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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kind of a simple loan that you would do a comparative  1 251
to, to say here's what a simple loan product would  2 251
look like, and we'll compare your offer to what this  3 251
simple loan looks like.  4 251
Then they could start to understand and  5 251
maybe ask questions, because that's how consumers --  6 251
they understand, they differentiate between  7 251
information more easily than one number in a box. 8 251
GOVERNOR KROSZNER:  Then we have our so- 9 251
called CHARM booklet that has some baseline  10 251
comparisons that could be used.  But I think we can  11 251
build off of that to try to make things much more  12 251
consistent, or have an ideal to make things much more  13 251
consistent. 14 251
So that people can actually have some sort  15 251
of base for let's say the CHARM booklet that they are  16 251
now required to have with the disclosures that they  17 251
get, and get that in a timely fashion, that can be  18 251
helpful.  19 251
MR. PEARCE:  To follow up on something, I  20 251
agree with everything Ren said, so I'll say it's Tom.  21 251
 But remember, these are folks -- assuming the  22 251
market's working well, in that people with subprime  23 251
credit are getting subprime loans.  So take out the  24 251
folks that get in the wrong bucket.  25 251
If you have subprime -- these are folks who  1 252
have had trouble managing their finances, and trouble  2 252
identifying the right credit choices for any number of  3 252
reasons.  And to think that a disclosure, even an  4 252
early disclosure that's totally clear, that's got one  5 252
comparison to a simple loan, is going to prevent a bad  6 252
loan or a bad choice, is -- it's just not -- it's  7 252
going to work for some, but not others. 8 252
If you want to change the marketplace,  9 252
banning prepayment penalties in subprime loans does  10 252
that, because you won't have lenders who will pay  11 252
brokers higher yield spread premiums, because they'll  12 252
know they won't get it back, because the borrower  13 252
might find out that they got overcharged. 14 252
They'll go down the street and get a better  15 252
loan.  I mean isn't that what we want in a competitive  16 252
market, that lenders will compete and if  they give  17 252
someone a really bad loan, "Hey, I can go down the  18 252
street.  I can get a better loan tomorrow." 19 252
GOVERNOR KROSZNER:  I think that's exactly  20 252
right, and that's what we want to do.  How do we make  21 252
the markets work most effectively, and effective  22 252
markets  work to weed out abuses.  Not completely for  23 252
sure, but when markets don't work effectively, then  24 252
people don't get the products that are best for them,  25 252
because they don't know how to choose them.  They  1 253
don't give the right signals to the market. 2 253
But I see that we're now getting close to  3 253
the end.  I'm giving a little bit of short shrift to  4 253
the escrow issues, but since they had little bit of  5 253
extra shrift in the earlier discussion, I think that  6 253
should be Okay. 7 253
So I want to turn to some of the escrow  8 253
issues, and if you want, we can take the same type of  9 253
approach of looking at some of the ways in which  10 253
they've been regulated in the individual states and  11 253
share some of those experiences, and think about how  12 253
we can build on those or if there are alternatives  13 253
that may be more appropriate.  Lori, you might want to  14 253
start? 15 253
MS. SWANSON:   Yes, sure.  Well, just seeing  16 253
abuses essentially with mortgage products being  17 253
marketed on the monthly payment amount, nobody really  18 253
looking at much else other than how much am I going to  19 253
have to pay per month, and we've also seen a lack of  20 253
disclosure of things like taxes and insurance, where  21 253
particularly a first time borrower, for example, who  22 253
hasn't had a mortgage before, doesn't understand and  23 253
appreciate that they have to pay other expenses like  24 253
taxes and insurance. 25 253
How we dealt with it in the Minnesota  1 254
legislation is the first time, and then each time  2 254
thereafter, the broker orally informs the prospective  3 254
borrower what the monthly payment amount is going to  4 254
be, how much they owe on the mortgage, that the broker  5 254
has to, at the same time, orally inform the borrower  6 254
that these other amounts are due for taxes and  7 254
insurance.  8 254
I'd just echo the last comments.  When  9 254
you're dealing with disclosures, it does get to be  10 254
very, very tricky.  All of us here at this table may  11 254
read disclosures, but a lot of people we're trying to  12 254
protect are not the people at this table.  So it is a  13 254
tough issue. 14 254
The attorney generals frequently take  15 254
enforcement actions where, including the mortgage  16 254
area, where people have disclosed all kinds of things  17 254
in writing, but what happens is the broker basically  18 254
lies orally. 19 254
That's what the borrower really relies on.   20 254
What is the broker orally telling the borrower?   21 254
That's how we've dealt with it on the tax insurance   22 254
issue in the Minnesota bill. 23 254
MR. ANTONAKES:  We've seen, you know, abuse  24 254
in the refinancing, primarily where a comparison is  25 254
made to a loan that includes taxes, insurance, to a  1 255
new loan that wouldn't, and therefore they provide  2 255
evidence there will be a smaller payment. 3 255
We would recommend the Board consider the  4 255
requirement that taxes and insurance be included, with  5 255
the opportunity for the consumer to affirmatively opt- 6 255
out of having their taxes and insurance included. 7 255
MR. MILLER:  We've seen the same issue, the  8 255
same problems with brokers, the ones that, you know,  9 255
try and take advantage of anything and everything, all  10 255
too many of them, at least in the past.  11 255
In terms of, you know, what you were  12 255
articulating before, transparency and being able to  13 255
make a meaningful comparison, having everybody in the  14 255
subprime area do the escrowing seems to make a lot of  15 255
sense. 16 255
MR. PEARCE:  I'd agree with Tom.  I think  17 255
apples to apples.  If you're marketing loan products  18 255
and I can take off a portion of the cost and sell you  19 255
on that and convince you of that, and not include  20 255
those costs, that's hard to have a competitive offer. 21 255
I would also think a little bit about the  22 255
prime market versus the subprime market.  I mean I  23 255
