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.

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regulation would cut off access to credit. 1 51
The subprime industry has created a  2 51
completely irrational marketplace, at least for  3 51
consumers.  In place of an efficient market that  4 51
provides real consumer choice and rewards consumers  5 51
for smart credit decisions and rational aspirations,  6 51
we have a subprime mortgage market that has recklessly  7 51
created and sold ridiculously risky mortgage products  8 51
that have excessively benefitted all of the market  9 51
players at the expense of middle class and low income  10 51
homeowners and their communities. 11 51
While I fear that for many American  12 51
homeowners, any regulatory action is too late, I am  13 51
glad to see that the Federal Reserve is beginning to  14 51
ask the right questions, and I hope that this will  15 51
serve as the first step in taking corrective actions  16 51
to protect future homeowners. 17 51
While I hope during the course of this  18 51
hearing to expand on these thoughts and  19 51
recommendations, here are some of my initial thoughts  20 51
on what the Federal Reserve can and must do under the  21 51
authority granted to it by Congress under HOEPA. 22 51
First, require common sense underwriting.   23 51
One of the greatest absurdities in the current out of  24 51
control subprime mortgage marketplace is a consumer's  25 51
true ability to repay the mortgage is often not  1 52
considered. 2 52
It is absolutely essential that the Federal  3 52
Reserve create regulations that force all mortgage  4 52
lenders and underwriters to make certain that a  5 52
borrower's repayment ability truly reflect the loan's  6 52
long-term affordability. 7 52
The Fed must also prohibit subprime mortgage  8 52
lenders from offering no document or stated income  9 52
forms.  These loans are not only a license for a  10 52
mortgage originator to lie about a borrower's ability  11 52
to repay, but also allows them to charge a higher  12 52
interest rate than the borrower would otherwise have  13 52
to pay. 14 52
Prohibit deceptive practices that disguise  15 52
the real cost of a loan.  In all of my experience  16 52
representing mortgage borrowers, I have never  heard a  17 52
rational reason that benefits the consumer, for a  18 52
subprime refinance loan to not include taxes and  19 52
insurance in the borrower's mortgage payment. 20 52
I have, on the other hand, spoke with  21 52
countless borrowers, who were led to believe that  22 52
their new mortgage payment would be lower than their  23 52
existing mortgage, only to discover, often too late,  24 52
that the only reason the payment was lower is because  25 52
taxes and insurance were not included.  1 53
The Fed must require taxes and insurance to  2 53
be included and disclosed as part of their future  3 53
monthly payment, in all of the prime loan documents. 4 53
Finally, establish effective consumer  5 53
remedies for unfair practices.  The fundamental  6 53
failure of the subprime marketplace to act rationally  7 53
towards consumers is caused by the complete lack of  8 53
accountability between the myriad of actors in today's  9 53
mortgage industry. 10 53
I'll expand on that later, as we get to the  11 53
question and answer session. 12 53
GOVERNOR KROSZNER:  Thank you very much.   13 53
Now we're going to hear from Janis Bowdler, from the  14 53
National Council of La Raza. 15 53
MS. BOWDLER:  Thank you.  Am I on?  Hello?   16 53
Can you hear me?  Is that better?  Okay.  Good  17 53
morning.  My name is Janis Bowdler.  I'm a senior  18 53
housing policy analyst for the National Council of La  19 53
Raza. 20 53
In my time there, I've published on fair  21 53
housing issues and predatory lending issues as they  22 53
affect the Latino community.  I've also testified  23 53
before the House and Senate and participated in last  24 53
year's hearing before the Fed in Philadelphia.  So I  25 53
want to thank you for this invitation. 1 54
The number of Hispanic families entering the  2 54
mortgage market is going up every year.  Hispanic home  3 54
ownership is at an all-time high, but unfortunately,  4 54
so is foreclosure. 5 54
For many of us that are here at the table,  6 54
though, this really isn't new news.  This didn't come  7 54
as a surprise.  NCLR has been warning for years that  8 54
lots of our Latino families were getting bad loans. 9 54
We think it's time to call it what it is.   10 54
The market is broken.  Many Latino borrowers have  11 54
unique profiles.  Thin credit files, multiple wage  12 54
