Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice
Federal Reserve Bank of Philadelphia
10 Independence Mall, Philadelphia, Pennsylvania 19106
June 9, 2006
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Pages 1-25 | 26-50 | 51-75 | 76-100 | 101-125 | 126-150 | 151-175 | 176-200 | 201-221
| Transcript | Line | Page |
|---|---|---|
| required in the contracts to purchase the | 1 | 151 |
| properties. | 2 | 151 |
| MR. GUTTENTAG: It's a violation of | 3 | 151 |
| RESPA. In all the cases that I have come across, | 4 | 151 |
| he has a financial (inaudible) in the form of | 5 | 151 |
| concession on the house. | 6 | 151 |
| MR. FALK: And we do hope that HUDs | 7 | 151 |
| secretaries will address this issue. | 8 | 151 |
| GOVERNOR OLSON: Mike or Leonard or | 9 | 151 |
| Sandy, any other questions? | 10 | 151 |
| MR. COLLINS: I just have one. I think | 11 | 151 |
| most of the other questions I had have been | 12 | 151 |
| addressed. This issue of the perception of | 13 | 151 |
| brokers at the core of some of these issues, | 14 | 151 |
| today, versus loan officers or banks or mortgage | 15 | 151 |
| companies, many may think that within banks | 16 | 151 |
| they've got risk management infrastructure to find | 17 | 151 |
| the bad people that are making loans over time. | 18 | 151 |
| In your comments to Governor Olson, you mentioned | 19 | 151 |
| there's a best practices guide. Does that, in any | 20 | 151 |
| way, sort of, clarify the role of brokers in your | 21 | 151 |
| experience as you understand where the complaints | 22 | 151 |
| are? Can you comment on that a little bit. | 23 | 151 |
| MR. FALK: Well, our best practices | 24 | 151 |
| deals with questions on how to deal with the | 1 | 152 |
| consumer and how to promote practices for the | 2 | 152 |
| mortgages industry that will serve the consumer in | 3 | 152 |
| an appropriate manner. We are concerned that the | 4 | 152 |
| best practices are followed, but we also | 5 | 152 |
| understand that so many different distribution | 6 | 152 |
| channels have been created today. | 7 | 152 |
| We have certain depository institutions | 8 | 152 |
| that outsource their entire mortgage department to | 9 | 152 |
| another lender. We have private label | 10 | 152 |
| institutions, which ultimately outsource all of | 11 | 152 |
| the distribution channels. We have mortgage | 12 | 152 |
| companies that act as mortgage brokers in one | 13 | 152 |
| transaction and then they act as a mortgage lender | 14 | 152 |
| in the next transaction. | 15 | 152 |
| There is such channel confusion in the | 16 | 152 |
| marketplace, that I am very safe to say that I | 17 | 152 |
| don't believe that a consumer understands that | 18 | 152 |
| there's a difference between a banker and a broker | 19 | 152 |
| and a lender. I think that the consumer walks | 20 | 152 |
| into a mortgage company and they are offering | 21 | 152 |
| products, and there's no discernable understanding | 22 | 152 |
| of a difference in role. | 23 | 152 |
| That being said, in the context of | 24 | 152 |
| RESPA reform, which is also going on in | 1 | 153 |
| Washington, it does endorse a full written | 2 | 153 |
| disclosure as part of the new good faith estimate, | 3 | 153 |
| to define the role of the mortgage broker so that | 4 | 153 |
| if someone chooses to act as an agency, more power | 5 | 153 |
| to you. If you wish to act as an independent | 6 | 153 |
| mortgage company with no specific duty or | 7 | 153 |
| authority or responsibility to the consumer other | 8 | 153 |
| than standard business practice, than that's okay | 9 | 153 |
| too. Let the models work out the competitive | 10 | 153 |
| marketplace itself, but in our view, consumers do | 11 | 153 |
| not know the difference between all these channels | 12 | 153 |
| because there is little substantive difference. | 13 | 153 |
| MR. BLEICKEN: I'd like to add to that | 14 | 153 |
| if your question was about self-policing. Another | 15 | 153 |
| part of what we're doing in Pennsylvania, one of | 16 | 153 |
| the initiatives that I mentioned before, is we | 17 | 153 |
| will check records, that kind of thing, for the | 18 | 153 |
| license application, but we will become the proper | 19 | 153 |
| kind of business when we roll this program out for | 20 | 153 |
| our mortgage brokers and our mortgage bankers to | 21 | 153 |
| police who they hire and to police who they do | 22 | 153 |
| business with, appraisers, settlement companies, | 23 | 153 |