think the notion of not having escrows, in the prime  24 255
markets people might have better use of their money,  25 255
might put it in different places, and they know they  1 256
will have $2,000 to pay the tax bill when it comes  2 256
due. 3 256
I think I have a lot less confidence in the  4 256
subprime market.  People are actually thinking, oh, if  5 256
I invest my money here, I'll get a higher return and  6 256
the lender won't be holding it or the servicer won't  7 256
be holding it.  I don't think folks are making that  8 256
calculation.  So another reason to include taxes in  9 256
escrow. 10 256
GOVERNOR KROSZNER:  What's your thoughts on  11 256
the escrow issue? 12 256
MR. DECKER:  I don't feel so strongly about  13 256
the question of whether there should be, you know,  14 256
sort of a leaning towards including taxes and  15 256
insurance or not including taxes and insurance in  16 256
escrow payments. 17 256
But I would argue that, like the gentleman  18 256
from Massachusetts just said, ultimately the borrower  19 256
should be able to opt out and it should be, you know,  20 256
a decision between the borrower and the lender as to  21 256
what's the best course for that particular borrowing  22 256
situation. 23 256
Some borrowers like the idea of being able  24 256
to pay their taxes and insurance every month, and not  25 256
have to worry about a bill when it comes.  Even prime  1 257
borrowers, you know.  It's a convenience.  From the  2 257
servicer's perspective, it actually makes the  3 257
servicing more valuable, knowing that there's an  4 257
escrow to pay those bills when they come due. 5 257
But some borrowers feel that, like the point  6 257
that was just made, they've got better uses of their  7 257
money. 8 257
MR. ANTONAKES:  Mike and I have agreed on  9 257
something. 10 257
GOVERNOR KROSZNER:  I think we have a lot of  11 257
agreement on escrows.  Do you guys have any systematic  12 257
evidence on the role of escrows? 13 257
MS. ESSENE:  Well, I think the more  14 257
systematic evidence around the role of default  15 257
options.  So that's one of the kind of best  16 257
behavioralist principles.  So you can see that with  17 257
401(k)s and the uptake of 401(k)s, and that if you  18 257
promote the good option, more people are going to  19 257
uptake it. 20 257
For example, someone with a 401(k), if you  21 257
say when you come into a company, you're automatically  22 257
enrolled, and if you want to opt out you can.  The  23 257
uptake rate is the difference 80 percent and 30  24 257
percent, or something right around there. 25 257
So it's a substantial difference.  What we  1 258
know is that it's not necessarily a consumer choice.   2 258
So I think having the default be to the -- for the  3 258
social good, you know, for folks to be able to make  4 258
their payments, that's the right thing to do, and then  5 258
allowing an opt-out principle. 6 258
GOVERNOR KROSZNER:  Joe? 7 258
MR. MASON:  Yes, but I want to follow up.   8 258
The key to that too is that you're just enrolled.  You  9 258
don't get an opt-out check often when you start the  10 258
job, but then you have to file form later, which you  11 258
often don't get around to doing.  That's how that  12 258
works, and that's how PMI works, cancelling PMI on the  13 258
other side, because many people never file that form  14 258
to cancel PMI. 15 258
I do believe in at least disclosing escrows,  16 258
because it's a matter -- or at least disclosing  17 258
insurance and tax information.  It's something that I  18 258
think most subprime borrowers don't think about,  19 258
knowing that they have to make the tax payment or they  20 258
lose the property. 21 258
But I would in fact go another step on this,  22 258
because I think this is where, as Tom mentioned, is  23 258
where a lot of lenders leave off.  They  beat on  24 258
payments because they leave off tax and insurance.   25 258
But they're also winning a lot of business  1 259
from FHA, because they leave off the FHA mortgage  2 259
insurance premium as well, but they replace that with  3 259
credit life and disability life. 4 259
So I think to require them to report all  5 259
monthly payments associated with that loan, so have  6 259
tax, insurance and then any associated -- any other  7 259
fees left with that.  So you get a real apples to  8 259
apples comparison on the payment. 9 259
I think you'll see more FHA loans.  Really,  10 259
I would argue, going where they should. 11 259
GOVERNOR KROSZNER:  Do you guys have  12 259
anything on this issue?  Any questions?  Any last  13 259
comments that people would like to make, on any of the  14 259
issues?  Not just escrow, but the whole thing that  15 259
we've discussed? 16 259
MR. MILLER:  Well Mark has swung me around  17 259
on the prepayment issue. 18 259
(Laughter; simultaneous discussion.) 19 259
MR. MILLER:  It went from a small priority  20 259
to a big priority.  I was always on his side, and what  21 259
did it is the huge use of the brokers to manipulate it  22 259
to their advantage, and the study that Ren cited to  23 259
bear that out. 24 259
Finally, Governor, I'd like to thank you and  25 259
the staff for conducting these hearings, and all the  1 260
work that you're putting into it.  Obviously, you're  2 260
very focused, you're very serious about this and we  3 260
appreciate that. 4 260
GOVERNOR KROSZNER:  Any other comments?  We  5 260
do take this very, very seriously, and this is why  6 260
we're so pleased to have so many of you in the  7 260
audience, to have so many excellent panelists who are  8 260
willing to come, taking their time, because we don't  9 260
munificently remunerate people to come on these  10 260
panels.   11 260
They pay their own way to get here and so we  12 260
are very, very pleased to have such excellent  13 260
panelists, to have had such robust discussions, this  14 260
afternoon as well as this morning. 15 260
As I've mentioned, we will be open for  16 260
comments, formal comments until August 15th, and we  17 260
look forward to any written comments you may have.   18 260
Any of the panelists, if they want to supplement what  19 260
they've said, anyone from the audience and anyone in  20 260
the public can submit that. 21 260
As I also said, we're going to have an open  22 260
mike set of presentations from people who have signed  23 260
up, and what we will do, since we've been going for  24 260
about two hours, let's take a very short break and  25 260
start at ten minutes after 3:00.   1 261
We'll have the open mike presentations,  2 261
where people will have three minutes -- who were not  3 261
