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
on the housing market.  1 176
My testimony today derives from two  2 176
recently-released reports.  You can find them on our  3 176
website, that I co-authored with my colleague, Bill  4 176
Apgar. 5 176
These studies explore very specifically  6 176
consumer behavior and how some mortgage market  7 176
players, some, take advantage of consumer decision- 8 176
making weaknesses. 9 176
We also have data that looks at the segments  10 176
of the marketplace, and suggests that higher-priced  11 176
loans flow through distinct channels.  In light of the  12 176
recent upsurge in foreclosures, there's growing  13 176
evidence that many families are taking on debt to get  14 176
mortgages that they don't understand, and that are  15 176
typically not suitable for their needs. 16 176
We looked at the economics and market  17 176
research, and found that consumer preferences are  18 176
malleable, consumers are vulnerable to outside  19 176
influence, consumers lack an awareness of mortgage  20 176
pricing, and even some of the most sophisticated  21 176
consumers find it difficult to shop in the complex  22 176
marketplace of today. 23 176
Unfortunately, some mortgage providers use  24 176
this knowledge to aggressively push market specific  25 176
products that may not be in the interest of the  1 177
borrower.  So instead of supporting an informed  2 177
choice, aggressive and misleading marketing can  3 177
actually play into a consumer's fear and lack of  4 177
knowledge.   5 177
Beyond, we look at the incentive structures  6 177
of mortgage brokers and loan officers, and we see that  7 177
some of them create additional challenges.   8 177
Specifically, where it relates to specific loan  9 177
features and terms, may result in consumers not  10 177
obtaining the best mortgage for which they qualify. 11 177
This can really worsen a consumer's economic  12 177
circumstance.  Problems exist in the regulatory  13 177
structure as well.  Historically, the federal  14 177
regulations have played an essential role in promoting  15 177
a fair and efficient marketplace, by clearly defining  16 177
these ethical industry standards and consumer  17 177
practices. 18 177
Unfortunately, some non-bank lenders and  19 177
brokers operate largely outside the federal regulatory  20 177
structure.  So therefore, what we find in looking at  21 177
the channels is that the most vulnerable borrowers in  22 177
our country are less likely to benefit from federal  23 177
consumer protections that are generally present in the  24 177
prime market. 25 177
So this lack of regulatory uniformity  1 178
actually distorts the market activity, and as less  2 178
regulated market segments exploit the advantage of  3 178
reduced regulations over their more regulated  4 178
competitors.  So we really have kind of a lack of  5 178
efficiency in the marketplace right now. 6 178
The two Joint Center papers that I mentioned  7 178
earlier suggest a range of solutions, and I won't go  8 178
through all of those.  But I'll just speak to the  9 178
consumer point, that letting the consumer decide has  10 178
distinct limitations, and efforts must be expanded to  11 178
guide consumers to good loans. 12 178
So specifically we look at how we changed  13 178
disclosure regulations to enhance consumer shopping,  14 178
and knowing that often they come too late.  I'll get  15 178
to this in our Q and A, because I'm about to run out  16 178
of time here. 17 178
But we make sure we match it to improve  18 178
timing.  We know that the timing issue really limits  19 178
the ability for disclosures to have an impact for  20 178
consumers in their shopping. 21 178
We also believe and even apply some of our  22 178
consumer principles to lead consumers to good loans.   23 178
So I think some of the suggestions around setting  24 178
defaults, specifically around the escrow, where you  25 178
really encourage a consumer to opt-in to the good  1 179
choice, while allowing for opt-outs in certain  2 179
circumstances. 3 179
These are good things.  It's what we learn  4 179
from consumer behaviors for setting defaults, and I  5 179
think that's a perfect example of how to set an  6 179
appropriate default solution. 7 179
Lastly, the federal government should  8 179
establish uniform minimum standards, while allowing  9 179
room for states to innovate.  So whether this is a  10 179
standing interagency guidance to cover all lenders,  11 179
including non-banks, to create a floor and create even  12 179
competition and consumer protection.  13 179
We also believe that the federal government  14 179
should assume responsibility for licensing mortgage  15 179
brokers and loan originators.  We think this is  16 179