| things like that. | 24 | 153 |
| MR. BERENBAUM: I'd like to add, one | 1 | 154 |
| area of our best practices that is a gray area, | 2 | 154 |
| and it's active appraisals and its relationship | 3 | 154 |
| with mortgage brokers. We are very troubled and | 4 | 154 |
| we have a light paper at the type center right | 5 | 154 |
| now. Because of the nature of the marketplace, | 6 | 154 |
| how it's operating, most mortgages brokers are | 7 | 154 |
| self-selecting their appraiser for loan | 8 | 154 |
| origination. That's understandable with the | 9 | 154 |
| marketplace right now. But that said, those loans | 10 | 154 |
| are being originated by large banks, financial | 11 | 154 |
| service corporations. In other words, rather than | 12 | 154 |
| showing independence in the appraisal process, an | 13 | 154 |
| objective arm's length transaction, they are | 14 | 154 |
| relying on APS to double check, and those are | 15 | 154 |
| highly inaccurate. They're helpful for | 16 | 154 |
| compliance, but it's not the same thing as | 17 | 154 |
| ensuring that you have an arm's length distant | 18 | 154 |
| objective appraisal in a mortgage broker | 19 | 154 |
| transaction. This is an area of emerging | 20 | 154 |
| liability for financial institutions, for brokers, | 21 | 154 |
| and an area of future focus, I hope, for | 22 | 154 |
| regulators. | 23 | 154 |
| GOVERNOR OLSON: We have a couple | 24 | 154 |
| minutes only, and does anybody have a closing | 1 | 155 |
| comment they would like to make? Predictably, you | 2 | 155 |
| could tell from a week ago, this would probably be | 3 | 155 |
| a lively panel, and you've each made a very | 4 | 155 |
| significant contribution. Any final comments that | 5 | 155 |
| anybody would like to make? | 6 | 155 |
| MR. GUTTENTAG: Well, I'd like to leave | 7 | 155 |
| you with something that David's boss keeps saying | 8 | 155 |
| when he speaks publicly about this very | 9 | 155 |
| passionately, the secretary of banking. He says, | 10 | 155 |
| when you buy stocks, when you buy some kind of a | 11 | 155 |
| financial product, you, as a consumer, have some | 12 | 155 |
| protection knowing that legally that seller, that | 13 | 155 |
| advisor, is required to sell you only a suitable | 14 | 155 |
| product. When you buy a house, the most important | 15 | 155 |
| purchase of your life probably, that realtor has | 16 | 155 |
| certain legal obligations concerning how they | 17 | 155 |
| represent you and the advice that they give you. | 18 | 155 |
| The mortgage, the most important financial | 19 | 155 |
| decision in most families' lives, certainly | 20 | 155 |
| deserves the same kind of legal protection. | 21 | 155 |
| People believe that it's out there | 22 | 155 |
| somewhere, and they're shocked when they come to | 23 | 155 |
| the lawyers, at the end of the day to find out, | 24 | 155 |
| that there really is not much out there, which | 1 | 156 |
| does give the same seriousness to the mortgage, | 2 | 156 |
| and I just ask that the board, certainly through | 3 | 156 |
| the board, I ask Congress, we need -- homeowners | 4 | 156 |
| need to know that the law is protecting them, and | 5 | 156 |
| this is a very, very important, probably the most | 6 | 156 |
| important financial decision of their lives. | 7 | 156 |
| GOVERNOR OLSON: Jack, Joe, David, Irv, | 8 | 156 |
| David, thank you very much for your participation | 9 | 156 |
| here. | 10 | 156 |
| Two points. First of all, a reminder | 11 | 156 |
| that at 3 o'clock we will have the open mike. | 12 | 156 |
| Those of you who would care to speak, everybody | 13 | 156 |
| has three minutes to make a presentation, a | 14 | 156 |
| comment, I guess, in three minutes, if you would | 15 | 156 |
| like. Please, the sign-up for that is out in the | 16 | 156 |
| back. We'll break now for lunch, and we will see | 17 | 156 |
| people back here at 1:30. We have a very | 18 | 156 |
| interesting panel at 1:30, talking about the best | 19 | 156 |
| practices in the subprime marketplace. Thanks | 20 | 156 |
| again to the panel. | 21 | 156 |
| (Whereupon, a lunch break was taken at | 22 | 156 |
| 12:15 p.m.) | 23 | 156 |
| (Whereupon, the proceedings resumed at | 24 | 156 |
| 1:30 p.m.) | 1 | 157 |
| GOVERNOR OLSON: Something we did not | 2 | 157 |
| announce earlier, but I'm sure will be of interest | 3 | 157 |
| to the group, Friday afternoon, beautiful day, | 4 | 157 |