earners per household, and these are characteristics  13 54
that prime lenders that thrive on automation don't  14 54
find very attractive. 15 54
Where prime lenders have neglected our  16 54
communities, subprime lenders have been quick to fill  17 54
the gap.  Now, as you heard Martin say, 40 percent of  18 54
Latino loans are subprime. 19 54
Prime lending to minority families is in  20 54
disarray, and it's high time the Federal Reserve and  21 54
other regulatory agencies affirm that commitment that  22 54
fair lending and equal access to credit laws and  23 54
principles.  All families should have access to  24 54
fairly-priced credit that is appropriate for their  25 54
risk level. 1 55
It's sad to say, but I don't think that  2 55
that's where we're at now, and I think the Fed has an  3 55
opportunity to restore some balance to the  4 55
marketplace.  In the interest of time, I'm going to  5 55
narrow my remarks to just a couple of areas, and then  6 55
expand it in question and answer. 7 55
So I'd like to talk about borrower's ability  8 55
to repay, some deceptive acts at pre- and post- 9 55
origination, and the fair advertising and minority  10 55
language publications.   11 55
I won't go into too much detail, since  12 55
ability to repay has already been covered.  But I do  13 55
want to say that I think this is one of the most  14 55
important issues facing us now.  Without an ability to  15 55
repay standard, underserved communities cannot rely on  16 55
home ownership to build wealth, which is the whole  17 55
reason that we promote home ownership in the first  18 55
place. 19 55
What our home ownership counselors tell us  20 55
is that over and over, the foreclosure clients that  21 55
they see have loans that they were never going to be  22 55
able to repay.   23 55
Now a large part of figuring out a  24 55
borrower's ability to repay is how you document their  25 55
income.  This is an issue that is very sensitive in  1 56
the Latino community.  Thirty-five percent of Latinos  2 56
born in the U.S. do not have basic banking accounts.   3 56
That number goes up to 45 percent when you look at  4 56
immigrant communities, and many rely on cash income. 5 56
Our community is still struggling to connect  6 56
to products that are flexible and accommodating of  7 56
these unique characteristics.  But at the same time,  8 56
stated income and low doc loans have been used to take  9 56
advantage of our families. 10 56
We need flexibility, but we also need  11 56
accountability.  So we recommend that the Federal  12 56
Reserve require originators to use the best and most  13 56
appropriate document available when verifying income. 14 56
NCLR is also concerned about deceptive ads  15 56
targeting Latinos, and escrow was already talked about  16 56
a little bit.  So I'm not going to go into that, but  17 56
I'd be happy to talk about that in Q and A. 18 56
What I do want to do is take some time to  19 56
pick up on something that Sandy actually talked about,  20 56
and I was really glad that they mentioned this, and  21 56
that is what we're seeing as an uptick in foreclosure  22 56
rescue scams. 23 56
Since I'm a big fan of visual aids, I have a  24 56
stack of solicitations here that are sent to Latinos  25 56
in financial crisis at the time of foreclose that I'd  1 57
be happy to share with you. 2 57
As you heard described, so-called  3 57
foreclosure consultants call.  Families think that  4 57
they're getting refinanced, and actually they've been  5 57
tricked into handing over the deed to their house.   6 57
Which means they lose the opportunity to do  7 57
mitigation, and they lose the opportunity to sell  8 57
their home. 9 57
We think that one way to get at this would  10 57
be to call this what it is, which is an extension of  11 57
credit under TILA and HOEPA, and that might get at  12 57
some of these issues.   13 57
One last issue that I want to bring your  14 57
attention to is we are concerned that little attention  15 57
is being paid to mortgage advertisements in Spanish  16 57
language press.  Latinos and other immigrants and  17 57
language minorities turn to ethnic press to find  18 57
practitioners that speak their language, and who they  19 57
believe will be more understanding of their credit  20 57
needs, the unique borrower profiles that I described  21 57
earlier. 22 57
I also have a stack of newspapers here from  23 57
this weekend, I come prepared.  In looking through the  24 57
papers, I couldn't find one broker advertised loan in  25 57
the English paper.  In the Spanish paper, I couldn't  1 58
find one traditional product, and I couldn't find one  2 58
