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
predictor if someone's going to pay is if they've paid  1 126
before, right.  We have to take all of that into  2 126
account. 3 126
MS. BRAUNSTEIN:  Anybody else down there  4 126
want to comment? 5 126
MS. DAVIS:  I'll add a few comments here.  I  6 126
believe that, you know, if you're going to restrict or  7 126
make any restriction on the stated or low income  8 126
loans, and I think I said this in my opening, was it  9 126
has to be tied to a bright line test that can be  10 126
consistently documented everywhere. 11 126
I mean we have done that at Wells Fargo.   12 126
Anything below a 620 FICO is not a stated income loan.  13 126
 I believe there is.  I believe stated income loans  14 126
have merit.  I personally have a stated income loan.   15 126
I do make money, and I do make my mortgage payments,  16 126
right? 17 126
So I do it, did it, but for ease and  18 126
convenience, it creates efficiency.  Whoever  19 126
underwrote my loan, I'm sure understood what my job  20 126
is, that hopefully that there's a reasonableness test  21 126
to that income.  So I think -- 22 126
MS. BRAUNSTEIN:  But can I add, not to get  23 126
personal, but  since you brought it up, is yours a  24 126
subprime loan? 25 126
MS. DAVIS:  No, it's not. 1 127
MS. BRAUNSTEIN:  Okay. 2 127
MS. DAVIS:  No, this one is not.  Not right  3 127
now. 4 127
(Laughter.) 5 127
MS. BRAUNSTEIN:  Not yet anyway. 6 127
MS. DAVIS:  Which is why for us we put in  7 127
that bright line test at FICOs less than 620.   8 127
MR. CHANIN:  Let me follow up on that.  One  9 127
of the things people have asserted, and it's been  10 127
pretty kind of strident statement, is that certainly  11 127
there may be individuals who, because of the way  12 127
they're paid, may not literally receive a paycheck.   13 127
So they may not be able to verify it that way. 14 127
But the assertion, at least that I've heard,  15 127
is that "But people file their taxes," and let's  16 127
assume it's someone who has been employed, if you  17 127
will, at the same occupation or type of job for two or  18 127
three years. 19 127
So the assertion is why not, if you don't  20 127
have a statement from an employer or employers, why  21 127
not simply require or use a tax form?  So I mean we  22 127
need a response to that or arguments, you know, why  23 127
that is inappropriate.  There may be privacy issues,  24 127
but people think we ought to use the tax form. 25 127
MS. SCHWARTZ:  Well, a couple of things.  I  1 128
mean tax forms are used all the time, in both signed  2 128
and unsigned loans.  It may be that ancillary income  3 128
that Pablo has talked about or other forms of income  4 128
or, you know, just cash that's not been reported.   5 128
It's certainly part of that. 6 128
I'd like to step back and just say, you  7 128
know, stated income loans have been a conundrum across  8 128
the market for years.  People have always been a  9 128
little bit uneasy about them in prime, in Alt-As, and  10 128
subprime.   11 128
Yet they seem to be pervasive and in the  12 128
last maybe four years, much more so across the market,  13 128
and that's true.  So what's interesting about that is  14 128
they perform quite well.  They do perform.  There's  15 128
performance.  There are other issues in ways people  16 128
underwrite. 17 128
Someone may have a lot of reserves.  Someone  18 128
might have a very good FICO score and I would argue,  19 128
having all FICOs, it's an interesting idea.  But there  20 128
are certainly high FICOs in subprime and not because  21 128
they were downstreamed in the market, because the  22 128
product they got was not available in the prime  23 128
market.  That's a big part of the subprime market.   24 128
It's a big part of the Alt-A market. 25 128
Likewise, a lot of great loans that are  1 129
subprime "cutoff" loans are made in the prime market.  2 129
 Fannie and Freddie do a wonderful job of reaching  3 129
down where they can, and measuring and layering risk. 4 129
So I think this is carefully-worded, through  5 129
the Fed.  I think you've got to look at  risk  6 129
layering.  Excessive risk layering is a problem.  So  7 129
there are ways to get at it, and just say if you don't  8 129
have excessive risk layering, and I guess I heard say  9 129
someone did it by, you know, a FICO cutoff. 10 129
That is a good cutoff.  I'm just suggesting  11 129
that a risk-basis, versus the market segmentation.  I  12 129
always work when they segment markets for one thing.   13 129
Then I think if you've had a current pay history on a  14 129
loan, a loan that's in your servicing portfolio, maybe  15 129