| each of you are getting a special accommodation | 5 | 157 |
| award for being here today, so congratulations. | 6 | 157 |
| We're happy to see everybody here. | 7 | 157 |
| Also, on a personal note, I would like | 8 | 157 |
| to thank the City of Philadelphia. Because I was | 9 | 157 |
| in Philadelphia last night, I was able to watch | 10 | 157 |
| the Washington Nationals on television. You | 11 | 157 |
| cannot do that from Washington, D.C., because of | 12 | 157 |
| restrictions that are violations of fundamental | 13 | 157 |
| economic principles. So I had to come to | 14 | 157 |
| Philadelphia to see the Nationals beat the | 15 | 157 |
| Phillies. | 16 | 157 |
| One final reminder, those of you who | 17 | 157 |
| care to speak when we go to the open mike at 3 | 18 | 157 |
| o'clock, please sign up just outside the door, | 19 | 157 |
| near the front door. So far it looks like it's | 20 | 157 |
| going to be a relatively short session, but we | 21 | 157 |
| want to make sure that that is available and | 22 | 157 |
| everybody knows that's available. | 23 | 157 |
| The final session this morning, I | 24 | 157 |
| think, is going to be a session that will be of | 1 | 158 |
| equal interest to all of those we have had thus | 2 | 158 |
| far. It's entitled, "The Subprime Market Best | 3 | 158 |
| Practices." Because of the explosion of the | 4 | 158 |
| subprime market, there is, first of all, clearly, | 5 | 158 |
| from our perspective, a significant societal value | 6 | 158 |
| of the development of that marketplace. But the | 7 | 158 |
| nature of the marketplace brings a risk, both to | 8 | 158 |
| the market and to individuals. And so I think | 9 | 158 |
| that -- and also when you add to that the | 10 | 158 |
| development of the secondary market for the | 11 | 158 |
| subprime product, it adds, in fact, another | 12 | 158 |
| complication. So the best practices, I think, | 13 | 158 |
| will be extremely informative. | 14 | 158 |
| We will continue, as we have, to go | 15 | 158 |
| from right to left, counterclockwise. Eric Eve | 16 | 158 |
| will go first. Eric, if you would introduce | 17 | 158 |
| yourself, your group, and as a reminder, Keith, | 18 | 158 |
| down there, has a sign that will show you when you | 19 | 158 |
| have one minute left of your five minutes. By | 20 | 158 |
| limiting the statement we have discovered that | 21 | 158 |
| gives us opportunity for very full follow-up | 22 | 158 |
| discussions. So, Eric, you're first. | 23 | 158 |
| MR. EVE: Good afternoon. Thank you, | 24 | 158 |
| Governor Olson, for the opportunity to discuss | 1 | 159 |
| best practices as you spoke to earlier. My name | 2 | 159 |
| is Eric Eve. I am head of the Community Relations | 3 | 159 |
| for Citigroup's global consumer group businesses, | 4 | 159 |
| which includes all of our retail businesses, both | 5 | 159 |
| in the U.S. and around the globe. Among the | 6 | 159 |
| functions that my office manages is the CRA HMDA | 7 | 159 |
| fair lending data analysis unit of the company, | 8 | 159 |
| public policies issue management team and global | 9 | 159 |
| programs functions, which structures our | 10 | 159 |
| partnerships with nonprofits, both in the U.S. | 11 | 159 |
| around the globe. | 12 | 159 |
| In this job, I take a pretty expansive | 13 | 159 |
| view of Citigroup's role to make communities | 14 | 159 |
| better because we're there. One of the key areas | 15 | 159 |
| in which we can improve on, is strengthening the | 16 | 159 |
| financial health of all these communities. In | 17 | 159 |
| this respect, the more strategic we are, the | 18 | 159 |
| greater impact we can have. | 19 | 159 |
| Being strategic, first and foremost, | 20 | 159 |
| from my perspective, means engaging, first and | 21 | 159 |
| foremost, with some of our partners here. | 22 | 159 |
| Consumer community advocates around the country in | 23 | 159 |
| order to have more thoughtful solutions and | 24 | 159 |
| discussions around the subprime market for the | 1 | 160 |
| reasons that the Governor spoke to, are even more | 2 | 160 |
| -- the partnerships are even more critical. | 3 | 160 |
| These thoughtful discussions have been | 4 | 160 |
| meaningful and yielded meaningful results and | 5 | 160 |
| they've translated into a number of best | 6 | 160 |
| practices, most importantly a partnership with | 7 | 160 |
| ACORN and NACA, to very prominent community based | 8 | 160 |
| organizations, and mortgage lending programs were | 9 | 160 |