up front in the panels, to make an oral presentation,  4 261
and then of course they can submit any further written  5 261
testimony they would want.  6 261
Thank you very much.  I really appreciate  7 261
your coming here. 8 261
(Whereupon, a short recess was taken.) 9 261
GOVERNOR KROSZNER:  Great.  Let's try to get  10 261
started again.  Those of you who have signed up to  11 261
speak, if you could move over to here?  We have  12 261
reserve seats for you.   13 261
We have the order that you're in, and if you  14 261
could sit in those seats, it would be very helpful, to  15 261
make sure to be able to move as expeditiously as  16 261
possible, because I want to use -- make sure that we  17 261
have the time for people to be able to speak. 18 261
I want to apologize in advance for having  19 261
this very strict time limit.  I know that many of the  20 261
people who are going to be speaking have faced some  21 261
personal tragedies for their families, for friends and  22 261
loved ones. 23 261
We do take this very, very seriously.  But  24 261
just to make sure to be able to get everyone -- make  25 261
sure that everyone does have a chance to have an  1 262
opportunity, we will have to enforce the three minute  2 262
 limit.  3 262
But of course, you'll be able to submit a  4 262
statement of any length you wish for the record.  You  5 262
just have to do that by the 15th.  So let's begin, and  6 262
we're going to begin first with Judith Kennedy.  Thank  7 262
you very much.  Our timekeeper is just right. 8 262
MS. KENNEDY:  Thanks for doing this.  I am  9 262
CEO of National Association of Affordable Housing  10 262
Lenders, 50 of the largest banks and 50 of the blue  11 262
chip non-profit lenders, who are America's leaders in  12 262
lending and investing in underserved areas. 13 262
I appreciate the opportunity to talk about  14 262
how we see the problem, teeing off where you were, the  15 262
last panel.  We're concerned about how to make markets  16 262
work effectively, and we're concerned about borrowers  17 262
walking away from legitimate consumer-friendly loans,  18 262
down the street to the predatory lender. 19 262
We are in this pickle, we believe, because  20 262
we have a very un-level playing field, a two-tiered  21 262
mortgage market in our country, one involving insured,  22 262
examined institutions and the second involving  23 262
government-sponsored enterprises, fair practices and  24 262
unregulated, unexamined lenders. 25 262
Essentially, the secondary market is a town  1 263
with no sheriff.  For years, insured institutions have  2 263
been telling Fannie Mae and Freddie Mac that their  3 263
fear of buying legitimate low down payment loans, that  4 263
banks have known for 10 to 20 years are safe and  5 263
sound, often involving neighborhood housing services,  6 263
soft seconds and on and on and on. 7 263
But that fear of buying was causing them to  8 263
lose customers to the subprime lender down the street,  9 263
who could assure them that they could have 40 percent  10 263
of their income paid, the lowest monthly payment, no  11 263
escrows, etcetera, etcetera.   12 263
Still today Fannie Mae and Freddie Mac do  13 263
not buy legitimate CRA mortgages, single family or  14 263
multi-family.  So as they resisted buying these  15 263
legitimate loans, and just to put it in perspective,  16 263
$316 billion worth of CRA singe family loans in 2005  17 263
alone.  18 263
What we didn't understand was what the  19 263
bankers were saying, and that is that the Fannie Mae  20 263
and Freddie Mac involvement with the subprime market  21 263
was as, what the LA Times call, the chief enabler.   22 263
They were the primary financiers of mortgage-backed  23 263
securities backed by subprime loans. 24 263
So in addition to there being no legitimate  25 263
secondary market, certainly no government-sponsored  1 264
benefits for CRA loans, we had the GSEs we now know  2 264
buying 44 percent of all subprime MBS in 2004, 37  3 264
percent in '05, and only 25 percent the first half of  4 264
'06. 5 264
This means that at the same time they were  6 264
ignoring 300 billion of CRA mortgages, they were  7 264
financing 174 billion of subprime.  All with -- well,  8 264
not all.  We don't know what's behind them.  But many  9 264
with terms that they publicly issued and insured  10 264
institutions couldn't originate. 11 264
You've got to level the playing field.  The  12 264
GSE reform bill or something like it has to cause the  13 264
secondary market to have a sheriff.  The GSEs have to  14 264
be persuaded or told to buy legitimate consumer- 15 264
friendly CRA loans. 16 264
You need to revisit existing filters that  17 264
failed.  How did HUD allow the GSEs to take those  18 264
subprime MBS and have them use them for their  19 264
affordable housing goals?  How did the secondary  20 264
mortgage market enhancement and the rating agencies  21 264
that are working? 22 264
So these are some of the things that I think  23 264
we need to build on.   24 264
GOVERNOR KROSZNER:  Thank you very much.   25 264
The next speaker is Samuel Bornstein. 1 265
DR. BORNSTEIN:  Thank you for giving me the  2 265
opportunity.  My name is Samuel Bornstein.  I'm a  3 265
professor at Kean University.  I'm a professor of  4 265
Accounting Taxation.  I've been there for 30 years.   5 265
Parallel with that, I'm a CPA and consultant for the  6 265
same 30 years. 7 265
I viewed this from an interesting  8 265
perspective.  I also have just recently completed five  9 265
years of research of small business failure, that has  10 265
evolved into a discussion now of subprime, because  11 265
they have something in common. 12 265
The solution to small business failure and  13 265
subprime, the same common solution is financial  14 265
literacy.  So basically -- by the way, this is a  15 265
supplemental to my original comment made on June 3rd,  16 265
which is on the website. 17 265
The topic of this comment is "Financial  18 265
Literacy Implications:  My Suggested Solution to the  19 265
Subprime Mortgage Lending Interaction Between Borrower  20 265
and Lender."  The sub-topic is "Let's not react to an  21 265
accident; let's prevent one." 22 265
Financial literacy will enhance an  23 265
understanding that is necessary to make an informed  24 265
mortgage loan decision.  This applies to all  25 265
consumers, especially to the low and moderate income  1 266
borrower. 2 266
Any solution to subprime mortgage lending,  3 266
delinquency, foreclosure phenomena should also address  4 266
the need for a clear understanding of the various  5 266
aspects of the subprime mortgage, especially on the  6 266
