	53
never seen a foreclosure where the lender made a	23	53
dime. There was a study in the '90s that on	24	53
average lenders were losing 28 percent of their	1	54
balance to go to foreclosure. So we would do	2	54
anything to not have to be in foreclosure.	3	54
I know when people say, well, why do	4	54
you have to foreclose, part of it is Federal	5	54
regulations require you to take certain actions at	6	54
certain times. Writing down the balance, and if	7	54
the loan goes a certain delinquency you have to go	8	54
into foreclosure. That is not, you know, an	9	54
option. Loan modifications, anything we can do to	10	54
stop a foreclosure.	11	54
The other things as a broker, the	12	54
lenders we do business with, they keep track what	13	54
our delinquency is. What percentage of loans we	14	54
have go bad. And if too many of them go bad --	15	54
GOVERNOR OLSON: You mean originated by a	16	54
specific broker?	17	54
MR. NABORS: Originated by a specific broker.	18	54
If they see a high rate of delinquency, they cut	19	54
those people off, because they are at risk.	20	54
GOVERNOR OLSON: Let me move on. Wright, the	21	54
question that comes up in a -- did you say a $2	22	54
trillion market, $1 trillion market with a 600	23	54
billion of originations, and that is all subprime,	24	54
what sort of -- is there a market expectation for	1	55
what a loss ratio would be or delinquency ratio	2	55
would be for that portfolio?	3	55
MR. ANDREWS: Governor, again, first I would	4	55
just say the lenders absolutely do not want	5	55
foreclosure. They try their best to make only	6	55
loans that are going to perform. It does cost	7	55
money. Jim referenced a 28 percent figure, I've	8	55
heard many people say 30 to 35 percent loss easily	9	55
when they have to foreclose.	10	55
Lenders are putting a great deal of	11	55
emphasis in recent years on work-out agreements.	12	55
There is much more effort being done to have that.	13	55
Lenders do not want their loans to perform badly in	14	55
the secondary market because it shows up.	15	55
And the pools attract, in terms of	16	55
the overall expectations, I don't know that there	17	55
is a precise, but you're going to have some higher	18	55
level of foreclosure on nonprime loans. That is a	19	55
given. I think they try to manage it, maybe 2	20	55
percent, 3 percent, just ballpark in terms of	21	55
loans.	22	55
GOVERNOR OLSON: I will say that if you look at	23	55
the mortgage market overall, as we look at those	24	55
numbers and we look at those numbers carefully, the	1	56
overall portfolio is very strong if you look at the	2	56
US mortgage market.	3	56
However, and this comes back I think	4	56
to Geoff's point, we clearly see that there are	5	56
some pockets, there are some markets, and they tend	6	56
to be the low-mod neighborhood, where there are	7	56
pockets where clearly we are seeing rises in	8	56
delinquency. And we have spoken to that issue	9	56
before and that continues to be a concern for us.	10	56
I'm sure that some of my colleagues	11	56
have some other questions. Sandy, of course, is	12	56
just bubbling with questions.	13	56
MS. BRAUNSTEIN: No, I just actually at this	14	56
point wanted to ask a little bit of follow-up on	15	56
the foreclosure issue. We have heard from the	16	56
industry for years that the industry really, you	17	56
know, does not want to go to foreclosure.	18	56
Can you explain, then, why we are	19	56
seeing an increase? If that's true, and I would be	20	56
giving -- you know, I would give that that is	21	56
probably true, people don't want to go to	22	56
foreclosure. Then why are we seeing an increase in	23	56
loans with stated incomes and low doc?	24	56
Because it seems like there is a	1	57
loosening in a lot of cases of underwriting. And	2	57
if the industry is really adamant about the fact	3	57
that we don't want to have to foreclose on people,	4	57
why do we see these loosening underwriting criteria	5	57
or loosening document criteria?	6	57
MR. ANDREWS: I would just say that I think	7	57
that industry recognizes that those loans are going	8	57
to have somewhat higher loss ratios. That is a	9	57
given. The industry tries to manage that, though.	10	57
And the stated income loans have been shown I think	11	57
over time to perform relatively well.	12	57
But in some cases there is no	13	57
question that there are bad loans that are put out	14	57
there, such as when you have a senior citizen with	15	57
