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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MS. BRAUNSTEIN:  Well, my question if it is.  1 151
 So we're not going to make -- 2 151
MR. EAKES:  If you really reach a point  3 151
where you think income does not correlate with  4 151
performance, you don't need to have stated income or  5 151
anything.  You just stop having a form of any sort  6 151
dealing with income.  You just do away with it.  7 151
And if you can save $300 in closing costs,  8 151
that's $3 million subprime borrowing, you're going to  9 151
have a billion dollars of potential savings that could  10 151
pass through to consumers.   11 151
The problem is that's not how it really  12 151
works, and without wanting to sound too moralistic,  13 151
that it is Southern and preachy, I heard the  14 151
statistics that I think that 90 percent of stated  15 151
income loans are exaggerated by 10 to 20 percent.   16 151
I've heard the statistic of 50 percent stated income  17 151
are exaggerated by more than 50 percent of income. 18 151
If we have a mechanism in place that when  19 151
the borrowers or originators or creditors or lenders,  20 151
that we are inducing people to lie routinely in  21 151
commercial transactions, it's not good for the overall  22 151
ethical standards within the industry. 23 151
I think that that really is what has  24 151
occurred over the last three or four years,  25 151
particularly in the subprime market.  It really it's  1 152
just not like, it's just a gap.  It's inducing  2 152
dishonesty.  Regardless of who you point the finger  3 152
at, it's not a good thing. 4 152
If we can say that it is irrelevant, that  5 152
income is not -- does not add any value over and above  6 152
a FICO score, then let's do a FICO score because it's  7 152
so cheap.  But that's not really what we're finding  8 152
out, now that price appreciation is starting to level  9 152
out.   10 152
We're finding that income does matter, and  11 152
the level from these Bear Stearns reports I've seen,  12 152
we need later 60 percent of the loans that have stated  13 152
income, 60 percent of the loans in 2006 that have 80- 14 152
20 first and second, and as some of my industry  15 152
friends say, well, we call them jokingly 90-20,  16 152
because they were never added up to 100 percent of the  17 152
value.  It's always 110 percent of the value. 18 152
You get catastrophic results from 40, 50, 60  19 152
percent.  You get huge loans or defaults when you  20 152
combine those two later.  You can't sustain this.  21 152
MR. CHANIN:  Can I follow up on that, just  22 152
in terms of what income matters, that's kind of a  23 152
secondary debate.  There is some question as to  24 152
whether income matters.  But debt to income certainly  25 152
matters, and there is this notion of borrower's  1 153
ability to repay and how you address that. 2 153
There have been some suggestions, and I  3 153
don't recall specific state laws, but certainly bills,  4 153
that have said a presumptively legitimate, if you  5 153
will, debt to income ratio of 50 percent, saying that  6 153
if the debt to income ratio is 50 percent or less,  7 153
then that loan is presumptively legitimate. 8 153
Some laws have said the fact that it's over  9 153
50 percent doesn't mean it's not valid and so forth.   10 153
But are there, I guess I'd like to get some comments  11 153
on debt to income ratios, how you measure ability to  12 153
repay, whether it is feasible to have a standard and  13 153
what the fallout might be from any such standard. 14 153
MR. SANCHEZ:  Let me jump in here, because I  15 153
just don't want to let that comment that it's the loan  16 153
officers out there are the liars, etcetera.  I think  17 153
we bear a level of responsibility to how we do and how  18 153
we train our sales people and how we do it. 19 153
But the consumer's part of the transaction  20 153
too, right?  And so I think we shouldn't just say this  21 153
is a stated income problem and it is all because of  22 153
the lenders and because they're all benefitting from  23 153
it. 24 153
There are folks that do this business the  25 153
right way, and I just would hate to have that as the  1 154
last record here, that it's all the lenders' fault  2 154
that this is happening. 3 154
MR. EAKES:  Harry will tell you that  4 154
generally, we lenders and advocates join together and  5 154
beat up on the brokers, right. 6 154
(Laughter.) 7 154
MS. COHEN:  Pablo, I appreciate that, and I  8 154
think there are a lot of -- I like my mortgage broker.  9 154