TILA disclosure available on that.  3 58
While we don't think that disclosures are by  4 58
any means the answer to what we have going on here,  5 58
fairness in advertising is an important part of  6 58
ensuring equal access to credit available to all  7 58
borrowers. 8 58
We know that where you enter the mortgage  9 58
market does predict reasonably what kind of product  10 58
you're going to end up with.  So we'd like to  11 58
recommend that this should be investigated by  12 58
oversight agencies, as high as DOJ and the Fed, and  13 58
we'd also like to see that the Board declare  14 58
misleading advertisements by third parties as a  15 58
deceptive act and practice.  16 58
With that, I will wrap up, and I will be  17 58
happy to answer or expand on anything in Q and A. 18 58
GOVERNOR KROSZNER:  Thank you very much.   19 58
Finally, we're going to hear from Alys Cohen from the  20 58
National Consumer Law center. 21 58
MS. COHEN:  Thank you.  Can people hear me?  22 58
 Thank you for having the National Consumer Law Center  23 58
here today.  My name is Alys Cohen.  I'm a staff  24 58
attorney at NCLC.  I've been working on predatory  25 58
lending issues for more than ten years. 1 59
I'm sorry to say that from day one,  2 59
consumers have been calling me about the loans they  3 59
can't afford, and they continue to call me today.   4 59
Lawyers who work with Ira and others call up and send  5 59
us the loan documents.   6 59
The only thing that has changed really is  7 59
the details.  But basically, this has been going on  8 59
for a long time, and for a long time, government  9 59
officials have been hearing about it.  We hope that  10 59
finally, serious action can be taken, because nibbling  11 59
around the edges is not going to solve this problem. 12 59
This is about wealth-building, and the cost  13 59
of not acting is a lot bigger than the cost of acting.  14 59
 What we've seen to date is rhetoric about access to  15 59
credit when what we really see is access to borrowers  16 59
by predatory lenders. 17 59
We want access to credit too.  We want  18 59
access to good and fair credit for everybody.  What  19 59
we're seeing is an epidemic of damaging loans,  20 59
primarily refinancings in the subprime market, and  21 59
there's been a lot of focus on the resets that we're  22 59
seeing for hybrid ARMs. 23 59
But I'd like to also focus you on another  24 59
problem.  Some preliminary data from the Mortgage  25 59
Project, which is an analysis of bankruptcy data for  1 60
homeowners by Catherine Porter and Tara Tummey, and  2 60
they wanted me to tell you it's preliminary data,  3 60
shows that 60 percent of ARMs that fail are pre-reset,  4 60
and that over half of the pool of failed loans are  5 60
fixed rate loans.   6 60
So we have a reset problem, but we have a  7 60
very broad problem that we really need to take a look  8 60
at.  Moreover, the cost to real people here is very  9 60
serious.  There's the cost of losing your home if it's  10 60
the only wealth you have, and in most communities of  11 60
color that's all there is. 12 60
Then there's the question of when you get  13 60
back into your home.  When can you get this wealth  14 60
again?  For white homeowners, it's over ten years, and  15 60
for African-American and Latino homeowners, it's 30 to  16 60
40 percent longer than that. 17 60
So the costs we're talking about are very  18 60
high, and we'd like to take the risk that's solely on  19 60
the backs of these folks and distribute it more  20 60
equitably between industry and borrowers instead. 21 60
The National Consumer Law Center would like  22 60
to make several recommendations.  I'll be brief and  23 60
then we can go into it more in discussion.  Did you  24 60
just ring a bell? 25 60
GOVERNOR KROSZNER:  No. 1 61
(Laughter.) 2 61
MS. COHEN:  Thank you, Leonard.  As you've  3 61
heard before, the biggest problem is people can't  4 61
afford their loans.  So we believe it's incumbent upon  5 61
the Federal Reserve to act and to prohibit loans that  6 61
are unaffordable by requiring an analysis of ability  7 61
to repay. 8 61
For us, this doesn't only include a debt to  9 61
income ratio consideration; it also includes looking  10 61
at residual income, because poor people need enough  11 61
money.  They don't just need a percentage.   12 61
It also means including taxes and insurance  13 61
in the analysis, whether or not it's escrowed,  14 61
although we believe it should be escrowed and that  15 61
should be mandatory. 16 61
The question is whether fully-indexed rate  17 61
is the right analysis of ability to repay.  We believe  18 61
