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
get a net lower rate, because they come in at a higher  1 101
rate, get deducted a half percent for prepayment  2 101
penalty, and it's really pernicious chain that in  3 101
subprime should just simply be prohibited. 4 101
The most cynical thing you could do as the  5 101
Fed is to have a rule that says we're going to  6 101
prohibit prepayment penalties that last beyond the  7 101
first reset period.   8 101
That would give the appearance that you had  9 101
done something.  But in essence, you would have done  10 101
absolutely nothing, because the borrowers are going to  11 101
be flipped 70 to 80 percent, as Ira said, before they  12 101
ever get to that reset period. 13 101
So whether it's fixed rate or adjustable  14 101
rate, that really is not adequate.  For me, since my  15 101
goal has been to work with minority borrowers, the  16 101
fact that this market is so disproportionate, it ought  17 101
to be just really repugnant to us that an African- 18 101
American borrower, just by the fact that they're  19 101
African-American, get a prepayment penalty, whether  20 101
they quote "choose it or not," and it's going to be  21 101
500 percent more likely if you're African-American or  22 101
Latino.  I find that just appalling. 23 101
GOVERNOR KROSZNER:  Well Martin, I've been  24 101
an economics professor many years, and it's very clear  25 101
that you are very well-schooled in economics.  So I  1 102
never thought that you were not so well-trained in  2 102
economics.  You have quite a sophisticated  3 102
understanding of those things. 4 102
MR. EAKES:  I've been in the habit. 5 102
(Laughter.) 6 102
GOVERNOR KROSZNER:  Certainly it is better  7 102
than we could hope for.  Any thoughts and response to  8 102
that?  Yes. 9 102
MS. DAVIS:  I don't want to be cynical, but  10 102
I do want to be very thoughtful on this issue.  I  11 102
think we're all aligned on this panel in terms of  12 102
being very supportive of the consumer.  At Wells  13 102
Fargo, I mean we are -- our consumers' financial  14 102
success is our vision.  It's what drives us.  Their  15 102
success breeds more success through a lot of different  16 102
ways. 17 102
If they're successful, they're going to do  18 102
more business with us, which makes us more successful.  19 102
 So we all have this same motivation.  We all share  20 102
the same passion. 21 102
I just want to be very thoughtful that when  22 102
we do something that we think is well-intended, that  23 102
there aren't any unintended consequences that create a  24 102
problem.   25 102
So when I think about this, what are the  1 103
impacts in the marketplace, what is the reaction to  2 103
the investor, the loan is prepaid faster than what has  3 103
been modeled or what the return that they expect as an  4 103
investor, then you may pull back on that. 5 103
I do believe, as Faith said earlier, that   6 103
there's got to be a clear benefit, you know.  You've  7 103
got to be able to show it.  They should have choice.   8 103
I do believe, and we can have dialogue or discussion  9 103
relative to what is the appropriate period.  10 103
At Wells Fargo right now, we currently say  11 103
it's the adjustable period or the fixed period of the  12 103
adjustable if you prepay in that period, or the lesser  13 103
of three years.  So if you had a five year adjustable  14 103
period and you prepaid at three, then the prepayment  15 103
penalty would not apply. 16 103
So there's going to be rich dialogue in  17 103
terms of what is that period.  But I just think you  18 103
have to look at it in a broad perspective, and look at  19 103
what are the potential outcomes.   20 103
MS. BRAUNSTEIN:  Susan, do your prepayment  21 103
penalties extend right to the reset date, in the sense  22 103
like for a 228 or a 327?  Or does it end a little  23 103
before that, to give people a chance to get out of  24 103
that loan without paying it? 25 103
MS. DAVIS:  It is at the reset period. 1 104
MS. BRAUNSTEIN:  At the reset? 2 104
MS. DAVIS:  Yes.  If you do refinance with  3 104
us, we're going to waive it.   4 104
MS. BRAUNSTEIN:  As long as they refinance  5 104
with you, as opposed to another lender? 6 104
MS. DAVIS:  Right. 7 104
MR. CHANIN:  Let me follow up on that.  I'm  8 104
not an economist, but I do work for several of them.   9 104
(Laughter.) 10 104
GOVERNOR KROSZNER:  Whether he likes it or  11 104
not. 12 104
MR. CHANIN:  Right.  But -- 13 104
MR. EAKES:  He's a lawyer.  That's even  14 104
worse. 15 104
MR. CHANIN:  But it's hard for me to think  16 104
that if a loan or the market has prepayment penalties  17 104
