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
issue.  The recent U.S. Supreme Court decision in the  1 201
Waters case restricts states' ability to regulate  2 201
national banks and their direct operating  3 201
subsidiaries. 4 201
As a result, Minnesota's legislation doesn't  5 201
extend to national banks or national bank operating  6 201
subsidiaries.   7 201
Since the Minnesota legislation passed just  8 201
this spring, here's a classified ad from the June  9 201
Star-Tribute, Minneapolis' largest newspaper, that  10 201
says "We're hiring aggressive, paying aggressive  11 201
incentive bonuses. We're hiring retail mortgage loan  12 201
consultants.  Our federally chartered status allows us  13 201
to continue to offer stated income and deferred  14 201
interest loans," because our law also bans negative  15 201
amortization loans.   16 201
So they're using essentially that Waters  17 201
decision to try to get around what would otherwise be  18 201
prohibitions. 19 201
So I think the states have shown leadership  20 201
in this area.  The states also need to help the Board  21 201
to fully address this issue. 22 201
I'd like to make one final point.   23 201
Everything we're talking about today is really  24 201
prospective in nature, and we've got a lot of  25 201
homeowners today who are under water, who are in  1 202
trouble.  I appreciate and recognize that the Board  2 202
has taken steps to encourage lenders under your  3 202
supervision to work with borrowers to reach effective  4 202
loan restructurings. 5 202
In my office, we're doing the same thing,  6 202
working with lenders and consumers.  We'd just urge  7 202
the Board to do anything in its power to continue to  8 202
do that, and take that position. 9 202
I believe that the financial institutions  10 202
that helped create this problem, either by writing  11 202
abusive loans or providing the financing that enabled  12 202
them to occur, do have the responsibility to work with  13 202
the borrower to help solve the problem.  I thank you  14 202
again for the opportunity. 15 202
GOVERNOR KROSZNER:  Well, thank you very  16 202
much again for all the excellent presentations, and  17 202
for keeping to the time limits, so that we can have a  18 202
good, robust discussion once again.   19 202
I think where we want to start off is where  20 202
we ended in the discussion this morning, in thinking  21 202
about consideration for borrowers' ability to pay.   22 202
This is a subject that a number of you had mentioned,  23 202
and that's one of the things that Lori had concluded  24 202
with. 25 202
So I want to explore that a little bit  1 203
further, both what is being done in the different  2 203
states, and we would like to see what's being done at  3 203
the different state levels and what is available under  4 203
HOEPA. 5 203
I don't know who wants to sort of start off  6 203
with that.  Probably one of the representatives from  7 203
the states might be -- 8 203
MS. BRAUNSTEIN:  Yes.  We're particularly  9 203
interested in how you define that in your state  10 203
statutes, and how you structure it, so that to put  11 203
some certainty some markets for the industry, so they  12 203
will know if they're meeting the criteria or not.   13 203
What are the statutes in this area?  Lori, do you want  14 203
to start? 15 203
MS. SWANSON:   Yes, I'd be happy to.  In our  16 203
state, we do have a couple of different ways in the  17 203
Minnesota legislation.  First, as I mentioned, we ban  18 203
purely stated income loans, no documentation loans.   19 203
Essentially, the state legislation says if you're  20 203
going to make and arrange a mortgage transaction,  21 203
you've got to in some way verify what is put down on  22 203
the application.  You've got to verify that the  23 203
borrower really has the income, really has the assets. 24 203
I'll note the argument that folks on the  25 203
other side will make is well, with regard to stated  1 204
income loans, that these loans have often been used  2 204
for people who are self-employed, who maybe don't have  3 204
the reliable stream of income. 4 204
We've seen case after case through my office  5 204
where people are, you know, subprime borrowers  who do  6 204
have a job and put in stated income loans, and it has  7 204
allowed widespread fraud and abuse. 8 204
The other point I'd make on that regard is  9 204
that sometimes that self-employed argument, the real  10 204
argument that I heard in the Minnesota legislature was  11 204
well gee, for a self-employed person may really be  12 204
pulling in 150 grand, but they've got so many  13 204
writeoffs.  The bottom line is their tax return they  14 204
may only be paying taxes on 50. 15 204