that goes a long way.  We believe it doesn't go far  19 61
enough.  There are people whose initial rates are  20 61
higher than the fully indexed rate, and many people  21 61
who never pay the fully-indexed rate.  They pay a lot  22 61
more. 23 61
The question is, are we going to leave those  24 61
people out in the cold?  You need to make loans  25 61
affordable not just when they're made, but throughout  1 62
the life of a loan.  That means forced placed  2 62
insurance that's provided by services should be  3 62
illegal unless the homeowner has been denied insurance  4 62
for a reason other than non-payment. 5 62
If the servicer can provide forced placed  6 62
insurance, they can provide affordable homeowners  7 62
insurance to their borrowers. 8 62
Loss mitigation is also necessary to keep a  9 62
loan affordable, and to keep someone in their home.   10 62
Right now, servicers may or may not provide full  11 62
access to loss mitigation, and it's really a coin toss  12 62
for the borrower.  13 62
We believe loss mitigation should be  14 62
required before foreclosure is pursued.  When the  15 62
loans are made, the best and most appropriate form of  16 62
documentation should be provided.  I want to be clear:  17 62
 self-employed people should not be excepted from  18 62
this.  I see loans regularly for self-employed people.  19 62
 They are some of the biggest victims of abuse. 20 62
If you can find an alternative means of  21 62
credit scoring people, you can find an alternative  22 62
means of actually evaluating the ability to repay for  23 62
people who are self-employed.  24 62
Two last ones.  One is we believe the  25 62
Federal Reserve Board should adopt a general  1 63
unfairness and deception standard that can apply  2 63
across America, to homeowners who are facing  3 63
foreclosure.   4 63
Right now, we rely on government officials,  5 63
and the truth is, they can't be everywhere and they're  6 63
not everywhere.  In addition, there are state laws,  7 63
but they don't apply in every state.  In Virginia, if  8 63
you are going to lose your house, and the bankers  9 63
haven't stepped in and the bank regulators haven't  10 63
stepped in, you cannot protect yourself with a state  11 63
unfairness or deception standard.  We think we need to  12 63
have a federal one. 13 63
Finally, there are certain terms that need  14 63
to be limited.  Prepayment penalties and also discount  15 63
points.  Discount points are only appropriate when you  16 63
get a discount.  I've never seen a discount point in  17 63
the subprime market that was associated with a  18 63
discount in the rate.  I'd like to see that. 19 63
In addition to discount points, we believe,  20 63
should not be charged when there's a yield spread  21 63
premium.  We can talk about that more in comments.   22 63
Finally, I just want to say communities across  23 63
American are bleeding.  They may not be your next door  24 63
neighbors, but it's happening.  If we don't fix it,  25 63
we're never going to be able to.  Thank you. 1 64
GOVERNOR KROSZNER:  Well, thank you very  2 64
much.  I thank all the panelists for excellent  3 64
presentations and also presentations that kept within  4 64
the time limit, because now we get to the particularly  5 64
interesting part, when we get to the posed questions. 6 64
I'm very pleased that the panel has touched  7 64
on the four key issues that I had wanted to discuss,  8 64
plus a number of others.  So why don't we start with  9 64
one of the issues that quite a few of you raised,  10 64
about escrow for taxes and insurance.   11 64
So I've heard discussions on both sides  12 64
about the importance of including that, and whether a  13 64
rule could be fashioned that would be helpful to  14 64
provide that.  So I want to hear from different  15 64
panelists about what they think about the importance  16 64
of taxes and insurance, having the escrow for that  17 64
included, or having a provision for that included. 18 64
If we were to consider a rule in that area,  19 64
how, if at all possible, to craft one that would allow  20 64
for that, but not somehow exclude responsible subprime  21 64
borrowing.  Whoever wants to start with that? 22 64
MR. RHEINGOLD:  I'm happy to start.  I think  23 64
that any rule -- I mean my personal view is that you  24 64
have to require taxes and insurance.  I think it has  25 64
to be required for all subprime loans. 1 65
I think one of the things -- and talking to  2 65
economists, we all understand that when people shop,  3 65
the most important fact for people is what is their   4 65
monthly payment going to be? 5 65
In my view, the lack of inclusion of taxes  6 65
