Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice
Federal Reserve Bank of Chicago
230 South LaSalle Street, Chicago, Illinois 60604
June 7, 2006
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| Transcript | Line | Page |
|---|---|---|
| And I guess the question to you is we | 1 | 151 |
| know there is a problem, so how do we get our arms | 2 | 151 |
| around this? What type of research can we | 3 | 151 |
| reasonably do that will really point to the | 4 | 151 |
| direction all of us should be going, whether we are | 5 | 151 |
| a credit rating agency -- because I know you have a | 6 | 151 |
| concern about packaging your loans and the | 7 | 151 |
| investors that want to buy those loans, they are | 8 | 151 |
| going to be concerned if there are issues of risk. | 9 | 151 |
| So what role can research play in that? | 10 | 151 |
| Then I also have a question as it | 11 | 151 |
| relates to the credit rating companies. Where do | 12 | 151 |
| you see yourself trying to help move this agenda | 13 | 151 |
| forward? Because at some point it's going to | 14 | 151 |
| impact you in a way that you're not going to be | 15 | 151 |
| probably happy with. So how do you deal with | 16 | 151 |
| that? | 17 | 151 |
| MR. ERNST: I will take a stab. There is a lot | 18 | 151 |
| there, some very great questions. I think a lot of | 19 | 151 |
| what motivated HOEPA and the state predatory | 20 | 151 |
| lending laws that have followed it have been | 21 | 151 |
| concerns about equities stripping. Instances where | 22 | 151 |
| borrowers, in fact, were losing ground in the | 23 | 151 |
| transaction. And I think that very much has been a | 24 | 151 |
| focus of state predatory lending laws today. It's | 1 | 152 |
| something that we can learn a lot about from the | 2 | 152 |
| states. | 3 | 152 |
| I think what is newly coming into | 4 | 152 |
| focus now is increasing awareness of issues that | 5 | 152 |
| relate more to underwriting suitability that | 6 | 152 |
| relates to loan outcomes. So not just whether the | 7 | 152 |
| transaction helped the consumer move forward and | 8 | 152 |
| was a constructive step in their economic life, but | 9 | 152 |
| whether or not -- and this goes some to externality | 10 | 152 |
| issues that Anthony was raising -- whether or not | 11 | 152 |
| there were issues related to foreclosures, and some | 12 | 152 |
| were touched on, appraisal issues and other | 13 | 152 |
| concerns from the former panel. But whether these | 14 | 152 |
| issues can provide some light. | 15 | 152 |
| So I would suggest there are two | 16 | 152 |
| broad sets of spectrums that research can help | 17 | 152 |
| eliminate. One is the extent to which certain loan | 18 | 152 |
| features help or hinder borrowers in their effort | 19 | 152 |
| to build and maintain wealth. And the second is | 20 | 152 |
| more directly related to foreclosures and loan | 21 | 152 |
| outcomes as indicators as to whether or not the | 22 | 152 |
| loan underwriting and origination process is | 23 | 152 |
| functioning sufficiently. | 24 | 152 |
| I think that second question really | 1 | 153 |
| is just coming more into focus in recent years as | 2 | 153 |
| we have had enough experience in subprime mortgages | 3 | 153 |
| to get a sense of what the outcomes were. Because | 4 | 153 |
| in 1999 and 2000 when North Carolina passed this | 5 | 153 |
| law, the market size was so small that it was hard | 6 | 153 |
| to get much insight into those patterns. But I | 7 | 153 |
| think we are getting more information now as to | 8 | 153 |
| where those opportunities exist. | 9 | 153 |
| MR. MASON: I would agree. If you look at the | 10 | 153 |
| state of the economy since post-September 2001, | 11 | 153 |
| it's just been on fire. So it's kind of hard to | 12 | 153 |
| look back at all of the state laws and see exactly | 13 | 153 |
| the impact, because people have been building up so | 14 | 153 |
| much equity in the housing market that there may be | 15 | 153 |
| some fuzziness of the data as to who is defaulting, | 16 | 153 |
| who is not defaulting, why are they defaulting. | 17 | 153 |
| Really, the question is why are they defaulting, | 18 | 153 |
| right? | 19 | 153 |
| And the increase in home prices has | 20 | 153 |
| probably -- and I think it was alluded to before -- | 21 | 153 |
| has probably taken out some of the low FICO score | 22 | 153 |