 I told Harry that.  I like my mortgage lender.  I've  10 154
had some questions about some of my services. 11 154
I want to be very clear with people, because  12 154
it's been my experience that people don't understand  13 154
what real human beings experience when they get a  14 154
subprime loan. 15 154
So let me tell you.  They don't fill out an  16 154
application.  They don't get any documentation in  17 154
advance.  Generally speaking, this is what our clients  18 154
experience.  When I say "our clients," I'm  19 154
representing legal services lawyers all over America  20 154
who tell me this.  This is standard. 21 154
They show up at the closing.  They don't  22 154
read any of the papers.  They generally have an oral  23 154
experience; that's what happens.  They don't know, for  24 154
the most part, that their income is falsified because  25 154
they haven't read the written or the typed version of  1 155
the application. 2 155
They didn't get an estimated TILA, for the  3 155
most part.  If they did, it's a day in advance, and  4 155
then they sign on the dotted line.  Sometimes, it's on  5 155
the side of the road on top of a car or at a diner, or  6 155
in their living room where they're busy showing their  7 155
children's pictures to the broker and the lender who's  8 155
in their living room. 9 155
So we need to think about what the real life  10 155
experience is of somebody when we're talking about  11 155
what's happening. 12 155
MR. SANCHEZ:  And I would agree with that.   13 155
But I will tell you this, right. 14 155
MS. COHEN:  And Harry may ask you that. 15 155
MR. SANCHEZ:  That's not the preponderance  16 155
of people's experience.  I grew up in this business as  17 155
a non-prime loan officer, right.  The very first  18 155
mortgage I ever did was for a person who got into debt  19 155
a little bit over her head.  All the banks said to her  20 155
no, we're not going to help you.  It was part of a  21 155
consumer finance organization.  We consolidated her  22 155
debts, saved her $750 a month.  She baked me a banana  23 155
bread.  I had not done a lot of loans.  I was 140  24 155
pound then; I'm 240 pounds now. 25 155
(Laughter.) 1 156
MR. SANCHEZ:  Right, and it was properly  2 156
disclosed. She knew what she was signing.  So I just  3 156
don't want to paint the whole business as this is the  4 156
way that it transacts.   5 156
MR. CHANIN:  Can we move on -- 6 156
MS. COHEN:  Can I ask you a question? 7 156
MR. CHANIN:  No.  I'd like to move on,  8 156
because we don't have much time. 9 156
(Simultaneous discussion.) 10 156
MS. COHEN:  I'm answering your question. 11 156
MS. BRAUNSTEIN:  That was your idea of the  12 156
50 percent DTIs.  13 156
MS. COHEN:  You know, I think that good  14 156
people can  disagree about the specific question,  15 156
about whether there should be a cap or not.  But there  16 156
appear to be people who can pay above DTI, and there  17 156
appear to be people who can pay above 50 percent, and  18 156
there are people who can't. 19 156
Whether or not you have a percentage that  20 156
you're looking at, if they don't have enough cash to  21 156
pay their exploding energy costs and their child care  22 156
and their transportation and their medicine, which may  23 156
not be insured, it's irrelevant what their DTI is. 24 156
So both of those analyses seem relevant.   25 156
And then the question is what do you do for people on  1 157
social security, who are having their income grossed  2 157
up.  I have in front of me a Wells Fargo loan.  It's a  3 157
228 made to buyer who was on social security.  It's  4 157
refinancing over $10,000 in credit card debt, and  5 157
she's paying about 50 percent of her income, 50  6 157
percent of her social security, her take-home income,  7 157
towards her mortgage. 8 157
There's something wrong with that picture.   9 157
So the question is, how can we get at that?  It may be  10 157
a complicated set of -- a list of characteristics,  11 157
rather than if you go over this number, then it's okay  12 157
or not okay.  Not complicated, but a list. 13 157
MR. RHEINGOLD:  And I think the point, part  14 157
of that point is when you figure out what that DTI  15 157
standard is, is that residual income is an important  16 157
part of that factor as well.  I mean because people  17 157
have different levels of income. 18 157
So you need to actually factor not only debt  19 157
to income, but actually how much money is really left  20 157
in their pocket that can afford to pay all the  21 157
expenses that people have today.  So I think it's not  22 157