in a fairly significant portion of the market, that  18 104
that's a, you can call it a revenue stream or whatever  19 104
you like, in terms of if will bring in some degree of  20 104
funding for lenders, for those consumers who do  21 104
prepay; that is, it is implemented for some lenders. 22 104
It's hard for me to believe that if you  23 104
eliminate it, if you were to ban prepayment penalties,  24 104
whether by product or subprime and so forth, that  25 104
there would not be some implications for pricing.  1 105
So the question, kind of following up Susan  2 105
on your comment, as well as others is, you know, it's  3 105
hard to predict such things.  But I would think there  4 105
would be some fallout in terms of either higher rates  5 105
or different terms or something.  Can you comment on  6 105
that, if there were a ban on prepayment penalties?   7 105
Faith? 8 105
MS. SCHWARTZ:  Well, it's a great question.  9 105
 I'm not sure how accurate or relevant this would be.  10 105
 Three years ago or so, we with some other folks  11 105
commissioned a study on that, some Wall Street entity,  12 105
Pentalpha Global Capital in fact circulated that study  13 105
to several people, some on this panel.   14 105
Since it's dated, it's hard to know.  But  15 105
the thought was well just eliminate all the prepay  16 105
penalties.  What would it do to the market, with no  17 105
change in the borrower's credit, no change in the  18 105
characteristics of the loan other than removing the  19 105
prepayment penalty? 20 105
At that time, it was suggested the whole  21 105
non-prime sector could rise 100 to 120 basis points,  22 105
with no other change.  I suspect, you know, that can  23 105
be poked at now, because I just don't know how  24 105
accurate it is today.  25 105
But that was -- when the discussion kept  1 106
going on, we were looking for information on well,  2 106
could we just eliminate them?  What would it really  3 106
matter?  Would investors still stay, and the guilt  4 106
they would require would be much higher. 5 106
The economists know better than I do, but as  6 106
you rise in your rates for your required yield, you  7 106
also worry about loans prepaying rapidly.  It's very  8 106
asymmetrical, that whole argument.  But we do have a  9 106
dated paper that maybe someone could improve upon and  10 106
create a new paper, just to see is there a market in  11 106
fact. 12 106
Then maybe it would settle down and maybe  13 106
the market would rationalize to get in a different  14 106
spot, and maybe that's a good thing too.  But I think  15 106
that's information we should all have on this issue. 16 106
MR. EAKES:  There are a number of states  17 106
that have prohibited prepayment penalties for  18 106
subprime.  In North Carolina, the General Assembly  19 106
assumed that getting rid of single premium credit  20 106
insurance and prepayment penalties would have a higher  21 106
interest rate of between a half and one percent. 22 106
As it turned out, it didn't occur.  We  23 106
weren't sure, and what we think that meant was that  24 106
there was overage pricing.  So once you took the  25 106
prepayment penalties out, we actually did not get the  1 107
increase in interest rates in that sector that we  2 107
expected, which meant that there was some market  3 107
imperfection.   4 107
But you would expect, if there's a half a  5 107
percent reduction in rates, that it might go up as  6 107
much as a half percent. 7 107
MR. CHANIN:  Were those -- let me ask you.   8 107
Before kind of the discounted, if you will, subprime  9 107
loans like 228s and 327s, because obviously if it's an  10 107
forming index or a fixed rate subprime loan, then the  11 107
pricing is set there.  But for the 228s, it's  12 107
discounted for the risk of the borrower. 13 107
So at least some have argued the prepayment  14 107
penalty compensates for that risk.  So did the North  15 107
Carolina law look at or study, look at those types of  16 107
products? 17 107
MR. EAKES:  I think the thing is that your  18 107
point is a really good one.  We had this negotiation.  19 107
 I think Faith was part of that four or five years ago  20 107
with Lehman Brothers. 21 107
MS. SCHWARTZ:  Five years ago. 22 107
MR. EAKES:  How long ago?  I thought it was  23 107
longer? 24 107
MS. SCHWARTZ:  Longer. 25 107
MR. EAKES:  It was really interesting what  1 108
came out in this really open discussion, that the  2 108
investor, people representing the investor markets  3 108
said we get, despite the rhetoric, 80 percent of the  4 108
value of the prepayment penalty is not the change in  5 108
