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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marketplace that will induce fraudulent behavior. 1 226
MR. DECKER:  There have been abuses of  2 226
stated income loans over the last two or three years.  3 226
 That's for sure.  But if you look at the performance  4 226
of stated income loans over the last 10 or 12 years,  5 226
they've actually performed fairly well. 6 226
That's I think one of the effects that led  7 226
to the growth of stated income loans, particularly for  8 226
subprime borrowers over the last two or three years,  9 226
combined, of course, with you know, multiple years of  10 226
double-digit house price increases, where lenders in  11 226
general, some lenders in general kind of took the  12 226
attitude that these loans can never default, because  13 226
as long as the house price keeps going up ten percent  14 226
a year, nobody's going to be in trouble. 15 226
But I think prohibiting stated income loans  16 226
 takes away from borrowers potentially in several  17 226
respects.  The obvious case is one where a borrower  18 226
can't or doesn't want to document their income, and   19 226
if they can't get a stated income loan, they simply  20 226
can't get a mortgage at all. 21 226
But consider a hypothetical situation, of  22 226
somebody who's a taxi driver or a bartender, you know,  23 226
somebody who receives a lot of cash income and the  24 226
cash income varies from period to period.  Perhaps  25 226
they don't report it all.  It's not clearly  1 227
documentable. 2 227
They have a four percent ARM that's due to  3 227
spike in a few months to eight percent.  They want to  4 227
be able to refinance -- they're able to refinance into  5 227
a six percent fixed, but you know, they can only do it  6 227
as a stated income loan. 7 227
Well, if you take away their ability to get  8 227
a fixed rate stated income loan, now they're stuck  9 227
with their ARM, which is going to boost them up to  10 227
eight percent, and they're just locked in, locked in  11 227
for good.  I think, correct me Ms. Swanson if I'm  12 227
wrong, but I think that the Minnesota law against  13 227
stated income loans applies to both prime and subprime  14 227
borrowers? 15 227
MS. SWANSON:   Correct. 16 227
MR. DECKER:  Yes.  So you know, we certainly  17 227
wouldn't want to see that kind of an approach  18 227
undertaken on a national basis. 19 227
(Simultaneous discussion.) 20 227
MR. MILLER:  Are you sure that there is a  21 227
safety valve, that really the legitimate stated loan  22 227
can be made under the Minnesota statute?  But it  23 227
really has -- you have to be able to show it.  You  24 227
have to be able to prove it. 25 227
MS. SWANSON:   That's right, yes.  Allowing  1 228
the lender to have some discretion, that you can't  2 228
just have a no documentation loan.  But it does let  3 228
the lender have other ways of showing documentation. 4 228
Again, the government is not in the business  5 228
of helping people cheat on their taxes, or somebody's  6 228
not reporting income or they're hiding assets.  That  7 228
really shouldn't be a policy that the government ought  8 228
to be encouraging, in my opinion. 9 228
I think Governor, it is the difference  10 228
between prevention and prosecution.  You're right,  11 228
there are lots of laws that prohibit fraud.   12 228
But at the same time, we know these stated  13 228
income abuses are occurring, and occurring on a really  14 228
widespread basis, and that the stated income products  15 228
have become a tool for so much abuse that the  16 228
borrower, frankly in some cases fraud upon the lender  17 228
as well, that it does make sense to regulate them as a  18 228
product which has been one, which has been a risky  19 228
product and a product that has led to abuses. 20 228
GOVERNOR KROSZNER:  A point that Mike  21 228
brought up, which with the industry folks I'd like to  22 228
get some feedback on, is I think perhaps you can draw  23 228
a distinction between refinancing and the original  24 228
loan, because I think there had been some discussion  25 228
of well, if we have, you know, if we have documented  1 229
income initially, and then the person has built a very  2 229
good payment history, in many cases people will --  3 229
that may be used as evidence, not necessarily  4 229
indirectly, but of a sufficient ability to repay,  5 229
particularly if it's being refinanced perhaps at a  6 229
lower rate than it was before. 7 229
Would you still want to say that even with  8 229
the refinancing, you have to go through the  9 229
redocumentation again, or would you draw a distinction  10 229
between the initial loan and a refinancing, in terms  11 229