some ridiculous figure given for the income. There	16	57
can be problems there. But we think that they are	17	57
managing the risk relatively well.	18	57
One thing I want to add in here, how	19	57
much of this is truly caused by fraud? When you	20	57
look at so many of the pockets, when I hear from	21	57
Linda Clines (phonetic), I continue to hear what a	22	57
serious problem we have in terms of fraud. There	23	57
is fraud over the lenders to improperly flipping,	24	57
et cetera, and everybody comes out of it hurt. I	1	58
think some percentage, I don't know what, but a	2	58
significant amount of all of this could be from	3	58
fraud.	4	58
MS. BRAUNSTEIN: We laid the question on its	5	58
side.	6	58
MR. NABORS: Can I add to that?	7	58
MS. BRAUNSTEIN: Sure.	8	58
MR. NABORS: We're hearing about stated income,	9	58
and that program has been around forever and it's	10	58
been expanded. Well, what NAM would like to see is	11	58
a legitimate -- stated income loans have been	12	58
around forever. They're not a new product on the	13	58
market. What we would like to see is a legitimate	14	58
third-party government -- to us legitimate third-	15	58
party is the government, okay -- the Federal	16	58
government do a study on that foreclosure and what	17	58
truly is -- what products are causing foreclosure.	18	58
What is it.	19	58
I mean, whenever we see a consumer	20	58
group or an industry group do a study, those have	21	58
to be questioned. Because going into it you kind	22	58
of know what you want the results to look like, so	23	58
you tend to lead the study in that direction. I	24	58
think if we always now as mortgage brokers use the	1	59
FTC study of 2004, that yield spread premium was	2	59
confusing to the consumer, as an example of a	3	59
legitimate third party that came out and studied	4	59
the issue and didn't care what the results were.	5	59
I think before we -- there is a need	6	59
for -- there are legitimate uses of stated income	7	59
loans. But to characterize that is causing the	8	59
majority of foreclosures, for example, I don't know	9	59
that.	10	59
You know, I hear the terrible stories	11	59
about the people that have lost their homes because	12	59
they had a stated income loan. But people for the	13	59
most part who have gotten stated income loans who	14	59
have succeeded don't really -- they don't get into	15	59
the paper. They don't, you know, they don't go out	16	59
and say, hey, what a great deal I got. I mean, you	17	59
know, and when they are in lower income levels,	18	59
those are the cases where there is an economy that	19	59
exists where you can look at someone's -- how they	20	59
live.	21	59
If I have someone who is claiming	22	59
they make $7,000 a month and I question it, I go	23	59
out and look at the quality of life they are	24	59
living. If I go out and they are living in a	1	60
$300,000 house, driving a new car, paying their	2	60
bills, sending their kids to school, I tend to	3	60
believe it. If I go out on $7,000 a month and they	4	60
are driving a '72 Chevy, I would begin the question	5	60
the legitimacy of that loan.	6	60
GOVERNOR OLSON: So then what would you do with	7	60
that application?	8	60
MR. NABORS: To me, that would be -- I would	9	60
think that would be fraudulent, okay.	10	60
GOVERNOR OLSON: On whose part?	11	60
MR. NABORS: Well, I would say it starts with	12	60
the consumer who told me he made $7,000. We too	13	60
often want to let the consumer off the hook and say	14	60
hey, they didn't do anything wrong.	15	60
MS. BRAUNSTEIN: Would you then turn it from	16	60
stated income to "I need documentation"?	17	60
MR. NABORS: Absolutely.	18	60
MR. WILLIAMS: Can I jump in there? When that	19	60
loan is sold in secondary market, what the	20	60
underwriter there sees is just that information	21	60
that is on the loan tape. They don't have the	22	60
ability, like Jim does, to actually go back and see	23	60
whether there is a '72 Chevy or a Mercedes Benz	24	60
that is there. They have that information, and we	1	61
have to look at that.	2	61
So then you say how do you insure	3	61
that doesn't happen? We look at what happens, and	4	61
if Jim sends us a loan that obviously wasn't going	5	61
to better form and a first payment wouldn't be	6	61
made, then this is a red mark on Jim and you might	7	61
not want to do business with him anymore.	8	61
And there are actually quite a few, a	9	61
number of lenders throughout the country that our	10	61
firm will refuse to do business with. Now,	11	61