| implications of how people are defaulting and | 23 | 153 |
| they're rebuying and they're buying from other | 24 | 153 |
| lenders. So I think as the data becomes seasoned | 1 | 154 |
| we will be able to see and as the housing market | 2 | 154 |
| has now been softening a little bit, I think we | 3 | 154 |
| will be able to see more of the real impact. | 4 | 154 |
| MS. WILLIAMS: Do you feel there is a role that | 5 | 154 |
| you can play to kind of assist in this whole | 6 | 154 |
| process as a credit rating agency? | 7 | 154 |
| MR. MASON: We honestly don't take steps to | 8 | 154 |
| push forward any sort of public policy. Our real | 9 | 154 |
| concern is what is the credit of this loan. What | 10 | 154 |
| is the credit profile of this borrower, what is the | 11 | 154 |
| potential of loss on this loan that will inure to | 12 | 154 |
| the investors in the mortgage backed securities. | 13 | 154 |
| So we pay attention to the laws, we assess the | 14 | 154 |
| laws, but we really don't take a stand on public | 15 | 154 |
| policy. | 16 | 154 |
| MR. QUERCIA: If I may add, I think Michael | 17 | 154 |
| said before the unfortunate event is that there is | 18 | 154 |
| not a data set that exists that you can use to | 19 | 154 |
| analyze this, and commitment from the housing | 20 | 154 |
| finances on the writing perspective. | 21 | 154 |
| To make it more complicated, as I | 22 | 154 |
| mentioned in my remarks, in my view there is an | 23 | 154 |
| intersection in here that actually creates a | 24 | 154 |
| problem. That actually consumer credit issues and | 1 | 155 |
| the housing finance is the other one of the two. | 2 | 155 |
| So it would be very difficult to tell you to make a | 3 | 155 |
| study to be conclusive about what you need to do to | 4 | 155 |
| address this issue. | 5 | 155 |
| So I think at best you have to find | 6 | 155 |
| people with differing opinions to do the study, but | 7 | 155 |
| I don't think you have in my view a study that | 8 | 155 |
| would provide an answer. | 9 | 155 |
| MS. BRAUNSTEIN: Actually, this was going to be | 10 | 155 |
| my question. I have to admit, I'm still being | 11 | 155 |
| somewhat confused by this, which seems to happen to | 12 | 155 |
| me more and more as I get older. But we see | 13 | 155 |
| different studies, and going back to North | 14 | 155 |
| Carolina, which has been around the longest and has | 15 | 155 |
| been studied most, we have, sitting here in the | 16 | 155 |
| room, two very different opinions about the impact | 17 | 155 |
| of that law. And it's hard to sort out kind of | 18 | 155 |
| what is what when you're trying to make policy. | 19 | 155 |
| I was wondering, and I may be sorry I | 20 | 155 |
| asked this, if it's possible to kind of not | 21 | 155 |
| through a very long dissertation on your papers -- | 22 | 155 |
| to kind of sort out, Michael, why is it that you | 23 | 155 |
| think that North Carolina has restricted credit, | 24 | 155 |
| and why, Keith, do you feel that it may have | 1 | 156 |
| prevented some loans being made but the ones it's | 2 | 156 |
| prevented are the bad ones. And is it possible to | 3 | 156 |
| kind of sum up what the differences are in some | 4 | 156 |
| respect? | 5 | 156 |
| MR. STATEN: Actually, I think there are a lot | 6 | 156 |
| of similarities in the study. There have been | 7 | 156 |
| three different databases that have been used, | 8 | 156 |
| completely different. There may have been some | 9 | 156 |
| overlap, but essentially three different | 10 | 156 |
| databases. My recollection is all of them found | 11 | 156 |
| reductions in at least the refi side of loans made | 12 | 156 |
| in North Carolina. Initially in the immediate | 13 | 156 |
| period afterwards, and now some of these studies | 14 | 156 |
| have gone further, ours now takes it right up to | 15 | 156 |
| 2004. It's not the case on the home purchase side, | 16 | 156 |
| but it was on the refi side. So I don't think | 17 | 156 |
| there is any disagreement there. | 18 | 156 |
| The disagreement comes in whether we | 19 | 156 |
| think that is a good thing or a bad thing. | 20 | 156 |
| Frankly, my opinion is somewhat more neutral. I'm | 21 | 156 |
| not saying necessarily it's good or bad. I'm | 22 | 156 |
| simply noting that there clearly was a reduction in | 23 | 156 |
| loans. | 24 | 156 |
| And I'm posing a question what | 1 | 157 |