part of the borrower and lender. 7 266
Basically, I believe we need to explore  8 266
technical tools to help us.  Financial literacy  9 266
involves education and learning.  The results of  10 266
recent research conducted at Johns Hopkins University  11 266
could change the way we think of education and  12 266
learning. 13 266
The conclusion was that we learn more by  14 266
inference rather than by direct instruction.  The  15 266
learning process is better accomplished when the  16 266
student figures it out himself, rather than by being  17 266
told what to do. 18 266
As an educator for the past 30 years, I've  19 266
learned that the student is the student's best  20 266
teacher.  As a practicing CPA and consultant for the  21 266
past 30 years, I also realized that the educated  22 266
client is also the best client. 23 266
This concept can be applied effectively to  24 266
the borrower-lender interaction in the mortgage loan  25 266
decision.  In my comment submittal on June 3rd, I  1 267
referred to a need for a technological tool that can  2 267
help both the borrower and lender understand the  3 267
implications of lending decisions. 4 267
The key factor is to concentrate on the  5 267
borrower's ability to repay the obligation.  We need  6 267
new and innovative technological tools.  The ideal  7 267
tool would be able to accept input of financial data  8 267
and changes, unique and specific to each individual  9 267
borrower situation. 10 267
This would include income, expenses, assets,  11 267
liabilities, including the various items of principal,  12 267
interest and insurance, as well as liabilities which  13 267
include debt, such as credit cards and auto loans. 14 267
In fact, the technological tool would view  15 267
the borrower as a business, in order to determine the  16 267
borrower's capability to handle the mortgage loan.   17 267
There are presently software programs that use  18 267
analytics to accomplish this for businesses.  19 267
However, this is now missing.   20 267
Unfortunately, what's missing is the missing  21 267
ingredient of the interpretation of the results in a  22 267
language that everyone can understand. 23 267
The technological tool should be in English  24 267
or in Latino, as to maintain simple and clear language  25 267
which the borrower can understand, and accompanied by  1 268
graphics.  This report will help the borrower  2 268
understand the implications of the loan decision. 3 268
The borrower can then retain this narrative  4 268
and bring it over to his counselor for discussion and  5 268
thought.  Thank you. 6 268
GOVERNOR KROSZNER:  I'm going to turn to  7 268
Bill Garber. 8 268
MR. GARBER:  Thank you, Governor.  I  9 268
appreciate the opportunity.  I'm Bill Garber with the  10 268
Appraisal Institute, which is the largest association  11 268
of real estate appraisers in the United States. 12 268
I'd like to encourage the Fed to focus on  13 268
issues relating to real estate appraisals,  14 268
particularly the importance of an independent real  15 268
estate appraisal process. 16 268
Sound real estate lending is based on three  17 268
C's -- credit, capacity to repay, and collateral.   18 268
Collateral is where the appraisals come in, so they  19 268
serve a very important role in real estate lending,  20 268
and we feel they serve a role in consumer protection. 21 268
It's true that a good appraisal, an honest  22 268
appraisal is a lender's best friend, because it helps  23 268
mitigate losses; it helps ensure that lenders do not  24 268
overextend credit.   25 268
They also serve consumers, in a few ways.   1 269
One is in the sense that consumers oftentimes pay for  2 269
appraisals.  So they deserve to have an honest  3 269
appraisal, and they definitely deserve not to be  4 269
steered into a home or have a mortgage that's worth  5 269
$300,000 or is costing them $300,000, where the house  6 269
is only worth $200,000. 7 269
Also, the existing federal rules require  8 269
appraisals to be disclosed to consumers within 30  9 269
written days, or 30 days upon written notice.  Also,  10 269
many times, when the appraisal comes back, it allows   11 269
for buyers and sellers to renegotiate prices within  12 269
the terms of the contract. 13 269
So in this sense, we think that appraisals  14 269
serve both lenders and borrowers. 15 269
In 1989, Congress passed FIRREA, which  16 269
required licensing for real estate appraisers, and it  17 269
set forth a whole series of events by the federal bank  18 269
regulators, including implementation of regulations  19 269
and guidelines, some of which prohibit borrowers from  20 269
ordering appraisals.  They require the use of  21 269
licensed, certified appraisers in conformance with  22 269
uniform appraisal standards. 23 269
Over the last few years, the federal bank  24 269
regulators, when conducting bank examinations, have  25 269
found widespread breakdowns in appraisal independence  1 270
within examined institutions.  They found that there  2 270
are individuals within the institutions that are  3 270
controlling the appraisal process, and then also have  4 270
the ability to sign off on a final loan decision. 5 270
There's a great deal of instances where  6 270
pressure, intimidation, coercion is applied on an  7 270
appraiser, because the appraisal is seen as an  8 270
obstacle in the financing process.  Now the bank  9 270
regulators have issued restatements on their  10 270
requirements in 2004 and 2005.   11 270
Unfortunately, what we see, if the federal  12 270
bank regulators have the opportunity to examine non- 13 270
bank mortgage lenders and mortgage brokers, we would  14 270
see that this nuance between those with a vested  15 270
interest in the transaction and those controlling the  16 270
appraisal process, we find that to be the norm, rather  17 270
than the exception. 18 270
Too often appraisers are pressured and  19 270
intimidated to artificially inflate appraisals.  We've  20 270
seen these cases come forward.  The AmeriQuest  21 270
settlement recently involved inflated appraisals and  22 270
breakdowns in appraisal independence. 23 270
We're also seeing, as a result of a lack of  24 270
rules in this unregulated area, new rules coming out  25 270
from the states, prohibited practices, requirements  1 271
for mortgage brokers and mortgage lenders to not  2 271
pressure appraisers, and criminal penalties against  3 271
coercion and intimidation of appraisers. 4 271
So I would just like to encourage the Fed to  5 271
include in these discussions about abusive and  6 271
deceptive practices, the idea that an inflated  7 271