they don't want to document everything, to refinance  16 129
to a better loan. 17 129
I'm not sure a good pay history and a  18 129
mortgage wouldn't be something that someone could just  19 129
say just don't even require the income and, you know,  20 129
make another loan.  I mean there are instances where  21 129
it certainly can be given.  Again, in our firm, that  22 129
reasonableness test, some of the other things are  23 129
performance tests, and it's really quite similar to  24 129
that of the full doc loans. 25 129
So that's what's made it difficult to just  1 130
say well, just get rid of them in the market, because  2 130
the performance over many years for that alone has  3 130
really been better than expected, I think. 4 130
MS. BRAUNSTEIN:  I hear what you're saying  5 130
about performance, but would a ban on stated income,  6 130
are there people, certain profiles of people that just  7 130
wouldn't be able to get mortgage loans? 8 130
MS. SCHWARTZ:  Oh, I have to think so, I  9 130
mean just because it's so prevalent in the broad  10 130
mortgage market.  I don't know the answer of how you  11 130
would measure it.   12 130
(Simultaneous discussion.) 13 130
MS. BRAUNSTEIN:  Yes.  But I just wonder is  14 130
the prevalence because it's there, it's available,  15 130
it's easy, or is it because somebody really just  16 130
couldn't, if they were asked to produce the  17 130
documentation necessary to get a loan?  And that may  18 130
be a rhetorical question. 19 130
MS. SCHWARTZ:  Yes.  I don't know the answer  20 130
to that. 21 130
GOVERNOR KROSZNER:  Janis had mentioned this  22 130
in her opening  remarks, and I want to get back to  23 130
this issue, because she said there were many people in  24 130
the Latin American community in the U.S. who may not  25 130
have an easy way to document the income that or their  1 131
family are making.  2 131
MS. BOWDLER:  We start with the NCLR home  3 131
ownership network, which you guys haven't kind of  4 131
talked about again.  You might be sort of the last  5 131
people on the earth not to have heard about it. 6 131
But last year we closed almost 3,000  7 131
mortgages through our network, 45 community-based  8 131
organizations working in 21 states.  They are working  9 131
with the population that is going to have the hardest  10 131
time documenting their income.   11 131
Ninety percent of our families are below 80  12 131
percent of the area median income, and a significant   13 131
portion are even below 50 percent of area median  14 131
income, and they all get prime or FHA products.  Some  15 131
are portfolio products, some are social programs that  16 131
they've negotiated on the ground.  But they're getting  17 131
prime products. 18 131
So we really feel like when it comes to  19 131
serving the low income, the immigrant community that's  20 131
going to have the toughest time in this area, we know  21 131
how to document those loans, how to underwrite them,  22 131
how to get them into homes responsibly. 23 131
That said, we know that in a lot of areas in  24 131
the Filipino community, there are challenges  25 131
documenting true traditional means.  That doesn't mean  1 132
they can't document it by any means, but if we're just  2 132
talking pay stubs and W-2s, there may be some  3 132
challenges. 4 132
So my recommendation was get the most  5 132
appropriate documentation available.  Certainly, you  6 132
know, there's probably a hierarchy there.  I think  7 132
it's hard to say that the market hasn't overreached  8 132
here.  I mean, Martin, how many -- what percent did  9 132
you say? 10 132
MR. EAKES:  Bear Stearns says that 60  11 132
percent of loans, subprime loans made in 2006 were  12 132
stated income, and other analysts have said as much as  13 132
45 to 50 percent. 14 132
MS. BOWDLER:  Okay.  It's hard to believe  15 132
that that percentage of the market doesn't have W-2s  16 132
or -- 17 132
MR. RHEINGOLD:  Or proof of social security. 18 132
MS. BOWDLER:  Yes, you know, all of these  19 132
different  things that you would need to document the  20 132
loans.  I think there's no question that the market  21 132
has overreached here, and then, excuse me.  The other  22 132
thing is that we know that there's also product out  23 132
there that accommodate for the moonlighters, as you   24 132
like to call them. 25 132
There are plenty of prime products out there  1 133
that allow for a certain percentage of your income to  2 133
be cash income, up to a certain dollar amount.   3 133
So I've often seen like 20 percent could be  4 133
cash income up to $1,200 a month or something like  5 133
that, you know.  There's plenty of products out there  6 133