important at this point.  There's clearly some  17 179
problems in the marketplace. 18 179
At the same time, we would want to assure  19 179
that the federal government allows for states to  20 179
establish higher licensing requirements if local  21 179
conditions warrant, to allow the states to be the  22 179
place to kind of test cases, where we can analyze and  23 179
see how regulations can be done and learn from those  24 179
experiences. 25 179
As the federal government does so, we should  1 180
make sure there's enough resources at the state level  2 180
to support the kind of enforcement that needs to  3 180
happen.  Thank you. 4 180
GOVERNOR KROSZNER:  Thank you very much.   5 180
Now we'll turn to Joe Mason from Drexel, someone whom  6 180
I have known since he was in graduate school. 7 180
MR. MASON:  Thank you.  Thank you, Randy.   8 180
Thank you, Ms. Braunstein and thank you to the Board  9 180
for the opportunity to testify today on this extremely  10 180
important topic of mortgage terms and regulation. 11 180
The overall theme of my statement today will  12 180
be that specific loan features and underwriting  13 180
practices are not per se undesirable.  While the  14 180
borrower may not always been the best judge of  15 180
suitability for particularly complex loan products,  16 180
non-price terms like prepayment penalties and escrows  17 180
are valuable ways to keep borrowing affordable, while  18 180
stated income and no doc loans play a crucial role for  19 180
small business people and entrepreneurs in today's  20 180
credit marketplace. 21 180
The remarks that follow and the more  22 180
detailed handout at the back, pose a challenge to  23 180
policymakers to improve regulation without hindering  24 180
new financial product development and borrower  25 180
flexibility, while at the same time striking a balance  1 181
between pursuing fraud and misrepresentation through  2 181
education and advocacy, and allowing individuals and  3 181
society to learn from their mistakes. 4 181
The consumer credit industry has found it  5 181
extremely lucrative in recent years to market on the  6 181
basis of payments rather than price.  Consumers have  7 181
become comfortable with temporary use rather than  8 181
ownership. 9 181
Non-price terms like prepayment penalties  10 181
and escrows tend to lower loan payments to levels that  11 181
are accessible to consumers.  While it's been standard  12 181
for business borrowers to choose from a menu of non- 13 181
price terms associated with different stated interest  14 181
rates, those choices are new to most consumers and  15 181
create new challenges for consumer credit regulation. 16 181
Standard MBA textbooks teach that the total  17 181
loan price is a function of the non-price terms, the  18 181
fee-based terms and the stated interest rate.  When  19 181
the borrower agrees to forego something, like  20 181
prepayment flexibility, or maintains something like  21 181
escrow balances, they're giving up the option of  22 181
acting otherwise. 23 181
Hence, many non-price terms can be valued as  24 181
a foregone options.  Foregone options that reduce  25 181
credit risk are valuable to the lender; hence, non- 1 182
price terms should lower interest rates by the value  2 182
of the option. 3 182
A borrower that does not intend to move or  4 182
refinance during the prepayment penalty term can  5 182
benefit by credibly committing that intent to the  6 182
lender, and receive a lower interest rate in return. 7 182
In such cases, however, the borrower may not  8 182
pay attention to the size of the prepayment penalty,  9 182
reasoning that the probability of moving is so small  10 182
that the feature doesn't pertain to them.  11 182
Ex-poste however, the borrower may lose  12 182
their job or just want to refinance during the  13 182
prepayment penalty period.  The borrower planned  14 182
wrong.  It's important to remember, however, that the  15 182
prepayment penalty that some allege to be per se  16 182
predatory has already been offset by a period of lower  17 182
interest payments up to that date.  Hence, the  18 182
borrower benefitted. 19 182
Escrow elections perform a similar economic  20 182
function.  The credible commitment to timely tax and  21 182
insurance payments reduces monthly payments by an  22 182
amount equal to the value of the foregone option.  The  23 182
borrower that does not intend to miss tax and  24 182
insurance payments can credibly commit that to the  25 182
lender, and receive an interest rate savings in  1 183
return. 2 183
If the lender or servicer can use the funds  3 183
in the same manner in core deposits, the interest  4 183
savings to the borrower should be even greater.  Many  5 183
new loan features are being invented that provide  6 183