of the amount of documentation you think is necessary? 12 229
MR. ANTONAKES:  If you've documented income  13 229
once, then I don't know why you'd want to not document  14 229
it the second time.  As Mark pointed out, you'll  15 229
probably get a higher rate loan.  It's just not --  16 229
it's counterintuitive in many respects, I believe. 17 229
You know, we ran the statistics that stated  18 229
income loans that were performed 12 years ago;  19 229
granted, a very different market then.  I'd like to   20 229
know of the earlier payment defaults that have  21 229
occurred in the past 18 months, how many were stated  22 229
income? 23 229
I'm willing to guess a fairly substantial  24 229
number.  I don't think restricting it to refinances  25 229
versus home purchases necessarily reduces fraud.  We  1 230
also spilled out some of the very egregious cases. 2 230
Part of the difficulty is many folks are a  3 230
little smarter about cheating on the income in ways  4 230
that isn't so obvious to identify necessarily. 5 230
GOVERNOR KROSZNER:  If we were to write a  6 230
rule that is closer to potentially having a chilling  7 230
effect on good behavior.  So that trying to get this  8 230
right is always very difficult. 9 230
MR. MILLER:  Yes.  I think what we have to  10 230
keep in mind is that the subprime market is a majority  11 230
refinancing.  I mean we tend to think of all these  12 230
home loans as putting people in their homes.  But in  13 230
subprime, a majority, maybe 60 percent and sometimes  14 230
maybe higher, is refinancing, and it's primarily a  15 230
refinance business. 16 230
So I think you have to have the same  17 230
documentation in the refinance for that reason,  18 230
because a lot of them are initiated by contact by the  19 230
lender.  The example that you cited, the person  20 230
building his credit, is the very unusual situation.  21 230
The more common situation is people call  22 230
them, what about your credit card debt?  So with that  23 230
kind of volume, I think the rule has to be driven  24 230
towards the full documentation, whatever is arrived  25 230
at.  1 231
Just to end the previous discussion, you  2 231
know, what we're asking you to do this, even though  3 231
there's fraud laws, because we have more respect for  4 231
you.  We think your power is greater than these fraud  5 231
laws, and I think as a practical matter it is.  And  6 231
then also it's early, it's prevention, as Lori said. 7 231
GOVERNOR KROSZNER:  Well certainly not in  8 231
terms of enforcement at, let's say, the state level.   9 231
I mean we don't have those enforcement powers at the  10 231
state level.  But you guys might. 11 231
MR. MILLER:  You don't, but your initial  12 231
rule, you know, will carry a lot of weight, will  13 231
accomplish a lot of good.  Do not underestimate that  14 231
at all. 15 231
GOVERNOR KROSZNER:  Right.  So but I want to  16 231
hear from you guys, but then I want to move on, to  17 231
make sure that we get to the other two topics.  Go  18 231
ahead, please. 19 231
MS. ESSENE:  Very quickly.  Let me just say  20 231
this also points to the fact to a lack of transparency  21 231
in the marketplace, and so maybe the people who going  22 231
to have stated income loans might not know that that's  23 231
what they have.  So that might be to have that  24 231
discussion of the disclosure conversation as well. 25 231
GOVERNOR KROSZNER:  Okay, good.  Any last  1 232
comments on this before we move on? 2 232
MR. DECKER:  I'll just make the point that I  3 232
think maybe others are sort of alluded to already.  If  4 232
a borrower or a lender or both are intent on  5 232
committing fraud by lying about income, knowing that  6 232
that's illegal and in some cases criminally illegal  7 232
under current law, I'm not sure prohibiting stated  8 232
income loans under HOEPA is going to necessarily  9 232
discourage that behavior. 10 232
GOVERNOR KROSZNER:  All right.  Let's move  11 232
onto prepayment penalties, and certainly there was  12 232
some discussion that in some of the states, there's  13 232
been moves against prepayment.  So I think it would be  14 232
very useful to hear about some of those experiences  15 232
first, and then we can talk about analyzing the  16 232
consequences of that.  If anyone wants to talk about  17 232
their experiences? 18 232
MR. MILLER:  We in Iowa have not had  19 232
prepayment penalties, I think, since 1978, a long  20 232
time.  You know, we've survived quite well without  21 232
them.  Our consumers have done Okay.  The lenders have  22 232
done just fine. 23 232
Admittedly, I don't feel as strongly about  24 232
this provision as I do about the other two that we  25 232