obviously we can't go out and share that	12	61
information amongst the firms because that would be	13	61
collusion and against the law. But each individual	14	61
firm knows who they won't do business with anymore	15	61
because of products that are like that.	16	61
But again, you have to -- the further	17	61
removed you are from the process, the less your	18	61
ability is to go back and figure out fraud.	19	61
MS. BRAUNSTEIN: I understand that. I just	20	61
wanted one last question, then I know I want to get	21	61
to another topic.	22	61
But from the other side of the table,	23	61
when you've seen these loans come in, people have	24	61
problems with them, Diane and Daniel, I'm just	1	62
wondering when you talk to the consumers, and you	2	62
said that you see the stated income loans and	3	62
oftentimes the stated income has obviously not much	4	62
basis in reality, is it the impression from the	5	62
consumer that they misstated their income because	6	62
they really, really wanted this particular house	7	62
and it's the only way they could qualify, or are	8	62
they giving the impression that the lender is	9	62
encouraging them to, well, you know, if you pad	10	62
your income a little bit, then you can qualify for	11	62
this loan?	12	62
I'm just trying to get a handle how	13	62
this is happening. What do you see most of the	14	62
time with the problem loans that you have seen?	15	62
MR. LINDSEY: There is a spectrum, of course,	16	62
as with all of these situations. And there is	17	62
occasionally the homeowner that we think was a	18	62
little too knowledgeable about what happened or	19	62
involved and proactive, and we say sorry, we're not	20	62
going to take your case. Overwhelmingly, the	21	62
answer to that question is the broker said this is	22	62
the way it's done, don't worry.	23	62
And at the other end of the spectrum	24	62
you have clients didn't even know the income was	1	63
misstated, it was changed around later. Or in the	2	63
case I mentioned earlier, this was a frail,	3	63
vulnerable woman, probably being close to	4	63
incompetent due to dementia or another ailment.	5	63
But overwhelmingly, it's orchestrated by the	6	63
mortgage broker or some type of loan officer, if	7	63
you're talking a direct employee of a lender. But	8	63
usually mortgage brokers because of the way the	9	63
market works, and usually there is some knowledge	10	63
or sense on the part of homeowner that, boy, that	11	63
doesn't look quite right, but they're encouraged	12	63
this is the way it's done, don't worry. That is	13	63
just the way it's done in the industry. And they	14	63
are right, that is the way it's done in the	15	63
industry.	16	63
MR. NABORS: I just need to jump in on that one	17	63
for second. That plays to our belief that	18	63
everybody needs testing, they need to be licensed.	19	63
Every originator needs to be licensed.	20	63
I would also say that lenders are now	21	63
putting their own checks and balances in place on	22	63
this. There are major lenders that when you do a	23	63
stated income loan, they look at the job that you	24	63
put in. And they put the job -- they have a	1	64
service that they go to and they put in what the	2	64
job is and what the zip code is, and it comes back	3	64
and tells them in that area what that job should	4	64
pay.	5	64
So, for example, if they are a	6	64
housekeeper and in that area you have $7,000 in	7	64
income. I'm using that because that has been	8	64
thrown out. And yet their computer says, well,	9	64
this job typically pays between 1500 and $2500 a	10	64
month, they themselves will reject the loan.	11	64
Because again, getting back to no one	12	64
wants foreclosures, and those bad actors, whether	13	64
they -- and again we talk about licensing and	14	64
testing. And that's why it's important to be more	15	64
than just mortgage brokers. Because even you said,	16	64
this happens from loan officers. Anyone that has	17	64
an incentive to profit by it may be tempted. And	18	64
we need to restrict that as much as possible, while	19	64
not eliminating programs that are working for the	20	64
great majority of people that are succeeding under	21	64
stated income loans.	22	64
MR. ANDREWS: Can I add that one thing the Fed	23	64
may want to do with respect to the HOEPA regs is at	24	64
least tighten up stated income loans for certain	1	65
types of borrowers. Again, some of the more	2	65
vulnerable people, senior citizens on a fixed	3	65