similar tradeoffs between non-price terms and monthly  7 183
payments.   8 183
State-of-the-art products like reverse  9 183
mortgages and new REX mortgages pose risks that are  10 183
not yet fully understood, and reduce monthly payments  11 183
to zero and beyond.  The challenge, therefore, becomes  12 183
how to help borrowers understand the value of these  13 183
non-price features, and decide which loan is right for  14 183
them. 15 183
Financial education in the U.S., even at the  16 183
K-12 level, is woefully inadequate.  A handful of  17 183
banks have begun providing financial education for  18 183
immigrant groups, as a way to approach that new market  19 183
for predominantly no doc and stated income loans.  But  20 183
there is virtually no financial education initiative  21 183
focused towards the elderly, who have the most at  22 183
stake in very complex reverse mortgage arrangements. 23 183
Even with education, however, consumers may  24 183
have difficulty understanding the value and importance  25 183
of non-price terms that are appropriate for their  1 184
transaction.  The problem is the complexity of the  2 184
transaction itself, combined with the relatively rare  3 184
incidence of home financing during one's lifetime. 4 184
It may therefore make sense to acknowledge  5 184
the limits to education and disclosure, by  6 184
recommending the advice of an independent third party  7 184
legal or financial professional in the event that  8 184
standard disclosure does not adequately represent the  9 184
risks of a particular loan product, rather than  10 184
prohibit such features outright. 11 184
Such a provision may balance financial  12 184
product innovation, with borrower protection, in a  13 184
manner beneficial to both. 14 184
Last, a brief caveat.  No matter the  15 184
disclosures or provisions enacted by the Board, some  16 184
borrowers will borrow no matter what the terms.  When  17 184
home price appreciation is again in the double digits  18 184
and income is rising, borrowers, brokers, originators,  19 184
investment banks and investors will not take the time  20 184
to properly understand the risks they're assuming. 21 184
Willful overborrowing is not a reason to  22 184
abrogate or limit contracts.  Thank you. 23 184
GOVERNOR KROSZNER:  Thank you very much,  24 184
Joe.  Now we're going to turn to Mike Decker from the  25 184
Securities Industry and Financial Markets Association,  1 185
which is now called SIFMA.   2 185
MR. DECKER:  Good afternoon and thank you  3 185
for the opportunity to be here.  The evolution of  4 185
mortgage securitization has been one of the most  5 185
remarkable developments in the financial markets over  6 185
the last 25 years.  7 185
The mortgage securities market, now the  8 185
largest sector of the U.S. fixed income market, has  9 185
brought numerous benefits to investors and especially  10 185
home buyers, and has reduced risks for banks, thrifts  11 185
and others engaged in mortgage lending. 12 185
The rise of subprime lending and the growth  13 185
 in access to mortgage credit for subprime home buyers  14 185
wouldn't have been possible without mortgage  15 185
securitization.   16 185
Millions of eligible families have been able  17 185
to purchase homes as a result of subprime mortgages  18 185
and mortgage-backed securities.  We estimate that  19 185
nearly 2.2 million families use subprime financing to  20 185
purchase their first homes between 2000 and 2006.   21 185
However, it has become clear that  22 185
underwriting standards were at times too loose at the  23 185
peak of the housing boom.  Subprime loans that  24 185
shouldn't have been made were made.  Subprime lenders,  25 185
secondary market investors and most importantly  1 186
borrowers are now paying the price. 2 186
The market has clearly and swiftly reacted  3 186
to correct the excesses.  This can be seen in the  4 186
closure of a number of subprime lenders, and  5 186
increasing loss rates on bonds backed by subprime  6 186
mortgages, which were poorly underwritten. 7 186
Overall, however, the subprime market has  8 186
worked extraordinarily well, and has served the needs  9 186
of homebuyers with weak credit.  Clearly, the vast  10 186
majority of subprime borrowers are able to pay their  11 186
loans on time, and they have been able to achieve the  12 186
dream of home ownership. 13 186
The vast majority of subprime mortgages are  14 186
sold by loan originators into the secondary market,  15 186
and become collateral for mortgage-backed securities.  16 186
 Participants in the secondary mortgage market  17 186
generally are not in positions to determine whether  18 186
the loans in which they invest were originated under  19 186
illegal, inappropriate or fraudulent terms. 20 186