just talked about.  But I think in terms of  1 233
transparency, it's important.  In terms of the  2 233
empirical information that we received and was talked  3 233
about this morning, that isn't really a rate reduction  4 233
as a practical matter for most consumers if there is a  5 233
prepayment penalty. 6 233
That all augers for prohibiting them, and as  7 233
I said, it was safely done in Iowa.  I would add that  8 233
in one of our investigations, since there were no  9 233
prepayment penalties in Iowa, we noticed that in  10 233
another abusive category, the company caught up  11 233
somewhat.  So maybe that's the market at play, but not  12 233
the way we wanted to be functioning. 13 233
MS. BRAUNSTEIN:  Are they banned, Tom, in  14 233
Iowa for all loans? 15 233
MR. MILLER:  I believe so, yes. 16 233
GOVERNOR KROSZNER:  What was that  17 233
alternative category, where people substituted in one  18 233
type of bad behavior? 19 233
MR. MILLER:  I think it was credit life  20 233
insurance, I think, when that was still a product. 21 233
GOVERNOR KROSZNER:  Other experiences in  22 233
other states? 23 233
MR. ANTONAKES:  We have a lot of prepayment  24 233
problems in the duration and the amount.  It's a state  25 233
law that, in all frankness, is not followed by non- 1 234
state chartered institutions.  Federal banks, national  2 234
banks don't adhere to our prepayment penalties, and we  3 234
think they should. 4 234
But you know, but our law was also written  5 234
in a period that predated the proliferation of 228 and  6 234
327 mortgages.  If you look at these loans, you know,  7 234
they're drafted, they're created primarily to assist a  8 234
subprime borrower to get credit and then, you know,  9 234
they should be able to refinance out before the first  10 234
rate adjustment. 11 234
The reality is many of them carry prepayment  12 234
penalties that extend beyond that first rate  13 234
adjustment.  That to me is unconscionable.  14 234
There should be a period -- if the  15 234
presumption is the borrower probably is told during  16 234
the application process, that don't worry, we'll  17 234
refinance you beforehand, there should be written in  18 234
there, a prepayment penalty if it exists at all, that  19 234
expires  well before that first rate adjustment, to  20 234
give the borrower time to either refinance with their  21 234
existing company, or shop the loan with someone else. 22 234
GOVERNOR KROSZNER:  And I think you said in  23 234
your opening remarks, 30 days? 24 234
MR. ANTONAKES:  I would say at least 30  25 234
days.  I mean but a sufficient period, you know, to  1 235
complete a refinancing process. 2 235
MR. PEARCE:  So North Carolina addressed  3 235
prepayment penalties three ways.  First, for loans  4 235
under $150,000, they're banned.  Second, in our high  5 235
cost loan, the state predatory lending law, we include  6 235
them in the calculation of points and T's, or most of  7 235
them. 8 235
We also had in our high cost loan a separate  9 235
trigger, so if it's a prepayment penalty above two  10 235
percent for 30 months, then it also triggers the high  11 235
cost loan protections.  I feel pretty strongly -- Tom  12 235
doesn't feel quite as strongly, but I feel pretty  13 235
strongly about this, because I think about the  14 235
incentives -- 15 235
MR. MILLER:  Sorry to undercut you.  I mean  16 235
we've got to stick together in -- 17 235
(Simultaneous discussion; laughter.) 18 235
MR. PEARCE:  The incentives in the  19 235
marketplace.  Prepayment penalties help fuel  20 235
upselling.  So where a broker says hey, you know, in  21 235
the subprime market it's not as price-competitive.   22 235
People aren't shopping on rate, for the most part.  So  23 235
the broker is the one that's actually setting the  24 235
rate. 25 235
If lenders will not pay the premium on these  1 236
loan transactions unless they can be guaranteed  2 236
they're going to get their money back, and they do it  3 236
through prepayment penalties.  Some borrowers pay it  4 236
and some borrowers don't. 5 236
So prepayment penalties in subprime loans do  6 236
create this incentive.  The prime market's  7 236
competitive.  It's also a place where you don't see a  8 236
lot of prepayment penalties.  So it's a different  9 236
market between prime and subprime.  So that's one  10 236
incentive. 11 236
The second is the thing about borrowers who  12 236
 have good credit, but got into a subprime loan.   13 236
There are different statistics out there.  Fannie Mae,  14 236
Freddie Mac have all, at various points, estimated.   15 236
We know there are some number of people, a significant  16 236
number of people, who have prime quality credit.  17 236