just a sort of okay, this is the limit, because it  23 157
varies based on what people's actual income is, and  24 157
what income they have. 25 157
MR. DINHAM:  I would agree with that  1 158
statement, because the VA has been doing this for  2 158
years.  The VA comes out with a 45 percent ratio plus,  3 158
I can't remember the exact number.  You've got to have  4 158
so much for the husband and wife and so much for every  5 158
child, and you have to have leftover. 6 158
I don't know how that takes into account for  7 158
what Alys was alluding to, about the uninsured drugs  8 158
or anything.  But at least you're doing something to  9 158
be sure that the person does have enough to live on  10 158
after they get into the home. 11 158
So I think that is something that we can all  12 158
learn to live with.  I think it's something we should  13 158
have been looking at and we haven't been looking at.   14 158
These percentages, you know, we stretched  15 158
them when the young kids got in in the beginning,  16 158
where they were doing the 2836 and just starting on a  17 158
house, and most of them all worked out. 18 158
But they were still stretching on the 95  19 158
percent loans.  So I think that if we look at the  20 158
backside, we'll all be a lot better off. 21 158
MR. EAKES:  FHA and VA are really a  22 158
datapoint that we should look at.  Their maximum debt  23 158
to income ratio is 41 percent, and they do this  24 158
residual income that both Alys and Harry are talking  25 158
about.   1 159
They still have a default for any years with  2 159
the loans.  It's somewhere between 15 and 20 percent.  3 159
 So it's relatively high at 41 percent.  There's no  4 159
way, without fixing those other income factors, that  5 159
you can have a 50 percent debt income limit and have  6 159
any kind of sustainable number of people make those  7 159
loans.  8 159
So somewhere between 41 and 50, you have set  9 159
debt-income.  Here, I wanted to slide away to the  10 159
lender side.  You know, I've got five billion dollars  11 159
of loans.  I'm telling you if you put something in  12 159
about ability to repay, I want you to have a debt- 13 159
income ratio specified bright line in this rule. 14 159
My reason for that is I don't want to slide  15 159
over and have something that -- I want to be able to  16 159
know precisely that I've made a good loan, and that  17 159
you're not going to subject me to liability.   18 159
I would say that I believe 50 percent is too  19 159
high.  However, within HOEPA itself it uses the 50  20 159
percent.  The reason the different states have 50  21 159
percent debt-income presumption in one direction or  22 159
the other, is because -- and I was involved in many of  23 159
those laws across the country -- is because HOEPA had  24 159
it. 25 159
HOEPA had in there a 50 percent debt-income  1 160
presumption.  So we triggered off of that around the  2 160
states.  Not because we really believed it was the  3 160
right trigger, but because we didn't feel like we had  4 160
another federal standard for 41 percent, which is  5 160
really closer to what it should be as a maximum. 6 160
MS. BOWDLER:  I also just want to add --  7 160
take the time to agree with Harry, because normally I  8 160
just wanted a little bit of detail which I want to  9 160
focus on the most and I don't get that opportunity  10 160
often. 11 160
But NCLR has been doing a series of  12 160
roundtables across the country with the National  13 160
Association of Real Estate Professionals, interviewing  14 160
mortgage brokers, practicing mortgage brokers.  We've  15 160
done two cities.  We've got four more this month. 16 160
What they are telling me is that exactly  17 160
what Harry described, the standard best practice for  18 160
them, something that they would consider important for  19 160
any originators to be doing, which is to sit down and  20 160
understand the totality of the consumers' situation.   21 160
So their understanding of what their financial  22 160
situation is and what their financial goals are, and  23 160
then therefore their residual income and what they  24 160
have available. 25 160
So the idea that Alys proposed, of a list of  1 161
minimum understanding of a person's situation, I  2 161
think, is important to this conversation and it also  3 161
goes to ability to repay as well. 4 161
MS. BRAUNSTEIN:  Down at the industry end,  5 161
I'd just like to hear what you think about bright line  6 161
standards for ability to repay, especially if it  7 161
wasn't in guidance; if it was somehow codified in the  8 161
national rule. 9 161