Well, I don't think the government ought to  16 204
be in the business of helping people essentially cheat  17 204
on their taxes.  So I think that argument sort of goes  18 204
away. 19 204
We also look at ability to repay by  20 204
basically saying you've got to look at, you know, the  21 204
ability to pay the fully-indexed rate and a repayment  22 204
schedule, which is full amortization over the life of  23 204
the loan.  So it can't just be can they repay the loan  24 204
at the initial teaser rate, but can they repay when  25 204
that rate is reset? 1 205
That's really how we address it through the  2 205
state legislature. 3 205
MS. BRAUNSTEIN:  So you didn't -- Lori, you  4 205
didn't set thresholds for debt to income ratios or  5 205
anything like that? 6 205
MS. SWANSON:   We did not.  The other  7 205
standard we put in place in the state law, recognizing  8 205
that we did have the authority to regulate the broker,  9 205
a duty of agency on the broker, much like the kind of  10 205
suitability standard or fiduciary standard that an  11 205
insurance agent would have or a securities  12 205
representative would have. 13 205
That requires that before the broker can put  14 205
somebody into a loan, they have to do -- ensure the  15 205
suitableness or there's some tangible benefit to it.   16 205
But we don't have a bright line standard. 17 205
GOVERNOR KROSZNER:  And what has been the  18 205
consequence of this, because certainly one of the  19 205
concerns has been, and it was raised in some of the  20 205
discussion, is that  I think that these kinds of  21 205
standards potentially can impinge on responsible  22 205
lending, not just irresponsible lending? 23 205
MS. SWANSON:   The law has just now passed  24 205
this spring, and so it's yet to be implemented. 25 205
MR. PEARCE:  I wanted to say something. 1 206
GOVERNOR KROSZNER:  Go ahead, Mark. 2 206
MR. PEARCE:  North Carolina hasn't enacted  3 206
any legislation on this yet.  I'd just make two quick  4 206
points.  The first is for HOEPA, I would encourage you  5 206
to have a bright line rule, some sort of safe harbor  6 206
that -- I think DTIs are good and what the number is. 7 206
You know, in some ways you all address this  8 206
in your 2001 revisions to HOEPA, and so in some ways  9 206
moving that forward or expanding that I think is a  10 206
good idea. 11 206
We already have, we've worked together on  12 206
guidance, that already says that one of the things to  13 206
be made was the ability to repay.  That guidance is  14 206
principles-based, and I know you all are working on  15 206
enforcing that and at the state level, we're working  16 206
on enforcing that as well. 17 206
So finding opportunities to work together,  18 206
to make sure we're enforcing that consistently is  19 206
something we need to work on outside this meeting.   20 206
But I think -- so there's room for principles-based,  21 206
but I think HOEPA needs to be clear. 22 206
GOVERNOR KROSZNER:  Tom? 23 206
MR. MILLER:  We don't have legislation  24 206
either.  You know, what I think is obviously the  25 206
starting point is there has to be something general,  1 207
at least, that says the ability to pay extends  2 207
throughout the duration of the loan. 3 207
How that's -- excuse me.  I'm recovering  4 207
from a little spring cold that extended.  How that's  5 207
actually implemented and whether there's specific hard  6 207
and fast rules, you know, I guess we haven't as AGs  7 207
gotten to that point, where we're at is the basic  8 207
concept that ability to pay has to extend throughout. 9 207
It has to extend to the whole industry.   10 207
Whatever we as a group do and you do, it has to extend  11 207
to the whole industry. 12 207
GOVERNOR KROSZNER:  Well, one part of this  13 207
important point, which gets to your point also, but is  14 207
this best done through coordination with the states,  15 207
through if the federal regulators put up guidance that  16 207
we then coordinate with you, to try to implement at  17 207
the state level, or is this something that you think  18 207
needs to be done through a particular HOEPA rule, that  19 207
may be more challenging to do in a principles-based  20 207
way than the guidance would be? 21 207
MR. PEARCE:  For me, it would be the latter.  22 207
 I think HOEPA needs to set out some bright line  23 207
standards to move the marketplace.  I think state and  24 207
federal regulators should work together on enforcing  25 207
the fuzzier principles-based standard, to address, you  1 208
know, within the boundaries. 2 208
I think HOEPA's boundary just needs to move,  3 208
to get -- to make sure that there's some limits that  4 208
we can say, and I think HOEPA now has a 50 percent  5 208