It would be inappropriate and unfair to  21 186
expect mortgage wholesalers or MBS investors to serve  22 186
as the supervisors of the subprime mortgage market.   23 186
Indeed, imposing undue obligations or liabilities on  24 186
secondary market participants would simply drive them  25 186
from the market altogether, and dry up funding for  1 187
subprime originations. 2 187
Some policymakers at the federal, state and  3 187
local level have supported imposing such assignee  4 187
liability on secondary market participants.  In some  5 187
cases, these efforts have resulted in a total shutdown  6 187
of subprime lending in those jurisdictions. 7 187
In addition, subprime mortgage regulation at  8 187
the federal, state and local levels have left the  9 187
market with a patchwork of different and sometimes  10 187
conflicting laws governing liabilities for the  11 187
secondary market. 12 187
SIFMA opposes the imposition of liability  13 187
for illegal lending on secondary mortgage market  14 187
participants.  However, if policymakers do impose  15 187
assignee liability on investors or others, observing  16 187
several key principles would help mitigate an  17 187
negative, unwanted effects, and ensure that worthy  18 187
subprime borrowers continue to have access to mortgage  19 187
loans. 20 187
These include, for example, providing for a  21 187
clearly defined national standard for subprime  22 187
lending, and ensuring that damages associated with  23 187
assignee liability would not exceed the actual  24 187
economic damage suffered by borrowers, among others. 25 187
In recent years, some states have imposed  1 188
assignee liability provisions that have been based on  2 188
unclear, subjective standards; have imposed uncapped  3 188
liabilities on assignees; or have otherwise imposed  4 188
unreasonable burdens on secondary market participants. 5 188
Perhaps the most egregious example was the  6 188
2002 Georgia Fair Lending Act, which included several  7 188
provisions that were onerously difficult to interpret  8 188
or apply, and which imposed potentially unlimited  9 188
liability on assignees. 10 188
The result of that action was a virtual  11 188
shutdown of the subprime lending business in Georgia,  12 188
unless the law was amended the next year.  In addition  13 188
to ensuring that assignee liability standards are  14 188
clear, objective and reasonable, SIFMA has views on  15 188
several other policy responses to current issues in  16 188
the subprime market. 17 188
For example, we encourage loan servicers to  18 188
employ flexibility, as provided for in loan and  19 188
servicing contracts, and in accordance with applicable  20 188
law and accounting standards, to help borrowers in  21 188
trouble avoid foreclosure. 22 188
Indeed, we have been promoting steps that  23 188
can help keep families in their homes.  These might  24 188
include alternative repayment plans, forbearance  25 188
agreements and loan modifications. 1 189
No one benefits from foreclosures, and it is  2 189
in the interest of both borrowers and lenders to try  3 189
and keep homeowners in their homes.  However, we  4 189
strongly oppose governmentally mandated forbearance or  5 189
loan modification.  Such actions would impose  6 189
unreasonable penalties on mortgage investors, not  7 189
responsible for how loans were originated, and would  8 189
threaten the legal and contractual underpinnings of  9 189
securitization and reduce the willingness and ability  10 189
of the secondary market to finance mortgage lending.  11 189
We also impose the imposition of suitability  12 189
standards applicable to mortgage lending, and we  13 189
oppose regulatory restrictions on specific mortgage  14 189
products.  Suitability is inherently subjective, and  15 189
would be too difficult to apply in the context of the  16 189
lender-borrower relationship. 17 189
Restricting particular mortgage products  18 189
could prevent lenders from offering borrowers  19 189
mortgages that best meet their needs. 20 189
SIFMA is committed to helping policymakers  21 189
at all levels of government address current issues in  22 189
the subprime market, in a way that preserves mortgage  23 189
lending for families with poorer credits. 24 189
Thank you again for the opportunity to be  25 189
here.  We'll be submitting a written response to the  1 190
specific questions raised for the hearing topic in a  2 190
very short time, and I look forward to our  3 190
discussions. 4 190
GOVERNOR KROSZNER:  Thank you very much,  5 190
Mike.  Now we're going to turn to Steve Antonakes from  6 190
the Banking Commission in Massachusetts. 7 190
MR. ANTONAKES:  Good afternoon Governor  8 190
Kroszner and Director Braunstein.  My name is Stephen  9 190
Antonakes.  I serve as the Commissioner of Banks in  10 190