appraisal or intimidating an appraiser could be  8 271
included under these definitions.  We would be happy  9 271
to assist in those efforts.  10 271
GOVERNOR KROSZNER:  Thank you very much.   11 271
Lisa Rice. 12 271
MS. RICE: Good afternoon.  Thank you,  13 271
Governor.  My name is Lisa Rice.  I'm with the  14 271
National Fair Housing Alliance.  I have three points  15 271
to make.   16 271
The first is that the APR is not a useful  17 271
tool in this marketplace, and hasn't been for some  18 271
time.  This is largely because terms and conditions  19 271
can be changed at the closing table in many  20 271
environments. 21 271
We informally have polled title companies in  22 271
Ohio, and ask them in what percentage of the cases did  23 271
they see terms and conditions changing at the closing  24 271
table.  The responses ranged between 50 percent of the  25 271
time and 65 percent of the time. 1 272
Now when I was a member of the CAC, I can't  2 272
count the number of times that I heard people talk  3 272
about educating consumers on the effective use of the  4 272
APR as a shopping tool.  The sad reality is that  5 272
people cannot do that in today's environment. 6 272
In addition to that, even if people do use  7 272
the APR as a shopping tool, there's not an apples to  8 272
apples comparison, because the underlying features and  9 272
components of the loan obviously may not be the same. 10 272
The second point is that consumers are often  11 272
encouraged, even when it's loan terms and conditions,  12 272
to change at the closing table.  They're encouraged to  13 272
go ahead and to close on that loan, because if they  14 272
pay their bills on time, they can refinance in a  15 272
couple of years into a better loan. 16 272
For the customers that we see coming into  17 272
our offices across the United States, this is not the  18 272
case.  One of the reasons obviously is because  19 272
consumers end up upside down in their loans.  The  20 272
second reason is because their credit score actually  21 272
has not improved to enable them to get into a better  22 272
product. 23 272
I think one of the things that a lot of  24 272
people don't talk about or maybe don't realize is that  25 272
the credit score is not simply a function of whether  1 273
or not you pay your bills on time.  Available credit  2 273
is a major component in many credit scoring  3 273
algorithms. 4 273
Especially if you're refinancing, if you're  5 273
refinancing the difference between your credit high  6 273
balances, your total credit high balances and your  7 273
total utilized balances, will be very low, resulting  8 273
ultimately in a lower credit score. 9 273
The third point is that when you drill down  10 273
and peel back the layers, what we're really dealing  11 273
with are systematic fair lending issues and abuses.   12 273
I'd like to see the Fed hold hearings, comprehensive  13 273
hearings, on fair lending enforcement and compliance. 14 273
The Fed and other regulators have to be more  15 273
diligent about fair lending compliance for banks and  16 273
bank holding affiliates.  Included in that discussion  17 273
should be specific questions about fees, and which  18 273
fees are to be included in the HOEPA calculation. 19 273
Also included in that discussion needs to be  20 273
a discussion about credit scoring algorithms and  21 273
models, because one of the things that we're finding  22 273
out from rating companies is that the credit score may  23 273
not be the best determinant for determining the rate  24 273
for a pool of loans.  However, we're not seeing that  25 273
correlating into the pricing scheme.  Thank you. 1 274
GOVERNOR KROSZNER:  Thank you very much.   2 274
Now we will hear from Paula Rush. 3 274
MS. RUSH:  Hi.  I guess I'm the first  4 274
consumer here.  I'm a consumer victim turned advocate.  5 274
 I've been helping people all over the country, to  6 274
hopefully avoid the experience that I had. 7 274
I did not consider myself a subprime  8 274
borrower.  My credit score was above 620.   9 274
Nonetheless, I fell victim to a lender and a broker  10 274
who totally misrepresented a loan to me.  It was a pay  11 274
option ARM loan, which you haven't talked much about  12 274
here today. 13 274
But I'm here to tell you that this loan is a  14 274
HOEPA loan on steroids.  This loan is the most  15 274
damaging loan out there in this market.  If it made  16 274
any sense at all in a market that was appreciating, it  17 274
certainly makes no sense at all in a market when real  18 274
estate is depreciating. 19 274
This product has become a product that  20 274
lenders are selling as an affordability tool to  21 274
consumers, who are having trouble with adjustable ARMs  22 274
adjusting up.  The problem is it's only going to be a  23 274
temporary fix, where payments will temporarily be  24 274
lowered, but will increase very rapidly, and massive  25 274
amounts of negative amortization is taking place. 1 275
So you're going to have a group of consumers  2 275
who are going to owe much more on their houses than  3 275
they're worth when these resets happen.  So if you  4 275
think you have problems now, if you continue to let  5 275
these loans proliferate, which they are, you're going  6 275
to have extreme problems in foreclosures going forward  7 275
when these loans reset. 8 275
These loans also create phantom profits for  9 275
the lenders.  When they're booking profits on their  10 275
books, saying that they're getting full payments on  11 275
these loans, when in fact 70 percent are only making  12 275
minimum payments. 13 275
So what is going to happen to the mortgage- 14 275
backed securities on Wall Street when these bills  15 275
become due and these people are not going to be able  16 275
to pay these loans?  The underlying collateral is not  17 275
going to be worth what is owed on these loans. 18 275
I have to say that today you talked about  19 275
quite a few things.  One is prepayment penalties.  I  20 275
do think this is trap that lenders use to trap people  21 275
into bad loans.  I was trapped into my loan by an  22 275
expensive prepayment penalty, and I dispute the  23 275
industry saying that these prepayment penalties are a  24 275
tool that they need to ensure that they have the loan  25 275
for a certain amount of time. 1 276
I have a rate sheet with me today, that says  2 276
that the broker gets a kickback based on that  3 276
prepayment penalty.  My broker made $19,794 on a YSP  4 276
for putting me in this loan.  Part of that was a one  5 276
percent fee that he got for giving me a prepayment  6 276
penalty.   7 276