MR. BREWSTER:  There's just a lot of  10 161
documents on this subject.  There's a lot of  11 161
conventional documents that have FHA-VA minimum  12 161
standards.  I think it's going to be very difficult to  13 161
put it in a single standard, unless you take into  14 161
consideration all the other standards already out  15 161
there. 16 161
I mean a couple of years ago, when I started  17 161
as a loan officer, as Harry mentioned, there's 28  18 161
versions of the conventional standards, and  19 161
underwriters are just not going to go past that.  The  20 161
business changes.  A lot of the stuff that's out there  21 161
now is not rules-based but it's guidance-based.  A lot  22 161
of it's automated underwriting.  So there's more  23 161
nuances than just relying on a bright line standard. 24 161
MS. SCHWARTZ:  I agree.  I think if you do  25 161
anything in rule-making, it has to be clear.  It's  1 162
just that to be processed, there's a lot of damage  2 162
that could be done.   3 162
But it feels like it's such a dynamic  4 162
process to underwrite a loan.  There's just so many  5 162
factors, so many differences that in a sense, the  6 162
guidance on how to deal with it might be better. 7 162
Just as an observation, I think if you do  8 162
any rule-making on it, you're going to have to be very  9 162
careful, like with that 2836.  If that were in a rule- 10 162
making, you know, you would have had a far different  11 162
standard ten years ago.  Some of us might have -- 12 162
(Simultaneous discussion.) 13 162
MS. SCHWARTZ:  We have had -- we do have a  14 162
record of brokers in the market and it's not all bad,  15 162
that's for sure. 16 162
MR. SANCHEZ:  And I would add that I think  17 162
we have a fairly sophisticated way of looking at the  18 162
performance of loans, and I particularly wouldn't want  19 162
to see a bright line rule around 50 percent.  I think  20 162
we need to have the flexibility.  In the non-profit  21 162
space, I think that's very reasonable.   22 162
As long as we have to implement this, if we  23 162
believe this to be true and reasonable for that  24 162
consumer, then our prevailing performance, our best  25 162
performance needs to be measured.  We don't get to  1 163
just do whatever we want, right.   2 163
We have folks to answer to.  We've got  3 163
profitability standards that we've got to meet, and  4 163
quite frankly, neither the consumer nor us would want  5 163
to be in a situation where we're foreclosing or have  6 163
somebody that's not having the ability to repay their  7 163
debt.   8 163
So I think we're fairly sophisticated around  9 163
being able to decide that for ourselves, as long as  10 163
the secondary market is for us.  But we've got to make  11 163
sure that the income is real.   12 163
MR. EAKES:  If we give an ability to repay  13 163
and a debt to income, we must take into account this  14 163
80-20 problem, the second mortgage.  It would make no  15 163
sense to have a first mortgage that is whatever size  16 163
it took to meet an ability to repay a debt income  17 163
standard. 18 163
Yet there's this other part of the  19 163
transaction that is somehow behind closed doors still  20 163
related to it.  So somehow you will need to  21 163
incorporate what is a dominant practice, at least in  22 163
2006, of the second mortgage problem. 23 163
MR. SANCHEZ:  Martin, are you saying that  24 163
you feel the piggyback second is not factored into the  25 163
debt to income ratio?  Is that what you're saying? 1 164
MR. EAKES:  I'm just saying it needs to be. 2 164
MS. BRAUNSTEIN:  Absolutely, and that would  3 164
need to be  spelled out, is what you're saying? 4 164
MR. SANCHEZ:  Yes. 5 164
MS. BRAUNSTEIN:  Right.  So that people,  6 164
that wouldn't be a loophole. 7 164
MR. SANCHEZ:  And that is something we've  8 164
done and have always done as part of that tradeoff. 9 164
MR. EAKES:  Chase actually, just if I can  10 164
give you a little plaudit, for at least the last five  11 164
or six years, has had the lowest delinquency of any  12 164
subprime lender.  So you clearly are underwriting to a  13 164
tighter ability to repay than virtually any other  14 164
lender, and we recognize it. 15 164
MR. SANCHEZ:  Thank you for saying that. 16 164
GOVERNOR KROSZNER:  It is noon, and that was  17 164
some agreement, which was good.   18 164
(Laughter.) 19 164
GOVERNOR KROSZNER:  I think we've had a  20 164
really robust discussion of a number of extremely  21 164
important issues, and I really appreciate the  22 164
panelists for taking the time to come with us.   23 164