number, and I think that's -- I've seen very few loans  6 208
that I thought had a DTI of 50 percent, that the  7 208
borrower had actually a meaningful ability to repay  8 208
the loan. 9 208
So I think setting the boundary in HOEPA and  10 208
then using our guidance collectively to address the  11 208
cases where somewhere less than that is probably the  12 208
right outcome. 13 208
GOVERNOR KROSZNER:  So I just want to drill  14 208
down on this a little bit more, and then I can get  15 208
others.  So what specifically more do we need to do,  16 208
since we have the 50 percent already.  What more do we  17 208
need to do? 18 208
MR. PEARCE:  So I would say the ability to  19 208
repay needs to be, you know, part of the unfair and  20 208
deceptive trade practice or unfair practice, to  21 208
originate a loan without concern for the borrower's  22 208
ability to repay the loan at a fully-indexed rate,  23 208
fully amortizing payment schedule. 24 208
Then you could say if the debt to income  25 208
ratio is less than 50 percent, then we'll send you  1 209
that rule.  So that's very clear.  Everyone can  2 209
understand how that operates in the marketplace, and  3 209
that applies to all institutions across the state,  4 209
across the country. 5 209
GOVERNOR KROSZNER:  Steve, I want to make  6 209
sure to hear from you on some of these things.  But I  7 209
want to hear your perspective on this. 8 209
MR. ANTONAKES:  No, I agree.  I think it  9 209
would be better under HOEPA, and would be, you know,  10 209
addressing loans beyond high cost loans, because  11 209
frankly in our experience, we have a predatory lending  12 209
law as well, is that once you pass the threshold, no  13 209
one makes high cost loans anymore. 14 209
They have means of getting below those  15 209
thresholds.  The ability to repay is, you know, to the  16 209
fully-indexed rate, a fully amortizing payment, you  17 209
know.  I don't see why it can't be further enhanced by  18 209
being included in the reg, as opposed to just a  19 209
guidance, which may be interpreted by some as  best  20 209
practices as opposed to a rule to be followed. 21 209
GOVERNOR KROSZNER:  Mike? 22 209
MR. DECKER:  I'd just make two points, I  23 209
think.  First, if there was going to be some kind of  24 209
an ability to repay provision implemented through  25 209
HOEPA, we'd advocate that it be some kind of a clear  1 210
bright line type rule, that both originators and  2 210
secondary market participants could easily determine  3 210
that the loan was in compliance through the kinds of  4 210
information that generally follows the loan from one  5 210
owner to the next. 6 210
The other point that I'd make is with  7 210
respect to HOEPA generally, and with respect to  8 210
implementing regulations through HOEPA, relatively few  9 210
loan originators actually make HOEPA loans.  The  10 210
standards are such that if a lender can't structure a  11 210
loan such that it falls outside of HOEPA, often the  12 210
loan just doesn't get made.   13 210
So if you restrict the kinds of loans that  14 210
are defined, if you further restrict the kinds of  15 210
loans that are defined under HOEPA, and lenders can't  16 210
find a way to structure loans outside of HOEPA, you'll  17 210
have some borrowers that simply won't get lending, and  18 210
that should be a consideration. 19 210
GOVERNOR KROSZNER:  I want to turn to the  20 210
academics, because I know there's been a lot of study  21 210
of what different states have adopted and changed some  22 210
of their regulations, and to get at exactly these  23 210
kinds of issues.  24 210
What sorts of provisions seem to have worked  25 210
and haven't worked in trying to provide safe harbors  1 211
and, in some cases, unsafe harbors, which have led to  2 211
a reduction of both irresponsible lending but  3 211
potentially responsible lending? 4 211
MR. MASON:  Well, getting back to --  5 211
starting with DTI, I want to say I would beware of  6 211
applying a bright line to a fuzzy concept, because the  7 211
concept is debt today is what's in question.  This  8 211
subprime  thing we have, which doesn't build equity  9 211
ownership in a house, is something we're calling debt. 10 211
I would be very wary of the composition of  11 211
debt in the consumer's portfolio.  Are they leasing a  12 211
car and renting furniture, and have a large balance on  13 211
their credit card, which is growing a couple of  14 211
hundred dollars a month? 15 211
That person is never going to come back from  16 211
their already high DTI ratio, and they're not a stable  17 211
borrower.  So I think that may differ from a person  18 211
who has a high DTI ratio and is buying their car, has  19 211