| born of often tense discussions which have | 10 | 160 |
| addressed needs in underserved communities, | 11 | 160 |
| enabling us to provide mortgages to consumers, | 12 | 160 |
| through our prime lending channel, to consumers | 13 | 160 |
| and borrowers who otherwise would enter our | 14 | 160 |
| subprime segment because of the criteria of the | 15 | 160 |
| borrower. These programs are very intense pre, | 16 | 160 |
| during, and post counseling, and the one-on-one | 17 | 160 |
| nature of the counseling allows us to track, in a | 18 | 160 |
| very measurable way, the performance of the time. | 19 | 160 |
| There are a number of commitments that | 20 | 160 |
| we've made. I'll touch on a couple, as it relates | 21 | 160 |
| to protecting against fraud and predatory lending | 22 | 160 |
| in the subprime mortgage lending space. Sever | 23 | 160 |
| relationships with thousands of brokers over the | 24 | 160 |
| years, who would not meet the standards that we | 1 | 161 |
| set forward in the code of conduct that we put in | 2 | 161 |
| place; implementing a policy not to originate | 3 | 161 |
| HOEPA loans as of 2003; our city financial branch | 4 | 161 |
| network, implementing consumer protection against | 5 | 161 |
| the negative effects of frequent refinancing. | 6 | 161 |
| In addition, to better serve our | 7 | 161 |
| existing customers, our subprime business, today, | 8 | 161 |
| offers borrowers significant opportunities to | 9 | 161 |
| lower their loan rates over time, as their credit | 10 | 161 |
| improves. Preferred fixed-rate mortgage products | 11 | 161 |
| allow applicants to qualify for a rate comparable | 12 | 161 |
| to a rate that we found in the prime channel, but | 13 | 161 |
| within the Citi financial network, a rate | 14 | 161 |
| reduction program, a graduation loan, and a number | 15 | 161 |
| of other initiatives, which we and others in the | 16 | 161 |
| industry have adopted over the years. | 17 | 161 |
| These commitments are not static. | 18 | 161 |
| They're evolving to be responsive to contemporary | 19 | 161 |
| issues. So when we hear that rising foreclosure | 20 | 161 |
| rates are rescue flawed, we need to engage in | 21 | 161 |
| brainstorming to let vulnerable communities know a | 22 | 161 |
| lender they can turn to, to provide valuable | 23 | 161 |
| post-purchase financial information and | 24 | 161 |
| recognition of the hardship that foreclosure | 1 | 162 |
| causes. We've lead the way with other | 2 | 162 |
| institutions in being one of the early adopters of | 3 | 162 |
| the HOPI initiative, which many of you are | 4 | 162 |
| familiar with in Chicago. This program, a unique | 5 | 162 |
| private partnership, has allowed us to fund -- | 6 | 162 |
| provide affordable mortgage options in | 7 | 162 |
| homeownership in the Chicago area. | 8 | 162 |
| GOVERNOR OLSON: Eric, thank you. We | 9 | 162 |
| are interested in hearing more, particularly, some | 10 | 162 |
| of the partnership arrangements that you had, and | 11 | 162 |
| also, the counseling that has lead to more | 12 | 162 |
| appropriate allowable pricing. | 13 | 162 |
| God bless Loretta. She was with us in | 14 | 162 |
| Chicago and she's back. Loretta, we don't have to | 15 | 162 |
| tell you the drill. | 16 | 162 |
| MS. ABRAMS: I know the drill. Thank | 17 | 162 |
| you, Governor, and it's good to be here today and | 18 | 162 |
| it's good to be back. My name is Loretta Abrams. | 19 | 162 |
| I'm the vice president of consumer affairs for | 20 | 162 |
| HSBC North America. HSBC serves more than 60 | 21 | 162 |
| million customers in the United States, across | 22 | 162 |
| five lines of business, from consumer finance to | 23 | 162 |
| banking. I'm pleased to be here today just to | 24 | 162 |
| share some of our learnings and our input | 1 | 163 |
| regarding best practices in mortgage lending. | 2 | 163 |
| We feel that there are many definitions | 3 | 163 |
| of best practices, and there's a broad range, a | 4 | 163 |
| varied range, of consumer protection. But there | 5 | 163 |
| are three elements that we find to be important to | 6 | 163 |
| be included. And those are: Value-added products | 7 | 163 |
| and services, easy to understand customer | 8 | 163 |
| communications, and clear consumer choices. Then | 9 | 163 |
| you have to bind all of these practices together | 10 | 163 |
| with solid investments in the community, | 11 | 163 |
| investments that will ensure the availability of | 12 | 163 |
