Home Ownership and Equity Protection Act (HOEPA)
Public Hearing

June 14, 2007

Board of Governors of the Federal Reserve System
Martin Building, Terrace Level
20th and C Streets, N.W., Washington, D.C.

TranscriptLinePage
We refer to it as our nutritional label.  We aspire to  1 26
make it simple.  I don't know that we're quite there  2 26
yet, but we are trying. 3 26
We want to have products that serve all of  4 26
our customers, including those who may have suffered  5 26
financial difficulties that affected their credit, or  6 26
those whose property may not qualify as performing.   7 26
We see non-performing properties frequently in our  8 26
urban markets, because many borrowers are on mixed use  9 26
property. 10 26
However, in each case, we based our  11 26
underwriting on the borrowers' ability and willingness  12 26
to repay, and when we review refinanced applications  13 26
from subprime borrowers, we conduct a net benefit  14 26
analysis as well. 15 26
We are also currently working with our  16 26
partners in the agencies to design new products,  17 26
suitable for borrowers with ARM resets who may have  18 26
affordability concerns.  We have always worked on one  19 26
on one directly with customers, but in 2004, we  20 26
established our Home Ownership Preservation Office, to  21 26
help our customers in times of financial stress. 22 26
This office serves as a portal for non- 23 26
profit organizations who are assisting our borrowers,  24 26
to find their way to the right place at Chase.  The  25 26
office runs a dedicated help line and also trains our  1 27
non-profit partners about the programs available to  2 27
help our clients avoid mortgage foreclosures. 3 27
More broadly, the office works with  4 27
community leaders and housing advocates to develop  5 27
foreclosure prevention programs, and has worked  6 27
closely with the Housing Policy Council, Neighbor  7 27
Works and the Ad Council on the upcoming national  8 27
foreclosure prevention campaign. 9 27
I'm here today to listen, to learn and to  10 27
provide industry insights wherever I can into the  11 27
issues that confront all of us, and I look forward to  12 27
participating.  Thank you. 13 27
GOVERNOR KROSZNER:  Thank you very much.   14 27
Now we're going to turn to William Brewster of Fannie  15 27
Mae. 16 27
MR. BREWSTER:  Thank you.  Is it possible  17 27
for me to sort of reclaim any of Pablo's time? 18 27
GOVERNOR KROSZNER:  No. 19 27
MR. BREWSTER:  I didn't think so.  Thanks.   20 27
GOVERNOR KROSZNER:  We'll give it to Pablo  21 27
when he's answering questions. 22 27
MR. BREWSTER:  Terrific.  Good morning,  23 27
everyone.  Thank you for inviting me to participate.   24 27
My name is Bill Brewster.  I'm the Director of Fraud  25 27
Issues for Fannie Mae.   1 28
My unit is responsible for Fannie Mae's  2 28
mortgage fraud investigations analysis and reporting,  3 28
as well as outreach to the industry and our law  4 28
enforcement on mortgage fraud matters. 5 28
Fannie Mae's regulator, the Office of  6 28
Federal Housing Enterprise Oversight, defines mortgage  7 28
fraud simply as "Material misstatement,  8 28
misrepresentation or omission relied upon by an  9 28
enterprise to fund or purchase or not to fund or  10 28
purchase a mortgage." 11 28
Over the past two years, we've seen an  12 28
increase in mortgage fraud incidents, especially those  13 28
involving mortgages that are processed in the Upper  14 28
Midwest.  For loans originated in 2005-2006, the Upper  15 28
Midwest and Southeast regions each account for about  16 28
one-third of our fraud findings. 17 28
Income misrepresentation remains the most  18 28
common type of fraud we find, followed by fraud- 19 28
related to the subject property and its appraised  20 28
value.  An alarming number of Fannie Mae's recent  21 28
investigations have found that otherwise honest  22 28
consumers and real estate professionals are fooled  23 28
into conspiring to commit mortgage fraud. 24 28
Mortgage fraud perpetrators are highly  25 28
imaginative, and then often involve other organized   1 29
criminal activity.  They are highly motivated to take  2 29
advantage of unsuspecting individuals. 3 29
In one case we're currently investigating,  4 29
an attractive website uses religious overtones to lure  5 29
consumers with comforting promises of credit repair  6 29
mandatory to home ownership.  In reality, the website  7 29
is operated by an LLC that specializes in buying  8 29
foreclosed properties and flipping them to home buyers  9 29
at inflated prices.  They use falsified asset and  10 29
appraisal documentation. 11 29
To make matters worse, the LLC is owned by  12 29