three years left on some student loans, and is just  20 211
finishing their degree or something like that. 21 211
There's a point that you could see this  22 211
person extinguishing their DTI, going down some time  23 211
and building into a creditworthy individual.  These  24 211
are products designed to build a credit portfolio, to  25 211
recover, to increase your credit rating or recover  1 212
your credit rating. 2 212
As such, they're part of a financial plan.   3 212
I think one of the key safe harbors here is to treat  4 212
this as a financial plan, and seek the advice of  5 212
someone like a financial planner and allow the  6 212
borrower to do that. 7 212
One of the key ways to do that -- most  8 212
everybody's touched on this today, so I won't spend a  9 212
lot of time, is have a commitment period, something  10 212
like 30 days prior, where I can run that by a  11 212
financial planner or at the very least, my brother-in- 12 212
law who works in a bank, and I can talk it over at the  13 212
family picnic and be told that this is stupid, and I  14 212
shouldn't be doing it. 15 212
But at the closing table, I want the house.  16 212
 The movers are waiting.  I've got everything lined  17 212
up, the kids are excited.  They've got me. 18 212
GOVERNOR KROSZNER:  Ren? 19 212
MS. ESSENE:  I don't know of any specific  20 212
studies right now.  I know Aberdeen, Paint and Cross   21 212
and a series of four authors are currently working on  22 212
looking at the impacts of predatory lending laws,  23 212
state laws and trying to understand how that's  24 212
impacted the marketplace. 25 212
So I think those are forthcoming and I think  1 213
it will be really interesting to see what the effects  2 213
are, and if there's going to be some real live data  3 213
this fall, I know, with our fall credit symposium. 4 213
What I would say, it's very heartening to  5 213
hear some of the state players talking about this  6 213
coordination issue between the federal government and  7 213
the states, because I think one of the dynamics we  8 213
need to really be focused on is this issue of high  9 213
roader and low roader lenders. 10 213
I think we heard earlier today from many of  11 213
the high roader lenders, and so we got to hear, you  12 213
know, some of the efforts that Faith and other folks  13 213
are putting forward, that are very positive in the  14 213
marketplace, are good models for what should be  15 213
happening. 16 213
Unfortunately, what we know is that there's  17 213
also low roaders in the marketplace as well, and that  18 213
it's challenging for the industry to kind of self- 19 213
regulate.  There's really a collective action problem,  20 213
where you have one person who's engaged in bad  21 213
behavior, and it's very hard for the rest of the  22 213
industry to sanction that player. 23 213
So I think that's the step for regulation to  24 213
come in, is to try to create this even playing field.  25 213
 I know that we found, you know, that high- priced  1 214
lending, specifically looking at that three percent  2 214
above Treasury, that about 12 percent of the industry  3 214
is really making the lion's share of most of those  4 214
loans, where they are specialists, high-priced  5 214
specialists that make over 50 percent high-priced  6 214
loans. 7 214
So I think we need to be focused then on  8 214
where that mischief is and create these kind of  9 214
minimum standards.  I think the guidance is a great  10 214
step in the right direction, and I think the question  11 214
is how to make that both enforceable and even across  12 214
the marketplace. 13 214
GOVERNOR KROSZNER:  Great.  Does anyone have  14 214
anything to add on this, because I want to move on to  15 214
prepayment. 16 214
MR. CHANIN:  Let me raise this one thing.   17 214
It's clear, to the extent that any rules adopted in  18 214
this ability to repay, that they have to be specific  19 214
and very clear, someone knowing in advance whether  20 214
they've complied or not. 21 214
One of the difficulties is just taking, for  22 214
 example, debt to income ratio.  Fifty percent seems  23 214
to be a pretty clear test.  That is, if it's 50  24 214
percent or less, then you know when you comply.  But  25 214
if you dig down to the details, it becomes very, very  1 215
complicated.  You start looking at underwriting. 2 215
For example, if you have a car loan and yo  3 215
have two payments left or one payment left, do you  4 215
consider that in the 50 percent debt to income ratio.  5 215
 Or, if you have a bonus, do you consider that?   6 215
If a lender is unable to know with some  7 215
degree of certainty whether those count or don't  8 215
count, it's going to be very difficult for the market  9 215