| happened to those borrowers that didn't get the | 2 | 157 |
| loans? Did they just not want them? Was it the | 3 | 157 |
| case that they were in the past targets of what is | 4 | 157 |
| called push marketing where they were sort of | 5 | 157 |
| persuaded that this was a good kind of loan but | 6 | 157 |
| didn't have the burning need, the liquidity need to | 7 | 157 |
| get it for themselves? Or were there some of them, | 8 | 157 |
| and our study it suggests it's the highest risk | 9 | 157 |
| guys, the low FICO guys, that just don't get the | 10 | 157 |
| loan at all? | 11 | 157 |
| I don't have an answer to that, but | 12 | 157 |
| it's clear there was a reduction. | 13 | 157 |
| MS. BRAUNSTEIN: I guess maybe I had it wrong. | 14 | 157 |
| I've always thought in the past that you were | 15 | 157 |
| saying this was a bad thing because people who | 16 | 157 |
| should be getting credit are not getting credit. | 17 | 157 |
| As opposed to this could be a good thing because | 18 | 157 |
| maybe the people who didn't get credit shouldn't be | 19 | 157 |
| getting the loans. | 20 | 157 |
| MR. STATEN: I certainly never said the | 21 | 157 |
| latter. But mostly what we've noted is loans have | 22 | 157 |
| gone down. And generally when you see that | 23 | 157 |
| happening as a result of a regulation, generally | 24 | 157 |
| your impulse is to say there is a problem. | 1 | 158 |
| MR. PENNINGTON-CROSS: Can I intervene to make | 2 | 158 |
| this a little less clear for you? | 3 | 158 |
| MS. BRAUNSTEIN: I want to give Keith a chance | 4 | 158 |
| to respond. | 5 | 158 |
| MR. ERNST: Perhaps I would be wise to yield to | 6 | 158 |
| Anthony at this point. But I want to make an | 7 | 158 |
| observation. One of the things that has been very | 8 | 158 |
| clear to me in the studies that have been done to | 9 | 158 |
| date is in the rejection rates. The applicants who | 10 | 158 |
| went in and applied for credit in North Carolina | 11 | 158 |
| were no more likely to be denied credit than | 12 | 158 |
| applicants in other states without laws under | 13 | 158 |
| similar settings. And if the law were really the | 14 | 158 |
| barrier to those loans being made, I would expect a | 15 | 158 |
| higher rejection rate for applications. Lenders | 16 | 158 |
| would say, look, we would like to make this loan | 17 | 158 |
| for you, but the regulatory burdens are too high. | 18 | 158 |
| Therefore, we have to reject your mortgage. | 19 | 158 |
| In fact, we don't see that in the | 20 | 158 |
| studies. I think there have been some studies that | 21 | 158 |
| did have a marginal decrease. We had one that | 22 | 158 |
| did. We went back with data later with another | 23 | 158 |
| look and said, well, we don't actually find a | 24 | 158 |
| significant difference in their accounting compared | 1 | 159 |
| to other states. | 2 | 159 |
| But conceding for the point of | 3 | 159 |
| argument there is a marginal decrease, I think the | 4 | 159 |
| question becomes is that decrease along the lines | 5 | 159 |
| that policy makers intended. And that is what our | 6 | 159 |
| study also tried to take a look at. And I will | 7 | 159 |
| concede Michael's point that it's very difficult to | 8 | 159 |
| know with absolute certainty whether you're | 9 | 159 |
| filtering exactly the right ones. But we've got to | 10 | 159 |
| ask the questions of the data we have and try to | 11 | 159 |
| find the answers. And when we did that, we found | 12 | 159 |
| what looked like a good match up with policy | 13 | 159 |
| makers' intentions. | 14 | 159 |
| MR. PENNINGTON-CROSS: Let me follow up on that | 15 | 159 |
| rejection comment. My research shows that there | 16 | 159 |
| are many laws out there that substantially reduce | 17 | 159 |
| rejection rates, okay. So that is a potentially | 18 | 159 |
| positive reaction to those laws, perhaps due to | 19 | 159 |
| additional prescreening by lenders. | 20 | 159 |
| We also have to note that rejection | 21 | 159 |
| rates sometimes are extremely high, over 40 | 22 | 159 |
| percent, in some states over 50. So it's a | 23 | 159 |
| substantial issue, this high rejection rate. | 24 | 159 |
| So now let me go back. We had a | 1 | 160 |
| bunch of comments about how the law in North | 2 | 160 |
| Carolina reduced the flow of credit. Let me also | 3 | 160 |
| say there were laws that increased the amount of | 4 | 160 |