an originating loan officer.  Consequently, the loan  13 29
officer collects both the normal commission and  14 29
excessive sales proceeds on each loan.  The loans are  15 29
subsequently sold on the secondary market to larger  16 29
lenders and then sold to Fannie Mae. 17 29
In this case, the consumers appear to have  18 29
intentionally exaggerated their assets and down  19 29
payment, in order to qualify for the mortgage loans.   20 29
But were they aware of how serious those exaggerations  21 29
were? 22 29
In another recent case, consumers were  23 29
induced to rent their credit to what they were told  24 29
was an investment club.  They attended a meeting at a  25 29
local hotel, provided their social security numbers  1 30
and signed blank documents. 2 30
In return, they received checks for as much  3 30
as $5,000.  A few months later, two of the consumers  4 30
were rejected for a car loan because their credit  5 30
reports showed significant mortgage delinquencies.  As  6 30
it turned out, unbeknownst to them, they were used as  7 30
straw buyers to purchase multiple properties in other  8 30
states over 1,000 miles away, and the investment club  9 30
was actually a property flip scheme used to unload  10 30
over 100 properties at excessive prices. 11 30
In such mortgage fraud schemes, it does not  12 30
matter what the product or the pricing is.   13 30
Perpetrators often go for the most efficient pricing,  14 30
and easily fabricate whatever documents are needed.   15 30
Yet the consumers caught up in these schemes are often  16 30
the most aggrieved victims of the real estate finance  17 30
system. 18 30
Our experience indicates that consumers and  19 30
all professionals in the mortgage process, including  20 30
real estate agents, mortgage brokers, lenders,  21 30
appraisers, title agents, must become better educated  22 30
on common mortgage fraud schemes and not inadvertently  23 30
conspire with the perpetrators of those schemes. 24 30
Clearly, expressed ethical standards applied  25 30
consistently make their attractive solicitations of  1 31
perpetrators less attractive.  The FBI and the  2 31
Mortgage Bankers Association, for example, recently  3 31
acknowledged as much when they collaborated on a one- 4 31
page voluntary notice that warns consumers that  5 31
misrepresenting personal financial information  6 31
constitutes mortgage fraud, and we have an example --  7 31
there's an example and there's some in the back, too,  8 31
that you can see. 9 31
In light of these concerns, we hope the  10 31
Board will consider the importance of consumer  11 31
education, specifically related to anti-fraud  12 31
education and best practices.   13 31
At Fannie Mae, we utilize a balance of  14 31
enforcement, education and information-sharing to  15 31
address mortgage fraud, product suitability and  16 31
predatory practices.  In 2006, Fannie Mae completed  17 31
over 25,000 loan filing underwriting reviews, over  18 31
18,000 specialized predatory lending reviews, and 98  19 31
case investigations involving over 7,500 loans. 20 31
We also referred over 300 unacceptable  21 31
appraisal reports to the appropriate state licensing  22 31
boards.  On the education front, we participated in 85  23 31
anti-fraud events since January of 2006, partnering  24 31
with non-profits, government agencies, trade groups  25 31
and our lender customers to reach over 10,000 real  1 32
estate professionals. 2 32
Our goal with these outreach efforts is to  3 32
share information about fraud schemes, and to  4 32
collaborate broadly on prevention strategies. 5 32
In closing, please allow me again to  6 32
emphasize that mortgage fraud knows no favorite  7 32
product or pricing scheme.  Perpetrators utilize  8 32
whatever products are available, and fabricate  9 32
whatever documentation they need to make deals work. 10 32
They exploit gaps in the mortgage process,  11 32
and when one gap closes, they find another.   12 32
Consequently, consumers must approach mortgage loan  13 32
applications responsibly and honestly, to avoid  14 32
becoming unwitting victims or conspirators. 15 32
All professionals involved in mortgage  16 32
processing must match the perpetrators' imagination  17 32
and creativity in order to skillfully prevent their  18 32
success.  Whatever the Board can do to help will be  19 32
much appreciated.  Thanks again for the opportunity to  20 32
participate.  I look forward to learning and hearing  21 32
more from all the other speakers. 22 32
GOVERNOR KROSZNER:  Thank you very much.   23 32
Now we'll hear from Susan Davis from Wells Fargo. 24 32
MS. DAVIS:  Thank you.  Before I start, I  25 32