They get in subprime loans.  If they have an  18 236
opportunity to refinance into a better loan, but yet  19 236
to do that they have to pay thousands of dollars to  20 236
get out of it, that -- steering into a bad loan has  21 236
significant economic consequences for that family. 22 236
The third incentive I want to talk about,  23 236
and I'm probably not the expert at the table.  I'm  24 236
going to defer down to the panel on this, is in the  25 236
securities market, you know, we've talked some about  1 237
whether people benefit from foreclosures or not. 2 237
Well, in the securities market, there are  3 237
some folks that get the stream of prepayment penalties  4 237
that are actually paid and collected.  So if I'm an  5 237
investor and I get money if the loan is charged a  6 237
prepayment penalty, that makes loan modification  7 237
pretty difficult, because in loan modification, what  8 237
you're saying is well, we're not going to charge that  9 237
prepayment penalty. 10 237
So the servicer may have many masters  11 237
they're trying to please, and having prepayment  12 237
penalties in the subprime marketplace just complicates  13 237
that picture of working out loans that can be worked  14 237
out. 15 237
MR. CHANIN:  Mark, can I follow up on one  16 237
point.  The North Carolina law, I think you mentioned,  17 237
makes a distinction in terms of -- it bans prepayment  18 237
penalties for, I think you said loan amounts $150,000  19 237
or less. 20 237
I think Minnesota takes a different  21 237
approach, banning them for subprime but not -- and has  22 237
different rules for prime.  Can each of you talk about  23 237
-- well, one Mark, the $150,000?  Was that intended to  24 237
be some sort of proxy for subprime, or what was the  25 237
rationale for that approach? 1 238
MR. PEARCE:  It used to be $100,000 limit,  2 238
and it moved up and I can't remember whether it was in  3 238
1999.  I think it was '99 when we passed our  4 238
revisions.  I think it was intended to address the  5 238
people who -- working families trying to get into home  6 238
ownership, so they're subprime borrowers.  7 238
So I do think it's a proxy for subprime or a  8 238
proxy for people who don't make a lot of money, who  9 238
are trying to develop home ownership opportunities. 10 238
MS. BRAUNSTEIN:  Lori, you've got different  11 238
stages too, don't you, in your loans? 12 238
MS. SWANSON:   We do, and actually years  13 238
ago, Minnesota banned prepayment penalties outright,  14 238
and then we kind of let up on those laws and allowed  15 238
prepayment penalties to be applied.  16 238
Then, in the last several years, we've seen  17 238
some real abuses with regard to prepayment penalties,  18 238
particularly in the subprime market.  So this year, we  19 238
once again banned prepayment penalties altogether in  20 238
the subprime market, primarily doing the subprime  21 238
because that's where we were seeing the abuses. 22 238
Again, it was situations where people were  23 238
particularly in the wave of defaults and foreclosures,  24 238
where people had prepayment penalties and now you see  25 238
that they're in trouble.  They try to refinance or,  1 239
you know, refinance their home, but yet they have  2 239
these hefty prepayment penalties. 3 239
And we've seen -- we've taken some past  4 239
enforcement cases where brokers put people into very,  5 239
very high cost loans and didn't adequately disclose  6 239
the prepayment penalties, and then the borrower was  7 239
kind of trapped in that loan or had trouble getting  8 239
out of that loan, due to the prepayment penalties.  9 239
That's kind of a history of why we took that  10 239
action.  I think prepayment penalties are a problem  11 239
area, and something that I would certainly encourage  12 239
the Board to look at. 13 239
MS. BRAUNSTEIN:  How are you defining  14 239
subprime for those? 15 239
MS. SWANSON:   We have a very, very, very  16 239
long definition of subprime. 17 239
(Laughter.) 18 239
MS. SWANSON:   I don't have enough time left  19 239
in the hearing for me to read it to you, but it's  20 239
based on a percentage above the U.S. Treasury yield,  21 239
essentially. 22 239
(Simultaneous discussion.) 23 239
MS. BRAUNSTEIN:  Kind of a -- 24 239
MS. SWANSON:   Kind of yes, it is. 25 239
(Simultaneous discussion.) 1 240
MR. CHANIN:  Is there, for the prime market  2 240
though,  then, you don't ban them.  So is it your  3 240
sense, either from your investigation review of this  4 240
or discussion with lenders, that there's a tradeoff in  5 240
terms of the market, i.e., that consumers who get  6 240
those in the prime market get a lower interest rate or  7 240
some other benefit, or you simply didn't see the  8 240