I really appreciate the honesty and exchange  24 164
of information that we've had.  Let's break for lunch  25 164
and we will reconvene promptly at one. 1 165
MS. BRAUNSTEIN:  Can I just -- one note.  I  2 165
just want to remind people, if you're planning to sign  3 165
up for the open mike session, that there's a table  4 165
right outside the door, and you should make sure to do  5 165
that.  Thank you.  6 165
(Whereupon, at 12:03 p.m., a luncheon recess  7 165
was taken.) 8 165
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A F T E R N O O N  S E S S I O N 1 166
1:09 p.m. 2 166
GOVERNOR KROSZNER:  We'd like to get  3 166
started.  Thank you.  We'd like to get started again.  4 166
 All right.  So thank you very much for coming back,  5 166
and it's a few minutes late.  What I think we're going  6 166
to do is go through this panel.  It's going to be  7 166
approximately two hours and we'll end it around three  8 166
o'clock.  We'll take a very, very short break and then  9 166
go to the open mike session after that and finish  10 166
hopefully right around four o'clock or a few minutes  11 166
after four. 12 166
So this afternoon's panel is thinking some  13 166
of the perspectives on rule-making initiatives from  14 166
the state government and researchers' perspective.  We  15 166
have once again a superb panel.  Why don't we do the  16 166
same ordering as last time, and start down at the end  17 166
with Tom Miller, who's down there? 18 166
From the attorney general of Iowa, and the  19 166
same rules.  Five minutes for opening statements and  20 166
that will leave a good amount of time for some robust  21 166
discussion.  Tom? 22 166
MR. MILLER:  Thank you.  Thank you very  23 166
much.  Thank you to the Federal Reserve for embarking  24 166
on this process.  I think it's a very important  25 166
process and discussion, so hopefully the rules and  1 167
regulations then comes out of this. 2 167
Like I said, it's so important for this  3 167
reason, that there's really been a significant change  4 167
going forward in consumer protection enforcement in  5 167
our country, in the financial area, because of the  6 167
preemption that was taken by the OCC, and then  7 167
ultimately supported by the Supreme Court of the  8 167
United States in Waters versus Wachovia. 9 167
This has given considerably more power, as a  10 167
practical matter, to the federal agencies.  With power  11 167
comes responsibility, very, very important  12 167
responsibility, because of what we're dealing with  13 167
here, people's finances regarding their homes, cars  14 167
and other items. 15 167
So we're at a very important point in  16 167
consumer protection in the United States.  Among the  17 167
federal agencies, the one with the greatest power is  18 167
the Federal Reserve, for a whole host of circumstances  19 167
and legislation and history. 20 167
That's probably a good thing.  The Federal  21 167
Reserve has an incredible reputation, incredible  22 167
staff, tradition.  It has the ability to resolve these  23 167
questions, has the credibility to resolve these  24 167
questions. 25 167
So in a sense, this is a fitting way to  1 168
wonder through this maze of preemption, and hopefully  2 168
come to a very good conclusion.  I think that the four  3 168
issues that have been identified for discussion in  4 168
this process are very good issues.  5 168
The one that I'm the most concerned about,  6 168
as a state attorney general, is the ability to pay.   7 168
You know, I was the lead attorney general in the  8 168
AmeriQuest case, the Household case before that as  9 168
well.  We've done, we think a lot in the subprime  10 168
area.   11 168
It's very painful to see what has happened   12 168
in the last couple of years.  In our view, the biggest  13 168
trigger has been the 228s, with the ability to pay for  14 168
two years, not the ability to pay for the 28.  That is  15 168
the prime driver in this enormous foreclosure mess  16 168
that we find ourselves in, both in terms of the people  17 168
involved, the borrowers and the people that own the  18 168
loans. 19 168
You know, common sense tells us that if you  20 168
take out a loan, you should have the ability to pay.   21 168
Not just for a short time, but over the course of the  22 168
loan.  You know, some practices that hurt consumers  23 168
benefit the lenders, namely in the fee areas. 24 168
But in this concept, it works against both.  25 168
 It's bad for the borrower and it's bad for the  1 169
ultimate investor or lender, because in this context  2 169
certainly, when consumers are abused, when it's  3 169