and insurance on that payment has everything to do  7 65
with telling people that your next payment, your  8 65
refinance loan is going to be lower than your existing  9 65
payment.  It's all about hiding what the real payment  10 65
of that loan is. 11 65
I think that it leads to all sorts of  12 65
problems.  We're talking about the subprime market.   13 65
We're talking about people with less liquidity, with  14 65
more credit problems, with less financial savvy.  I  15 65
think making sure that taxes and insurance are  16 65
included will one, prevent sort of that shock; will  17 65
stop, will prevent hiding the real cost of that loan;  18 65
and also sort of go a long way to preventing some of  19 65
the other problems that exist along the way because of  20 65
non-payment of taxes, where I've seen people lose  21 65
their houses because of non-payment of taxes, or the  22 65
forced place insurance that Alys talked about, that  23 65
it's just sort of an incredibly costly thing that has  24 65
hurt a lot of homeowners as well. 25 65
GOVERNOR KROSZNER:  Yes, Faith. 1 66
MS. SCHWARTZ:  We actually -- we agree, in  2 66
the sense that we believe a loan with escrow is a much  3 66
better loan than a loan without escrow.  We've worked  4 66
very hard to get them on the front end of the market,  5 66
but as Ira noted, you know, marketing in a market, to  6 66
try to transform it one lender at a time, it's pretty  7 66
difficult to do, although escrows have improved in  8 66
percentage considerably since over the last five to  9 66
eight years. 10 66
Our performance clearly shows it's better to  11 66
have an escrow loan.  So we think there are ways  the  12 66
Fed can influence the market, to guidance, to offer an  13 66
opt-out of escrows, not an opt-in.  Almost that it is  14 66
a package of you should require escrowing. 15 66
I know what we do on the back end.  We've  16 66
worked with the National Fair Housing Alliance for  17 66
years on this.  We have an innovative pilot on the  18 66
back end to put them on as soon as those loans got  19 66
loaded into servicing.  We have a website, we have  20 66
outbound calls to escrow mortgages and it has improved  21 66
our percentage of escrowing. 22 66
But at the end of the day, there are reasons  23 66
some people don't want to escrow.  I don't know why  24 66
others wouldn't, but not everyone is always a cash- 25 66
strapped borrower.  In fact, it's a mix of borrowers  1 67
in the broad business. 2 67
So I think there probably are people who  3 67
don't escrow for some reason.  So I guess the key is  4 67
if they have to opt-out, you'll get a much higher  5 67
influence, and the Board should probably recommend  6 67
escrowing in the subprime market. 7 67
You'd see more consistency, better loan  8 67
performance and I don't know many lenders -- I can't  9 67
speak for the lenders and I don't.  But we would be  10 67
pleased to have escrows on our loans, at a higher  11 67
percentage than we do see. 12 67
MS. BRAUNSTEIN:  But would you be pleased if  13 67
it was required for subprime loans?   14 67
MS. SCHWARTZ:  Well, I believe in guidance.  15 67
 Again, I think there's some choice that has to be  16 67
there.  I don't know that you should tell everyone  17 67
they have to escrow.  I wouldn't want to be told to  18 67
escrow if I don't want to escrow. 19 67
How do you know I'm not a subprime borrower?  20 67
 There you go.  I think we should encourage and  21 67
influence and improve the market performance. 22 67
GOVERNOR KROSZNER:  So let me hear from one  23 67
of the lenders.  You said let's hear from one of the  24 67
lenders.   25 67
MR. SANCHEZ:  What I would say is we  1 68
absolutely have to require the taxes and insurance to  2 68
be calculated in the monthly payment.  In fact, we  3 68
believe that escrow should be offered 100 percent of  4 68
the time to the non-prime borrowers. 5 68
But requiring it, making it mandatory only  6 68
for that first time home buyer, that hasn't had the  7 68
experience of having taxes and insurance and escrow.   8 68
So we think it's absolutely the right thing to  9 68
pinpoint it at the first time home buyer, to make sure  10 68
that we take care of it. 11 68
I think one of the challenges in the whole  12 68
escrow, today we do it in the prime space all of the  13 68
time.  But we also have many times have a cash- 14 68
strapped borrower, who in order to start the  15 68
traditional escrow they don't have the funds to do  16 68
that. 17 68
So we've been talking about is there a way  18 68
that we can help to fund for that escrow in the  19 68
beginning, because it's great to say "Well, you have  20 68