just want to say thanks for all you're doing on the  1 33
fraud front.  That's just huge. 2 33
Good morning.  I am Susan Davis, and I lead  3 33
the Consumer Real Estate Lending Activities for Wells  4 33
Fargo Home Mortgage.  I would like to first address  5 33
the general questions the Board has asked, and given  6 33
the rapidly changing real estate lending environment,  7 33
Wells Fargo believes guidance is more appropriate than  8 33
rules, and existing and contemplated guidance should  9 33
be given the chance to work. 10 33
Any action taken by the Board should be  11 33
designed to create uniform standards that apply to all  12 33
lenders, including federal and state regulated lenders  13 33
and others.   14 33
You have asked whether specific terms or  15 33
practices should be regulated across the board, or  16 33
just for subprime lending.  We believe that truly  17 33
unfair, deceptive and abusive practices should be  18 33
eliminated for all mortgage loans.  We believe that  19 33
consumers, prime and subprime alike, should be  20 33
protected from unscrupulous and unregulated loan  21 33
originators who offer irresponsible loan products. 22 33
It is also important to note that the  23 33
specific loan terms and practices being examined by  24 33
the Board are not, by themselves, or in isolation,  25 33
unfair, deceptive or abusive.  1 34
Lenders who adhere to responsible lending  2 34
principles can develop responsible loan products that  3 34
incorporate some of these loan terms for certain  4 34
customers.   5 34
At Wells Fargo, we have chosen not to make  6 34
pay option ARMs or loans with negative amortization.   7 34
The problem with the loan terms in question is that  8 34
irresponsible lenders, without a shared interest in  9 34
the long-term financial success of the consumer and  10 34
investor, can abuse each of these loan terms and  11 34
practices. 12 34
Next, I will address the Board's question on  13 34
specific loan terms or practices.  With respect to  14 34
prepayment penalties, Wells Fargo believes that they  15 34
are useful and appropriate when provided in a  16 34
responsible fashion.  Prepayment penalties allow  17 34
consumers who intend to stay in their homes for an  18 34
extended period of time the option of a lower interest  19 34
rate. 20 34
The existence of prepayment penalties has  21 34
also contributed to the liquidity of the secondary  22 34
markets, by assuring a minimum return to investors.   23 34
We agree that limiting the term of the prepayment  24 34
penalties to the initial fixed period of an adjustable  25 34
rate loan, as Wells Fargo currently does, would be an  1 35
appropriate standard for the industry. 2 35
We agree that providing additional  3 35
disclosures about the nature of prepayment penalties  4 35
and the availability of loans without such terms would  5 35
also be appropriate.  The consumer should also receive  6 35
a clear benefit, such as a reduced interest rate, if  7 35
she or he chooses a prepayment penalty. 8 35
On the topic of requiring escrows for  9 35
subprime loans, we believe lenders should clearly  10 35
disclose the absence or availability of escrows, and  11 35
regardless of the consumer's choice, should underwrite  12 35
the loan assuming the full amount of principal,  13 35
interest, taxes and insurance. 14 35
Regarding any restriction on stated or low  15 35
documentation loans, we believe these loans need to be  16 35
tied to bright line tests that can be consistently  17 35
documented.  Several years ago, Wells Fargo  18 35
implemented such a bright line test when it chose to  19 35
eliminate the availability of stated income loan  20 35
products to all consumers whose FICO scores were below  21 35
620. 22 35
With respect to the affordability of credit,  23 35
there has been a great deal of discussion about how to  24 35
determine a borrower's ability to repay an ARM loan  25 35
and at what rate and payment amount should be used in  1 36
underwriting an ARM. 2 36
The FFIEC, in its inter-agency guidance and  3 36
statements, has recommended that a fully indexed rate  4 36
be used, except in those cases where because of the  5 36
interest rate environment, another rate, such as a  6 36
fixed rate, may be more prudent. 7 36
Wells Fargo strongly believes that the  8 36
evaluation of a consumer's ability to repay an ARM  9 36
loan should be determined in accordance with the  10 36
inter-agency guidance. 11 36
Capping the debt to income ratio at 50  12 36
percent does both lenders and consumers a disservice,  13 36
as interest rates move up and down, new types of  14 36
mortgage products evolve, and the credit environment  15 36
