FRB: Federal Reserve Bank of San Francisco - June 16, 2006 - Transcript

Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of San Francisco
101 Market Street, San Francisco, California 94105
June 16, 2006

Agenda | Transcript

Pages 1-25 | 26-50 | 51-75 | 76-100 | 101-125 | 126-150 | 151-175 | 176-200 | 201-225 | 226-250 | 251-254

Transcript	Line	Page
us -- some have even asked us to design model forms and model	1	76
disclosures.	2	76
MR. FULLER: And it might be because we've been --	3	76
this is just me guessing, but we've been doing it for a while	4	76
and so we feel like we'll be able to work through it. Maybe	5	76
others that are new are a little less certain.	6	76
MR. LIEBER: And I would say we generally agree with	7	76
Bruce's comments in that I think there would be great risk in	8	76
making the guidance overly prescriptive because there will be	9	76
bad actors who then will say, "Hey, you told me I had to do	10	76
this on this feature, but I've got a hundred features I can	11	76
deal with and you didn't mention the other 95. So I can go	12	76
expand on those."	13	76
Our position is that the banks that are regulated,	14	76
regulated banks, have examiners that come in on a regular	15	76
basis and go through and look on a very holistic basis at	16	76
loan programs. And we think the guidance should stay general	17	76
and that the examiners who come out can make the decision of	18	76
whether or not each institution is coming up with prudent and	19	76
reasonable loan programs on all aspects, not just ones that	20	76
may or may not make their way into either guidance or	21	76
regulation.	22	76
MR. STEIN: Just as a general matter, sometimes I	23	76
worry that we're more upset with you guys than the lenders	24	76
are. So I appreciate your kind of walking in the middle	25	76
there.	1	77
And just on the issue of regulation, I'm thinking	2	77
back to the last hearings and when we were talking more	3	77
specifically about HOEPA. And I think that's also relevant	4	77
today. And I'm curious, just as you -- to look back and	5	77
wonder what comments were made at the time from those who	6	77
were concerned about additional regulation and have those	7	77
concerns proven to be valid. Because the regulations were	8	77
tightened after the hearings.	9	77
And I haven't heard much in the way of complaint	10	77
about, you know, having to deal with the new HOEPA framework.	11	77
So in the same vein we would urge you to go back and look at	12	77
HOEPA and look at prepayment penalties and yield spread	13	77
premiums.	14	77
And again, as a general matter, you know, we're	15	77
interested in the results. So whether it's flexible or more	16	77
prescriptive from the regulators is not much of a concern,	17	77
though we do feel that to the extent that you can be more	18	77
specific that it provides less, you know, wiggle room for	19	77
those who might try and circumvent the regulations.	20	77
MR. OLSON: Anybody else? We're at 10:28. And this	21	77
has been very helpful. Thanks to all of you, Paul, Kevin,	22	77
Rick, Bruce.	23	77
We'll take a break now. We will be back at 10:45.	24	77
Trust me, unless I have a heart attack, we're going to start	25	77
right at 10:45. And that in doing so, that gives us full	1	78
opportunity for a very thorough discussion.	2	78
Thanks again.	3	78
(Whereupon a recess was taken.)	4	78
MR. OLSON: If the panelists could come forward, we	5	78
hope to get started now on our second panel.	6	78
Continuing very much on the same subject but	7	78
focusing even more on informed consumer choice, we will have	8	78
five panelists in total. And with the same process. So we	9	78
will have a five-minute statement for everybody and then	10	78
opportunity for a -- for questions from our panel. And, of	11	78
course, opportunities for exchange amongst the panelists.	12	78
And we will conclude at 12:15 with a break for lunch.	13	78
We will -- the procedure I think worked well in the	14	78
first, when we started from the left and went	15	78
counterclockwise. So Heidi, we'll start with you and then	16	78
Lori, George, Michael, and Judy.	17	78
If you would introduce yourself, your group, and	18	78
then five minutes. And then we'll proceed with Q's and A's.	19	78
Heidi.	20	78
MS. LI: Sure. Thank you. My name is Heidi Li and	21	78
I'm co-director of Housing and Economic Rights Advocates.	22	78
We're an Oakland city-based nonprofit legal organization that	23	78
focuses on doing -- providing legal services and advocacy	24	78
around the areas of fair housing and predatory lending abuse	25	78
concerns.	1	79