against their interest, it's also against the interest  4 169
of the lending side, because the consumer ultimately  5 169
can't pay. 6 169
We have the marriage of both consumer  7 169
protection and safety and soundness in this criteria,  8 169
in this proposal.  So I would strongly encourage the  9 169
Federal Reserve to go ahead and make strong  10 169
regulations concerning the ability to pay.   11 169
Common sense supports it; consumer  12 169
protection supports it; safety and soundness supports  13 169
it.  Briefly then on the other three, all of which I  14 169
think are important, probably the second most  15 169
important, in my view, is the stated loans. 16 169
As a practical matter, am I moving too much  17 169
here?  As a practical matter, there are companies that  18 169
don't violate the law in terms of stated loans, and  19 169
there are other companies that violate it very, very  20 169
often. 21 169
This is a serious problem.  It is  22 169
potentially a criminal problem.  Stated loans have to  23 169
be cleaned up.  Whether they're totally banned or  24 169
whether there's tight restrictions that make sure we  25 169
don't have the problem in the future, it has to be  1 170
done either way.  The current situation is totally  2 170
unacceptable. 3 170
I do support also the changes in prepayment  4 170
penalties.  We don't have prepayment penalties in Iowa  5 170
and consumers and lenders survived just fine, and I do  6 170
support the escrow. 7 170
Finally, I want to mention briefly what I  8 170
mentioned yesterday, and that is that in the subprime  9 170
market, if the major players were to all work together  10 170
on an ongoing basis, using our powers and anticipating  11 170
problems, this industry could be cleaned up. 12 170
When I say "the players," I mean the Federal  13 170
Reserve, the OTC, the OTS, the FDIC, the state  14 170
attorney generals and the state banking regulators.  15 170
This is an area where the states do still  16 170
have considerable power.  If we developed a working  17 170
group where we had our most active and knowledgeable  18 170
people working all the time, consulting all the time,  19 170
what are you doing, what are the problems, what is  20 170
your progress, how do we solve it with the principals  21 170
involved at the appropriate time, we could clean up  22 170
the subprime market.  Thank you. 23 170
GOVERNOR KROSZNER:  All right.  Thank you  24 170
very much.  Let's move on to Mark Pearce from North  25 170
Carolina. 1 171
MR. PEARCE:  Great.  Good afternoon,  2 171
Governor Kroszner and members of the staff of the  3 171
Federal Reserve Board.  My name is Mark Pearce, and  4 171
I'm Deputy Commissioner of Banks for the State of  5 171
North Carolina. 6 171
The Office of the Commissioner of Banks  7 171
licenses and supervises 1,600 mortgage lenders and  8 171
brokers, and 17,000 loan officers.  Thank you for  9 171
permitting me the opportunity to talk today with you  10 171
about opportunities to ban unfair practices under  11 171
HOEPA regulation. 12 171
I do not envy your task.  We are the world's  13 171
best, most innovative most competitive mortgage  14 171
delivery system in the world, bar none.  Yet  market  15 171
forces have outpaced regulatory control and due  16 171
diligence systems. 17 171
The private market has not prevented abusive  18 171
lending or improvident lending.  Weak underwriting has  19 171
led to foreclosures.  Thus, the Federal Reserve must  20 171
weigh the pressing need to reduce abusive lending with  21 171
the recognition that market innovation has helped many  22 171
homeowners through increased choice and lower costs. 23 171
So my comments today I'm going to offer you  24 171
North Carolina's experience with these issues, and my  25 171
views on the today's marketplace. 1 172
Despite the challenges, I believe HOEPA can  2 172
be updated to address problems in the marketplace,  3 172
without hampering innovation or access to credit.  In  4 172
1999, my home state of North Carolina enacted the  5 172
first state-level supplement to HOEPA. 6 172
Over the past eight years, studies have  7 172
tried to assess the impact of North Carolina's law, on  8 172
both abusive terms and on access to credit.  Why this  9 172
question is important is worth studying.  It is   10 172
nearly irrelevant to today's debate about payment  11 172
shock, stated income, lack of escrows. 12 172
While researchers built models and while  13 172
policymakers debated, market participants adapted to  14 172
North Carolina's law, without missing a beat.   15 172
Unscrupulous lenders developed new tools to take  16 172