that allow you to account for all the numbers.  7 133
So if you babysit on the side, you do  8 133
construction on the side, you can account for that  9 133
income.  So what I hear the industry saying and what I  10 133
hear a lot from folks working on the ground is that  11 133
stated income is just a lot easier to put through the  12 133
system. 13 133
But it's also more expensive for the  14 133
consumer.  So we've seen this as a real pressure  15 133
point, where our families have gotten taken advantage  16 133
of when they can document their income, have no idea  17 133
what the difference is between a documented loan and a  18 133
stated income loan, and now they're upsold for a more  19 133
expensive loan because it's easier to produce. 20 133
So from our perspective, what we want to  21 133
avoid is just because you have multiple wage earners  22 133
and some cash income doesn't mean that you can't  23 133
document your income, and you're just automatically  24 133
thrown into these loans because they're easier and  25 133
more profitable. 1 134
I think it's really a sign of the failure of  2 134
mortgage lenders to be able to legitimately serve the  3 134
low and moderate income community. 4 134
GOVERNOR KROSZNER:  What sort of  5 134
documentation would be used in the non-traditional  6 134
documentation for people who don't have the pay stubs  7 134
or W-2 forms? 8 134
MS. BOWDLER:  Sure.  We've seen, in some  9 134
cases, letters from employers saying that they receive  10 134
cash income.  You can use bank statements.  You can  11 134
use regular check cashing receipts.  You can use a  12 134
check cashing, which we know they use.  Certainly our  13 134
community uses them.   14 134
So it can be groups that you regularly cash  15 134
a certain amount of -- maybe you cash the check, but  16 134
you don't use a bank or you may not have a full record  17 134
of that.  There can be other ways as well.  But what  18 134
we encourage through the network is that families open  19 134
accounts, and that they routinely deposit their cash. 20 134
So that's how we do it, and that's how we  21 134
try to encourage it.  Certainly, our population is one  22 134
that may carry a lot of cash, and that can be  23 134
dangerous.  So underbanks and other bank populations  24 134
as a whole is informed, but that's something that we  25 134
encourage. 1 135
GOVERNOR KROSZNER:  But of course, that is  2 135
one of the challenges of being able to try to provide  3 135
credit products to people who, for one reason or  4 135
other, they don't feel comfortable with them being  5 135
part of the banking system.   6 135
I think for people who are part of the  7 135
banking system, it's much easier to do the kind of  8 135
documentation that they've been talking about.  But  I  9 135
-- you know, that's why I wanted to explore how can   10 135
we make sure not to cut off credit to people who've  11 135
been responsibly borrowing in this area, but they may  12 135
have, you know, particular challenges in being able to  13 135
provide appropriate information. 14 135
MS. BOWDLER:  I certainly agree with you,  15 135
and I think in rural communities, in the colonials, in  16 135
areas where the banking system is not as developed and  17 135
not as usually acceptable, it's certainly an issue as  18 135
well. 19 135
But people's incomes come from somewhere,  20 135
and I think that we can be creative and really think  21 135
through how we can measure that.  Perhaps we need more  22 135
dialogue there, and that I would certainly be happy to  23 135
participate in that and give you more of my comments. 24 135
But I do think that it is a very sensitive,  25 135
and as I said in my comments, sensitive issue for our  1 136
community, and it's a careful balance, but one that we  2 136
are willing to come to the table and talk about. 3 136
MS. BRAUNSTEIN:  I have a question.  Again,  4 136
the fly in the ointment question is if you're told up  5 136
front you're getting a stated income loan and you  6 136
don't have the documentation, how is that unfair and  7 136
deceptive?  Anybody who wants to answer that. 8 136
MS. BOWDLER:  Well, I think what probably  9 136
happens.  I mean I have the ads here.  It says right  10 136
in there, don't have to document your income, don't  11 136
have to document your credit history.  12 136
I think what's deceptive about it is that  13 136
they don't know they potentially have another option  14 136
available for them.  But certainly, you know, the fact  15 136
that they don't have another option available to them  16 136
is one thing.  17 136
(Simultaneous discussion.) 18 136
MS. BRAUNSTEIN:  Either unfair or deceptive.  19 136