| subprime credit. So we had regulations that were | 5 | 160 |
| passed that actually were associated with quite | 6 | 160 |
| large increases in subprime. We had other laws | 7 | 160 |
| that were associated with large decreases in places | 8 | 160 |
| like Georgia. | 9 | 160 |
| So how do we pass something that is | 10 | 160 |
| regulating a market and have actually applications | 11 | 160 |
| and originations go up? It doesn't sound like an | 12 | 160 |
| old-style usury law. That is a point for | 13 | 160 |
| interpretation, but it's my interpretation that | 14 | 160 |
| people were uncomfortable, and during this market | 15 | 160 |
| when they felt it was likely they were going to be | 16 | 160 |
| predated on. That they were vulnerable, and they | 17 | 160 |
| felt more comfortable when the law was in place. | 18 | 160 |
| And when the law covered a large segment of the | 19 | 160 |
| market, more people tended to apply to this high | 20 | 160 |
| cost segment. | 21 | 160 |
| MR. STATEN: Can I add a follow-up comment to | 22 | 160 |
| that? | 23 | 160 |
| MS. BRAUNSTEIN: Sure. | 24 | 160 |
| MR. STATEN: Maybe I'm all wet on this, and | 1 | 161 |
| those of you in the mortgage business can school me | 2 | 161 |
| if I am wrong, but when I think about these large | 3 | 161 |
| national mortgage companies making loans throughout | 4 | 161 |
| the country, I think of it in terms of the credit | 5 | 161 |
| card process. I think about the marketing | 6 | 161 |
| process. We all know how much volume of | 7 | 161 |
| solicitations we get through our mail, or we get | 8 | 161 |
| through the telephone in the old days if you didn't | 9 | 161 |
| take yourself off the list. | 10 | 161 |
| If a law is passed that discourages | 11 | 161 |
| me as a big lender from taking a higher risk | 12 | 161 |
| because I can't price accordingly, or if I do price | 13 | 161 |
| accordingly I have to put up with all these | 14 | 161 |
| regulations, then I'm going to tweak my marketing | 15 | 161 |
| machine. I'm going to prescreen, as Anthony | 16 | 161 |
| suggested, and you know they are all doing this. | 17 | 161 |
| And I'm going to tweak it so I aim to a little | 18 | 161 |
| different segment of the market, not the high risk | 19 | 161 |
| guys anymore. The little bit different segment of | 20 | 161 |
| the market that's lower risk, more qualified. I | 21 | 161 |
| put more marketing resources into it. My rejection | 22 | 161 |
| rates go down because they are more qualified, I | 23 | 161 |
| may actually get applications going up. | 24 | 161 |
| MS. BRAUNSTEIN: But is that what's happening? | 1 | 162 |
| MR. STATEN: I don't know. But I'm saying that | 2 | 162 |
| could be the explanation. | 3 | 162 |
| Let me just finish. The person is | 4 | 162 |
| not getting the loan anymore, because they are not | 5 | 162 |
| getting the call anymore, they're not getting the | 6 | 162 |
| piece of mail, is the high risk factor. | 7 | 162 |
| MR. POSNER: Can I make a point on that? I | 8 | 162 |
| think some of this debate is barking up the wrong | 9 | 162 |
| tree. I think there is a fact which I have heard | 10 | 162 |
| and somebody will jump in and correct that, I think | 11 | 162 |
| the data suggests that very few HOEPA loans get | 12 | 162 |
| paid, period. | 13 | 162 |
| Now, is that good or bad? I don't | 14 | 162 |
| know. But the debate so far is about trying to | 15 | 162 |
| demarcate which parts of the market are good or bad | 16 | 162 |
| because it's X points or X fees. Meanwhile, the | 17 | 162 |
| markets that are driving this business are changing | 18 | 162 |
| every day. | 19 | 162 |
| I want to add a comment about what | 20 | 162 |
| drives subprime loans into default. I'm very | 21 | 162 |
| skeptical of a regulatory or legislative process | 22 | 162 |
| that would try to identify that cause and proscribe | 23 | 162 |
| laws around it. Because in fact investors are | 24 | 162 |
| studying these issues statistically in real time, | 1 | 163 |
| and they would tell you it's not just the | 2 | 163 |
| borrowers' FICO and it's not just the terms of the | 3 | 163 |
| loans, but it's also the housing market. So | 4 | 163 |
| booming home prices are going to lead to very | 5 | 163 |
| different loss profiles than softer housing | 6 | 163 |
| markets. And it's not just interest rates and the | 7 | 163 |
| rest of the economy. I'm very skeptical that any | 8 | 163 |