behavior, it's not the slowdown in the prepayment  6 108
rate.   7 108
Eighty percent is the cash flow of the  8 108
penalty, which they know they will receive, because 70  9 108
to 80 percent of the loans refinance during the prepay  10 108
period.  So they know that. 11 108
It really is not so much the change.  The  12 108
change in prepayment speed back then, when we were  13 108
looking at it, was the difference between 20 percent  14 108
CPR and 17 percent, which is a difference.  But it  15 108
wasn't a really, truly dramatic difference in speed. 16 108
That meant 20 percent would prepay each year  17 108
if they didn't have a prepayment penalty, and only 17  18 108
percent would prepay each year if they did. 19 108
So I think that if the market is efficient  20 108
now, if you take one of the measures of cash flow  21 108
away, which prepayment penalties collected routinely  22 108
will be, there has to be some increase in rate, or  23 108
else the market is not efficiently pricing them. 24 108
MS. SCHWARTZ:  You know, I think the  25 108
question here is about transparency of pricing.  How  1 109
many people here have a prepayment penalty on their  2 109
loans?   3 109
MR. EAKES:  How many people know? 4 109
(Laughter; simultaneous discussion.) 5 109
MS. COHEN:  Great.  So we've got one.  So in  6 109
the subprime market, it's 70 percent.  This is exactly  7 109
like credit card pricing.  If you want to know what I  8 109
think about your credit card proposal, we can talk   9 109
about that later. 10 109
(Laughter.) 11 109
MS. BRAUNSTEIN:  A different forum. 12 109
MS. COHEN:  In the credit card market, some  13 109
people know what they're going to pay, because they  14 109
don't really pay late.  Then a bunch of people pay all  15 109
these fees at the back end.   16 109
Similarly, what we're seeing in the subprime  17 109
market is some portion of what people are paying they  18 109
don't know about up front, because they don't really  19 109
either (a) know about the prepayment penalty, (b)  20 109
understand the prepayment penalty, or (c) appreciate  21 109
how likely it is that they're going to be flipped,  22 109
because generally it's not their idea to do so. 23 109
So to the extent that you're seeing most of  24 109
it being about cash flow, don't people have the right  25 109
to know what their loan's going to cost, and don't  1 110
they have the right to have their loan underwritten  2 110
for that in some appropriate way? 3 110
GOVERNOR KROSZNER:  Well, this raises the  4 110
important point of disclosure, and obviously, as I've  5 110
mentioned in my introductory remarks and as you well  6 110
know, we're reviewing our disclosure proposals. 7 110
Is this something -- could we at least  8 110
partially address it, perhaps not completely address  9 110
it, but at least partially address it through improved  10 110
disclosure? 11 110
MS. COHEN:  My view is any abuse needs to be  12 110
addressed by a substantive regulation.  If you want to  13 110
supplement it by disclosure, we have plenty of ideas  14 110
about how disclosures could be improved.  Most of them  15 110
don't ever end up getting adopted.  But we're happy to  16 110
provide them again. 17 110
(Laughter.) 18 110
MS. COHEN:  The bottom line here is what  19 110
people receive, not whether they understand it not. 20 110
GOVERNOR KROSZNER:  Well, no.  I do think  21 110
it's very important that they understand what they're  22 110
going to pay.  So that they're not independent of each  23 110
other.  It is important what they ultimately do pay.   24 110
But one of the hopes is that we can at least  25 110
improve for more people, certainly not for everyone,  1 111
their ability to understand the type of contracts that  2 111
they're getting into.   3 111
MR. SANCHEZ:  We'd probably agree that that  4 111
is right.  A lot of the problems that we care about in  5 111
the marketplace are people saying oh, my God.  I  6 111
didn't understand that I had this right. 7 111
So I think the issue of disclosure, and  8 111
having it up front.  For example, we make it a part of  9 111
our up front RESPA package, and it is out there in  10 111
front for the customer to be able to see and  11 111
understand it.   12 111
As we drive that more to their decision  13 111
point, and have a standard by which we all who have to  14 111
play, I think it's very, very important.  The idea  15 111
that the theory of a prepayment penalty should have a  16 111
lower cost of entry for the consumer, I think, is  17 111
right if we make it real. 18 111
We haven't done a good job of that in the  19 111
industry, because we've extended these prepayment  20 111