| banking services, provide financial education, | 13 | 163 |
| encourage homeownership, and support affordable | 14 | 163 |
| housing developments. | 15 | 163 |
| To understand how we, at HSBC, deliver | 16 | 163 |
| these best lending practices in community | 17 | 163 |
| investments, we conduct a good deal of consumer | 18 | 163 |
| research. We research to understand what worries | 19 | 163 |
| consumers have about their finances. We want to | 20 | 163 |
| know what they like, what they dislike, what they | 21 | 163 |
| don't understand, and what they want us to help | 22 | 163 |
| with. And the people we meet with in the many | 23 | 163 |
| financial educational workshops and seminars that | 24 | 163 |
| we conduct, tell us that they want to make sure | 1 | 164 |
| that the loan issue is the right one for them, | 2 | 164 |
| that it meets their immediate needs, and it brings | 3 | 164 |
| them closer to the long-term financial goals. | 4 | 164 |
| However, there's a knowledge gap. Only | 5 | 164 |
| 18 percent of the consumers we talked to, stated | 6 | 164 |
| that they have a complete understanding of the | 7 | 164 |
| different types of mortgage products. | 8 | 164 |
| Our consumer finance business has | 9 | 164 |
| required that each mortgage loan must provide a | 10 | 164 |
| very real benefit to consumers through such | 11 | 164 |
| features as interest rates or payment reductions. | 12 | 164 |
| If the loan doesn't pass the benefit test, the | 13 | 164 |
| loan doesn't get made. It can't be funded. | 14 | 164 |
| Our March 2006 survey highlighted the | 15 | 164 |
| need to provide clarity in the loan closing | 16 | 164 |
| process. Now, in spite of the fact that the | 17 | 164 |
| majority, 78 percent of consumers, stated that | 18 | 164 |
| they are not, at all, very knowledgeable about how | 19 | 164 |
| to take out a mortgage loan, they actually spend | 20 | 164 |
| very little time reviewing mortgage options. We | 21 | 164 |
| talked about that a little bit earlier today. 34 | 22 | 164 |
| percent of consumers told us that they researched | 23 | 164 |
| their mortgages options for less than a week, and | 24 | 164 |
| people spend months looking for just the right | 1 | 165 |
| home, and then they spend less than a week making | 2 | 165 |
| sure they've got just the right mortgage to match | 3 | 165 |
| up to that home. | 4 | 165 |
| Another third of the people that we | 5 | 165 |
| talked to, and half of those who make less than | 6 | 165 |
| $25,000 a year, said that they didn't have a home | 7 | 165 |
| inspection before the loan closing process, an | 8 | 165 |
| opportunity to help consumers understand the often | 9 | 165 |
| complicated and oftentimes stressful loan closing | 10 | 165 |
| process. So to ensure a fully informed decision, | 11 | 165 |
| HSBC's finance corporation uses an independent | 12 | 165 |
| third party loan closer, who works with each | 13 | 165 |
| customer to manage the loan closing process and | 14 | 165 |
| review all the loan documents, whether they're | 15 | 165 |
| written in English or Spanish. | 16 | 165 |
| Also, in this package is a simple | 17 | 165 |
| one-page plain English document that provides a | 18 | 165 |
| quick, easy to understand snapshot of the loan | 19 | 165 |
| fees, the points, the payment amounts, and the key | 20 | 165 |
| product options that are available to that loan. | 21 | 165 |
| Finally, there is a cancellation | 22 | 165 |
| policy. The customers have a full ten days to | 23 | 165 |
| cancel the loan if they change their mind. And we | 24 | 165 |
| also know that it's not enough just to put the | 1 | 166 |
| practices in place. We have to overlay all of | 2 | 166 |
| this with systemic controls, underwriting | 3 | 166 |
| practices, training, compliance, and monitoring | 4 | 166 |
| policies, that will ensure that the best practices | 5 | 166 |
| are working and that they keep on working. | 6 | 166 |
| And so we automated as many of these | 7 | 166 |
| processes as possible. We operate everything with | 8 | 166 |
| strict monitoring, regular compliance testing, and | 9 | 166 |
| audit reviews throughout the process. And I | 10 | 166 |
| couldn't conclude my statement today without | 11 | 166 |
| commenting on the special responsibility we feel | 12 | 166 |
| to educate our own customers and to advance the | 13 | 166 |
| financial literacy of all consumers. It's for | 14 | 166 |