changes.  This is an area where guidance is more  16 36
appropriate than bright line rules. 17 36
The Board should avoid any rule-making that  18 36
unnecessarily limits availability of innovative  19 36
lending products, and it should allow the market to  20 36
make necessary corrections, and should not overreact  21 36
to the current wave of concerns. 22 36
In conclusion, the Board should focus on  23 36
creating a regimen of uniform consumer protection  24 36
requirements that consistently applies to both  25 36
federally regulated lenders and others.  Recognizing  1 37
the constantly changing mortgage environment, we urge  2 37
the Board and other agencies to maintain the ongoing  3 37
dialogue with mortgage market participants.  Thank  4 37
you. 5 37
GOVERNOR KROSZNER:  Thank you very much.   6 37
And now we're going to hear from Harry Dinham of the  7 37
National Association of Mortgage Brokers. 8 37
MR. DINHAM:  Good morning.  I am Harry  9 37
Dinham, President of the NAMB.  We appreciate being  10 37
invited to participate in this morning's panel.  We're  11 37
the only trade association devoted to representing the  12 37
mortgage broker industry.  Our members are state- 13 37
regulated, independent, small business men and women,  14 37
that adhere to a strict code of ethics and best  15 37
lending practices. 16 37
Today, we have one of the strongest mortgage  17 37
financing delivery systems in the world.  The  18 37
tremendous growth and development in the secondary  19 37
market has given lenders greater access to capital,  20 37
lower cost, diversified risk, and increased access to  21 37
credit for all consumers.  22 37
Credit scores, automated underwriting  23 37
models, and risk-based pricing have increased the  24 37
number of originators and therefore competition, which  25 37
has decreased the relative cost of the non-prime  1 38
versus the prime. 2 38
Still, our success has not come without  3 38
problems, particularly in the non-prime variable rate  4 38
market.  We walk a fine line if we craft measures to  5 38
address the problems in this market segment.  We all  6 38
agree that we need to curb abusive lending practices,  7 38
but we must be careful not to advance measures that  8 38
will unintentionally harm consumers.   9 38
I want to clarify before discussing our  10 38
recommendations that we are not convinced HOEPA is the  11 38
best forum for many of the measures needed to address  12 38
the abusive lending practices effectively. 13 38
The intent of HOEPA was to prohibit  14 38
practices and provide a cooling-off period for  15 38
consumers of high cost loans.  What needs to be  16 38
addressed today are the practices that are unfair,  17 38
deceptive and unethical.  What we believe that it is a  18 38
leap to say the protections in HOEPA must be expanded,  19 38
irrelevant of the cost of loans.   20 38
With that in mind, NAMB recommends the  21 38
following best business practices for the industry.   22 38
NAMB believes regulators can establish and encourage  23 38
industry-driven best practices that address  24 38
professional standards, ethics and financial literacy. 25 38
We are currently reviewing our best  1 39
practices, and are willing to work with regulators and  2 39
other industry representatives to ensure that there is  3 39
a uniform standard of best practices that applies to  4 39
everyone. 5 39
We also recommend that a uniform industry- 6 39
wide best practice that all mortgage originators  7 39
conduct their business and operate under a duty of  8 39
good faith and fair dealing.  We do not need to wait  9 39
for laws and regulations to tell any of us to be  10 39
ethical, honest and not lie, cheat, steal or commit  11 39
fraud. 12 39
Secondly, effective disclosure is the best  13 39
defense against abusive lending practices.  Some have  14 39
said there are too many pieces of paper now.  We do  15 39
not need more.  NAMB agrees, and we support  16 39
streamlining the mortgage process. 17 39
But with the new complex mortgages like  18 39
option ARMs, more disclosure, not less, is warranted.  19 39
 NAMB proposes the creation and industry-wide use of a  20 39
one page payment disclosure, that communicates key  21 39
loan features and deters the prospect of payment  22 39
shock. 23 39
In addition, we encourage HUD and the Board  24 39
to update other key disclosures, such as the GFE and  25 39
TIL statement. 1 40
Three, regulate the practices, not the  2 40
products.  Abusive practices relate to people, not  3 40
products.  We should remember that each consumer is  4 40
unique.  Each one chooses a loan for his or her own  5 40
personal reasons. 6 40
What was inappropriate for some was perfect  7 40