| research done using databases will be able to | 9 | 163 |
| replicate that decision making criteria. | 10 | 163 |
| So this strategy of trying to say | 11 | 163 |
| this fee, this point, HOEPA, non-HOEPA, I think is | 12 | 163 |
| extremely shortsighted. Whereas if we look back at | 13 | 163 |
| what has gone wrong in the last few years -- I | 14 | 163 |
| started to mention, I got beeped off -- some of the | 15 | 163 |
| big problems have been companies like Providian or | 16 | 163 |
| Household or Associates, and I haven't followed | 17 | 163 |
| Ameriquest but it seemed to be there had been some | 18 | 163 |
| issues there. These were problems not of fees or | 19 | 163 |
| pricing or that kind of stuff, they were problems | 20 | 163 |
| of cultures and controls at these companies. | 21 | 163 |
| And I have no idea how legislation | 22 | 163 |
| would address those kinds of issues. In fact, what | 23 | 163 |
| worked really well is consumer activists working | 24 | 163 |
| together with regulators sensitive to consumer | 1 | 164 |
| complaints, stepping in and fixing the problems at | 2 | 164 |
| those companies. So to me that seems like a more | 3 | 164 |
| fruitful approach. More focusing regulatory | 4 | 164 |
| reaction to actual consumer complaints. | 5 | 164 |
| MS. WILLIAMS: If I can just ask -- | 6 | 164 |
| GOVERNOR OLSON: Go ahead, Alicia. | 7 | 164 |
| MS. WILLIAMS: Because I'm listening to | 8 | 164 |
| Kenneth, and I guess going back to what Michael | 9 | 164 |
| said earlier, which I don't think I heard a | 10 | 164 |
| response to, because I think I heard you say that | 11 | 164 |
| we haven't identified a practice we are trying to | 12 | 164 |
| study. | 13 | 164 |
| So could you elaborate on what you | 14 | 164 |
| meant? | 15 | 164 |
| MR. STATEN: Well, we don't have an unambiguous | 16 | 164 |
| definition of what is a predatory term. It's not a | 17 | 164 |
| high price on a loan. High prices can be fine. | 18 | 164 |
| It's not a prepayment penalty. It's not high | 19 | 164 |
| loan-to-value ratio. Those can all be good things | 20 | 164 |
| in the right hands with the right borrower. But | 21 | 164 |
| they can be really lousy things, too. | 22 | 164 |
| I think that plays, then, any | 23 | 164 |
| attention to judge whether a law squeezes out some | 24 | 164 |
| of those terms was effective. Well, is the effect | 1 | 165 |
| of it it squeezed out those terms, but did it | 2 | 165 |
| benefit the borrowers? And that is my point. | 3 | 165 |
| MR. ERNST: I will recognize it's a challenge. | 4 | 165 |
| I guess I would say there are many instances in | 5 | 165 |
| life, safety and soundness is one, where we have a | 6 | 165 |
| vague concept that we have to try to | 7 | 165 |
| operationalize. We have to try to find some way to | 8 | 165 |
| say, well, how are we going to find some guidance, | 9 | 165 |
| how are we going to provide a regulatory framework | 10 | 165 |
| that leads to good outcomes, can we find ways to do | 11 | 165 |
| it. | 12 | 165 |
| And I think for researchers our | 13 | 165 |
| challenge is to say, well, how is this working in | 14 | 165 |
| the predatory lending context. How are the policy | 15 | 165 |
| makers trying to get a handle on this, and then to | 16 | 165 |
| ask questions about whether or not it's worked. | 17 | 165 |
| And I think we can always work to do a better job | 18 | 165 |
| of that, but I would say it's not impossible to | 19 | 165 |
| proceed and try and glean some knowledge from the | 20 | 165 |
| data that is available to us. It's challenging, | 21 | 165 |
| but it's not impossible. | 22 | 165 |
| MS. WILLIAMS: Are there things that you think | 23 | 165 |
| the regulatory agencies can use to help facilitate | 24 | 165 |
| research that you're trying to do in this vein? | 1 | 166 |
| MR. ERNST: Well, I do think there are things, | 2 | 166 |
| and we probably don't want to open the whole | 3 | 166 |
| Homeowner Mortgage Disclosure Act debate here, but | 4 | 166 |
| I do think there is additional information that | 5 | 166 |
| could be brought to light properly. | 6 | 166 |
| GOVERNOR OLSON: If I can come back, Keith, you | 7 | 166 |
| introduced the term "suitability" and then a couple | 8 | 166 |
| of times you then said "suitability and | 9 | 166 |
| underwriting." I am familiar with the term | 10 | 166 |
| "suitability" as it applies to investment | 11 | 166 |