 How would that meet that standard? 20 136
MR. RHEINGOLD:  I'll pick up a little bit of  21 136
what Janis is saying, is in fact what we're talking  22 136
about, is that people, this isn't a question of  23 136
choice.  I don't think consumers have actually -- I  24 136
mean the numbers are -- I mean it's a rhetorical  25 136
question and at some point I'd love to have the  1 137
answer, is what is the rational explanation that 50  2 137
and 60 percent of subprime homeowners in the last two  3 137
years have decided that stated income was better for  4 137
them. 5 137
So I think if you sort of base this  6 137
assumption that's what's happened is that consumers  7 137
suddenly have this great choice, you can have a stated  8 137
income loan or you can have an income.  You don't have  9 137
to document by documentation. 10 137
They're all choosing stated income loans.   11 137
Well, that's not what's happening.  The fact is that  12 137
if people are given rational choice and said "Hey, you  13 137
give us your W-2, or you don't give us your W-2 and  14 137
the cost of your loan is going to be more expensive if  15 137
you don't give us that documentation."  16 137
They're going to choose.  "Oh no, well I'm  17 137
not going to bother handing you my biweekly W-2 form,  18 137
because I want to pay more for my mortgage."  I mean  19 137
that's not what's happening in the marketplace. 20 137
MS. BOWDLER:  And that -- I'm sorry. 21 137
MR. RHEINGOLD:  No, go ahead. 22 137
(Simultaneous discussion.) 23 137
MS. BOWDLER:  What I was going to say is  24 137
that I think what is actually put to families is look,  25 137
you want that house?  You've already seen my friend,  1 138
the realtor.  It's going for sale, and if we don't get  2 138
you in there quick -- 3 138
MS. BRAUNSTEIN:  It's going to be gone. 4 138
MS. BOWDLER:  Yes.  So I can get you a loan  5 138
in a couple of weeks, or you can wait, you know, 45  6 138
days.  That is not the real choice that we would want  7 138
families to have available for them to be making. 8 138
Again, I would go back to, in an age of  9 138
information technology and the ability to improve our  10 138
automated underwriting systems, we should be able to  11 138
serve low and moderate income and immigrant  12 138
communities with the same efficiency that we serve  13 138
other communities. 14 138
So I would put -- we have been putting a lot  15 138
of pressure on our friends at the other end of the  16 138
table, to speed out those processes, so that families  17 138
do have a real choice, because I think that's the  18 138
question that's being posed to them, one of ease and  19 138
efficiency and quickness, not one of documentation. 20 138
GOVERNOR KROSZNER:  Although I would -- go  21 138
ahead. 22 138
MS. SCHWARTZ:  Too much time down at that  23 138
end.  No, not really.  I think the points have been  24 138
great, and I think, and I would just like to say, and  25 138
the market has been overexuberant, and we all know it,  1 139
the last couple of years, the last couple of years. 2 139
But what I would suggest is it's not  3 139
perfect.  But when you are buying loans or working  4 139
with brokers, when you're not there, you aren't at the  5 139
point of sale, and back to the choice, because this is  6 139
an important aspect. 7 139
We were also concerned about the same issue.  8 139
 We're worried about fraud in the stated income loan.  9 139
 That's classic.  The borrower didn't even know she or  10 139
he had a stated income loan.  That was more worrisome  11 139
than any other issue on stated income, at least for me  12 139
and for Option One. 13 139
So what we did is say well, what can we do  14 139
to make sure that's not the case?  I'm going to read  15 139
you -- indulge me for just a minute -- just a few  16 139
bullet points on the disclosure we send the day we get  17 139
the loan application. 18 139
"You provided the" -- Okay.  "Borrower  19 139
Acknowledgments.  You provided the reported monthly  20 139
gross income in Section V, Monthly Income and Combined  21 139
Monthly Housing Expense of the Uniform Residential  22 139
Loan Application. 23 139
"You have carefully reviewed the Uniform  24 139
Residential Loan Application to confirm that it  25 139
accurately states your income, your assets and your  1 140
obligations. 2 140
"You understand that you have the option to  3 140
apply for a loan using full income documentation,  4 140
which will result in a lower interest rate.  You  5 140
understand that your qualification for a loan is based  6 140
in part on stated income documentation.   7 140
"You understand a stated income," in bold,  8 140
is not designed to allow for declaring inflated  9 140