penalties beyond resets, where we know people are  21 111
going to change.   22 111
I think we have to adopt something that says  23 111
we are not going to go past that first adjustment  24 111
period, and secondly, to the point of the folks before  25 111
me, we have to give the consumer a reasonable period  1 112
of time before that adjustment sets, so that they  2 112
don't have a prepayment penalty and they aren't forced  3 112
to either come back to us, right, and have the ability  4 112
to be in the open market and have the ability to be a  5 112
consumer, right. 6 112
So I think the prepayment penalty exists for  7 112
a reason.  I think we all have an expectation that it  8 112
should be of mutual benefit, right, both to the  9 112
consumer and to us, so that we can generate a  10 112
reasonable profit and provide liquidity in the market  11 112
and opportunity for folks. 12 112
MS. BOWDLER:  And you're -- just thinking --  13 112
oh, sorry.  Do you want me to --  14 112
GOVERNOR KROSZNER:  No, Alys can respond. 15 112
MS. BOWDLER:  Go ahead. 16 112
MS. COHEN:  I agree that disclosure and  17 112
choice are good where they're available.  In the late  18 112
90's, when the first predatory lending hearing was  19 112
held on the Senate Special Committee on Aging, John  20 112
Breaux, Senator from Louisiana, announced that he  21 112
didn't read the closing papers on his mortgage. 22 112
Now maybe he had the privilege of not  23 112
needing to understand or read the closing papers on  24 112
his mortgage.  But the people who we see, whether or  25 112
not they'd like to understand their mortgage, a  1 113
disclosure is not going to solve their problem.   2 113
So we're all in favor of better disclosure,  3 113
but the question is whether that's the full answer to  4 113
the problem.  I took a cab here this morning from  5 113
Union Station.  My cab driver is a civil engineer from  6 113
Ethiopia.  He's been here for ten years and is a  7 113
citizen.  He's got a bunch of kids, he owns his home.  8 113
  9 113
I said "Oh, I'm going to the Fed.  I'm  10 113
involved in a meeting.  We've got these rules."  He  11 113
said "Oh, is it about mortgages?"  I said "Yes, it's  12 113
about mortgages."   13 113
He said well, the real problem is, and this  14 113
is the point I'd like to make, he said "People see an  15 113
advertisement like in a newspaper, and they come and  16 113
they find out that rules are different.  But by the  17 113
time they figure out that the rules are different, and  18 113
that's the part, because disclosures up front are not  19 113
enforceable, by the time they find that out, they  20 113
don't feel like they can leave.  They feel desperate,  21 113
and they sign the papers anyway. 22 113
Now if he understands that, why can't we all  23 113
implement a rule that appreciates some of this, or you  24 113
guys implement the rule.   25 113
GOVERNOR KROSZNER:  Janis. 1 114
MS. BOWDLER:  Well, Alys stole a little bit  2 114
of my thunder.  3 114
MR. CHANIN:  You were in the same taxi? 4 114
(Laughter.) 5 114
GOVERNOR KROSZNER:  Well done. 6 114
MS. BOWDLER:  What I was going to say is,  7 114
you know, in the hearing that we had last summer, the  8 114
panel I was on was looking at consumer choice, and how  9 114
do consumers make decisions about the products that  10 114
they get.  11 114
We know that consumers don't have the tools  12 114
that they need to shop effectively, and we know that  13 114
they go to mortgage brokers because they assume that  14 114
the broker shops for them. 15 114
So when we talk about whether or not  16 114
consumers are actually making the choice to get that  17 114
prepayment penalty, it's very unlikely.  They come in,  18 114
as we've already talked about.  They get quoted a  19 114
monthly payment, and that's where all decisions are  20 114
really made. 21 114
So just to answer your question,  22 114
specifically about looking at the idea of what would a  23 114
disclosure look like for the prepayment penalty, I  24 114
think we also need to think about it in the context of  25 114
what exactly is it, and how exactly are you disclosing  1 115
it? 2 115
Because are we disclosing it as a fee, which  3 115
is how it's operated functionally acting in the  4 115
market, or as a potential tool to discount the cost of  5 115
your mortgage.  To me, you can only disclose it as a  6 115
potential discount to your mortgage if it's actually  7 115
doing that, and we've heard already all of the  8 115
problems of why we think that that's not happening in  9 115
the marketplace. 10 115
So in thinking what a disclosure would look  11 115