problems there? 9 240
MS. SWANSON:   My impression, we have some  10 240
limitations on the ability to have prepayment  11 240
penalties, even in the prime market.  For example,  12 240
even in the prime market, they're banned upon a sale  13 240
of a home.  If you sell your home, there can't be a  14 240
prepayment penalty, or if you refinance after 42  15 240
months, there can't be a prepayment penalty. 16 240
So we have a number of limitations on it.   17 240
But my impression is that in the prime market, that  18 240
there have been less abuses, at least based on the  19 240
cases that I've been seeing.  Better transparency,  20 240
better disclosure, and then more of a tradeoff than in  21 240
the subprime market, when they've tended to be put  22 240
into products without people even necessarily knowing  23 240
they're there. 24 240
GOVERNOR KROSZNER:  Let's go to -- well,  25 240
please. 1 241
MR. DECKER:  Well, I'd just make the point  2 241
that I think, you know, on the question of prepayment  3 241
penalties, as on many of the issues that we're  4 241
discussing today, the issue boils down at, at least on  5 241
some level, accessibility and cost of credit versus  6 241
consumer protection. 7 241
So you know, if you ban the prepayment  8 241
penalties outright, some loans simply won't get made,  9 241
because the lenders who make those loans need to know  10 241
that the loan will be on the books for at least some  11 241
defined period of time, or if not, then the lender  12 241
will receive some kind of compensation.  So some loans  13 241
just won't get made. 14 241
Or they'll get made at some substantially  15 241
higher cost.  If there's no prepayment penalty, the  16 241
lender's going to have to require that they get some  17 241
way of recouping income so the loans will get made at  18 241
a higher cost.  So I think that's ultimately the  19 241
tradeoff that you have to weigh. 20 241
MS. BRAUNSTEIN:  Tom, did you -- I'm sorry.  21 241
 Can I just follow up on that, because Tom, did you  22 241
find in your experience that the costs go up for  23 241
lending when you ban prepayment penalties? 24 241
MR. MILLER:  I don't think there's any  25 241
comprehensive study, but the impression is that it did  1 242
not, or if it did, it just very much at the margin.   2 242
And, you know, we're not aware of any loans, any  3 242
people in Iowa that didn't get loans because we banned  4 242
prepayment penalties. 5 242
GOVERNOR KROSZNER:  Joe or Ren, do you have  6 242
any -- 7 242
MS. ESSENE:  Well, I would just add, and I  8 242
think the earlier panel, Faith and Susan Davis, a  9 242
couple of folks, talked about that prepayment  10 242
penalties are, really should be tied to a clear  11 242
benefit to the consumer.   12 242
There was a study done in 2005 by Keith  13 242
Ernst, where he actually investigated non-prime  14 242
purchase loans and prepayment penalties, and found  15 242
that actually the value, the benefit of prepayment  16 242
actually went completely to the broker and the  17 242
consumer actually did not benefit in a price way, from  18 242
the prepayment penalty. 19 242
So I think this really challenges some of  20 242
our presumptions, that the mortgage market is  21 242
economically efficient and really there's kind of an  22 242
allocational efficiency problem that exists with  23 242
prepayment penalties.  So I think that should really  24 242
be the focus here, you know, in that it helps lead us  25 242
to believe that it's really a predatory practice. 1 243
GOVERNOR KROSZNER:  Joe? 2 243
MR. MASON:  I'd like to just point out, Ms.  3 243
Braunstein, the way that you asked your question of  4 243
Tom just now, and it was the right economic way to ask  5 243
the question.  What happened to the cost of borrowing? 6 243
I would argue that's what we really want to  7 243
provide to the consumer.  We want to provide a total  8 243
cost of borrowing.  Whether it's a prepayment fee,  9 243
origination fee, yield spread premium, any other weird  10 243
term we can think of, because that's what always  11 243
surprises the borrower. 12 243
We give the borrower an APR, and then we  13 243
tell them the existence of these fees, and we expect  14 243
them to somehow work it out.  They don't have the  15 243
capacity to do it.  So let's give it to them and tell  16 243
them total cost of borrowing if you stay in this home  17 243
for 30 years, 20 years, ten, five, three.   18 243
Then the prepay penalty is going to spill  19 243
right out.  You can make those comparisons across  20 243
different lenders, and you're going to see it.  A  21 243
three year time interval, and remind them, this is  22 243
going to bite if you refinance or move. 23 243