| products, and specifically not as it applies to any | 12 | 166 |
| credit product that is carefully underwritten. | 13 | 166 |
| In your judgment is suitability | 14 | 166 |
| necessary in the absence of underwriting, or is it | 15 | 166 |
| something that we need to have both of? | 16 | 166 |
| First of all, I'm not sure that we | 17 | 166 |
| need a suitability standard in the business if in | 18 | 166 |
| fact the underwriting is working, but that's my | 19 | 166 |
| question. | 20 | 166 |
| MR. ERNST: I guess where suitability comes from | 21 | 166 |
| in my comments is sort of a growing recognition | 22 | 166 |
| that increasing the home mortgage options that | 23 | 166 |
| borrowers are faced with today are every bit as | 24 | 166 |
| complicated as the investment options they are | 1 | 167 |
| presented by investment counselors who are subject | 2 | 167 |
| to that requirement. We think that a suitability | 3 | 167 |
| requirement could go a long way towards raising | 4 | 167 |
| professional standards in assuring that borrowers | 5 | 167 |
| are being recommended products that serve their | 6 | 167 |
| interests and their needs. | 7 | 167 |
| Now, I think underwriting will also | 8 | 167 |
| be and will always be a critical component of the | 9 | 167 |
| process. But just because a mortgage product has | 10 | 167 |
| been underwritten doesn't mean that -- prudently | 11 | 167 |
| doesn't necessarily mean that that was exactly or | 12 | 167 |
| what was necessarily a product, a good indicator | 13 | 167 |
| that it was a suitability product for the | 14 | 167 |
| borrower. But I think it's different because | 15 | 167 |
| suitability goes to what products were recommended | 16 | 167 |
| to a borrower and underwriting goes to how does the | 17 | 167 |
| borrower fit into the product that is recommended | 18 | 167 |
| to them. | 19 | 167 |
| MS. BRAUNSTEIN: This is an interesting | 20 | 167 |
| discussion, because this issue has come up more and | 21 | 167 |
| more recently in different venues, is that I think | 22 | 167 |
| our philosophy has been up until now that we have | 23 | 167 |
| tried through disclosure, through having the | 24 | 167 |
| disclosures to give the consumers the information | 1 | 168 |
| that they would need. So that they could make that | 2 | 168 |
| decision themselves in terms of what is suitable | 3 | 168 |
| and what is not and do product comparison. As | 4 | 168 |
| opposed to putting that responsibility on the | 5 | 168 |
| lender to try and somehow evaluate what is suitable | 6 | 168 |
| for the consumer, and I would just like to get a | 7 | 168 |
| reaction on that. | 8 | 168 |
| MR. ERNST: Around my point and then I will | 9 | 168 |
| step away from the microphone. I think actually | 10 | 168 |
| the flipping standard, we had some conversation | 11 | 168 |
| this morning about the desire for greater coverage, | 12 | 168 |
| but I think the flipping standard that was | 13 | 168 |
| implemented in the last round of HOEPA revisions is | 14 | 168 |
| in fact a suitability type standard if we stop and | 15 | 168 |
| think about it. It requests that the loans serve | 16 | 168 |
| the interest of the borrower, which is the loan | 17 | 168 |
| suitable for the borrower in these circumstances. | 18 | 168 |
| So I think we have some precedent in thinking it | 19 | 168 |
| through. | 20 | 168 |
| MR. QUERCIA: My feeling is that many of the | 21 | 168 |
| mortgage products are so complex, I don't think | 22 | 168 |
| it's appropriate to put the burden on the | 23 | 168 |
| borrowers. I think it will make the borrowers have | 24 | 168 |
| trouble without following the finances and many | 1 | 169 |
| other things. | 2 | 169 |
| GOVERNOR OLSON: Do we have any advocates of | 3 | 169 |
| behavioral economics at the table who want to speak | 4 | 169 |
| to how that might impact, how that is impacting the | 5 | 169 |
| choices? | 6 | 169 |
| (No verbal response.) | 7 | 169 |
| GOVERNOR OLSON: I don't blame you. | 8 | 169 |
| MR. CHANIN: Have there been any studies or | 9 | 169 |
| research on whether consumer counseling has been of | 10 | 169 |
| benefit in terms of either pre- or post- in terms | 11 | 169 |
| of consumer default rates for this market? | 12 | 169 |
| MR. STATEN: Well, there have. The one that | 13 | 169 |
| most specifically addresses homeownership | 14 | 169 |
| counseling I think is the one that folks did three | 15 | 169 |