to function effectively.  So I guess I would not  10 215
relish the notion of having a very long list of every  11 215
different type of debt, income and so forth to address  12 215
in any rule. 13 215
So I'd ask for any suggestions or if any  14 215
states or others have had any experience with that,  15 215
how they dealt with those types of issues. 16 215
MR. MILLER:  You know, perhaps we could  17 215
check with our colleagues.  This is obviously a very  18 215
important  question.  Maybe we can survey the AGs and  19 215
also the banking superintendents, to wrestle with this  20 215
a little more.  21 215
Because I think it is really important that  22 215
we have a rule or regulation that applies to  23 215
everybody, and that we all together then to enforce  24 215
that.   25 215
GOVERNOR KROSZNER:  Certainly, I think just  1 216
as a reminder, but the record is open until August 15th  2 216
for getting comments, and we're always happy to have  3 216
comments.  But it would be particularly valuable to  4 216
have something by that August 15th deadline.  Yes, Joe. 5 216
MR. MASON:  I'd just like to make one  6 216
comment before we move on, because it seems like we've  7 216
talked a little bit about stated income mixed in with  8 216
affordability.  So tell me if I'm jumping ahead here. 9 216
But I wanted to make a note about income.   10 216
While in our minds it all seems like income definitely  11 216
correlates with affordability, it does in our minds.   12 216
But our minds aren't running the underwriting and  13 216
pricing process. 14 216
We know that what's received by the broker  15 216
is an income statement of some sort.  I can print out  16 216
from TurboTax different tax forms with different  17 216
income levels on them, and I can sign them and present  18 216
them as the taxes that I filed this year. 19 216
People do have unstated sources of income.   20 216
Waiters, bus boys, that kind of thing.  So there's a  21 216
lot of noise in the income that you get.  We've talked  22 216
about that.  But what we haven't talked about is how  23 216
it plays into the credit scoring model, because the  24 216
credit scoring model is what's grading the credit and  25 216
giving out the loans. 1 217
When we get to that point, the FICO score  2 217
gives about 80 percent of your predictability.  In  3 217
fact, the income is correlated with protected class.   4 217
So what we've done on the model side is we've had to  5 217
wash out the statistical predictability of the income,  6 217
such that it creates just a small, marginal effect.  7 217
So while it makes sense that income  8 217
correlates, there's a lot of noise in income and in  9 217
the models.  It cannot be used, because it runs afoul  10 217
of fair lending.   11 217
GOVERNOR KROSZNER:  Well actually, what we  12 217
could do is rather than turn to prepayment issues,  13 217
since you've brought up the income issues, that we  14 217
might segue into that piece. 15 217
So as Lori had mentioned, you've gone  16 217
towards, I guess, an actual prohibition on no doc and  17 217
stated income loans.  I wanted to understand that a  18 217
little bit better in practice, what kind of standards  19 217
you either have in mind or have started to see in  20 217
practice, for providing appropriate documentation? 21 217
Because that's one of the challenges that we  22 217
talked about in the earlier panel, with providing --  23 217
if we are going to be moving away against low or no  24 217
doc loans, I want to make sure that people who do have  25 217
incomes but not incomes that are documented in the  1 218
traditional way, still have access to credit. 2 218
MS. SWANSON:   Yes, I think that I can jump  3 218
start it.  We allow some flexibility in our law for  4 218
lenders to deal with those kind of individual  5 218
situations, recognizing that we're not a homogeneous  6 218
country and people do make a living in different ways. 7 218
So although we do ban purely no  8 218
documentation loans or stated income loans, we do  9 218
require the lender to look at some documents, again to  10 218
show that the borrower really does have assets and  11 218
income in the ballpark of what is represented on the  12 218
application, and that can be various types of  13 218
documentation.   14 218
It could be tax returns.  It could be  15 218
payroll receipts; it could be a bank statement.  We  16 218
allow flexibility in individual cases, for the lender  17 218
to make some determination of what that documentation  18 218
should be.  The law basically says it has to be  19 218
reasonable, and it ought to be reasonable for the  20 218
lender to rely on it. 21 218
But again, recognizing there are these types  22 218