for others.  For this reason, NAMB does not believe in  8 40
prohibiting programs, products or loan features.   9 40
Instead, we support the creation of policies that will  10 40
prevent abusive practices in the market. 11 40
Since 2002, NAMB has called for the increase  12 40
in professional standards, educational requirements  13 40
and background checks for all originators.  We remain  14 40
the only industry trade association calling for this  15 40
reform.  In addition, NAMB believes mortgage  16 40
originators must have something to lose if they act  17 40
unethically. 18 40
Therefore, NAMB supports the creation of a  19 40
national registry for all mortgage originators, that  20 40
will prevent bad actors from moving within the  21 40
mortgage community. 22 40
Four is principle-based guidance.  The  23 40
recent Supreme Court case, Waters v. Wachovia, has  24 40
split the mortgage industry into two camps:  those  25 40
subject to federal oversight versus subject to federal  1 41
and state oversight. 2 41
This split system has created gaps and  3 41
without appropriate oversight, two things will happen.  4 41
 New business models will develop that exploit the  5 41
removal of state consumer protection laws for the  6 41
federal entities and their subsidiaries.  There will  7 41
be confusion as to whether a similar level of consumer  8 41
protection can be afforded consumers of federally- 9 41
exempt entities. 10 41
The federal banking agencies currently do  11 41
not possess the infrastructure and resources needed to  12 41
respond to consumer complaints appropriately, and in a  13 41
timely manner. 14 41
In contrast, all 50 states have similar  15 41
elements of consumer protection.  They also have well- 16 41
established processes for handling consumer  17 41
complaints, and for supervising and handling  18 41
individual licensed professionals who interact with  19 41
consumers. 20 41
To create uniformity, NAMB believes the  21 41
federal agencies should create principle-based  22 41
guidance and allocate funds for supervisory oversight,  23 41
in addition to delegating authority to the state  24 41
agencies currently providing consumer protections.   25 41
Thank you. 1 42
GOVERNOR KROSZNER:  Thank you very much.   2 42
Now we're going to turn to Martin Eakes, Center for  3 42
Responsible Lending. 4 42
MR. EAKES:  Good morning.  I'm the CEO of  5 42
Self Help, which is a community-developed lending  6 42
group based in North Carolina.  For the past 26 years,  7 42
we've been making loans to minority and low income  8 42
families. 9 42
I say that we're one of the very earliest  10 42
subprime lenders.  We didn't know it.  We were just  11 42
helping people.  Our loss rate on providing 55,000  12 42
homeowners $5 billion in financing has been under a  13 42
half a percent each year.  If you have large losses in  14 42
making subprime loans, it means you're doing something  15 42
wrong. 16 42
I'm also the CEO for the Center for  17 42
Responsible Lending, a non-profit research  18 42
organization dedicated to protecting home ownership  19 42
and family wealth by working to eliminate abusive  20 42
financial practices. 21 42
In November of last year, we issued a study  22 42
that noted the foreclosures that would occur over the  23 42
next few years.  The two facts of note in that study  24 42
were number one, that one out of five borrowers who  25 42
received a subprime loan during 2005 and 2006 would  1 43
lose their homes to foreclosure over the coming year. 2 43
That amounts to about 2.2 million families  3 43
either that have lost or will lose their homes because  4 43
of subprime loans.  To put this in perspective,  5 43
Hurricane Katrina displaced 300,000 families.   6 43
Reckless and virtually unregulated subprime lending  7 43
has created a storm disaster that is at least seven to  8 43
ten times that magnitude. 9 43
But the storm in foreclosures is happening  10 43
silently all across the country, one home at a time,  11 43
in neighborhoods that are faceless and unseen all  12 43
across the country.  This is particularly devastating  13 43
for communities and families of color. 14 43
Fifty-three percent of all African-American  15 43
loans made in the United States in 2005 to 2006 were  16 43
subprime.  So basically we have two different systems  17 43
of lending.  One for white borrowers, and one that  18 43
serves the majority of African-American and 40 percent  19 43
of all Latino borrowers. 20 43
Because of foreclosures and loss of equity  21 43
by persistent flipping of loans, it is likely over the  22 43
next four or five years we will see the greatest loss  23 43