| or four years ago. And they found a definite | 16 | 169 |
| positive lift if done the right way, and I forgot | 17 | 169 |
| the details now. | 18 | 169 |
| MS. BRAUNSTEIN: They looked at 40,000 loans | 19 | 169 |
| that are in their affordable goal product, which | 20 | 169 |
| was targeted for loans. | 21 | 169 |
| MR. STATEN: And they got substantially lower | 22 | 169 |
| delinquency rates on those two or three years out. | 23 | 169 |
| MR. PENNINGTON-CROSS: We noticed that that | 24 | 169 |
| paper is published. So there are technical | 1 | 170 |
| problems with their selection and documentation in | 2 | 170 |
| the computer. There is strong support that there | 3 | 170 |
| is problems with that data. | 4 | 170 |
| MR. QUERCIA: I also stand on the reviews. But | 5 | 170 |
| looking at post-mortgage counseling, and the reason | 6 | 170 |
| it's most likely to be effective for borrowers that | 7 | 170 |
| had received prepurchase, before purchase. So | 8 | 170 |
| there is some kind of connection even after they | 9 | 170 |
| take their home, or the impact of having received | 10 | 170 |
| counseling before purchasing a home. | 11 | 170 |
| MR. STATEN: There is another study, and it | 12 | 170 |
| came out in the Feds Consumer Affairs Research | 13 | 170 |
| Conference last year maybe, on the ability of | 14 | 170 |
| homeownership counseling to school borrowers to | 15 | 170 |
| make better choices with respect to prepayment, and | 16 | 170 |
| I forget the effect on default. But there was some | 17 | 170 |
| result with respect to timing of prepayment, which | 18 | 170 |
| suggests that at least it's possible to educate | 19 | 170 |
| them. It's not maybe going to go all the way to | 20 | 170 |
| some of these exotic loan products, but it's | 21 | 170 |
| possible. | 22 | 170 |
| GOVERNOR OLSON: I sense the panel is losing a | 23 | 170 |
| little steam. Maybe that happens at five minutes | 24 | 170 |
| before lunch and nobody wants to impede on their | 1 | 171 |
| lunch. | 2 | 171 |
| Kim made a point that I would like to | 3 | 171 |
| just follow up, because I think it's critical. We | 4 | 171 |
| began, at least I began, the program this morning | 5 | 171 |
| by talking about extraordinary changes having taken | 6 | 171 |
| place in the mortgage market just in the last four | 7 | 171 |
| years. And I would encourage all of us, and it's | 8 | 171 |
| instinctive for me and it may be for some of you, | 9 | 171 |
| to presume that where we are now will be a steady | 10 | 171 |
| state for a while. | 11 | 171 |
| But at the pace of change that is | 12 | 171 |
| taking place, I can only assume that the pace of | 13 | 171 |
| change will continue to accelerate. There are no | 14 | 171 |
| destinations, there are only journeys. So I would | 15 | 171 |
| think that as we look at the changes that are | 16 | 171 |
| taking place, we ought to keep that in mind that a | 17 | 171 |
| fix or even an evaluation of today's market may or | 18 | 171 |
| may not have -- may have limited value as the | 19 | 171 |
| market goes forward. I will consider that the | 20 | 171 |
| benediction, unless someone has something they | 21 | 171 |
| would like to add. | 22 | 171 |
| We will now break for lunch, then we | 23 | 171 |
| are back here at 1:30. And I think the afternoon | 24 | 171 |
| panel is really important because we are talking | 1 | 172 |
| about the area of consumer education. And this has | 2 | 172 |
| to be at the heart of this issue. Then at 3:00 | 3 | 172 |
| o'clock, again we want to hear from people who | 4 | 172 |
| would care to speak. And be sure, if you want to | 5 | 172 |
| speak at 3:00 o'clock, that you have registered. | 6 | 172 |
| Thanks very much. It's been a very | 7 | 172 |
| informative morning. | 8 | 172 |
| (Whereupon, a lunch break was | 9 | 172 |
| taken.) | 10 | 172 |
| GOVERNOR OLSON: Welcome back to the afternoon | 11 | 172 |
| session. We had two, I thought, very good, highly | 12 | 172 |
| interactive sessions this morning. We've heard | 13 | 172 |
| from people that represented various points of | 14 | 172 |
| views that were expressed very thoughtfully and the | 15 | 172 |
| discussion I think added a lot. This is the sort | 16 | 172 |
| of dialog I think that we were hopeful to be able | 17 | 172 |
| to generate from this hearing, so that's an awfully | 18 | 172 |
| good start. | 19 | 172 |