monthly gross income, for the purpose of qualifying  10 140
for a loan."  And finally, "if you stated an income  11 140
higher than you actually receive, you may encounter  12 140
difficulty making your mortgage payments."  I think it  13 140
can go farther. 14 140
MR. EAKES:  Okay.  So that's as good a  15 140
disclosure as you can make.  How many of your loans  16 140
are -- 17 140
(Simultaneous discussion.) 18 140
MS. SCHWARTZ:  It's at 60 percent, in the  19 140
40's, in the low 40's.  But it's high.  It's a  20 140
function of the market.  I don't disagree.  It's a  21 140
good discussion.  We do the other income limited doc  22 140
type of things that were announced today.  23 140
So I think this is healthy discussion.  But  24 140
I'm just suggesting that there is more to this. 25 140
MR. EAKES:  Let me a give a strawman defense  1 141
of stated income.  You know that something's coming  2 141
after that, but if you don't have to document a  3 141
person's income, the closing process can be more  4 141
efficient.  5 141
It's less cost, because you just simply take  6 141
a statement.  So long as that worked, meaning that it  7 141
didn't create catastrophic losses for either the  8 141
homeowners or the investors, which basically means  9 141
there's an assumption that income is no longer  10 141
correlated with loan performance. 11 141
I mean and during the period of time where  12 141
housing prices were rising at 15 percent a year, 20  13 141
percent a year in many markets, that was a valid  14 141
assumption.  Income was not the determinant of whether  15 141
investors suffered losses or whether borrowers were  16 141
going to be foreclosed immediately.  There was always  17 141
another flipping refinance two years down the road. 18 141
In many ways, this issue has taken care of  19 141
itself in the investor community.  The investor  20 141
community, now that house prices have dropped two and  21 141
a half percent last year, are predicted to drop as  22 141
much as three percent this year, the investors are  23 141
going to be less tolerant of stated income, because it  24 141
no longer works.  That assumption is gone. 25 141
This is simply old style banking.  I mean  1 142
even for us radical -- 2 142
(Simultaneous discussion.) 3 142
MS. SCHWARTZ:  No.  You're right, Martin. 4 142
MR. EAKES:  --to document income. 5 142
MS. SCHWARTZ:  Martin, you're right.  The  6 142
market has reacted that now you're in the 30's.  You  7 142
have probably stated income maybe more appropriately  8 142
than it's been priced.  But I'm just saying that --  9 142
and whether it's low documentation or stated income,  10 142
that's just historically been the fact of why that's  11 142
been in existence. 12 142
It's not just the only risk issue.  Again,  13 142
loan to value, FICO, all those other things, people  14 142
don't make them over 90 percent LTV or whatever that  15 142
might be. 16 142
MR. EAKES:  Because the estimate is that no  17 142
more than one to two percent of borrowers do not have  18 142
W-2s.  So that when a very high percentage of  19 142
borrowers -- 20 142
(Simultaneous discussion.) 21 142
MR. CHANIN:  Let me follow up on that,  22 142
because I have had a couple of discussions off the  23 142
record with some lenders, and it's gone like this,  24 142
that most people have W-2s; most people have pay stubs  25 142
or some form. 1 143
But there are discussions where the consumer  2 143
doesn't want to provide the W-2 because they have  3 143
other additional, as Faith alluded to, other  4 143
additional income to declare, and it puts the lender  5 143
in an awkward position of putting down something that  6 143
they know is incorrect, when they've seen the W-2. 7 143
So I have heard, at least anecdotally, is  8 143
some part of this market.  It goes to kind of Janis'  9 143
questions or comments.  So if you ban stated income  10 143
loans, what are you doing for that practice or for  11 143
reliance on other family members who are not on the  12 143
note in terms of being obligated on the transaction. 13 143
MR. EAKES:  So what I would say to that is  14 143
if we're going to base our policy on trying to serve  15 143
tax cheats, that's a challenge.  The part that I would  16 143
respond is we do a lot of loans with Latino families,  17 143
and virtually every single borrower declares their  18 143
income and pay tax returns. 19 143
So I don't want to have an association  20 143
between low income or Hispanic or African-American  21 143
borrowers and failure to declare income on tax  22 143
returns. 23 143
I just think if we're talking about personal  24 143
responsibility in the marketplace, that shouldn't be  25 143