| this reason that we've been involved in educating | 15 | 166 |
| consumers about credit and finance matters for | 16 | 166 |
| over 75 years, and we're continuing that today | 17 | 166 |
| with our Your Money Counts education program and | 18 | 166 |
| through the programs that I've described, and by | 19 | 166 |
| conducting the surveys I referred to today. I | 20 | 166 |
| think this is a wonderful opportunity for us to | 21 | 166 |
| work together and collaborate and discuss | 22 | 166 |
| solutions on this very important issue. And I | 23 | 166 |
| thank you for the opportunity to be here today. | 24 | 166 |
| GOVERNOR OLSON: Thank you very much. | 1 | 167 |
| Eric Stein, just introduce yourself, your group, | 2 | 167 |
| and five minutes. | 3 | 167 |
| MR. STEIN: Thank you very much | 4 | 167 |
| Governor Olson. My name is Eric Stein and I'm | 5 | 167 |
| chief operating officer of Self Help that's | 6 | 167 |
| affiliated with responsible lending. We're a | 7 | 167 |
| community development financial institution. Our | 8 | 167 |
| mission is to create wealth and ownership | 9 | 167 |
| opportunities and financing for small businesses | 10 | 167 |
| and homes. We have a billion dollars in assets. | 11 | 167 |
| We've done about four and a half billion dollars | 12 | 167 |
| in financing for 50,000 families to buy homes and | 13 | 167 |
| build businesses. Compared to these two groups, | 14 | 167 |
| we're like a branch developer, but anyhow, that's | 15 | 167 |
| our contribution. | 16 | 167 |
| Our focus is addressing wealth | 17 | 167 |
| disparities between Latino and African-American | 18 | 167 |
| families on the one hand, and white families on | 19 | 167 |
| the other, which is about ten to one. How can one | 20 | 167 |
| address that? Well, social scientists said that | 21 | 167 |
| 20 to 80 percent of lifetime wealth is a | 22 | 167 |
| generational inheritance. It's kind of hard to | 23 | 167 |
| pick your parents, so we focus on homeownership. | 24 | 167 |
| Two-thirds of low income and minority wealth is in | 1 | 168 |
| home equity. Three-quarters of whites own their | 2 | 168 |
| homes versus half of Latino and African-American | 3 | 168 |
| families. | 4 | 168 |
| If you look at a low-income renter, | 5 | 168 |
| they have $1 wealth of the loan, and a homeowner | 6 | 168 |
| of the same income has $12. And Neighborhoods | 7 | 168 |
| Social Indicators Group has homeowners' rates | 8 | 168 |
| increase as well. We would look upon it as a | 9 | 168 |
| national goal, raising minority homeownership | 10 | 168 |
| rates to the national average. How we would go | 11 | 168 |
| about that, on the lending side we have two | 12 | 168 |
| programs that I'll mention. The first is direct | 13 | 168 |
| home lending through Self Help Credit Union, which | 14 | 168 |
| we started back in 1984. Obviously, times have | 15 | 168 |
| changed significantly, and we've done about two | 16 | 168 |
| hundred million dollars in direct loans to 3,000 | 17 | 168 |
| families. We realize that our direct lending was | 18 | 168 |
| going to have a limited impact, and banks, such as | 19 | 168 |
| the ones sitting next to me, are the ones who have | 20 | 168 |
| the distribution networks ability to meet people. | 21 | 168 |
| If you're going to make a difference, you need to | 22 | 168 |
| speak to the large players. | 23 | 168 |
| In addition, we realized, in our | 24 | 168 |
| experience in North Carolina, that they're not | 1 | 169 |
| going to replicate the experience of the savings | 2 | 169 |
| and loans. If they're going to do the CRA loans, | 3 | 169 |
| they need to be sellable. They need an outlet for | 4 | 169 |
| those loans. That's why we wanted to step in, and | 5 | 169 |
| we created a secondary market program. The goal | 6 | 169 |
| is to harness advances and securitization and | 7 | 169 |
| bring Wall Street money to help subprime purchase | 8 | 169 |
| borrowers the opportunity to get the conventional | 9 | 169 |
| findings, and it's what Eric was saying was his | 10 | 169 |
| goal as well, and therefore to create wealth for | 11 | 169 |
| other families. | 12 | 169 |
| The benefits of getting a loan through | 13 | 169 |
| our partner lenders, which includes Citigroup and | 14 | 169 |
| HSBC, to provide loan assistance to us, as well, | 15 | 169 |
| and both have been significant partners in this, | 16 | 169 |
| is substantial against the alternatives that we | 17 | 169 |
| would like to receive in, really, three different | 18 | 169 |