So then you're going to see that total cost  24 243
of borrowing different.  I think that's subsumes all  25 243
the possible fees that we could see on the horizon,  1 244
new inventions, new ways to get around it.  They're  2 244
going to come out in this cost of borrowing. 3 244
MR. MILLER:  But the practical world for us,  4 244
in the study she cited, is that you know, it's all a  5 244
cost to the borrower, that there's no benefit. 6 244
MR. MASON:  In the reality, and that point's  7 244
something, I think, has been apparent throughout the  8 244
day, is that the disparity between some theory and the  9 244
reality of this, this market.  This market functions  10 244
in ways that don't fit the theories.  The study that  11 244
Ren just cited, you know, explains that completely. 12 244
MR. MILLER:  Well, once you provide the  13 244
disclosure, then you need to allow room for  14 244
competition.  What we've said this morning and on this  15 244
panel is there's no competition at the closing table.  16 244
 You have one provider with a monopoly on the deal.   17 244
So you need to give that competition 30 days  18 244
ahead of time or something, to allow these offers to  19 244
be compared across lenders.  When you go to a  20 244
different lender, they'll say "I can beat that  21 244
number." 22 244
GOVERNOR KROSZNER:  So I want to make sure I  23 244
understand what you're suggesting.  So that you think  24 244
an effective way to deal with this is not necessarily  25 244
to ban the particular practice, but to try to  1 245
formulate a disclosure that is very straightforward,  2 245
that includes this, and allows for comparisons across  3 245
-- so it's very much standardized. 4 245
It allows for comparisons, but would be  5 245
provided much earlier in the process to the potential  6 245
borrower? 7 245
MR. MILLER:  Yes, yes. 8 245
GOVERNOR KROSZNER:  How do you feel about  9 245
dealing with that, at least obviously we hear a lot  10 245
about how we have to try to improve disclosures.   11 245
I think what we learned from credit cards is  12 245
making things easily comfortable and trying to have  13 245
both interest rates and fees and numbers, concrete  14 245
numbers that people see, not an effective rate that's  15 245
400 percent.   16 245
That's just outside the realm that people  17 245
normally operate in.  But if they see $75 or $750 a  18 245
month extra, that seems to be something that, at least  19 245
the consumer testing that we've done with respect to  20 245
credit cards, that people can understand that much  21 245
more readily, and it means something to them and they  22 245
respond to that. 23 245
Do you think that would be at least  24 245
something that should be done, perhaps along with what  25 245
Steve was suggesting, having something that we -- not  1 246
necessarily banning the prepayment penalties, but  2 246
requiring them to expire with a reasonable amount of  3 246
time before the reset, and improving disclosures?  Is  4 246
that something that is feasible or reasonable, or is  5 246
that something that is not going to fly? 6 246
MR. DECKER:  You know, the devil's always in  7 246
the details.  But I think that taking the approach of  8 246
providing for a prepayment penalty for some reasonable  9 246
amount of time over the loan, giving the borrower the  10 246
opportunity to refinance out without a prepayment  11 246
penalty at some point, and generally making disclosure  12 246
more clear and more understandable, and providing it  13 246
sooner in the loan closing process, are all worthwhile  14 246
approaches. 15 246
GOVERNOR KROSZNER:  In practice, is it  16 246
possible to do what Joe was suggesting, to have the  17 246
disclosure sufficiently early that people really would  18 246
be able to do the shopping and do the comparisons? 19 246
MR. MILLER:  You want to write a regulation  20 246
requiring that? 21 246
GOVERNOR KROSZNER:  No.  I know you don't.   22 246
So I don't think it happens short of that.  I don't  23 246
think what's described --  24 246
MR. MILLER:  It's certainly possible with  25 246
respect to disclosure, that we can sit, that certain  1 247
types of disclosures have to come earlier in the  2 247
process than later in the process.  So I didn't want  3 247
to submit I was proposing that particular regulation.  4 247
But one of the things that we could think   5 247
about is changing the timing, because some of the  6 247
disclosures come very late in the process.  I think  7 247
Joe was getting at the issue.  That's too late for  8 247
competition to work, and potentially one of the  9 247
reasons why competition isn't working is because the  10 247
disclosures are coming too late. 11 247
As I said in my introductory comments, if  12 247