advantage of vulnerable homeowners. 17 172
Products designed for high income and more  18 172
knowledgeable borrowers as an exception, they became  19 172
the norm for borrowers with poor credit and less  20 172
knowledge. 21 172
In 2001, North Carolina enacted a  22 172
comprehensive licensing and supervision scheme for  23 172
mortgage brokers, lenders and loan officers.  In the  24 172
interest of time, I'll refer you to my written  25 172
statement on our experience in trying to regulate this  1 173
increasingly fragmented origination system. 2 173
It's been a work in progress, and it will  3 173
continue to be a work in progress, as the states work  4 173
together on a national licensing system and other  5 173
cooperative efforts.   6 173
In addition to licensing, North Carolina law  7 173
sets out duties expected of the mortgage originators.  8 173
 We have principle-based standards that we use to get  9 173
rid of the bad apples in the marketplace.   10 173
However, principle-based rules alone do not  11 173
provide the clarity that's needed to channel  12 173
origination activity away from abusive loan terms.  By  13 173
now it is old news that capital markets' appetite for  14 173
mortgage securities, coupled with too many mortgage  15 173
originators chasing too few loans, has led to poor  16 173
underwriting and to mortgage fraud. 17 173
In North Carolina, we've seen the selling of  18 173
loans based primarily on the initial monthly payment,  19 173
the use of loan products that lead to payment shock  20 173
two or three years down the road.  21 173
Subprime loans without checking borrower's  22 173
income, and loans with false information in the loan  23 173
documents.  While North Carolina has suffered fewer  24 173
foreclosures than many other states, our evidence  25 173
supports the notion that payment shock and mortgage  1 174
fraud are built into too many subprime loans. 2 174
The Federal Reserve can reduce abusive  3 174
lending that we have witnessed in North Carolina by  4 174
updating its HOEPA regulation with a few clear  5 174
prohibitions, such as ban prepayment penalties and  6 174
subprime home loans; ban most stated income loans in  7 174
the subprime market; require the escrow of taxes and  8 174
insurance in the subprime loans; and to require  9 174
lenders, as Tom Miller said, to consider a borrower's  10 174
ability to repay the loan. 11 174
In addition, I encourage the Federal Reserve  12 174
to fix the broken system of disclosures in the  13 174
mortgage process.  On behalf of CSBS, the Conference  14 174
of State Bank Supervisors, I have included in my  15 174
testimony a discussion draft of a model disclosure  16 174
form that we hope has the effect of providing not too  17 174
much, not too little, but just the right amount of  18 174
information to help borrowers make informed choices. 19 174
Now that being said, good disclosures will  20 174
not prevent bad loans.  Recent problems in the  21 174
subprime market have exposed both the strengths and  22 174
weaknesses of relying on markets to ensure responsible  23 174
lending.  Lenders and some investors have paid a price  24 174
for irresponsible lending practices. 25 174
At the same time, irresponsible practices  1 175
have had a devastating impact on too many families and  2 175
their communities.  Market forces alone will not  3 175
protect our most vulnerable homeowners. 4 175
As regulators, we must use the right tools  5 175
at the right times, to keep pace with changes in the  6 175
marketplace.  HOEPA did not solve predatory lending in  7 175
1994.   8 175
The North Carolina predatory lending law in  9 175
1999 did not solve predatory lending.  The guidance  10 175
and the statements that we've been issuing and working  11 175
together on, they're helpful, but they're not  12 175
sufficient. 13 175
I respectfully urge the Federal Reserve to  14 175
update HOEPA now, while recognizing that even these  15 175
measures will not be the last word on predatory  16 175
lending.  Thank you. 17 175
GOVERNOR KROSZNER:  Thank you very much.   18 175
Let's now turn to Ren Essene from Harvard. 19 175
MS. ESSENE:  Thanks.  I want to start today  20 175
by thanking you, Governor Kroszner and of course the  21 175
Federal Reserve Board, for inviting me here today.   22 175
I'm a research analyst at the Joint Center for Housing  23 175
Studies at Harvard University, which is one of the  24 175
nation's leading sources of information and analysis  25 175

NEAL R. GROSS
COURT REPORTERS AND TRANSCRIBERS
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