like, we'd have to think about is it a fee, or is it a  12 115
discount, and how we talk about that?  Then of course,  13 115
can we get it to them in time, where they can actually  14 115
act on the information that they're receiving. 15 115
MR. CHANIN:  Martin, I think to follow up on  16 115
one comment that I think you made, and that is I  17 115
believe you said that, for example, providing a time  18 115
frame before the reset date would not be a  19 115
satisfactory answer to this. 20 115
That is, allowing the consumer to prepay  21 115
without a penalty for some time framer before that.   22 115
If you said that, why is that the case? 23 115
MR. EAKES:  Let me hedge my bets a little  24 115
bit.  If you're going to have a limit but not prohibit  25 115
prepayment penalties, it needs to be at least six  1 116
months before the reset period.  Because the mortgage  2 116
processing takes time, particularly if you have credit  3 116
blemishes you have to fix. 4 116
If you say within 30 days, it's just a joke,  5 116
because you then get to the closing table.  You are  6 116
forced to close even if you have a disastrous loan put  7 116
in front of you.  So when I was saying that it's  8 116
particularly cynical to say that we would have a  9 116
regulation that said the prepayment penalty can't go  10 116
longer than the reset period, I just believe that has  11 116
no impact. 12 116
What I believe is that the prepayment  13 116
penalty, we have a market where we see what consumer  14 116
choice is in the prime market, and roughly four  15 116
percent choose prepayment penalties.  We shouldn't  16 116
judge our policy on what I call the fertile  17 116
octogenarian; you know, the one case where it might  18 116
happen.  It might be true, and then let that drive our  19 116
policy. 20 116
Well, that's what we're doing when we talk  21 116
about prepayment penalties.  There may be a couple of  22 116
people who really would get a benefit.  But for most  23 116
people, the asymmetry of information is dramatic.   24 116
Nothing else I say is going to be heard, right?  You  25 116
have the image of the -- 1 117
GOVERNOR KROSZNER:  We're trying to keep  2 117
that out of our head.  But go ahead. 3 117
(Laughter.) 4 117
MR. CHANIN:  I guess part of it though, is  5 117
the pricing appropriate?  That is, is the market  6 117
functioning properly?  That's one issue.   7 117
The second issue though, and to the extent  8 117
you can divorce them, is if there's a problem with the  9 117
way the market is functioning in terms of prepayment  10 117
penalties, and thus consumers, in a sense, have to pay  11 117
the penalty or have to roll it over with the lender or  12 117
have to pay the reset rate, can you address that by  13 117
having a window of time, whatever is appropriate,  14 117
before the reset date, permitting the consumer to  15 117
refinance without that? 16 117
MR. EAKES:  You see, what I'm telling you is  17 117
this problem is -- this one is not tagged to reset  18 117
only.  If you had every subprime loan in America with  19 117
a fixed rate, there were no reset whatsoever; we had  20 117
even done escrows and they weren't triggers for  21 117
refinancing, these are very short term loans, where  22 117
the borrower assumes they're going to be able to be in  23 117
the loan for longer than they do.   24 117
That's why I say it's asymmetric  25 117
information.  No one would choose a prepayment penalty  1 118
unless they thought they would be in the loan to  2 118
recover, and in many cases it's going to leave a half  3 118
year of interest times 80 percent. 4 118
Well, that's true, because the higher your  5 118
interest rate is, the worse your loan, the more locked  6 118
into it you are at that point.  So that's the standard  7 118
prepayment penalty today, is the higher your interest  8 118
rate, the more you need to be able to refinance, the  9 118
more pernicious it is for you to try to do that. 10 118
MR. RHEINGOLD:  Let me take a crack at this  11 118
as well, because I'm thinking about the role of abuse  12 118
prior to the adjustable rate mortgages, and why they  13 118
were bad even then. 14 118
But the fact is is that I don't believe that  15 118
prepayment penalties exist because there's an  16 118
assumption of the subprime market that consumers are  17 118
rationally going to choose to get out of that for that  18 118
matter, and go ahead and get a new loan. 19 118
In fact, I sort of view it as mortgage  20 118
lenders protecting themselves from each other, because  21 118
they know there's this voracious appetite to flip  22 118
people and continue to refinance them and equity  23 118