Our mission as a statewide organization is to ensure	2	79
that all persons, particularly lower income, minority,	3	79
elderly and other vulnerable persons are protected from	4	79
discrimination and economic abuses.	5	79
We work with a variety of organizations as well, not	6	79
just legal advocates but nonprofits, government agencies,	7	79
community-based organizations to go ahead and offer them	8	79
technical assistance and training to address particularly	9	79
predatory mortgage lending abuse issues and also to work with	10	79
them to try to screen and assist these folks who are getting	11	79
into these abusive and unfortunate loan situations.	12	79
So that's my quick introduction I hope.	13	79
MR. OLSON: My goodness, I'm stunned. Nobody has	14	79
taken that little time. We'll be -- we'll save the rest of	15	79
it for our questions and answers. Thank you.	16	79
Lori.	17	79
MS. LI: Well, I think that was actually just to let	18	79
you folks know who I --	19	79
MR. OLSON: Oh, that was the introduction. Oh.	20	79
MS. LI: I'm sorry. That actually wasn't so short.	21	79
So let me go ahead and actually talk about and share with	22	79
folks today what I'm here to hopefully speak a little bit	23	79
about.	24	79
And I just want to say thank you for the opportunity	25	79
to testify at today's hearing. I'm here speaking on behalf	1	80
of my organization but also as a consumer advocate and	2	80
housing rights advocate who actively partners, as I	3	80
mentioned, with a number of other types of entities and	4	80
organizations to address predatory mortgage lending abuse.	5	80
Some of these organizations I understand will	6	80
actually be here a little later today during the open comment	7	80
period and hopefully offer their own testimony, along with	8	80
perhaps a few of their clients that we've all been trying to	9	80
assist with these predatory situations.	10	80
I'll start first with listing and giving an overview	11	80
of what are some of the nontraditional mortgage products that	12	80
many of us as advocates are seeing increasingly in the	13	80
consumer mortgage market these last four or five years.	14	80
Particularly we're finding that consumers, many of	15	80
whom are first-time home buyers, some of whom are refinance	16	80
borrowers, are coming to us with one of the following types	17	80
of nontraditional mortgage products:	18	80
A no document income stated loan, an interest only	19	80
or negatively amortizing option ARM product, or sometimes	20	80
what we've actually been identifying or seeing are	21	80
combination of the two, and lastly, for seniors, predatory	22	80
equity stripping refinance loans or reverse mortgages.	23	80
These products have been increasingly in presence in	24	80
the lending mortgage market since the 2002 revisions to	25	80
HOEPA, which the Federal Reserve Board, you know, went ahead	1	81
and made recommendations to congress and to the FDC to go	2	81
ahead and implement. So we want to sort of say that, you	3	81
know, this is something that I do think really requires some	4	81
new scrutiny and looking at since the last few years.	5	81
On a related note, we're also seeing something that	6	81
isn't being covered by HOEPA but we think is important to be	7	81
looking at, perhaps on the federal level, and these are these	8	81
detitle theft scams. We are seeing an increasing number of	9	81
homeowners who have had their homes for a couple of years at	10	81
least and built up some equity, and unfortunately often when	11	81
they're in some sort of foreclosure or financial distress,	12	81
they're getting their title to their homes actually taken	13	81
from them by foreclosure scam artists and financial	14	81
consultants who are ripping them off.	15	81
So here in California we have -- we are really the	16	81
home for significant amount of subprime mortgage lending, I	17	81
think I understand perhaps about a quarter of the annual	18	81
lending that occurs. We also have a very demographically	19	81
diverse market and resident base. Really the -- I understand	20	81
based on the U.S. census, we have probably somewhere in the	21	81
range of 20 percent each of Latino and Asian Pacific Islander	22	81
residents in this state. We also have a strong	23	81
African-American and other nonwhite population presence as	24	81
well.	25	81
When you look at all this together, coupled with the	1	82
fact that the average price for a home here is about minimum	2	82
$400,000, we're really concerned that when folks are getting	3	82
not only put into but aggressively marketed or pushed into	4	82
these -- some of these nontraditional loan products that this	5	82