| ways. The first is product, and the product we | 19 | 169 |
| offer is, generally, a vanilla, 30-year amortizing | 20 | 169 |
| fixed-rate mortgage, which is kind of boring, but | 21 | 169 |
| if you compare it to the dominant subprime | 22 | 169 |
| product, which is a 228 hybrid ARM, fixed for two | 23 | 169 |
| years and then becomes adjusting every six months | 24 | 169 |
| thereafter, it's really a superior product for | 1 | 170 |
| local families, in my opinion. | 2 | 170 |
| Six hundred billion of these hybrid | 3 | 170 |
| ARMs, 228, face a reset problem in the next few | 4 | 170 |
| years, they're going to adjust up, with interest | 5 | 170 |
| rates going from 7 percent to 11 percent; monthly | 6 | 170 |
| payments going up 50 percent. Families just | 7 | 170 |
| aren't going to be able to sustain that, the | 8 | 170 |
| low-income families. | 9 | 170 |
| The second way that families will get | 10 | 170 |
| value through participating in the program is | 11 | 170 |
| better terms, up front fees between 0 and 1 | 12 | 170 |
| percent versus subprime, 3 percent plus, and in | 13 | 170 |
| some cases better than that. Prepayment | 14 | 170 |
| penalties, we don't allow them, two-thirds of | 15 | 170 |
| subprime loans have them and probably two-thirds | 16 | 170 |
| of borrowers pay them if they have them and the | 17 | 170 |
| rate is the best available. | 18 | 170 |
| And the third way I think that it's | 19 | 170 |
| superior is in foreclosure, in trying to keep that | 20 | 170 |
| house. If you look at subprime loans originated | 21 | 170 |
| in the year 2000, almost one-quarter have actually | 22 | 170 |
| entered foreclosure, and it's much better here. | 23 | 170 |
| We started small in North Carolina and expanded | 24 | 170 |
| through the Ford Foundation and with partnership | 1 | 171 |
| with Fannie Mae, where we get nonperforming loans | 2 | 171 |
| and turn them into performing conventional. | 3 | 171 |
| The two most important results, I | 4 | 171 |
| think, in addition to the numbers, are the | 5 | 171 |
| families have been able to pay back their loans. | 6 | 171 |
| Our total losses in the system is 43 basis points, | 7 | 171 |
| which is not an annual figure but a total figure. | 8 | 171 |
| Secondly, the families have, indeed, created | 9 | 171 |
| wealth. UNC did a study with Fannie Mae and found | 10 | 171 |
| that the average appreciation, as of the end of | 11 | 171 |
| last year, was 30 percent, so times 4 billion | 12 | 171 |
| dollars, that's 1.2 billion dollars of wealth | 13 | 171 |
| that's been created to date. Thank you very much. | 14 | 171 |
| GOVERNOR OLSON: Eric, thank you so | 15 | 171 |
| much. Mark Pinsky is next. | 16 | 171 |
| MR. PINSKY: Good afternoon and thank | 17 | 171 |
| you inviting a Phillies season ticket holder. I | 18 | 171 |
| am Mark Pinsky. I'm president and CEO of the | 19 | 171 |
| Opportunity Finance Network, which is a national | 20 | 171 |
| network of about 165 financial institutions around | 21 | 171 |
| the country, working at urban, rural, and | 22 | 171 |
| reservation based communities. We've done about 9 | 23 | 171 |
| billion dollars of financing through our history | 24 | 171 |
| for quality and affordable housing for small | 1 | 172 |
| business and for community services. | 2 | 172 |
| The assumption I come into this | 3 | 172 |
| discussion with today, is that laws, rules, and | 4 | 172 |
| regulations can slow but they can't stop predatory | 5 | 172 |
| lenders from doing bad things to good people. And | 6 | 172 |
| we believe that the best hope for responding | 7 | 172 |
| effectively is a both/and approach to predatory | 8 | 172 |
| lending, which is both through the law and through | 9 | 172 |
| the marketplace. | 10 | 172 |
| We, in our industry, represent CEFI, | 11 | 172 |
| the best self-help and reinvestment fund that you | 12 | 172 |
| heard from today. We think of ourselves as | 13 | 172 |
| working just outside the margin of conventional | 14 | 172 |
| finance to try and bring the people in those | 15 | 172 |
| communities to the economic mainstream and through | 16 | 172 |
| the economic mainstream that's in those | 17 | 172 |
| communities. And in these markets, we call them | 18 | 172 |
| opportunity markets, people are seeking nothing | 19 | 172 |
| more than the chance to join the race for the | 20 | 172 |
| American people of economic and social mobility. | 21 | 172 |