the Commonwealth of Massachusetts.  My office  11 190
supervises over 260 state-chartered banks and credit  12 190
unions, and over 2,000 licensed mortgage lenders and  13 190
mortgage brokers. 14 190
The evolution of a subprime mortgage market  15 190
compounded by a weakening real estate market and  16 190
increasing interest rates, have led to a substantial  17 190
number of foreclosures.  These issues have been well- 18 190
chronicled. 19 190
My goal this afternoon is to focus primarily  20 190
upon efforts underway in Massachusetts to improve the  21 190
supervision of the mortgage industry and assist  22 190
homeowners facing foreclosure.  I will also touch  23 190
briefly upon coordinated efforts among state mortgage  24 190
regulators and some actions I believe the Federal  25 190
Reserve could take under existing authority to further  1 191
enhance consumer protection. 2 191
Last year, my office conducted over 400  3 191
examinations of non-bank lenders and brokers.   4 191
Examinations include a review of their overall  5 191
financial safety and soundness, and compliance with  6 191
Massachusetts and federal consumer protection laws. 7 191
As a result of our supervisory efforts, my  8 191
office issued over 100 enforcement actions last year  9 191
against licensed lenders and brokers.  In addition to  10 191
our normal examination activities, we conducted a  11 191
sweep of 90 mortgage brokers predominantly serving low  12 191
and moderate income communities, focusing upon stated  13 191
income loans. 14 191
As a result of these visitations, we issued  15 191
several cease and desist orders, essentially  16 191
shuttering companies found to be overstating income on  17 191
loan applications or engaging in other types of  18 191
deceptive practices.  19 191
In an effort to develop a comprehensive  20 191
strategy to address increasing foreclosure rates in  21 191
Massachusetts, my office organized a Mortgage Summit  22 191
this past November, attended by nearly 50 individuals,  23 191
representing 29 government, industry and non-profit  24 191
organizations. 25 191
Following the Summit, we established two  1 192
working groups, one that focused on rules and  2 192
enforcement and the other on consumer education and  3 192
foreclosure assistance.  Each working group met at my  4 192
office for two weeks for three months. 5 192
Massachusetts Governor Deval Patrick has  6 192
taken steps to effect both the long-term and short- 7 192
term goals, to improve supervision over the industry,  8 192
and protect homeowners.  He's directed my office to  9 192
immediately begin implementing the recommendations of  10 192
the Mortgage Summit Working Groups, including amending  11 192
existing regulations and drafting new legislation. 12 192
Changes in regulations will result in  13 192
increased net worth, bonding and experience  14 192
requirements for licensed lenders and brokers, and  15 192
increased licensing and examination fees for licensed  16 192
mortgage lenders and brokers, to support additional  17 192
examiner hires and the staffing of a mortgage fraud  18 192
unit. 19 192
Earlier this week, the governor filed a bill  20 192
to enact the legislative recommendations of the Summit  21 192
Working Groups.  The bill includes provisions to  22 192
criminalize mortgage fraud, prohibit abusive  23 192
foreclosure rescue schemes, prohibit a lender from  24 192
making an adjustable rate subprime loan unless a  25 192
consumer affirmatively opts out of a fixed rate  1 193
product and presents a certificate indicating that  2 193
they've received home buyer counseling, and will also  3 193
establish a central repository of foreclosure  4 193
information at the Division of Banks to enable my  5 193
office to track foreclosure data by product,  6 193
geographic region, originator, broker and lender. 7 193
In addition, the administration has already  8 193
testified in favor of bills to license mortgage loan  9 193
originators and extend provisions of the Massachusetts  10 193
Community Reinvestment Act to certain mortgage  11 193
lenders. 12 193
In order to provide immediate assistance, my  13 193
office has also, on a case-by-case basis, seeked  14 193
delays in the foreclosure process from mortgage  15 193
lenders and mortgage services for any Massachusetts  16 193
homeowner who files a complaint with my office. 17 193
The goal is to provide a short amount of  18 193
time to allow my office to review complaints, refer  19 193
homeowners to reputable home ownership counseling  20 193
firms, and encourage mortgage lenders to utilize this  21 193
time to work with homeowners who are unable to make  22 193
their mortgage payments.  To date, we have fielded  23 193
over 400 calls from Massachusetts residents.   24 193