to escrow, and you know have to bring $800 to the  21 68
closing table in order to start your escrow."  Many of  22 68
those folks don't have it.  23 68
So requiring it, I think, for everyone,  24 68
really puts a limit on who has the ability to do that. 25 68
MS. BRAUNSTEIN:  Someone else? 1 69
MS. BOWDLER:  Yes.  I would just like to say  2 69
that, you know, we're kind of talking about what  3 69
happens when people have the choice of escrow and they  4 69
don't take it, or maybe they weren't offered escrow. 5 69
But we've seen, especially in Southern  6 69
California and a few other places, where this is  7 69
actually an outright fraud, not just to be more  8 69
competitive in artificially lower payments.   9 69
But if you can get somebody to take a loan  10 69
that doesn't have taxes and insurance and you know  11 69
that they're going to be shocked in a few months with,  12 69
you know, a couple of thousand dollar tax bill, then  13 69
who does it come back to?  They come back to whoever  14 69
their originator was, looking for some help, and now  15 69
they're in a refinance cycle. 16 69
So we've actually seen it as a tool for  17 69
bringing business back to an originator, and stripping  18 69
out more equity with fees.  So we are in favor of  19 69
requiring escrow to -- and tying it to something very  20 69
specific, subprime, high LTVs or otherwise cash- 21 69
strapped borrowers. 22 69
MR. CHANIN:  Let me follow up on just the  23 69
lenders.  In terms of escrowing, what your practice is  24 69
for Alt-A as well as prime loans; that is, what in  25 69
terms of the data and the number and percentage of  1 70
people that escrow?  Do you require it for those?  Do  2 70
you strongly encourage it and so forth?  Is there a  3 70
difference between your practices for subprime and  4 70
non-subprime?  Maybe Susan, if you have any thoughts  5 70
on that. 6 70
MS. DAVIS:  No.  No difference between prime  7 70
and non-prime. 8 70
GOVERNOR KROSZNER:  I'm not sure people can  9 70
hear you. 10 70
MS. DAVIS:  Can you hear me?  Hello?  Okay.  11 70
 No, not in terms of what the policy is in terms of  12 70
escrows are offered, as opposed to a choice.  13 70
The one thing I just want to draw a  14 70
correlation here is as I'm listening to everybody  15 70
speak, it's dawned on me that there's a very strong  16 70
correlation about ability to pay and the escrow issue. 17 70
So to me, it's absolutely critical that that  18 70
is included in the underwriting calculation of  19 70
principal, interest and taxes and insurance, that  20 70
you're actually looking at all of that. 21 70
I think that may solve some of it.  I am  22 70
also doing a small test here to see should we look at  23 70
requiring it at certain LTVs for higher risk loans,  24 70
etcetera.   25 70
My results are preliminary data that I have  1 71
actually been looking at before we launched this.   2 71
We're working towards it.  Did not reflect the gain,  3 71
which then told me that a lot of the benefit is really  4 71
looking at the ability to pay. 5 71
If you can pay the taxes, that's critical.   6 71
So I actually put more emphasis on the ability to pay  7 71
and linking principal and interest, taxes and  8 71
insurance in your underwriting, as opposed to a  9 71
separate escrow, although as I said, I am working on  10 71
looking for some modeling there. 11 71
GOVERNOR KROSZNER:  Yes, Harry? 12 71
MR. DINHAM:  Well, you know, I've been in  13 71
this business almost 40 years, and as long as I've  14 71
known Fannie Mae and Freddie Mac have always required  15 71
escrow on loans that are over 80 percent LTV.  I think  16 71
that's a good place to start.   17 71
Another way to look at this would be, you  18 71
know, some people have compared FHA loans to subprime  19 71
loans, and no matter what your LTV is on that, you  20 71
have to have escrows.   21 71
I think that we need to really look at the  22 71
fact that these people don't have the ability to pay  23 71
their bills on time, and for us to think that we can  24 71
put them out there in this home and maybe look at a  25 71
two or three thousand dollar tax bill at the end of  1 72
the day, is a good thing.  I don't think that's a good  2 72
thing. 3 72
I think we need to do some type of guidance  4 72
that's going to help us get it at least to the -- if  5 72
they're making loans over 80 percent LTV, loan to  6 72
value, that they need to have the ability to have  7 72
escrow accounts.  So I think that's where we need to  8 72
go. 9 72
MS. DAVIS:  Can I just make one other -- oh  10 72
Martin, if you want to comment. 11 72
MR. EAKES:  Yes.  I want to just add two  12 72