of different situations out there.  But I do want to  23 218
emphasize.  I think it is very important for the Board  24 218
to take some action in the stated income arena.  I  25 218
just think that the no documentation loans have led to  1 219
very, very real abuses that we've seen through these  2 219
three general enforcement actions and other cases that  3 219
we've taken.   4 219
I think it's important to act, using the  5 219
HOEPA authority.  As I also mentioned, if you look at  6 219
the want ads in the Minneapolis paper, people are  7 219
trying to get around that law.  So that's where a  8 219
federal action could be very, very helpful in this  9 219
area.  Thank you. 10 219
MR. MILLER:  I'd just underscore what Lori  11 219
said, that the stated income practice for some  12 219
companies, not all companies, but with enough  13 219
companies, has been a national scandal and it has to  14 219
stop.  There has to be some regulation that  15 219
effectively stops it, something like they did in  16 219
Minnesota or some variation of that.   17 219
What we saw in our investigation, and Lori,  18 219
I think, mentioned a couple of the instances, are just  19 219
chilling.  You know, looking back, it's really  20 219
criminal fraud.  Next time around, we should use the  21 219
criminal statutes.  But the better way is to use your  22 219
power to make sure it doesn't happen in the future. 23 219
MS. BRAUNSTEIN:  Well Lori, I just want to  24 219
offer one question.  Do you have liability attached to  25 219
your law, banning stated income loans? 1 220
MS. SWANSON:   There is a private right of  2 220
action that a consumer would have against a broker who  3 220
violates that law, yes. 4 220
MS. BRAUNSTEIN:  Okay, and the reason I  5 220
asked this because one of the things we're struggling  6 220
with is there is the same kind of right in HOEPA.  If  7 220
we can't draw the bright lines, there's some concerns  8 220
about the industry not having certainty.  It sounds  9 220
like you've got some fuzziness in your law about this  10 220
reasonable, whatever that means.   11 220
So are you getting pushback from the  12 220
industry about that or -- 13 220
MS. SWANSON:   You know no, we're not.  In  14 220
fact, we worked in my state -- as I mentioned I put  15 220
together this study group to try to come up with  16 220
reforms, and that was bankers and lenders and, you  17 220
know, consumer advocates and actually worked with the  18 220
industry.   19 220
In the end, the bill was supported and  20 220
endorsed by the bankers association, the mortgage  21 220
brokers association in my state who worked with us and  22 220
then supported the legislation.  They certainly felt  23 220
they could live with it.  In my state anyway, they  24 220
supported it in the end. 25 220
MS. BRAUNSTEIN:  Steve, do you ban stated  1 221
income loans? 2 221
MR. ANTONAKES:  We do not ban stated income  3 221
loans.  However, we're trying to restrict their  4 221
proliferation, I would say.  Certainly, I mean, you  5 221
have to, I think, realize and look at the fact that,  6 221
you know, incentives were created through the  7 221
securitization of these higher cost loans, for  8 221
originators to push this product, including in  9 221
numerous instances in which a real need to document  10 221
income was readily available. 11 221
I'm just going to give you a couple of the  12 221
most egregious cases that we've found in our  13 221
examinations.  An individual who was pleased to show  14 221
us his due diligence program, which involved him going  15 221
to www.salary.com, plugging in an occupation and a zip  16 221
code, getting the range of incomes and multiplying the  17 221
high end by 125 percent. 18 221
This isn't something that we found by  19 221
accident.  This was his way of showing he was doing  20 221
his job, Okay.  Other cases.  Full documentation loans  21 221
which had incomes of $30,000, tucked behind the file  22 221
was a reduced documentation loan, with everything else  23 221
the same except the income is now $65,000, Okay. 24 221
Cases in which 40 loans in a portfolio  25 221
originated in the last year, in which everyone had the  1 222
same job and the same income, Okay?  This is an area  2 222
fraught for abuse, and there has to be a means of  3 222
limiting, you know.   4 222
Stated income loans once upon a time served  5 222
a purpose.  But they've gone well beyond that original  6 222
limited purpose, and they should be brought back. 7 222
MR. PEARCE:  Yes, I mean I can chime in.   8 222
Again, my own story about the highway patrolman that  9 222
made $22,000 a month.  It's a pretty good job if you  10 222
can get -- 11 222
(Laughter.) 12 222
MS. BRAUNSTEIN:  He's getting a cut from the  13 222