income. At least at some level there, something	4	65
could be done to address some of those areas	5	65
without going to the broader market where we think	6	65
that things are working well.	7	65
MR. CHANIN: One of the panelists talked about	8	65
push marketing, and I wanted to talk about	9	65
disclosures and consumer shopping for these	10	65
products. Particularly consumers that end up in	11	65
trouble, either foreclosures or significant	12	65
problems.	13	65
And speaking I guess anecdotally, are	14	65
mostly these consumers simply recipients of	15	65
solicitations, or are they shopping for a loan?	16	65
And if they are recipients, are they coming through	17	65
the mail?	18	65
MR. JAMES: I guess it's my turn. It's changed	19	65
over time as the federal law has changed.	20	65
Certainly early on, ten years ago, eight years ago,	21	65
it was primarily done with cold calling. I think a	22	65
lot of these large subprimes, three of which we've	23	65
sued, used cold calling and boiler room	24	65
atmospheres. And they were commission-driven to	1	66
produce 1003s.	2	66
MS. BRAUNSTEIN: Tom, I'm sorry, when you say	3	66
cold calling, do you mean telephone or bell	4	66
ringing?	5	66
MR. JAMES: Telephone call. And I think a	6	66
secondary avenue has been door-to-door sales. You	7	66
see a lot of that. And a third avenue, of course,	8	66
is entry through construction, home repair, where	9	66
there is going to be some significant financing. A	10	66
forth avenue is through fire loss, where insurance	11	66
people know where somebody has got to refinance or	12	66
where there is going to be a significant capital	13	66
movement. So there are a lot of avenues.	14	66
Then, of course, people who are in	15	66
trouble with their loans, the minute a lis pendens	16	66
is filed, get a plethora of solicitations. So we	17	66
had something like 17,000 foreclosures in Cook	18	66
County last year. All of those people received	19	66
enormous quantities of direct mail solicitation.	20	66
Of course, they are going to get rolled in those	21	66
loans, into worse loans short term, and end up back	22	66
in foreclosure.	23	66
MR. CHANIN: So my question is, it sounds like	24	66
these are not as one would expect. These are not	1	67
consumers who are leisurely shopping for a loan.	2	67
They are receiving information and for whatever	3	67
reason they apply and receive the loan.	4	67
And my question goes to the utility	5	67
of the disclosure, which we are looking at. But	6	67
the question is whether changing those disclosures,	7	67
assuming it's possible to make them more concise	8	67
and more useful to people, whether that will assist	9	67
in remedying or addressing this problem in any real	10	67
way? Or is that simply -- is this market such that	11	67
that is really not the solutions to these	12	67
individuals' problems.	13	67
MS. THOMPSON: If I could, I first think it's	14	67
important, that big stack of papers that people get	15	67
at closing, most of that is not disclosures. Most	16	67
of that I think the lenders want people to sign for	17	67
their own reasons. You see pages and pages of	18	67
indemnification agreements, you see insurance	19	67
riders, you see "you're giving us the right to	20	67
correct anything that we decide you filled out	21	67
incorrectly." So that is the first thing.	22	67
So, yes, I think we all agree that	23	67
that stack would be helped if it was whittled down,	24	67
but that is not simply a matter of disclosures.	1	68
I think there are things that can and	2	68
should be done with the disclosures that would be	3	68
helpful even to somewhat less than sophisticated	4	68
consumers. But I think the critical piece of that	5	68
that is there be meaningful liability all the way	6	68
up the food chain attached to violations of those	7	68
foreclosures.	8	68
And one example of why I believe this	9	68
is you almost always see pretty good compliance	10	68
with the rescission notices. People get the	11	68
rescission notices, and they get them usually when	12	68
they're supposed to get them. There is a little	13	68
bit of litigation about that, but basically people	14	68
get the rescission notices. And that's basically	15	68
not surprising, given that if you fail to give the	16	68
rescission notices, the secondary market can see	17	68
that in the file and liability goes all the way up.	18	68
So everybody is going to make sure those	19	68
rescission notices are given.	20	68