becomes a very big problem, when they are not meaningfully	6	82
getting disclosures about what the loans are about, what the	7	82
terms are consisting of, and what's the real true result of	8	82
what's going to happen to them financially once they're	9	82
actually in these loans.	10	82
The other concern is that really a very high	11	82
incidence of the folks that we're seeing coming to us,	12	82
housing counseling agencies that we work with, other legal	13	82
service providers, are really folks who are Latino or	14	82
African-American. They're often lower or moderate income	15	82
homeowners or individuals, many of whom are immigrants and	16	82
limited English-speaking individuals, and quite a few	17	82
increasing number of seniors, many of whom have disabilities.	18	82
So I think when you talk about what is a meaningful	19	82
disclosure, we're really concerned that under the current	20	82
HOEPA requirements, one, that there are a number of products,	21	82
including these nontraditional products that are not actually	22	82
covered under HOEPA, but two, that those disclosures alone	23	82
are not adequate or sufficient for this type of consumer	24	82
market.	25	82
How are consumers shopping for loans? Well, this is	1	83
the thing. We see two things that are happening. There's	2	83
really a lot of referral going on on -- in an informal manner	3	83
through channels that are not your traditional lending, prime	4	83
market channels. And that happens often for two reasons.	5	83
One because there is perhaps that lack of	6	83
familiarity or trust that folks are -- are not feeling when	7	83
they go to some of the more standard institutions, lending	8	83
institutions, but two, a lot of those traditional	9	83
institutions, especially with prime and other products, are	10	83
not actually being based in communities and neighborhoods	11	83
that are high of color or moderate income communities. So we	12	83
think that is a concern.	13	83
And I think perhaps the reporting issue that you're	14	83
looking at as far as enhancing some reporting as to where the	15	83
loans are being issued should be something to be looked at by	16	83
the lenders as part of regulations that you are looking to	17	83
perhaps address with reporting concerns.	18	83
As far as going back to the referrals, we have seen	19	83
that unfortunately many folks are getting referred to	20	83
realtors. These realtors are people they know from their	21	83
families, their friends, their communities, their churches --	22	83
MR. OLSON: Heidi, we're going to have to stop you	23	83
there. I think where you are now we want to come back to.	24	83
MS. LI: Sure.	25	83
MR. OLSON: Because an issue that is really key is	1	84
where people go for advice. And this is not -- we're not	2	84
sociologists. We're not even behavioral economists for the	3	84
most part at the Fed. But it plays an important decision in	4	84
how people end up in the kinds of financial transactions	5	84
where they are. So this will be really important for us.	6	84
Lori Gay, you're next.	7	84
MS. GAY: Thank you, Governor. Do we have three	8	84
minutes or five minutes?	9	84
MR. OLSON: Five.	10	84
MS. GAY: Okay. I want to time myself.	11	84
Thanks for having us here. We appreciate you	12	84
looking at these regs, again. It's been six years. I want	13	84
to talk about what's gone on since then.	14	84
I'm here as the president and CEO of Los Angeles	15	84
Neighborhood Housing Services. We're a nonprofit	16	84
neighborhood lender, developer, community development,	17	84
financial institution, realtor, you know, all the things that	18	84
help people get in affordable homeownership and stay there.	19	84
We're a member of the National Neighborhood Network,	20	84
which serves over 1,500 neighborhoods in all states	21	84
throughout the U.S. as our kind of trade group.	22	84
And then today I was asked to also show up as a	23	84
member of the California Reinvestment Coalition. You heard	24	84
from Kevin Stein earlier.	25	84
I want to start my comments by underscoring some of	1	85
what's important here in California with our coalition, that	2	85
we'd love to see and urge the Fed to consider.	3	85
We'd like to see more overpriced loans within the	4	85
protection of HOEPA and also -- and another review of	5	85
restricting yield spread premiums and prepayment penalty	6	85
provisions that we believe charge borrowers thousands of	7	85
dollars for refinancing out of bad loans.	8	85
We want to have you review, again, protection for	9	85
consumers from unscrupulous lenders and brokers who take	10	85