In recent years, state mortgage regulators  25 193
have also been working collaboratively to improve  1 194
supervision of the residential mortgage industry.   2 194
Several high profile nationwide settlements have  3 194
returned nearly one billion dollars to consumers. 4 194
In addition, through the Conference of State  5 194
Bank Supervisors and American Association of  6 194
Residential Mortgage Regulators, three years of work  7 194
have gone into the development and implementation of a  8 194
nationwide database of mortgage professionals. 9 194
This system will provide a national  10 194
repository of licensing and enforcement actions, and  11 194
is scheduled to be launched on January 1st of 2008.   12 194
Finally, over 40 state mortgage regulators have either  13 194
adopted or are in the process of adopting guidance  14 194
similar to federal interagency guidance on non- 15 194
traditional mortgage loans.  Similar action is  16 194
expected once the statement on subprime lending is  17 194
finalized.   18 194
Based upon my experience as a state  19 194
regulator, I believe there are areas where the Federal  20 194
Reserve Board could use its broad rule-making  21 194
authority to ensure one set of rules exist throughout  22 194
the country, relative to subprime mortgage lending. 23 194
Respectfully, I would recommend that the  24 194
Board consider the following:  Prepayment penalties  25 194
should expire at least 30 days prior to the first  1 195
adjustment period for subprime adjustable rate  2 195
mortgage loans. 3 195
The Board should use its broad authority  4 195
under HOEPA to ensure that all creditors abide by  5 195
prepayment penalty limitations applicable to them,  6 195
regardless of whether they're state or federal laws.  7 195
The Board should require escrow for taxes  8 195
and insurance for all subprime mortgage loans, with  9 195
the ability of the borrower to affirmatively opt out.  10 195
 The Board should consider adopting a rule whereby  11 195
consumers qualified for subprime credit would normally  12 195
receive a 30-year fixed rate, fully amortizing, full  13 195
documentation loan.  An affirmative opt-out and  14 195
completion of counseling would be required for the  15 195
subprime borrower to apply for the subprime loan,  16 195
which either features an adjustable rate or a negative  17 195
amortization or less than full documentation of  18 195
income. 19 195
Finally, the Board should require lenders to  20 195
underwrite all subprime and non-traditional mortgage  21 195
products based upon the fully-indexed rate, and based  22 195
upon a fully-amortizing payment schedule. 23 195
I appreciate the opportunity to testify this  24 195
afternoon, and look forward to your questions. 25 195
GOVERNOR KROSZNER:  Thank you very much,  1 196
Steve, and also Steve is our representative on the  2 196
FFIEC, the regulatory body or the body that  3 196
coordinates among the federal regulators and the  4 196
recent regulatory relief bill included many of the  5 196
states on there.  We're very pleased to have Steve as  6 196
part of that. 7 196
We're also very pleased to have Lori Swanson  8 196
with us back again.  She's a part of our Consumer  9 196
Advisory Council, but I just want to do something.   10 196
But unfortunately, she decided that Minnesota was  11 196
where she needed to be, and she's now the attorney  12 196
general of Minnesota.  Lori? 13 196
MS. SWANSON:   Governor Kroszner, Director  14 196
Braunstein, Board staff, thank you for the opportunity  15 196
to appear today on this important topic. 16 196
I think it's important to put into context  17 196
what we're here about.  You know, mortgage is the  18 196
largest financial transaction for most Americans, and  19 196
the American dream of home ownership has been the way  20 196
that most middle income Americans have built a nest  21 196
egg. 22 196
Yet today, many of our neighbors live  23 196
paycheck to paycheck.  They can't work harder, spend  24 196
less or save any more.  That makes them particularly  25 196
vulnerable to surprises in their mortgage transaction,  1 197
like exploding interest rates, hidden prepayment  2 197
penalties our undisclosed payments. 3 197
It's also important to recognize that  4 197
there's an unlevel playing field between the borrower  5 197
and the mortgage lender.  Anybody who's ever attended  6 197
a mortgage closing understands the blizzard of paper  7 197
work put before the borrower.  But that gets stacked  8 197
against the home owner and some untrustworthy lenders  9 197
and brokers use that stacked deck to their fullest  10 197
advantage. 11 197
Documents uncovered during our investigation  12 197
of one company describe the sales environment of the  13 197
lender as a "boiler room."  A manager in another  14 197