strip.  The prepayment penalty existed because they  24 118
knew it was going to happen, because as soon as the  25 118
loan closed, three months later, six months later,  1 119
they were going to be approached by a new lender to  2 119
say "We can do this for you and we can do this for  3 119
you." 4 119
That prepayment penalty wasn't because a  5 119
consumer was rationally going to -- because there was  6 119
a concern that a consumer was rationally going to get  7 119
out of that loan.  It was because they knew the rest  8 119
of the industry was going to devour that consumer.  So  9 119
that's why prepayment penalties.  Even if you create  10 119
that short a reset date, it's not going to solve the  11 119
entire problem. 12 119
GOVERNOR KROSZNER:  Any response on that?   13 119
Yes.  14 119
MR. DINHAM:  Not on that particular issue,  15 119
but I did want to respond to something that Alys said.  16 119
 One of the biggest problems that I've seen in the  17 119
marketplace for years has been the good faith  18 119
estimate, and the HUD-1 are not required to be  19 119
anywhere close to the same. 20 119
We need to do something to put variances on  21 119
the good faith estimates, so the consumer will know at  22 119
that time.  In other words, if it increases any more,  23 119
that they are required to disclose it at some time  24 119
prior to the actual closing. 25 119
It's been a hole in our system for as long  1 120
as I've been doing this.  I started before they had  2 120
Truth in Lending and RESPA too.  So I've seen it all  3 120
come about, and one of the most confusing things is  4 120
about one of your forms too, is that you continue to  5 120
put the APR but not the number right on there.  The  6 120
consumer really gets upset about that. 7 120
But I would really like to see us do  8 120
something that gives the consumer more assurance at  9 120
the time of application, that these are actually  10 120
figures that you're going to see, or he's going to be  11 120
resolicited.  So I think that that's another issue as  12 120
the slope is concerned. 13 120
GOVERNOR KROSZNER:  Any last words?  I'm  14 120
coming to -- we've spent like a half an hour on this,  15 120
so I want to bring this section to a close.  Anything  16 120
more on this issue? 17 120
MS. COHEN:  Can I just say one quick thing  18 120
in response to what Harry said?  I think it was said  19 120
before, and I just want to point out that most of the  20 120
clients are not required to do so in any way that  21 120
would have a penalty associated with it.   22 120
So I think those two things would go hand in  23 120
hand.  That may not be about the people here, but just  24 120
to get it on the record. 25 120
GOVERNOR KROSZNER:  Any further thoughts?   1 121
Yes. 2 121
MS. DAVIS:  I have thought about what's the  3 121
right approach, and I am concerned that I believe in  4 121
choice for customers.  I believe in information so  5 121
that they can make good decisions.  Again, their  6 121
success correlates back to our success.   7 121
Markets are very, very efficient.  I worry  8 121
about trying to take actions or create a change  9 121
without understanding all of those dynamics, or doing  10 121
so because you're trying to solve the bad actors or  11 121
the unregulated.  I just have a concern there. 12 121
MR. EAKES:  The last point I wanted to make  13 121
on it is to say that you should think of a prepayment  14 121
penalty loan similar to a neg am loan, that you are  15 121
going to be paying three or four percent of the  16 121
payments for the period you hold the loan out of the  17 121
equity in the home, just as if you said at the  18 121
beginning of the loan, to make it more affordable,  19 121
we're going to lower your payment and add to the  20 121
balance of your loan. 21 121
So that any protections that are  22 121
appropriate, and I'm not saying that neg am loans are  23 121
inappropriate and offsetting, but I think in subprime,  24 121
with borrowers who are vulnerable, there are cautions  25 121
that would lead me to say it's okay to do away with  1 122
prepayment penalties, as eight or ten or more states  2 122
have done across the country. 3 122
MS. DAVIS:  Again, I just want to be very  4 122
cautious.  We've already said we do not do negative am  5 122
loans. 6 122
MR. EAKES:  But you do prepayment penalties  7 122
-- 8 122
MS. DAVIS:  And we do.  We do offer  9 122
consumers prepayment penalties with what I believe is  10 122
good information, choice and abatement.  And again, we  11 122
have limits on the period for the prepayment penalty.  12 122
 So I don't correlate those two together in the way  13 122