advantage of borrowers not fluent in English. One of the	11	85
most amazing things I've seen in my 15 years at NHS is how	12	85
many documents are not in Spanish or Korean or Mandarin but	13	85
yet that may be the first language of the family being	14	85
served. And we've counseled them or talked to them in all of	15	85
those languages, only to get down to closing and have	16	85
everything in English. It's like driving a car in another	17	85
country. Not a good thing.	18	85
Expand Home Mortgage Disclosure Act reporting	19	85
requirements so more data is available to better detect areas	20	85
of discrimination. I sat with nine banks over the last six	21	85
to eight months when the HMDA review detail came in the	22	85
marketplace. All of them made lots of excuses. They're all	23	85
my friends. I love them all. But they made lots of excuses	24	85
with the new reporting on why their HMDA looked the way it	25	85
did, and then made further excuses about why basically the	1	86
data didn't really reflect what was going on. I thought that	2	86
was amazing.	3	86
So I want to see the reporting requirements expanded	4	86
even more because I don't think we all know what's really	5	86
going on and we've got to continue to dig into it.	6	86
We will always be on the side of requiring housing	7	86
counseling before closing of loans, generally, because as a	8	86
nonprofit we believe it's a good protection for families. I	9	86
think it's difficult in the mortgage marketplace to require	10	86
it, but I think the closer we come to pushing for people to	11	86
think about, learn about, and really know what they're	12	86
signing, it's helpful. And to receive as much neutral	13	86
counseling as possible. I don't think that all counseling	14	86
that somehow leads to a loan with the same group is bad. I'm	15	86
just suggesting that it's helpful.	16	86
So that's my support of the California Reinvestment	17	86
Coalition's position.	18	86
I want to just further state the importance of this	19	86
effort today on promoting and sustaining homeownership. Our	20	86
background in Los Angeles, one of our tags is that we put 55	21	86
families a day on the road to homeownership. What we mean by	22	86
that is that we take the people through a system of borrowing	23	86
that's important. It's called full-cycle lending.	24	86
And it works toward financially educating and	25	86
counseling families about options, about what a mortgage is,	1	87
et cetera, et cetera, looking for affordable loans for them	2	87
and/or providing one through our company, providing	3	87
construction management services since 95 percent of most of	4	87
the housing loans that are done in L.A., the homes need some	5	87
kind of rehab because we have older housing stock. That's a	6	87
big deal. We ultimately then look toward neighborhood	7	87
revitalization happening in that process.	8	87
What's the state of housing today? We've seen	9	87
median home prices rise, household incomes rise at a slower	10	87
level. California is the second least affordable state in	11	87
the union and in California we have the top eight least	12	87
affordable counties in the United States. We have a 14	13	87
percent affordability index right now on housing and 12	14	87
percent in Los Angeles county.	15	87
So I think we've got some issues in our state that	16	87
are a little different than other states. Ninety-seven	17	87
percent occupancy rate in a city like Los Angeles with $1,500	18	87
costs on average, Governor, for a two-bedroom apartment. So	19	87
as people look to buy homes, they are then going into, so I	20	87
bring this home for you, the impact is that families are	21	87
looking at stated incomes as an option.	22	87
I will spend time again on the phone today with a	23	87
client of ours at NHS who came through the city's rehab	24	87
program to get $90,000 worth of rehab at zero percent fixed	25	87
for 30 years loan because their family makes $24,000 a year,	1	88
family of five. They were approved by the city for the loan	2	88
that we packaged and originated on behalf of the city at NHS.	3	88
And then I found out two days ago that they wanted	4	88
more money and I just couldn't quite figure that out. And so	5	88
when I looked at the detail of what had gone to the city and	6	88
gotten approved, they have two stated income loans. The	7	88
city's loan was going to be in third position. I'm confused	8	88
by that scenario. Why the city would have approved it	9	88
astounds me.	10	88
MR. OLSON: Lori, these are -- we will be getting	11	88
back to you on these also. What you're describing is a	12	88