you don't have information, market's don't work very  13 247
well.  So perhaps we can help the working of the  14 247
markets -- I don't want to say by no means would I say  15 247
that they work perfectly, but that may be a way to try  16 247
to address, at least partially, some of the issues and  17 247
concerns. 18 247
GOVERNOR KROSZNER:  Ren, go ahead. 19 247
MS. ESSENE:  Yes.  We're studying behavioral  20 247
economics and trying to understand how consumers act.  21 247
 I think the concern I would have with that is that  22 247
consumers don't necessarily act rationally and gather  23 247
all the information and look at all of the choices. 24 247
One of the things that we know is that  25 247
consumers really trust a trusted advisor, right.  So  1 248
they go out, they meet with, you know, whether their  2 248
realtor who recommends them to a loan officer, or to a  3 248
mortgage banker.  4 248
They sit across that table and they build a  5 248
bond and they trust the person across the table to  6 248
make a recommendation.  So I think that's a major  7 248
dynamic that's happening in the marketplace, where  8 248
you're really looking for advice.  9 248
I think it's hard to counter that with  10 248
enough information.  As you said, information overload  11 248
is incredible, and your comments, I think, get  12 248
directly to that point. 13 248
So you know, I wouldn't throw out  14 248
disclosures and say disclosures aren't important,  15 248
because absolutely information is a good thing.  I  16 248
think the timing is a critical component of this.  I  17 248
don't know that three to seven days before closing,  18 248
you know, is enough time.   19 248
I know that's been a recommendation that's  20 248
been put out there.  I believe Kathy Cloy's paper  21 248
talks some about that.  I think much earlier in the  22 248
process, you know, good faith estimates.  Is there a  23 248
way for a good faith estimate to actually be, go hard  24 248
earlier in the process, so that folks actually have a  25 248
chance to shop?   1 249
If we want consumers to shop and that's what  2 249
we want to accomplish, then  boy, people should really  3 249
get that early on.  I think a loan officer, you know,  4 249
it's a computer world.  They know -- they have a  5 249
general sense of where the borrower is going to be  6 249
coming in. 7 249
I think they'd get much closer to what that  8 249
end loan product's going to look like a lot sooner.   9 249
Susan Woodward did a pretty good study, where she  10 249
actually asked the question "Is information enough?"   11 249
She found that when consumers were looking at --  12 249
presented with a single price, they were much more  13 249
likely to be able to make a better choice then when  14 249
there was multiple dynamics. 15 249
So I think again that complexity is very  16 249
difficult for consumers.  So to think that you're  17 249
going to give them price points on multiple options,  18 249
and then have them be able to do an analysis of all  19 249
that data to make the best choice, again, I think  20 249
that's probably less likely. 21 249
So the more that we can make them simple,  22 249
some of things that I believe the Fed, that Tom  23 249
Jergen's work has looked at, the more we can simplify  24 249
that and have it early on, and the best chance we have  25 249
is with disclosures. 1 250
GOVERNOR KROSZNER:  I think that's certainly  2 250
something that we'd like, to make things simple,  3 250
comfortable, find out which number is relevant to  4 250
people.  Sometimes people say well, an effective rate  5 250
of interest could be a very useful number.   6 250
But we found that many people just didn't  7 250
pay attention to it.  But when they saw that it was X  8 250
number of dollars that month.  So maybe one relevant  9 250
type of disclosure is the payment per month, perhaps  10 250
along the lines that Joe was suggesting, that we might  11 250
give them some alternative scenarios of if you leave  12 250
in two years or five years. 13 250
Obviously, you don't have the information  14 250
overload and just give every possibility.  But  15 250
thinking along those kinds of lines, how to thread the  16 250
needle to get enough information out there early  17 250
enough that people can make choices, but not have so  18 250
much that it just becomes confusing and useless, and  19 250
it's just ignored. 20 250
MS. ESSENE:  One thing I would just follow  21 250
up to that, just as a suggestion or a thought, is that  22 250
consumers really respond both the framing but also to  23 250
the incurring of a cost.  24 250
So if you could actually -- maybe you have  25 250

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