our first concern, tax cheats.  It shouldn't be the  1 144
basis for maintaining stated income. 2 144
MR. CHANIN:  No, no.  It's not a matter of  3 144
that being the basis.  That's the, if you will, the  4 144
dilemma when the borrower comes to that financial  5 144
institution, and the institution says no, we can't do  6 144
this.  Then what I've heard is then the borrower goes  7 144
to someone who will.   8 144
MR. EAKES:  Pay your taxes.  That's why if  9 144
you have a rule that applies to all lenders, they  10 144
can't find another outlet.   11 144
MS. DAVIS:  Let's take some turns. 12 144
MS. SCHWARTZ:  Okay. 13 144
MS. DAVIS:  I just have to add some clarity,  14 144
because we've brought up the tax cheat situation, and  15 144
I want to -- 16 144
(Laughter; simultaneous discussion.) 17 144
MS. DAVIS:  We do it for other reasons, ease  18 144
of convenience being one of them.  You know, we sound  19 144
like we're coming at it from different angles, and I  20 144
still believe we all have this same best interest of  21 144
the consumer, giving them credit, helping them get in  22 144
the homes and helping them succeed. 23 144
In the non-prime loans, there are a lot of  24 144
people that are in homes and are making payments, and  25 144
are doing very fine and that's a very good thing.  A  1 145
lot of what has happened over the past three years has  2 145
enabled them to do that. 3 145
I still go back to when you talk about  4 145
stated income.  We've talked about just one of many  5 145
things.  It's just one factor.  We talk about what to  6 145
me is the ability to pay.  We've referred to that in  7 145
almost every part of this conversation. 8 145
In order to have the ability to pay, you  9 145
have to have income and you have to have willingness  10 145
to pay.  On income, we've heard Bill talk about the  11 145
fact that I can provide a document, does not mean it's  12 145
real, Okay.  There is fraud.  Anybody can do anything. 13 145
So as lenders, you have to be very good  14 145
underwriters.  You have to be able to understand the  15 145
consumers that you're serving.  You need to be able to  16 145
understand what Pablo said, is that reasonableness.   17 145
Is that reasonable?  Is the person that is in a low to  18 145
moderate income job and it disclosing an unreasonable  19 145
amount of income, does that make sense?  Do all of the  20 145
factors together in this picture make sense? 21 145
Not just one in isolation, but all of them.  22 145
 I think we are making more out of stated income than  23 145
maybe really is necessary.  I think there is a point,  24 145
a place for it.  I think there are concerns relative,  25 145
in terms of our bright line, of where we said we're  1 146
really uncomfortable because there's not enough  2 146
support under a 620 FICO.  But I think we're going a  3 146
step too far. 4 146
GOVERNOR KROSZNER:  This might be a good  5 146
transition, because I think you're right.  There's a  6 146
very close relationship between some of the things  7 146
we're discussing right now and Janis had mentioned  8 146
this as an issue.   9 146
The ability to document may also have  10 146
something to do with affordability of products that  11 146
are being offered to people.  That was one of the last  12 146
issues that I want to discuss.   13 146
Something I did want to make sure that we  14 146
came back to, because it was mentioned just briefly,  15 146
is the relationship between risk layering and other  16 146
affordability or risk layering and documentation,  17 146
because I think that's one of the challenges. 18 146
It's not just that, you know, you get the 80  19 146
percent loan, but it's also when you do the 80-20, and  20 146
have that other piece on it.  That poses a lot of  21 146
challenges to people, when they really have no skin in  22 146
the game to be doing that.   23 146
Then if there's just slight changes in the  24 146
market, getting back to what Martin was just talking  25 146
about, very slight variations in the market can lead  1 147
to very different behavior, than if you don't have  2 147
that same kind of risk layering. 3 147
So there might be some sort of interesting   4 147
interaction between risk layering and -- affordability  5 147
issues and risk layering and documentation.  But I  6 147
just wanted to sort of move in, not say completely  7 147
move away from the stated income and low documentation  8 147
ideas, because I think they're related, but to move us  9 147
a little bit towards the broader ability to pay and  10 147
affordability discussion. 11 147
MR. EAKES:  The risk layering is very hard  12 147
to do.  It makes very good sense to have in  13 147