market where there are a lot of positive things happening in	13	88
the market but some -- but there are collateral effects of	14	88
that --	15	88
MS. GAY: Right.	16	88
MR. OLSON: -- of that success that have	17	88
implications for individuals. And we want to come back and	18	88
pursue it further.	19	88
MS. GAY: Thank you.	20	88
MR. OLSON: George, you're next.	21	88
MR. HANZIMANOLIS: Good morning. I'm George	22	88
Hanzimanolis, vice president of the National Association of	23	88
Mortgage Brokers. Thank you for inviting NAMB to speak on	24	88
informed consumer choice relating to nontraditional	25	88
mortgages.	1	89
As the voice of mortgage brokers, NAMB speaks on	2	89
behalf of more than 25,000 members in all 50 states. Most	3	89
mortgage brokers are small businessmen and women, guiding	4	89
consumers through the mortgage loan origination process. We	5	89
provide an efficient market mechanism for the distribution of	6	89
mortgage products to locations where banks, lenders, and	7	89
others do not go.	8	89
In order to shop, consumers need a free market,	9	89
origination and consumer education, and new mortgage	10	89
comparison tools such as a charm booklet and a good faith	11	89
estimate that are consumer tested.	12	89
NAMB believes there are five critical tools	13	89
consumers need in order to choose a mortgage, traditional or	14	89
nontraditional: One, government and industry have failed to	15	89
provide consumers with the necessary tools to shop for	16	89
mortgage products. Therefore, NAMB has proposed revising the	17	89
current disclosures to account for mortgage innovations in	18	89
nontraditional mortgages. This means creating a good faith	19	89
estimate that consumers receive at the beginning of the	20	89
mortgage process that mirrors the HUD1, is one page in	21	89
length, and provides the information valued by the customer,	22	89
most notably meaningful estimates of closing costs and	23	89
monthly payment.	24	89
Furthermore, any new disclosures should treat the	25	89
disclosure of rate, fees, costs, and points uniformly	1	90
regardless of the channel, banker, lender, or broker chosen	2	90
by the consumer to originate their mortgage loan.	3	90
Second, we need to create and implement	4	90
well-designed and well-tested consumer disclosures that are	5	90
uniform, consistent, and meaningful to the consumers who read	6	90
them. Regardless of the distribution channel chosen, each	7	90
consumer should receive the same disclosures in the same	8	90
format for any particular loan product, type, or transaction,	9	90
giving meaning to the ability comparison shop.	10	90
The well-documented 2004 study by the Federal Trade	11	90
Commission on a proposed good faith estimate form showed that	12	90
many consumers would choose a higher cost loan from a direct	13	90
lender over a mortgage broker loan because they were confused	14	90
by the format of disclosure.	15	90
Third, we need to protect consumer choice by keeping	16	90
a competitive marketplace alive and not stifling market	17	90
innovation by limited product choice. We must be careful not	18	90
to rob this innovative and dynamic industry of the ability to	19	90
remain a free and capitalist market that brings credit to the	20	90
underserved markets.	21	90
We should not band products from the market nor set	22	90
compensation or usury caps. Those have all failed in the	23	90
past. We should empower the consumer with both knowledge and	24	90
the ability to make an informed financial decision that fits	25	90
in the context of their life circumstance. The consumer is	1	91
the only person that should choose his or her mortgage, not	2	91
government, not consumer advocates, and not a bank, lender,	3	91
credit union, or mortgage broke.	4	91
Fourth, the government should ensure that every	5	91
single mortgage originator is required to complete both	6	91
preemployment and continued education requirements. Every	7	91
originator should be knowledgeable about the risks and	8	91
benefits of the products offered, especially nontraditional	9	91
products.	10	91
If consumers shop, they'll learn about the products	11	91
and choices available to them. If consumers shop and	12	91
compare, then they'll have questions to ask. Consumers	13	91
should not and in the competitive marketplace do not have to	14	91
use someone who is not willing or not able to answer these	15	91
questions.	16	91
And fifth, most importantly, we cannot and should	17	91
not continue to ignore the role of the consumer versus the	18	91
role of government. We must advocate for financial literacy	19	91