of African-American and Latino home wealth that the  24 43
country has ever seen. 25 43
Even in the midst of all of these  1 44
foreclosures, the market forces have really not reined  2 44
in abusive lending.  If we go to a review of the  3 44
securitized loans, of subprime loans during the first  4 44
quarter of 2007, 80 percent were still the exploding  5 44
ARM loans, even in the first quarter of 2007, once the  6 44
problem had become so pronounced. 7 44
Seventy-two percent had prepayment  8 44
penalties; 43 percent were stated income loans.  We  9 44
have this sense that the market has been correcting,  10 44
and yes, there has been some reduction in the investor  11 44
community.   12 44
But unfortunately, we have two different  13 44
markets.  One is the investment market; the other is  14 44
the home ownership market.  In the home ownership  15 44
market, there's no correction whatsoever.  Families  16 44
are losing their homes; the level of correction is  17 44
happening too late.  18 44
I will say candidly that the Federal Reserve  19 44
bears some responsibility for this.  Thirteen years  20 44
ago, Congress required that the Board prohibit  21 44
mortgage lending acts that are abusive, unfair and  22 44
deceptive.  It wasn't a request; it wasn't a  23 44
discretionary action; it was a mandate that said the  24 44
Board will prohibit these actions. 25 44
Seven years ago, I testified in a House  1 45
Committee that Chairman Leach was chairing, and  2 45
Chairman Leach said the following.  He said "Congress  3 45
passed a law which was very strong in its sense and  4 45
purposes, the 1994 HOEPA, in outlawing predatory  5 45
lending. 6 45
In effect then, because Congress felt that  7 45
the subtleties of this were beyond Congress, we gave  8 45
to the federal regulators, most specifically the  9 45
Federal Reserve Board, the authority to make  10 45
definitions and to move in this direction." 11 45
So the question becomes, if there's a  12 45
problem out there, and Congress has given very strong  13 45
authority to regulators and to the Federal Reserve,  14 45
has and is the Federal Reserve AWOL? 15 45
I would suggest during the last seven years,  16 45
the Federal Reserve has made some small steps, but  17 45
they've been very insufficient.  With this tsunami of  18 45
foreclosures and lost homes, the Federal Reserve has  19 45
not used this authority that was mandated at all  20 45
during these seven years. 21 45
Let's talk about some of the specific  22 45
problems.  The ability to pay others will talk about.  23 45
 I want to really focus on the escrows for taxes and  24 45
insurance, and on the prepayment penalties. 25 45
The dominant practice in the marketplace in  1 46
subprime loans today is to focus solely on the monthly  2 46
payment.  That's what companies market; that's what  3 46
consumers identify.   4 46
So if you have a responsible lender that has  5 46
a very good product, that's low cost, that would be  6 46
sustainable and not put a family in jeopardy of  7 46
foreclosure, they are in this terrible situation where  8 46
if they get marketed a product that says "I can give  9 46
you a 20 percent lower monthly payment because we  10 46
don't have an escrow for taxes and insurance." 11 46
It's a totally artificial market failure  12 46
that the Board could easily correct, by simply  13 46
requiring that escrows be collected for any subprime  14 46
mortgage loans. 15 46
On prepayment penalties, the problem with  16 46
prepayment penalties is that in the prime market,  17 46
where people really do have a choice, only two to four  18 46
percent of borrowers choose prepayment penalties.  19 46
In the subprime market, where borrowers  20 46
really are given a paper and said "Sign here," it's  21 46
somewhere near 70 percent of all borrowers are given  22 46
loans with prepayment penalties.  You can't really  23 46
explain the difference between those two markets.   24 46
It's anti-competitive to have a prepayment penalty,  25 46
and most subtly, the prepayment penalties are the glue  1 47
that enable racial steering to stay in place. 2 47
I'll come back to that if we have time in  3 47
the question and answer session. 4 47
Two other issues, just to throw out and I  5 47
won't talk about them, is that we need to deal with  6 47
the 60 percent of subprime loans in 2006 that were  7 47
made with second mortgages, where you have a 80  8 47
percent first and a 20 percent second, which makes it  9 47
impossible for borrowers to get out. 10 47
If you consider the affordability just for  11 47
the first loan and not the second, you've got a  12 47
problem. 13 47
Finally, we need to talk about mortgage  14 47