things.  Fannie Mae and Freddie Mac require escrows on  13 72
any loan above 80 percent, because that's a measure of  14 72
risk.  I would posit that every single subprime loan  15 72
has a higher level of risk than an 81 percent LTV  16 72
prime loan. 17 72
The second thing I would say is guidance  18 72
will not work here, and voluntary will not work here.  19 72
 You can't have it both ways.  Guidance is most  20 72
effective when you are a bank regulator that has  21 72
supervision over the entities. 22 72
If you want it to apply to all lenders,  23 72
which it must, if it doesn't apply to all lenders,  24 72
then the lenders who can offer non-escrow will win in  25 72
the marketplace, because it is deceptive and borrowers  1 73
will be told you have a monthly payment that's 20  2 73
percent lower than the responsible lender next door. 3 73
This is one of those ones where you have to  4 73
go ahead and just have a simple required rule, bright  5 73
line across the board for everyone.  I have had the  6 73
majority of subprime lenders that I have talked to,  7 73
who have told me we would like to have that as a  8 73
bright line requirement.  We just can't be the first  9 73
actor and act unilaterally, or we will have zero  10 73
volume in the next year. 11 73
MS. BRAUNSTEIN:  Would increased and better  12 73
disclosures help with escrows? 13 73
MR. EAKES:  Disclosures are roughly five  14 73
percent of the solution to the problem.  When you have  15 73
50 percent of the population, as reported by GAO, that  16 73
read at the 8th grade level of less, and 23 percent of  17 73
adult Americans who are illiterate, you cannot through  18 73
disclosure solve this problem. 19 73
You need to have as little intrusive across- 20 73
the-board rules as you can.  But you know, we can't  21 73
solve this problem with Disclosure. 22 73
MS. BRAUNSTEIN:  Well, one of the issues  23 73
that we're facing in trying to look at all of these  24 73
issues and structure rules, is that there are some  25 73
well-established precedents for what the  1 74
characteristics are of unfair and deceptive acts and  2 74
practices, even though it's well-established in the  3 74
FTC Act. 4 74
So trying to associate some of these  5 74
practices with those criteria is not an easy task.  So  6 74
I was wondering if you have any guidance for us, in  7 74
terms of in particular we'll want to talk about this  8 74
with all the practices, like for escrows. 9 74
MR. RHEINGOLD:  I think that lack -- I think  10 74
that was my initial point.  It's fundamentally unfair  11 74
not to include escrow, because that -- because the  12 74
lack of escrow has been used as a deceptive practice  13 74
to hide the real cost of mortgages for a lot of people  14 74
in the subprime mortgage market. 15 74
MR. EAKES:  I mean the FTC definition of  16 74
deceptive, if we use that prong -- 17 74
MS. BRAUNSTEIN:  Right. 18 74
MR. EAKES:  Remember, the standard here is  19 74
unfair or deceptive.  It doesn't have to be both, but  20 74
either/or.  So for deceptive, a practice is deceptive  21 74
if it is likely to mislead reasonable consumers, and  22 74
the misleading representation is material. 23 74
Well, I think we see the entire market  24 74
failure here, because of responsible lenders not being  25 74
able to compete, and borrowers don't understand that  1 75
this is the cost, or they wouldn't fall into the trap  2 75
of saying this is really a 20 percent less expensive  3 75
loan when it really is not. 4 75
So it's squarely within the deceptive  5 75
language, even of precedent.  I would argue that you  6 75
have more mandate than that, that the FTC Section 5  7 75
was in place from '75 on.   8 75
Congress saw fit in 1994.  So in 1994, we  9 75
still had this problem of predatory mortgage lending,  10 75
and they went further.  They didn't say -- because you  11 75
already had the authority to prohibit unfair or  12 75
deceptive under the FTC.   13 75
But they went further, saying we need  14 75
something more than that, and we empower the Fed to  15 75
have independent mandate and authority for mortgage  16 75
loans in particular, to prohibit abuses and unfair or  17 75
 deceptive. 18 75
I would suggest that that takes you and  19 75
gives you strength and authority beyond what the FTC  20 75
standards are if you needed that.   21 75
MS. BRAUNSTEIN:  One of the main things that  22 75
gave us was the ability to affect rules for all  23 75
mortgage transactions, whereas you know, with the FTC  24 75
Act, you know, we have the ability to affect rules for  25 75

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