that you have.   14 122
GOVERNOR KROSZNER:  This has been a  15 122
fascinating discussion of these issues.  I'm thinking  16 122
about exactly are there benefits or are the benefits  17 122
so strong that the cost of eliminating the practice  18 122
outweigh any potential unintended consequences. 19 122
But I think we've had a good discussion back  20 122
and forth there.  Also, I think a good discussion of  21 122
the role of disclosure, whether it can or cannot be  22 122
effective in this particular area.  So I'm very  23 122
pleased that we had that. 24 122
But now, if it's okay, I'd like to move on  25 122
to the next topic, which is something I'm sure will  1 123
generate no controversy at all, stated income or low  2 123
and no documentation loans.  My hunch is people will  3 123
have some different perspectives on this, and this  4 123
obviously is another thing that's of great interest to  5 123
us here at the Fed. 6 123
So thinking about guidance, any kind of  7 123
rules.  Who would like to start talking about that  8 123
issue? 9 123
MR. CHANIN:  Oh, we're on the next topic? 10 123
(Laughter.) 11 123
GOVERNOR KROSZNER:  I think we'll start it  12 123
to the left.  So why don't we do that?  Remember, the  13 123
Fed is right in the middle. 14 123
(Laughter.) 15 123
MS. BRAUNSTEIN:  No, I would like to -- I  16 123
could start this by just posing a question actually to  17 123
the right, to the industry, which is, you know, one of  18 123
the things we hear often is that we should ban stated  19 123
income loans, and that there's no good reason in 2007,  20 123
with technology and information available at people's  21 123
fingertips, that somebody can't produce something that  22 123
shows what their income is for a loan. 23 123
So I'd like to know from your perspective  24 123
what the implications are of no stated income loans,  25 123
and where these actually are done responsibly, and  1 124
where they are necessary and helpful to people. 2 124
MR. SANCHEZ:  Okay, I'll start.  I think it  3 124
would impact all of us, to do away with them.  While  4 124
this is a very complex part, even more complex is the  5 124
number of ways people earn income, and are able to  6 124
disclose income. 7 124
So I think we start with the panel on the  8 124
left and we're talking about the Latino community, and  9 124
the different ways in which they earn income, in cash  10 124
and those type of things. 11 124
I think what we've got to do as a  12 124
responsible lender is to make sure that there's some  13 124
reasonableness to what folks are stating, and that we  14 124
have tried to get to a level of documentation that is  15 124
right.  It's very easy to do that when we've got a  16 124
wage earner in a very traditional job, to get the  17 124
paycheck that we need for documentation. 18 124
So that's easy for us to do.  When that same  19 124
person also has a job on the side to support them  20 124
along with other family income, it's very difficult to  21 124
do.  So I think it's prudent for us to establish a  22 124
reasonableness standard for stated income, right? 23 124
We shouldn't see a dishwasher come in with  24 124
an application that says they make $200,000 a year.   25 124
That's not reasonable.  Those are some of the things  1 125
that we've seen happen in the industry, and that is  2 125
wrong, and we have got to correct that. 3 125
So I think applying a reasonableness  4 125
standard, but understanding there are lots of  5 125
challenges out there, even in the world of technology  6 125
today, of people being able to truly document their  7 125
income, that they've shown us that they've got the  8 125
ability and willingness to pay.  I think that's where  9 125
we should be. 10 125
MS. BRAUNSTEIN:  Pablo, just following up on  11 125
that, is there -- do you have any ideas on more  12 125
specificity, actually, of what you mean by a  13 125
reasonableness standard?  How would you define that?   14 125
I mean that's kind of a broad term. 15 125
MR. SANCHEZ:  It is, and it's used in a law  16 125
every single day, that kind of reasonable person test.  17 125
 That's why we have underwriters, and that's why we  18 125
train the folks to look at these situations.  We do  19 125
use technology and we go to the Internet, and there  20 125
are sites out there that say this is an average range  21 125
of what this person is likely to make.  We use some of  22 125
those tools today to figure that out. 23 125
But it is subjective, and we very much rely  24 125
on somebody's credit and their history.  The best  25 125

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