in this country, starting at the middle school level. We	20	91
must allocate funds for financial literacy programs at the	21	91
middle school and high school level so that consumers are	22	91
educated about the financial decisions that make and retain	23	91
the decision making ability.	24	91
I know there are those who want to argue that this	25	91
is a long-term solution that will take time. And I agree, it	1	92
is. But we are not talking about a short-term problem that	2	92
will respond to a Band-Aid approach.	3	92
The evolution of consumer finance did not begin in	4	92
1994 when HOEPA was passed into law. Since the time of	5	92
barter and trade, we've grappled with the issue of how to	6	92
increase fair and equal access to affordable credit for all	7	92
socioeconomic classes, not just the elite few.	8	92
Laws have been passed, enforced, and forgotten as	9	92
we've turned to new and different laws. We must focus on the	10	92
solution that will stick. That solution is financial	11	92
literacy.	12	92
Thank you and I look forward to answering any	13	92
questions that you may have.	14	92
MR. OLSON: George, I think from the time that I was	15	92
nominated to the Federal Reserve, I had more people from more	16	92
different walks of life comment on the financial literacy	17	92
component of it as being -- as being a gap that has probably	18	92
been ignored, and we have a lot of catching up to do in that	19	92
area.	20	92
Mike.	21	92
MR. FAUST: Thank you, Governor. My name is Michael	22	92
Faust. I'm the vice president of the government affairs	23	92
committee for the National Association of Mortgage Brokers.	24	92
NAMB is proud to offer educational courses and	25	92
professional certification programs to mortgage	1	93
professionals. Our members adhere to a code of ethics and a	2	93
strict practice -- strict set of best practices. Because of	3	93
this, our members are better prepared to guide consumers	4	93
through the complex mortgage process.	5	93
There are numerous distribution channels in the	6	93
mortgage industry today. The consumer can get a loan from a	7	93
traditional depository, a credit union, a mortgage banker,	8	93
and a mortgage broker, an Internet lender, and the list goes	9	93
on and on and on.	10	93
Each distribution channel shares one thing in	11	93
common; the consumer approaches them with the same goal in	12	93
mind, obtaining a home loan. The consumer does not	13	93
distinguish between a mortgage broker and a mortgage banker	14	93
or a direct lender. To a consumer, they all provide the same	15	93
thing, the opportunity for homeownership.	16	93
However, only mortgage brokers currently divulge the	17	93
fact they earn indirect compensation when a loan closes,	18	93
referred to as yield spread premium. With lenders and	19	93
bankers, they claim they can't determine this income, thus	20	93
they can't disclose it.	21	93
We all know this is ridiculous. They receive	22	93
indirect compensation in the form of service release premium	23	93
or gain on sale. This differential and disclosure provides	24	93
confusion for the consumer when comparing loans from	25	93
different distribution channels.	1	94
There are three interconnected components to the	2	94
mortgage finance system, the government, the industry, and	3	94
the consumer. Each of them has a substantial role to play	4	94
when evaluating nontraditional mortgages, how consumers shop	5	94
for mortgages and the effectiveness of the mortgage	6	94
disclosures they use during the process.	7	94
Many industry critics have based all the problems	8	94
that some consumers have from the current shopping process,	9	94
products and disclosures within one point of this triangle,	10	94
the industry. When they do, it simply ignores the vital	11	94
roles of the government and the consumers in the loan	12	94
process.	13	94
The role of the industries remain innovative,	14	94
competitive, and knowledgeable, so consumers can use their	15	94
financial education when they shop and compare. This can be	16	94
accomplished through licensing, education, and criminal	17	94
background checks for all mortgage originators.	18	94
Anyone who signs a 1003 and originates a loan should	19	94
be held to the same standard, no matter the distribution	20	94
channel they may work for. Mortgage brokers in many states	21	94
already adhere to these standards. However, the banks and	22	94
mini-regulatory schemes which mortgage bankers are licensed	23	94
under do not require originators to have any licensing, any	24	94
continuing education requirements, or submit to criminal	25	94