But what you don't see, what I have	21	68
never seen, even though almost all of my clients	22	68
have ARMs, what I have never seen is a client walk	23	68
in with the Fed's adjustable rate mortgage	24	68
disclosure booklet. Not once have I seen a client	1	69
walk into my office with that, even the little old	2	69
ladies who have every envelope that they ever got.	3	69
And I think, you know, I think it's	4	69
not a coincidence that there is no liability for	5	69
failure to provide the adjustable rate mortgage	6	69
booklet. So I think you can do something with the	7	69
disclosures, but there has to be a meaningful cost,	8	69
including fully assigning liability for failure to	9	69
do the disclosures correctly.	10	69
MR. CHANIN: But that goes to the question of	11	69
whether people will comply at every level with the	12	69
provisions. And certainly if there were to be an	13	69
increase in assigning liability to something, you	14	69
might get there.	15	69
But my question goes fundamentally so	16	69
if that little old lady received the ARM brochure,	17	69
would that help her in any real way?	18	69
MS. THOMPSON: I think a disclosure to a low	19	69
income family that the loan, the amount that you	20	69
could pay on a month on this loan is going to be	21	69
greater than your total monthly income, would be of	22	69
use to that family.	23	69
I've had people say to me when the	24	69
ARM was adjusted up or whatever, "I had no idea it	1	70
was going to go up. I would never have signed the	2	70
papers had I realized that." I think that is one	3	70
simple, clear example where improved disclosures	4	70
would make a difference. I don't think it's	5	70
everything, but I think it's important.	6	70
MS. BRAUNSTEIN: And would the CHARM booklet	7	70
have told them that?	8	70
MS. THOMPSON: No.	9	70
GOVERNOR OLSON: Paulette, you have some	10	70
questions.	11	70
MS. MYRIE-HODGE: I don't have questions,	12	70
because I'm a regulator and I don't talk to the	13	70
general public, you know, and I don't see. The	14	70
only time I ever get anything from the general	15	70
public is if there is a complaint.	16	70
But I do have a concern when I hear	17	70
the brokers say that it's basically that people are	18	70
not educated, and they are not. Because I do think	19	70
that there are brokers there.	20	70
I have a neighbor she didn't come to	21	70
me because I'm a regulator, but she's my next door	22	70
neighbor and she has been solicited a lot by	23	70
brokers. And she went to one and they told her you	24	70
could afford the loan. I know she couldn't afford	1	71
the loan based on what she told me.	2	71
So I do think you're talking about	3	71
policing and all that, but I do think you guys need	4	71
to understand that there are people there that go	5	71
out. And she is not somebody that is older or --	6	71
she just doesn't understand this part of the	7	71
business. She's not an idiot, she just doesn't	8	71
understand this part of the business.	9	71
And there are people out there that	10	71
they target people like that, and you guys should	11	71
know that. I don't get to see it on a day-to-day	12	71
basis because my banks do well and we don't have	13	71
that. But when we have bankers that are dealing	14	71
with the secondary market, but they try very hard	15	71
because they know the Fed will crack down.	16	71
GOVERNOR OLSON: Paulette's comment indicates	17	71
one of our real frustrations here is that as	18	71
regulators of banks and bank holding companies,	19	71
overwhelmingly we see with the institutions we	20	71
regulate very well run institutions that monitor	21	71
their risk exposures very carefully. We need to	22	71
say that on behalf of our clientele.	23	71
Jim, you had a follow-up comment?	24	71
MR. NABORS: Well, I'm going to go right to	1	72
this point, because there are bad actors in every	2	72
industry. There are bad actors in the mortgage	3	72
broker business, there are bad actors who are	4	72
attorneys, insurance agencies, CPAs.	5	72
That's why we truly believe every	6	72
originator needs -- we need to get rid of them.	7	72
And getting rid of them is, well, we'll eliminate	8	72
these products or we'll put these guidelines, they	9	72
will go away. No. They'll find some other way.	10	72
We need to get at those peoples.	11	72
That's why NAM has supported every	12	72
state licensing, testing, education of the people	13	72
that are making the loans. There are always going	14	72
to be people that are looking for ways to skirt the	15	72