So these lenders are giving the brokers the  8 276
money up front.  That makes no sense for them to say  9 276
that they need that money on the back end in case the  10 276
person gets out of the loan.  Stop giving it to the  11 276
broker.  Does any broker -- do you make $19,794 a day  12 276
or two days for doing a loan?  I don't think so. 13 276
This is the kind of fees these brokers are  14 276
making, and they're making it under the table, on the  15 276
back end, in the form of YSPs that the borrower  16 276
doesn't even know that they're getting these funds. 17 276
I have the rate sheets.  They're based on a  18 276
lot of other things.  I have lots of things to add to  19 276
this discussion.  I know we have limited time, so I  20 276
won't be able to finish.  I'll submit all of my  21 276
comments in writing. 22 276
GOVERNOR KROSZNER:  Thank you very much.  I  23 276
appreciate that.  We're now going to hear from Sylvia  24 276
Lake. 25 276
MS. LAKE:  Good afternoon Governor, and  1 277
thank you for this opportunity to speak.  My name is  2 277
Sylvia Lake.  I'm with the National Community  3 277
Reinvestment Coalition, and NCRC operates a CRF, a  4 277
community rescue fund, and we have for many years. 5 277
We see borrowers every day or very  6 277
regularly, who are on the verge of bankruptcy and  7 277
foreclosure due to abusive lending practices.  We  8 277
either mediate with the lenders to modify the loans  9 277
and terms, or arrange a rescue refinance with our loan  10 277
partner, which is HSBC. 11 277
Most of the loans in the CRF program are  12 277
subprime and non-traditional ARMs or stated income  13 277
loans.  Due to our experience with the CRF program, we  14 277
would agree with Congressional testimony, which was  15 277
offered by Sheila Bair from the FDIC, that in  many  16 277
cases these borrowers, borrowers for exotic loans,  17 277
would have qualified for less expensive and safer  18 277
fixed rate loans. 19 277
So the devastation this is causing with the  20 277
predatory lending is really frustrating, because  21 277
especially knowing that federal regulation and  22 277
legislation here could have avoided much of the  23 277
abusive lending practices responsible here in the  24 277
prime and subprime markets. 25 277
NCRC believes very -- in strong limits and  1 278
prohibitions that could be applied to non-traditional  2 278
and high cost loans, in order to prevent unfair and  3 278
deceptive practices, which violate HOEPA. 4 278
Prepayment penalties.  NCRC believes that  5 278
the Federal Reserve must apply strict limits to  6 278
prepayment penalties.  Prepayment penalties must not  7 278
apply after the expiration of the teaser rate in ARM  8 278
and subprime loans. 9 278
We feel strongly that escrows for taxes and  10 278
insurance should certainly be included in every loan,  11 278
both prime and subprime, fixed and adjustable rate,  12 278
and stated and low doc loans, we agree with the  13 278
Comptroller of the Treasury that stated and low doc  14 278
income loans are prone to abuse by predatory lenders  15 278
and brokers inflating borrowers' incomes.  This type  16 278
of abuse should not be allowed. 17 278
I'm just going to take a moment to speak  18 278
from personal experience as a borrower, because I  19 278
think when we speak of consumers in the abstract, it's  20 278
easy to distance ourselves from a problem that's very  21 278
real. 22 278
The borrower here is quite vulnerable to the  23 278
recommendation of the broker.  As a first time  24 278
borrower, there's one set of circumstances.  You are  25 278
clearly reliant on brokers' advisement.  I got into a  1 279
piggyback loan.  Fortunately, all it did was save me  2 279
PMI.  But if I had been offered an ARM or hybrid loan,  3 279
it would have seemed like the best option.  It would  4 279
have seemed like the opportunity for me to get into a  5 279
home at that time. 6 279
So I would just encourage you to use your  7 279
capacities here to enforce stricter regulation.  Thank  8 279
you. 9 279
GOVERNOR KROSZNER:  Thank you very much.   10 279
We're now going to hear from Michael Nelson. 11 279
MR. NELSON:  I'm Michael Nelson and I run  12 279
the credit ratings business for the U.S. mortgage- 13 279
backed securities for Dominion Rating Service, which  14 279
is one of the credit rating agencies. 15 279
My background is a little unique, because in  16 279
addition to working for the rating agencies for many  17 279
years, I worked as an investment banker, creating  18 279
mortgage-backed securities and actually worked for the  19 279
largest subprime lender at that time in the country  20 279
for many years.  So I have an interesting background. 21 279
Just briefly in terms of S&E liability,  22 279
which is the capital markets issue relating to  23 279
liability on some of these laws, HOEPA's been pretty  24 279
effective in that regard, in terms of creating a limit  25 279
on the secondary markets and what they could do. 1 280
The concern with S&E liability, and Michael  2 280
mentioned it; it was actually an interesting paper  3 280
here for the American Securitization Forum, is that  4 280
when it's not exact and when it's not limited, the  5 280
capital markets shut down.  We've heard stories about  6 280
New Jersey and Georgia and some of those instances. 7 280
So what we would urge regulators, and we  8 280
talk with them regularly, is that while it's certainly  9 280
important that the capital markets be aware that they  10 280
are funding all of these loans, that if it's not  11 280
precise and exact and limiting in nature as to what  12 280
the liability is, the market will tend to shut down. 13 280
In that case, essentially they'll be no  14 280
funding for those assets whatsoever.  From the lender  15 280
side, having worked at a lender, lenders do find ways  16 280
to make loans if the market wants it.  That doesn't  17 280
mean then in some cases they don't make mistakes, and  18 280
clearly we hear about many of those. 19 280
But if there's not an opportunity for credit  20 280
out there, or a need for credit, it wouldn't in fact  21 280
occur.  I think that's something to be aware of.  Many  22 280
of these lenders, the large ones, do buy from the  23 280
brokers that you have been hearing about, and I think  24 280
it's important to police the brokers, because in many  25 280
cases that's where many of the loans are coming from. 1 281
From our experience in dealing with some of  2 281
these predatory lending laws, we've determined that  3 281
there is a patchwork of existing, both civil and  4 281
criminal penalties which are out there, which do cover  5 281