lending institution told his brokers "We're all here  15 197
to make as much money as possible, bottom line.   16 197
Nothing else matters." 17 197
Our office, along with Iowa, was one of the  18 197
lead states and three of the country's biggest  19 197
mortgage lending enforcement actions including FAMCO,  20 197
Household Finance and AmeriQuest.  Those cases  21 197
involved such abuses as misleading borrowers into  22 197
purchasing teaser ARMs with exploding interest rates;  23 197
forcing borrowers to stay in expensive loans through  24 197
costly prepayment penalties, and placing borrowers in  25 197
stated income loans, in which the lender fabricated  1 198
borrowers' income or assets. 2 198
You know, some subprime lenders like to  3 198
claim that they do these things to help borrowers  4 198
achieve the American dream of home ownership.  I know,  5 198
however, that in many of the most abusive loans,  6 198
they're actually refinancing loans where the person  7 198
already had a mortgage and already had a home, and in  8 198
fact many of those are sold as cash-out refinancings,  9 198
where the borrower is encouraged to use the loan  10 198
proceeds to pay off things like credit card debt.   11 198
I would urge the Board to adopt substantive  12 198
regulations to help address the predatory mortgage  13 198
lending crisis.  In Minnesota, I put together a  14 198
predatory lending study group comprised of bankers and  15 198
business people, legal experts and policymakers, to  16 198
recommend reforms in this area.   17 198
It resulted in state legislation, which was  18 198
enacted into law this spring, which covers really all  19 198
of the main topics for today's hearings.  I would urge  20 198
the Board to use its regulatory authority under HOEPA  21 198
to similarly regulate these practices. 22 198
I caution the Board that enhanced  23 198
disclosures to the loan are not enough.  It's very  24 198
easy, given the complexity of a mortgage transaction  25 198
as I described it, for a broker or lender who's bent  1 199
on misleading a borrower to do so, regardless of the  2 199
disclosures.  I think there is a need for substantive  3 199
regulation. 4 199
I'd like to briefly touch on some of the  5 199
main topics for today's hearing.  With regard to  6 199
stated income loans, we've seen in Minnesota and  7 199
around the country serious abuses with stated income  8 199
loans.  In my state, we see brokers falsify  9 199
applications to claim that people in the 80's hauled  10 199
in cash by making birdhouses they didn't make,  11 199
cleaning homes they didn't clean.  We had a gardener  12 199
in his early 20's made six grand a month as a  13 199
landscape engineer.  That a suburban couple made money  14 199
renting out an apartment in their home of their  15 199
basement that they didn't have. 16 199
It's no surprise that borrowers, who are put  17 199
into products because of that kind of activity,  18 199
default because they can't afford the monthly  19 199
payments.  The Minnesota legislation prohibits loans   20 199
based merely on a statement by the borrower of his  21 199
income or net worth.  22 199
Borrowers and lenders have to verify the  23 199
borrower's income and assets by reliable documents  24 199
like tax returns, payroll receipts or bank records.  I  25 199
frankly think it should be a no-brainer for a lender  1 200
to verify in some way the income and assets on an  2 200
application, at least by looking at historical tax  3 200
returns, to make sure that the applicant has in the  4 200
past earned something in the ballpark of what they put  5 200
down on the application. 6 200
I'd encourage the Board to similarly look at  7 200
banning stated income loans in the subprime market.   8 200
With regard to borrowers' ability to repay,  9 200
far too many mortgage loans have been sold with little  10 200
or no regard to the borrowers' ability to repay the  11 200
loan with little or no underwriting.  The  Minnesota  12 200
legislation requires brokers and lenders to verify the  13 200
borrowers' ability to pay, not just the principal but  14 200
also the taxes, insurance and the like.  The lender  15 200
must confirm that the borrower can repay not just the  16 200
initial payments but also the payments when the price  17 200
spikes occur.  I would also urge the Board to adopt  18 200
similar regulations there. 19 200
In my state, we have banned prepayment  20 200
penalties for subprime mortgages, which can oftentimes  21 200
trap people into an unsuitable loan, because they  22 200
can't afford to pay the prepayment penalty. 23 200
The Minnesota legislation is a good step,  24 200
but we need the Board's help to fully address this  25 200

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