law, and there needs to be some kind of reporting	16	72
mechanism so we can get at them, okay. So that we	17	72
can make it easier to get them out of the industry,	18	72
too.	19	72
But when someone comes in and says,	20	72
well, the broker, you know, the broker just told me	21	72
it's okay, all right. You're now hearing this from	22	72
someone who has a problem. The one thing I've	23	72
always found is that the great thing about being in	24	72
America is you're never responsible for your own	1	73
actions. You can always find someone who it's	2	73
their fault.	3	73
GOVERNOR OLSON: I don't think that is	4	73
exclusively American, but we will review that	5	73
separately.	6	73
MR. NABORS: So subsequently, when they're in	7	73
foreclosure, it's not their problem, they are	8	73
looking for ways out. I also am concerned with	9	73
you're talking door-to-door, which I haven't really	10	73
seen. But Internet, okay, where these loans are	11	73
being out-sourced and originated outside the	12	73
country. How is the enforcement arm going to be	13	73
handled there? I mean, there is an entirely -- the	14	73
Internet has exploded hugely and is effecting this	15	73
market dramatically. I think that is one of the	16	73
issues that also needs to be addressed.	17	73
But I do agree, simplify disclosures	18	73
so the customer understands. I'm not so sure you	19	73
can go with a thing that says "this payment could	20	73
go up to more than your income will be." Because	21	73
at the adjustable period you don't know what their	22	73
income is going to be. But I would agree that it	23	73
should be, "at adjustable, this is the maximum your	24	73
payment could ever be."	1	74
GOVERNOR OLSON: Jim, let me stop you.	2	74
We tried to add some perspective to	3	74
this because you folks have the benefit. In the	4	74
insurance industry there are insurance products	5	74
that are sold aggressively and there are insurance	6	74
products that have a variety of pricing. There are	7	74
other credit instruments. There are credit cards,	8	74
other types of credit products that are very	9	74
aggressively sold and there are a lot of fees built	10	74
into them.	11	74
You folks have focused -- I say "you	12	74
folks," because your perspective has been the	13	74
mortgage industry. But what are you finding in	14	74
other products and is your experience with the	15	74
mortgage industry consistent with that, or is there	16	74
a difference? I would be interested in what you	17	74
found.	18	74
MR. JAMES: Well, you know, we have the	19	74
emergence now of the option payment and the	20	74
nontraditional.	21	74
GOVERNOR OLSON: Go outside the mortgage	22	74
product.	23	74
MR. JAMES: Well, I'm thinking of the option	24	74
payment in terms of the way credit cards have been	1	75
regulated and marketed.	2	75
GOVERNOR OLSON: I see, okay.	3	75
MR. JAMES: And the minimum payment and the	4	75
non-amortizing loan. And I think with those	5	75
nontraditional products, you are into the credit	6	75
card-type territory with respect to the way credit	7	75
will be perceived and the way, you know, you're	8	75
moving more from a system that ultimately gives you	9	75
a fee simple absolute with no obligation, to a	10	75
system of I suppose at the extreme indenture	11	75
servitude, where you essentially never work your	12	75
way out of the credit position. Which could be a	13	75
good thing, could be a bad thing. But that is kind	14	75
of where I think that area of credit is headed if	15	75
there aren't some checks put into place.	16	75
MR. SMITH: I would just say at Woodstock we	17	75
looking at credit card lending, and I think our big	18	75
concern is the targeting issue. The targeting of	19	75
minority populations alone, moderate income	20	75
population for these high cost products. And that	21	75
is where the fair lending aspects of my comments	22	75
came in, making sure when you look at these high	23	75
cost products -- and it's obviously the terms and	24	75

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Pages 1-25 | 26-50 | 51-75 | 76-100 | 101-125 | 126-150 | 151-175 | 176-200 | 201-225 | 226-250 | 251-267

2006 Hearings

Building Sustainable Homeownership: Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of Chicago 230 South LaSalle Street, Chicago, Illinois 60604 June 7, 2006

Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of Chicago
230 South LaSalle Street, Chicago, Illinois 60604
June 7, 2006