| Predatory lending in these markets, as you know, | 22 | 172 |
| is a constantly mutating viral infection that | 23 | 172 |
| others have said before me, and I wouldn't go on | 24 | 172 |
| about that. That's the first point I really | 1 | 173 |
| wanted to make today. | 2 | 173 |
| The second, as I said, is a policy. | 3 | 173 |
| Policy solutions are critically important. We | 4 | 173 |
| need them. But they are probably inadequate and | 5 | 173 |
| still too limited to really be able to stop the | 6 | 173 |
| damage. | 7 | 173 |
| But the third point, the one that I was | 8 | 173 |
| asked to focus on, is the new generation of | 9 | 173 |
| responsible mortgage financing strategies in | 10 | 173 |
| subprime and predatory markets that are intended | 11 | 173 |
| to use market forces to mitigate predatory lending | 12 | 173 |
| in the short-term and, hopefully, to undermine it | 13 | 173 |
| or to stop it in the long run, if that's possible. | 14 | 173 |
| We know that in, sort of, taking this | 15 | 173 |
| approach, we may be pursuing the good and not | 16 | 173 |
| always necessarily the best solution, but we | 17 | 173 |
| believe that the pursuit of a changing market | 18 | 173 |
| behavior is going to be difficult and that at | 19 | 173 |
| most, we may be a tail wagging a dog. But we can | 20 | 173 |
| no longer sit by and wait as we see the people, as | 21 | 173 |
| Eric and others have described, we see people, | 22 | 173 |
| good people, having their lives ruined by | 23 | 173 |
| incredibly bad practice. | 24 | 173 |
| We are now in the process of putting | 1 | 174 |
| the finishing touches on a mortgage platform, in | 2 | 174 |
| conjunction with a whole range of partners, to | 3 | 174 |
| deliver responsible mortgage products, through | 4 | 174 |
| CDFI's people who are, or may be, vulnerable to | 5 | 174 |
| predatory lenders. | 6 | 174 |
| Let me try and explain, quickly, how it | 7 | 174 |
| will work. We are creating a CDFI industry owned | 8 | 174 |
| mortgage company that will contract with a | 9 | 174 |
| mainstream mortgage company. That mainstream | 10 | 174 |
| mortgage company, as a subcontractor, will provide | 11 | 174 |
| a full range of mortgage services through the | 12 | 174 |
| CEFIs. This structure is intended to insure that | 13 | 174 |
| the CDFI industry maintains the government's | 14 | 174 |
| control over the entire process, and therefore, | 15 | 174 |
| the ability to maintain the purpose of what we set | 16 | 174 |
| it up for. | 17 | 174 |
| The industry's own mortgage company, | 18 | 174 |
| the one we're creating, will screen and monitor | 19 | 174 |
| the mortgage distribution network for compliance | 20 | 174 |
| with a set of responsible lending criteria. The | 21 | 174 |
| lenders will operate, either as correspondent | 22 | 174 |
| lenders or as brokers, whichever they choose, | 23 | 174 |
| whichever makes more sense for them. We've | 24 | 174 |
| prepared a series of software decision-making | 1 | 175 |
| tools to help them, our potential correspondents | 2 | 175 |
| and brokers, decide whether the market is right | 3 | 175 |
| for them to be involved, and to assess what the | 4 | 175 |
| economic impact on them will be of getting | 5 | 175 |
| involved in this business, many of whom are not in | 6 | 175 |
| the mortgage business. | 7 | 175 |
| We're involving a marketing campaign | 8 | 175 |
| that will focus heavily on the generation. The | 9 | 175 |
| entire effort that we're trying to make will make | 10 | 175 |
| sense only if we can achieve real material scale. | 11 | 175 |
| We're incorporating financial education as part of | 12 | 175 |
| a loss mitigation strategy in a way that's | 13 | 175 |
| quantifiable and translates into savings for | 14 | 175 |
| borrowers and security for investors. And in the | 15 | 175 |
| end, what we're trying to do is create a mortgage | 16 | 175 |
| system, rather than just a product to offer. | 17 | 175 |
| On the topic of best practices, let me | 18 | 175 |
| just try and quickly sum up what we see as the | 19 | 175 |
| best practices that have come out of what we've | 20 | 175 |
| learned from Self Help, from ACORN, from our bank | 21 | 175 |
| partners, and from others. | 22 | 175 |
| First, in order for this to work, we | 23 | 175 |
| need to be prepared to stay with our customers | 24 | 175 |
Class Act Reporting Agency, Philadelphia, Pennsylvania, 215-928-9760
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