background checks. We encourage the government to set a	1	95
single standard the consumers can count on, no matter the	2	95
distribution channel they go to to get a home loan.	3	95
The role of the consumer is to acquire financial	4	95
acumen, both during school and then throughout their	5	95
lifetime. The consumer should take advantage of the	6	95
competitive marketplace to shop, compare, ask questions, and	7	95
expect answers. And if they don't get answers, they should	8	95
move on to someone else.	9	95
To make comparison shopping most effective, all	10	95
distribution channels should provide the same disclosures.	11	95
Let's be careful not to lull consumers into believing that	12	95
the government, the industry, critics, or the industry is	13	95
here to protect them at every turn. Such an approach only	14	95
ensures reliance by people who feel comfortable in their lack	15	95
of knowledge.	16	95
If we want consumers to be empowered to make	17	95
financial decisions, then the role of government must be to	18	95
provide the information and the guidance necessary. This can	19	95
be accomplished through financial literacy and updating the	20	95
disclosures and information booklets provided consumers. We	21	95
must inject financial literally into our middle schools and	22	95
our high schools.	23	95
We're aware this is not a short-term solution. This	24	95
is a long-term solution. But this is a serious problem that	25	95
cannot be fixed with simple slogans. Government can and	1	96
should develop a simple, plain language brochure on	2	96
nontraditional loan products. This should be for	3	96
distribution to consumers at application of nontraditional	4	96
loan products.	5	96
Revise the charm booklet to include information	6	96
about features, risks, and benefits of nontraditional loan	7	96
products. Consumers test the revised charm booklet and	8	96
special information booklet to ensure its utility first of	9	96
all and its effectiveness as an information source for	10	96
consumers.	11	96
Consult with a task force that represents current	12	96
mortgage marketplace. Entertain both industry and consumer	13	96
input when revising that booklet. And enforce the existing	14	96
laws to eliminate deceptive and misleading marketing	15	96
practices. And last but not least, ensure and maintain an	16	96
innovative and free marketplace.	17	96
Thank you very much.	18	96
MR. OLSON: Thank you very much, Michael.	19	96
Once a Minnesotan and now back in California, Judy.	20	96
MS. ZEIGLER: Thank you, Governor Olson, for the	21	96
opportunity to participate in this important hearing pursuant	22	96
to homeownership and Equity Protection Act, HOEPA.	23	96
I'm a realtor with Prudential California Realty. I	24	96
live in Palm Desert, California and I'm here today	25	96
representing the National Association of Realtors.	1	97
First let me put the issues in context as far as the	2	97
National Association of Realtors is concerned. The National	3	97
Association of Realtors has long been concerned about the	4	97
impact of predatory lending on home buyers. Our primary	5	97
concern is with purchase money mortgages, but refinancing,	6	97
strip homeowner equity are also a problem because it can rob	7	97
a family of its wealth and make moving up to a better house	8	97
impossible.	9	97
In 2005 the National Association of Realtors	10	97
established a subprime lending work group to develop	11	97
standards that represent balance for continued valid uses of	12	97
subprime loans for borrowers with imperfect credit while	13	97
avoiding predatory lending practices. In May of 2005, the	14	97
National Association's board of directors approved this	15	97
subprime lending work group report.	16	97
The report has two primary recommendations:	17	97
Consumer education. Encourage realtors to work with	18	97
existing programs and community groups to help consumers	19	97
qualify for fair and affordable housing, become more	20	97
financially literate, and, where appropriate, obtain	21	97
counseling.	22	97
Strengthen HOEPA. Support strengthening HOEPA	23	97
including expanding its coverage to purchase money mortgages,	24	97
lowering the triggers to apply to more mortgages, which	25	97
should have the effect of reducing interest rate and fees for	1	98
subprime mortgages as lenders price their products to avoid	2	98
HOEPA requirements.	3	98
Bar prepayment penalties or at least shorten the	4	98
maximum permissible time to three or fewer years. Cut the	5	98
amount of fees and points that may be included in the loan at	6	98
about five percent, plus up to two bona fide discount points	7	98