| We're about to start the third panel, | 20 | 172 |
| the title of which is "Sustainable Ownership: | 21 | 172 |
| Consumer Education." That sustainable ownership | 22 | 172 |
| certainly is a societal value. Consumer education | 23 | 172 |
| is going to go a long way to help achieve that | 24 | 172 |
| value. So we are looking forward to the | 1 | 173 |
| panelists. | 2 | 173 |
| As we did this morning, we will ask | 3 | 173 |
| everybody to have their opening statement of five | 4 | 173 |
| minutes, and that gives us ample and full | 5 | 173 |
| opportunity to get a lot of dialog and discussion. | 6 | 173 |
| Right at 3:00 o'clock we're going to | 7 | 173 |
| make sure that the people that are here who care to | 8 | 173 |
| speak would be given a chance to do so also. | 9 | 173 |
| We will continue to go in the order | 10 | 173 |
| from my right to your left, which is clockwise. | 11 | 173 |
| So, David, why don't you introduce | 12 | 173 |
| yourself, your group, and grab the microphone from | 13 | 173 |
| Michael there, and then we will hear from you | 14 | 173 |
| first. | 15 | 173 |
| MR. ROSE: Okay. I'm unlucky or -- | 16 | 173 |
| GOVERNOR OLSON: Very fortunate. | 17 | 173 |
| MR. ROSE: Good afternoon. My name is David | 18 | 173 |
| Rose, I'm research director at National Training | 19 | 173 |
| and Information Center, NTIC. | 20 | 173 |
| NTIC was founded by Gail Sacana | 21 | 173 |
| (phonetic) in 1973 to try to improve the quality of | 22 | 173 |
| life in neighborhoods across the country. We have | 23 | 173 |
| been trying to fulfill that mission for the last | 24 | 173 |
| 30-some years, and one of the things that we | 1 | 174 |
| certainly learned is that access to credit is | 2 | 174 |
| central to helping neighbors. But it's not just | 3 | 174 |
| access to credit, any credit, it's access to good | 4 | 174 |
| loans. Loans to residents to help them build their | 5 | 174 |
| wealth and their goals. | 6 | 174 |
| There are three points I wanted to | 7 | 174 |
| try to make today. The first, general consumer | 8 | 174 |
| education does not withstand high pressure sales | 9 | 174 |
| tactics, nor do the emotions that are involved in | 10 | 174 |
| buying a house. Some people are simply not ready | 11 | 174 |
| to be homeowners and that is a hard truth for many | 12 | 174 |
| to accept. | 13 | 174 |
| As a solution to predatory lending, | 14 | 174 |
| the arguments for consumer education often blame | 15 | 174 |
| the borrower. The arguments suggest that if the | 16 | 174 |
| borrower had known more, they wouldn't have agreed | 17 | 174 |
| to such a lousy loan. | 18 | 174 |
| Often, the real mistake the borrower | 19 | 174 |
| made was to take the advice of a real estate or | 20 | 174 |
| finance professional that did not have their best | 21 | 174 |
| interests at heart. General consumer education | 22 | 174 |
| will never prepare a borrower well enough to go up | 23 | 174 |
| against a well-trained finance professional, nor | 24 | 174 |
| overcome the emotions of falling in love with a | 1 | 175 |
| home or the willingness to do anything to get one's | 2 | 175 |
| family into a home or to keep them in a home. | 3 | 175 |
| The second point I want to make is | 4 | 175 |
| that the comprehensive home buyer education can | 5 | 175 |
| help combat these pressures, but it is a very | 6 | 175 |
| limited resources. | 7 | 175 |
| NTIC works with community groups | 8 | 175 |
| across the country whose mission it is to improve | 9 | 175 |
| their neighborhoods. When working with one of our | 10 | 175 |
| community partners, the borrower receives more than | 11 | 175 |
| consumer information. They gain an ally that is | 12 | 175 |
| not interested in simply closing deals, but | 13 | 175 |
| preparing families for successful homeownership. | 14 | 175 |
| And the organization is around after the sale to | 15 | 175 |
| help the new homeowners deal with the inevitable | 16 | 175 |
| problems of owning a house. | 17 | 175 |
| NTIC has developed community | 18 | 175 |
| corporate partnerships that use the strength and | 19 | 175 |
| commitment of local organizations to design | 20 | 175 |
| appropriate loan products and to help families have | 21 | 175 |
| safer homes. | 22 | 175 |
| The third point I want to make is | 23 | 175 |
| that the industry must be held accountable for its | 24 | 175 |
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