examination guidance, because then you can go in and  14 147
check, line by line.  It's very hard to say, in a  15 147
bright line rule, when you have four of the five  16 147
possibly bad features, or you can have two of the  17 147
five. 18 147
It doesn't work for a bright line rule  19 147
standard.  I think risk layering, it's a different  20 147
discussion in a different context. 21 147
MS. COHEN:  Well, speaking of risk layering  22 147
and no doc loans, one of my favorite recent examples  23 147
of this issue is a self-employed couple.  They're  24 147
lobstermen in Maine.  They've got a broker fee of  25 147
5,000, and a yield spread premium of 8,000 bucks, an  1 148
inflated appraisal, an inflated title insurance, and  2 148
their monthly payment now is more than their income.   3 148
They're self-employed.  So they have to pay  4 148
for their boat and their, you know, lobster cages and  5 148
all the other things.  So we have a problem, and if we  6 148
can't resolve this through a checklist, as Martin just  7 148
described, the source of the problem in this loan is  8 148
that it's a no doc loan. 9 148
Because if you actually look at what the  10 148
people could afford, they never would have gotten the  11 148
loan to begin with.  We separately need to resolve  12 148
inflated appraisals, but they're not unrelated. 13 148
What Janis was talking about before makes it  14 148
extremely clear.  You can document unconventional  15 148
income, and the flip side of not documenting  16 148
unconventional income is that it is regularly  17 148
falsified.  There are lawyers around the country who  18 148
can tell you that on a routine basis, they see Uniform  19 148
Residential Loan Applications, which by the way is  20 148
many more words and many more syllables than anyone  21 148
can understand.  Maybe you can compensate with a  22 148
disclosure. 23 148
Where income is falsified, babysitting  24 148
income, rental income, that is routine.  So it is  25 148
incumbent upon the Fed to some way to create a rule  1 149
that says you have to verify that income.  It is  2 149
without requiring verification of that income, you're  3 149
allowing qualification of that income, and it's a  4 149
serious problem. 5 149
It is universally understood by people who  6 149
talk to abused consumers that no doc loans are a  7 149
serious root of the problem.   8 149
MR. BREWSTER:  I'd like to respond to that.  9 149
 I believe that -- I was actually thinking that I was  10 149
really gratified that people were saying that fraud is  11 149
Okay.  Everybody was saying take this and focus very  12 149
clearly.  You should get fraud. 13 149
I've seen the exposure that's out there,  14 149
that says if you lie on the application about  15 149
anything, then that's fraud.  I had kind of a question  16 149
for Martin on that issue, which was somewhat  17 149
connected, on stated income. 18 149
One of the rationales for a stated income  19 149
loan is that it's easier to do it more efficiently.   20 149
Doesn't that argue that it should be cheaper?  If it  21 149
was cheaper to the consumer, would that make it Okay?  22 149
 Because I'm hearing two arguments.   23 149
One is that consumers will be pushed into  24 149
stated income loans because the price is different.   25 149
But then what Alys just said, that the stated income  1 150
loans give consumers a choice, basically, to not tell  2 150
the truth. 3 150
And somehow, even though we have rules that  4 150
say that you shouldn't lie or exaggerate, now you're  5 150
given the freedom to state your income how you want.   6 150
It is freedom to lie, and I don't think that that is  7 150
something we can regulate. 8 150
There's already rules out there that say you  9 150
shouldn't lie, that it's a crime. 10 150
MS. COHEN:  I'm all in favor of not lying.   11 150
The question really is who's lying.  Now no doc loans,  12 150
stated income loans are known as liar loans.  That is  13 150
the standard description of them in the industry, and  14 150
it's not because the borrower lies.  It's because the  15 150
loan originator.  That is the standard -- 16 150
MR. BREWSTER:  Hold on for a second.  We  17 150
don't accept liar loans as a standard.  I know we hear  18 150
it and Fannie Mae certainly doesn't think that that's  19 150
appropriate.  But I understand people say that, but I  20 150
think that's a mis-definition.  I think it's a  21 150
mischaracterization, because as a basic example,  22 150
there's lenders out there that are telling people  23 150
specifically that it's not a liar loan.  So I just  24 150
want to make that clear. 25 150

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