a variety of items such as a fraud and mortgage fraud,  6 281
etcetera.  In many cases, I believe that these items  7 281
can fall under those statutes. 8 281
Somebody mentioned before about the Fed, and  9 281
I think there was a remark about whether they have  10 281
limited powers or not.  Whether they have limited  11 281
powers or not, having the Fed as the centerpiece, in  12 281
terms of all the other regulators, even as a  13 281
figurehead, will make an enormous difference in my  14 281
opinion. 15 281
In terms of the specific items that were  16 281
asked about, I think in some circumstances they're  17 281
Okay and some are not.  But just to talk about the  18 281
prior speaker's comments, I took a mortgage out  19 281
recently and I'm fairly comfortable with the  20 281
documentation. 21 281
I didn't see any disclosure in there that  22 281
said if you don't make your payment, your house could  23 281
be taken away.  If you have an adjustable mortgage, it  24 281
could go up 50 percent in X amount of time.  I looked  25 281
for that in my mortgage. 1 282
We need much better disclosure, and we need  2 282
it in simple language, just like the SEC takes  3 282
prospectuses and has it in simple English.  We need a  4 282
piece of paper that says "If we're offering you a  5 282
prepayment penalty, you should ask for a benefit."  6 282
I think if we do those things and we educate  7 282
folks, as one of the other speakers said, they will  8 282
realize that they have options that they never thought  9 282
they had.  So thank you. 10 282
GOVERNOR KROSZNER:  Thank you very much.   11 282
We're now going to hear from the Reverend Gloria  12 282
Sweringa. 13 282
REV SWERINGA:  Good afternoon.  My name is  14 282
Reverend Gloria Sweringa.  I am a victimized consumer  15 282
of predatory lending.  I'm also chair of Maryland  16 282
ACORN, Prince George's County ACORN, and head of  17 282
Maryland's anti-predatory lending efforts.   18 282
I really appreciate this opportunity to  19 282
speak to all of you, but the problem is this.  All of  20 282
this, you know, this is a rhetorician's dream.   21 282
Tweaking, tantalizing, changing things just a bit,  22 282
simplifying.  You've already let the fox into the  23 282
henhouse. 24 282
The serpents of predatory lending are  25 282
sucking the blood and squeezing to death America's  1 283
homeowners in record numbers.  How do you make the  2 283
market behave better?  Take the blindfold off Lady  3 283
Justice, look the criminal element squarely in the  4 283
eye, and draw a line that's bright enough for this  5 283
blind lady to benefit from, that says "Enough.  No  6 283
more.  This far and no farther." 7 283
You can either decide to really protect the  8 283
homeowner or continue to abet the enemy, aid and abet  9 283
and give comfort to the enemy.  Let me tell you  10 283
something a little bit about my story. 11 283
I paid off a bankruptcy in four months back  12 283
in '04 that I had to file, because my bottom feeder of  13 283
a predatory lender was calling in a forbearance that  14 283
was only in place because of my deadbeat deserting  15 283
husband's economically challenged approach to  16 283
financial responsibility. 17 283
I filed a protective 13, paid -- a bunch of  18 283
my relatives were obliging enough to die and leave me  19 283
some assets that I used to pay it off in four months.  20 283
 In September of '05, I went home to a death, came  21 283
back and everybody's knocking on my door with every  22 283
scam imaginable. 23 283
I wouldn't have known that were it not for  24 283
ACORN's training.  Thank you, ACORN.  I said to one  25 283
young man "Why the heck am I getting all this  1 284
attention?"  "Reverend, don't you know?  Your mortgage  2 284
company has a sell by date on your house."  I had not  3 284
missed a payment.  I had not been notified that they  4 284
had sent me into foreclosure. 5 284
I did not find out until I hired competent  6 284
representation, went to court, disputed the claim.   7 284
They had not only sent me into foreclosure, not once  8 284
but twice.  It seems to me that Americans with  9 284
Disabilities Act, Title 2, Section on Communication,  10 284
entitles me to access to what goes on in my mortgage  11 284
banking situation.   12 284
Even though that bankruptcy judge warned my  13 284
predatory lender when I prevailed, I just found out  14 284
the other day the bankruptcy is still in place. 15 284
Now when the predators have that little  16 284
respect for all of you people, you're going to have to  17 284
get around to regulating.  Thank you. 18 284
GOVERNOR KROSZNER:  Thank you very much.   19 284
We're now going to hear from Gilma Merkert. 20 284
MS. MERKERT:  Good afternoon.  My name is  21 284
Gilma Merkert, and I'm a homeowner.  Okay, thank you.  22 284
 My name is Gilma Merkert, and I am a homeowner and  I  23 284
live in Pennsylvania.  I'd like to take this  24 284
opportunity to thank you for allowing me to be here,  25 284
and the reason I'm here is because I am a victim of  1 285
the predatory lending. 2 285
I am also an ACORN member from Pennsylvania.  3 285
 In the name of all the owners that we're here in the  4 285
same predicament all over the country, kindly I'd like  5 285
to request from the federal government or whoever is  6 285
necessary, to take care of this problem, to stop  7 285
immediately this abusing way of business, if it's  8 285
possible. 9 285
Personally, I'd like to keep my home for my  10 285
son and my family.  I don't want to lose it.  I put  11 285
much sacrifice into it, and I'm here not only to  12 285
request in my name but in the name of many other  13 285
people in the same predicament, because this is quite  14 285
like a nightmare. 15 285
I haven't been able to sleep really good  16 285
because I said it's going to be my son's home, my home  17 285
and we cannot afford to lose it.  Only if we can just  18 285
take the right measurement at the right time,  19 285
hopefully things could be better for all the families  20 285
in this country, I guess. 21 285
My son is in the Army, and he's serving the  22 285
country.  Certainly, when he comes home, I'd like to  23 285
have him in a nice, decent home one day.  Previously,  24 285
I have a loan; it was variable, and it did change  25 285
after three years when they told me. 1 286
So I went to the same broker, and I  2 286
requested to give me a similar product or something  3 286
better.  What happened is he gave me a total different  4 286
part.  He gave me an ARM, adjustable loan, and I  5 286
thought it would change in five years, as he told me. 6 286
It didn't.  It changed immediately the next  7 286