tickets. 14 222
MR. PEARCE:  Or a speed trap.  You know, I  15 222
think still in the marketplace, something stated  16 222
income loans, the last that I looked at it, was  17 222
somewhere around 30 percent of the subprime market  18 222
still were stated income loans. 19 222
I don't think these are folks who are  20 222
working second jobs and not reporting incomes.  I mean  21 222
I don't think we should drive our policy based on  22 222
people who aren't reporting income anyway. 23 222
But I don't think this is customer choice.   24 222
They're saying you know, it's too hard for me to get  25 222
these -- my tax return together or my W-2 form.  I've  1 223
seen plenty of loan files that had stated income  2 223
loans, that had W-2s in the file that did not match  3 223
the stated income. 4 223
So I don't think this is being driven by  5 223
borrowers.  I think it's being driven by, as Steve  6 223
said, a preference in the securities marketplace for  7 223
stated income loans.  If you look at a rate sheet for  8 223
 -- I don't know whether this is a high road lender or  9 223
a low road lender, and you look at stated income.  You  10 223
go through the chart.  Stated income loans for a  11 223
subprime hybrid loan. 12 223
Borrowers could get a fix rate loan at a  13 223
lower cost if they brought full documentation.  They'd  14 223
get lower cost than the initial teaser rate of that  15 223
loan.  I do not think there are very many borrowers  16 223
that said "Oh, if I don't have to bring in my tax  17 223
forms, give me a loan that's more expensive up front  18 223
and will go up two years from now." 19 223
And who knows what interest rates might do?  20 223
 I mean you guys probably do, but -- 21 223
(Laughter.) 22 223
MR. PEARCE:  So anyway. 23 223
GOVERNOR KROSZNER:  There are two aspects of  24 223
this.  Obviously, there's the fraud aspect, which Tom  25 223
had mentioned.  So clearly, if there's fraud that's  1 224
going on, there are anti-fraud statutes that very  2 224
clearly cover the type of egregious behavior that  3 224
you've illustrated with these examples.  So obviously  4 224
that is something that is unconscionable and  5 224
fortunately is against the law. 6 224
So that's why I really want to understand   7 224
by doing something additional with HOEPA, I guess  8 224
these things that are clearly fraudulent activities,  9 224
they could be attacked through those means.  I want to  10 224
understand the interaction between sort of extending  11 224
HOEPA and the existing fraud statutes, for those types  12 224
of things.  So if anyone wants to comment on that. 13 224
MR. MILLER:  I think that it's acting  14 224
earlier and being preventative, rather than having the  15 224
crimes take place and do some criminal prosecution and  16 224
try and unravel the damage that's done to everybody.  17 224
The idea is to have a national standard that  18 224
all lenders have -- are clearly on notice that they  19 224
have to do, and they have to watch over the people  20 224
that are working in their office, and to some extent  21 224
watch over the brokers, to make sure that these things  22 224
don't happen right from the beginning. 23 224
It's the best chance to stop the problem at  24 224
the greatest level. 25 224
GOVERNOR KROSZNER:  What about this anti- 1 225
fraud statute, and if a person is encouraging their  2 225
loan officers to do the $22,000 a month or do some of  3 225
the other things that Steve was talking about?  I mean  4 225
how is it any different if we have it in a HOEPA rule  5 225
than if it's clearly something that is fraudulent,  6 225
like it might be in these egregious cases we're  7 225
talking about? 8 225
MR. PEARCE:  Stated income loans are just  9 225
invitations to fraud, that if you're not even going to  10 225
verify the income, then it doesn't matter what you put  11 225
down.  I've had brokers tell me "Isn't that what  12 225
stated income means?  I just state whatever income I  13 225
want to put on the form." 14 225
That broker's no longer doing business in  15 225
North Carolina, so that's a different story.  Well  16 225
certainly, the states, every state I know, I mean  17 225
we've got a mortgage fraud bill pending in North  18 225
Carolina, to make it criminal, to try to increase the  19 225
penalties.   20 225
We're certainly doing all we can to enforce  21 225
it.  We've hired more investigators.  We're doing more  22 225
examinations to do it.  But if the lending products  23 225
that are offered are invitations to fraud, by saying  24 225
you don't need to check, then I think it's creating a  25 225

NEAL R. GROSS
COURT REPORTERS AND TRANSCRIBERS
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