brokers.  There is a problem there.  Most of them are  15 47
good, but many of the mortgage brokers are simply a  16 47
license to put people in loans as quickly and as fast  17 47
as possible.  Thank you. 18 47
GOVERNOR KROSZNER:  Thank you very much.   19 47
Now we're going to hear from Ira Rheingold from the  20 47
National Association of Consumer Advocates.  Is this  21 47
working?  It sounds like it's working. 22 47
MR. RHEINGOLD:  Good morning.  My name is  23 47
Ira Rheingold.  I'm the Executive Director and General  24 47
Counsel of the National Association of Consumer  25 47
Advocates.  1 48
Our members are the consumer advocates  2 48
across this country, who on a daily basis speak with  3 48
and represent the consumers victimized by bad lending  4 48
practices, and see the very real life consequences of  5 48
an out of control subprime mortgage lending  6 48
marketplace. 7 48
I hope that at today's hearings, you will  8 48
hear their voices through me, and that after this  9 48
hearing you will begin to take the necessary actions  10 48
with systems development, of a rational subprime  11 48
mortgage market that actually serves the needs and  12 48
demands of consumers and communities across our great  13 48
land. 14 48
As my testimony is based on my personal  15 48
experience and the collective experience of consumer  16 48
advocates like me, I'd like to start by sharing a  17 48
little bit about my background. 18 48
Since graduating law school in 1986, I've  19 48
spent my legal career working in some of the poorest  20 48
rural and urban communities across our nation.  I've  21 48
seen what it's like to live in a homeless shelter or a  22 48
rural shack without indoor plumbing, or one of the  23 48
toxic public housing projects that are a testimony to  24 48
our nation's failure to provide clean, affordable and  25 48
safe housing to all our citizens. 1 49
I understand the dream and promise of home  2 49
ownership, of living in a safe and decent community  3 49
where the essential human need of successfully raising  4 49
a family can be met.  Unfortunately, I've seen and now  5 49
understand how these dreams and that great promise can  6 49
be turned into a nightmare, when the needs and  7 49
aspirations of home owners are abused by all of the  8 49
players in the subprime mortgage marketplace. 9 49
In the mid-1990's, after I worked on health,  10 49
welfare and public rental housing issues, I began  11 49
running a foreclosure prevention project at the Legal  12 49
Assistance Foundation of Chicago.  As I began that job  13 49
and I began meeting with homeowners, I was initially  14 49
shocked at the mortgage loan documents they would show  15 49
me. 16 49
Astronomical broker and lender fees;  17 49
incredibly high APRs.  I'll never forget the first  18 49
FAMCO loan I saw.  Ridiculous junk fees and included  19 49
credit life and credit disability insurance, and  20 49
absurd payments to unknown creditors and home repair  21 49
companies that never did any work. 22 49
I remember as it was yesterday, in my first  23 49
conversation with a mortgage lender, who explained to  24 49
me, in my ignorance and naivete, that all of these  25 49
fees and charges, especially the credit insurance,  1 50
were absolutely necessary, were in the consumer's best  2 50
interest, and that any regulation that would limit  3 50
these fees or restrict interest rates would needlessly  4 50
cut off access to credit and the dream of home  5 50
ownership to my clients and the communities I cared  6 50
about. 7 50
I knew that argument was absurd then, as it  8 50
is even more so today, and that this has  9 50
unquestionably been proven over the past decade.  Be  10 50
thankful you don't see credit insurance anymore.  The  11 50
Fed deserves some credit for that, and we really see  12 50
loans that exceed the homeowner state legislative fee  13 50
and/or interest limits.  14 50
Yet no one can argue that the availability  15 50
of credit has done anything but explode, while these  16 50
necessary mortgage loan features have been mandated  17 50
away.  Unfortunately, while these equity destroying  18 50
products have mostly left the mortgage market, the  19 50
subprime lending industry continues to adapt and  20 50
morph, creating more and better ways to exploit the  21 50
limited wealth of our nation's most vulnerable home  22 50
owners and borrowers, left all but unregulated over  23 50
the past dozen years as Congress and all the federal  24 50
regulators unthinkingly accepted the false mantra that  25 50

NEAL R. GROSS
COURT REPORTERS AND TRANSCRIBERS
1323 RHODE ISLAND AVE., N.W.
WASHINGTON, D.C.  20005-3701
(202) 234-4433
www.nealrgross.com