month, the following month after I took the mortgage.  8 286
 I call him immediately when I saw the options or  9 286
whatever.  I never had any idea about these options,  10 286
and I was disgusted, because it was a nightmare right  11 286
from the beginning.  Thank you. 12 286
GOVERNOR KROSZNER:  Thank you very much.   13 286
Next is Cheryl Harvey. 14 286
MS. HARVEY:  Hello.  I'm Cheryl Harvey.  I'm  15 286
from Philadelphia and I'm a member of ACORN.  I'm the  16 286
mother of six and I'm a widow, and I want to say that  17 286
not just for myself, because I was a victim of  18 286
predatory lending, but it's affecting the entire  19 286
neighborhood. 20 286
People who had homes who were raising their  21 286
children are now in shelters.  These same people are  22 286
now homeless, and they need somebody to step in to  23 286
help them, because if you don't help them now, what's  24 286
going to end up happening is it's going to create a  25 286
catastrophe in the future, not just for them but for  1 287
their children, for their grandchildren.  2 287
As Gilma says, she wants to have a place  3 287
there for her son, for his family one day.  I'm asking  4 287
you not to just look at it as a case of where people  5 287
are coming here and you can't see what's happening to  6 287
them, because it hasn't happened to you. 7 287
I want you to feel it as we feel it.  I want  8 287
you to know that we are feeling it in our  9 287
neighborhoods, and it's happening all over the  10 287
country.  The news is talking about how many  11 287
foreclosures there are.  This month, 116,000 or  12 287
something to that effect. 13 287
People are hurting all over.  So you're  14 287
going to have to do something.  The government is  15 287
going to have to step in, because this predatory  16 287
lending has went too far, and there are people who  17 287
aren't making enough money.   18 287
They just raised what was the small amount  19 287
of money to seven dollars, and the people can hardly  20 287
afford to pay their bills as it is.  Now with this,  21 287
they borrow money they can ill afford to pay back.   22 287
Their mortgages are going up, they're losing these  23 287
homes.   24 287
They're not going to make a choice of paying  25 287
for a loan as in preference of having food on the  1 288
table, and I don't think anybody expects them to.  So  2 288
something has to change.  I can only pray that all of  3 288
you who are listening here today won't say "Well,  4 288
Okay.  That won't work.  We won't do it this way.   5 288
We'll go through a whole lot of rigmarole." 6 288
I would say all of you come together in  7 288
agreement and make this change.  Make it today.  Thank  8 288
you. 9 288
GOVERNOR KROSZNER:  Thank you very much.   10 288
Finally, we'll hear from Allen Fishbein. 11 288
MR. FISHBEIN:  Thank you, Governor.  I'll  12 288
quickly sum up the day in three minutes, if I can try  13 288
to do that.  I'm Allen Fishbein, Director of Housing  14 288
and Credit Policy with the Consumer Federation of  15 288
America.   16 288
CFA is a federation of some 300 consumer  17 288
organizations organized 40 years ago to promote the  18 288
consumer interest, and home ownership is one of our  19 288
key concerns. 20 288
I just want to make four quick points and  21 288
observations that really came from the hearing.   22 288
Number one, we believe it's vital that the Fed act  23 288
swiftly and decisively to use its very broad authority  24 288
under HOEPA to rein in unfair and deceptive practices  25 288
in the marketplace. 1 289
Mortgage abuses that are resulting in many  2 289
homeowners being placed in mortgages they cannot  3 289
afford, and facing the prospect of foreclosures.   4 289
We're going to submit written comments about the  5 289
substantive provisions that have been discussed here  6 289
today. 7 289
But I want to say the fact that so many  8 289
homeowners are at risk at this stage is an indication  9 289
that the current consumer protection laws are largely  10 289
obsolete and inadequate, which shouldn't come as a  11 289
surprise, because it's been over a decade since  12 289
consumer protection in this area has been enacted.   13 289
The market's changed a lot.  Consumer protection has  14 289
not.   15 289
The second point is we heard throughout the  16 289
day, and I think it cannot be emphasized enough, is  17 289
that the subprime market works differently than other  18 289
segments of the mortgage market.  It's a push market;  19 289
loans are not sold based on rates and terms, but  20 289
really on monthly mortgage payments. 21 289
Consumers have fewer choices, almost by  22 289
definition and therefore are subject and more  23 289
vulnerable to be taken advantage of, which was the  24 289
original rationale behind the enactment of HOEPA back  25 289
in 1994. 1 290
Third, we believe the Fed's in a unique  2 290
position to level the playing field, that by adopting  3 290
substantive regulation in this area, it will apply  4 290
across the board to all lenders, in a way that  5 290
guidance cannot. 6 290
Lastly, enhanced Disclosure, which is a  7 290
concept we certainly agree with and support, is  8 290
necessary but ultimately insufficient to curb a lot of  9 290
the abuses that are occurring, and that substantive  10 290
regulation that would prohibit abusive practices will  11 290
need to be adopted by the Board as well.  Thank you  12 290
very much. 13 290
GOVERNOR KROSZNER:  Thank you very much.   14 290
I'd like to thank all of the speakers for sharing  15 290
their views, and their personal histories.  These are  16 290
very important.  I am well aware that this is about  17 290
not just big concepts and markets, but also about  18 290
individuals and families who are facing potential  19 290
tragedies in their lives. 20 290
It's very important that we undertake the  21 290
right actions, to make sure that we avoid those  22 290
personal tragedies as much as we can, and also make  23 290
sure to be able to provide credit, on a responsible  24 290
basis, to people who can handle it and who can make  25 290
their lives better because of it. 1 291
I want to thank you very much again for  2 291
coming and sharing this day with us.  It's been  3 291
incredibly valuable to me and I think to both Sandy  4 291
and to Leonard, and hopefully it was very valuable to  5 291
you.  Thank you very much. 6 291
(Whereupon, at 3:56 p.m., the hearing was  7 291
adjourned.) 8 291
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NEAL R. GROSS
COURT REPORTERS AND TRANSCRIBERS
1323 RHODE ISLAND AVE., N.W.
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(202) 234-4433
www.nealrgross.com