and numerous other recommendations for making HOEPA stronger.	8	98
Implementation of the work group. One of the ways	9	98
the National Association of Realtors implemented the subprime	10	98
lending work group report was to develop two consumer	11	98
education brochures in partnership with the Center for	12	98
Responsible Living. And you heard from Paul Leonard earlier.	13	98
The brochures are in a series captioned "Shopping	14	98
for Mortgage, Do Your Homework First." They are available on	15	98
Realtor.Org, which is the web site for the National	16	98
Association of Realtors. You can download them for free and	17	98
print them yourself. I know they're in English and Spanish.	18	98
Or you can order them from the National Association of	19	98
Realtors at a minimal cost.	20	98
The first brochure -- and I believe you have some of	21	98
them in packets. Okay -- is called "Specialty Mortgages,	22	98
What Are the Risks and Advantages?" Specialty mortgages are	23	98
also called nontraditional or exotic mortgages. The	24	98
brochures help consumers weigh the pros and cons of	25	98
nontraditional mortgages. Payment shock is probably the	1	99
biggest concern of interest only and payment option ARMs. We	2	99
also include 40-year mortgages as nontraditional since	3	99
borrowers accrue equity at a much slower rate and pay much	4	99
more interest over the time of the loan.	5	99
The second brochure is called "Traditional	6	99
Mortgages, Understanding Your Options." This brochure warns	7	99
consumers once again about nontraditional mortgages and	8	99
explains 30-year and 15-year fixed rate mortgages,	9	99
traditional ARMs, including hybrid ARMs and home equity	10	99
loans.	11	99
The Federal Banking Agency proposed nontraditional	12	99
mortgage guidelines. The National Association of Realtors	13	99
submitted comments to the Feds and other banking agencies on	14	99
their proposed nontraditional mortgage guidelines for banks	15	99
and their affiliates.	16	99
The National Association of Realtors applauds the	17	99
strong stand the banking industries took in urging banks to	18	99
make sure consumers understand these mortgage products.	19	99
However, we are concerned that underwriting standards may be	20	99
so strict that they will unduly restrict the ability of	21	99
families to buy homes in high-cost areas such as California.	22	99
If we understand the guidelines correctly, lenders	23	99
must underwrite a nontraditional mortgage loan based on the	24	99
proposed borrower's ability to repay from today's current	25	99
income, the maximum potential mortgage payment when fully	1	100
indexed payment kicks in. The result is that only families	2	100
that could qualify for nontraditional mortgages would be	3	100
those that don't need them.	4	100
Lenders based on written documentation should be	5	100
able to approve nontraditional mortgages for families that	6	100
will be able to afford the -- that will be able to afford the	7	100
higher payment based on changing circumstances such as	8	100
expectation that a family member will join the workforce upon	9	100
graduation or when young children start school, the borrower	10	100
proposed to renovate the home and built sweat equity, or the	11	100
borrower plans to live in the home only for a few years.	12	100
As a realtor for 28 years, I've had the experience	13	100
of working with many clients from various income brackets and	14	100
I've worked with people on interest only, payment option	15	100
mortgages, and 40-year mortgages. And I'll be happy to	16	100
answer any questions you have and thank you for inviting us.	17	100
MR. OLSON: Judy, thank you very much. This is a	18	100
link that we haven't explored very much. We have been	19	100
talking to the community groups, to lenders, but to get the	20	100
realtors' vantage point would be enormously helpful.	21	100
Heidi, come back to a point, if you would, that you	22	100
started on, and was discussed at some of our previous panels,	23	100
particularly in Chicago, where you talked about the	24	100
counseling process and -- and it's very significant in the	25	100

Professional Reporting Services, Inc., Walnut Creek, California, 800-261-4814

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2006 Hearings

Building Sustainable Homeownership: Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of San Francisco 101 Market Street, San Francisco, California 94105 June 16, 2006

Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of San Francisco
101 Market Street, San Francisco, California 94105
June 16, 2006