[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
PROMOTING HOME OWNERSHIP BY
ENSURING LIQUIDITY IN THE
SUBPRIME MORTGAGE MARKET
=======================================================================
JOINT HEARING
BEFORE THE
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
AND THE
SUBCOMMITTEE ON
HOUSING AND COMMUNITY OPPORTUNITY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
JUNE 23, 2004
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-97
U.S. GOVERNMENT PRINTING OFFICE
95-652 WASHINGTON : DC
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
MARK GREEN, Wisconsin JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona MIKE ROSS, Arkansas
VITO FOSSELLA, New York CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
MELISSA A. HART, Pennsylvania JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota RAHM EMANUEL, Illinois
TOM FEENEY, Florida DAVID SCOTT, Georgia
JEB HENSARLING, Texas ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey CHRIS BELL, Texas
TIM MURPHY, Pennsylvania
GINNY BROWN-WAITE, Florida BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
Subcommittee on Financial Institutions and Consumer Credit
SPENCER BACHUS, Alabama, Chairman
STEVEN C. LaTOURETTE, Ohio, Vice BERNARD SANDERS, Vermont
Chairman CAROLYN B. MALONEY, New York
DOUG BEREUTER, Nebraska MELVIN L. WATT, North Carolina
RICHARD H. BAKER, Louisiana GARY L. ACKERMAN, New York
MICHAEL N. CASTLE, Delaware BRAD SHERMAN, California
EDWARD R. ROYCE, California GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
SUE W. KELLY, New York DENNIS MOORE, Kansas
PAUL E. GILLMOR, Ohio PAUL E. KANJORSKI, Pennsylvania
JIM RYUN, Kansas MAXINE WATERS, California
WALTER B. JONES, Jr, North Carolina DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois JULIA CARSON, Indiana
PATRICK J. TOOMEY, Pennsylvania HAROLD E. FORD, Jr., Tennessee
VITO FOSSELLA, New York RUBEN HINOJOSA, Texas
MELISSA A. HART, Pennsylvania KEN LUCAS, Kentucky
SHELLEY MOORE CAPITO, West Virginia JOSEPH CROWLEY, New York
PATRICK J. TIBERI, Ohio STEVE ISRAEL, New York
MARK R. KENNEDY, Minnesota MIKE ROSS, Arkansas
TOM FEENEY, Florida CAROLYN McCARTHY, New York
JEB HENSARLING, Texas ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey JOE BACA, California
TIM MURPHY, Pennsylvania CHRIS BELL, Texas
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
RICK RENZI, Arizona
Subcommittee on Housing and Community Opportunity
ROBERT W. NEY, Ohio, Chairman
MARK GREEN, Wisconsin, Vice MAXINE WATERS, California
Chairman NYDIA M. VELAZQUEZ, New York
DOUG BEREUTER, Nebraska JULIA CARSON, Indiana
RICHARD H. BAKER, Louisiana BARBARA LEE, California
PETER T. KING, New York MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, Jr., North BERNARD SANDERS, Vermont
Carolina MELVIN L. WATT, North Carolina
DOUG OSE, California WM. LACY CLAY, Missouri
PATRICK J. TOOMEY, Pennsylvania STEPHEN F. LYNCH, Massachusetts
CHRISTOPHER SHAYS, Connecticut BRAD MILLER, North Carolina
GARY G. MILLER, California DAVID SCOTT, Georgia
MELISSA A. HART, Pennsylvania ARTUR DAVIS, Alabama
PATRICK J. TIBERI, Ohio
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
C O N T E N T S
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Page
Hearing held on:
June 23, 2004................................................ 1
Appendix:
June 23, 2004................................................ 51
WITNESSES
Wednesday, June 23, 2004
Calhoun, Michael D., General Counsel, Center for Responsible
Lending........................................................ 18
DeMong, Richard F., Virginia Bankers Professor of Bank
Management, McIntire School of Commerce, University of Virginia 22
Green, Micah S., President, The Bond Market Association.......... 14
Kogut, Pamela, Assistant Attorney General, Office of the Attorney
General, Commonwealth of Massachusetts......................... 19
Raiter, Frank, Managing Director, Standard & Poor's Credit Market
Services....................................................... 16
APPENDIX
Prepared statements:
Ney, Hon. Robert W........................................... 52
Bachus, Hon. Spencer......................................... 54
Clay, Hon. Wm. Lacy.......................................... 58
Gillmor, Hon. Paul E......................................... 59
Hinojosa, Hon. Ruben......................................... 61
Miller, Hon. Gary G.......................................... 63
Velazquez, Hon. Nydia M...................................... 64
Waters, Hon. Maxine.......................................... 65
Calhoun, Michael D........................................... 67
DeMong, Richard F............................................ 90
Green, Micah S............................................... 98
Kogut, Pamela................................................ 104
Raiter, Frank................................................ 111
Additional Material Submitted for the Record
Coalition for Fair and Affordable Lending, prepared statement.... 117
Freddie Mac, prepared statement.................................. 127
Housing Policy Council of the Financial Services Roundtable,
prepared statement............................................. 135
PROMOTING HOME OWNERSHIP BY
ENSURING LIQUIDITY IN THE
SUBPRIME MORTGAGE MARKET
----------
Wednesday, June 23, 2004
U.S. House of Representatives,
Subcommittee on Financial Institutions and
Consumer Credit, and
Subcommittee on Housing and
Community Opportunity
Committee on Financial Services,
Washington, D.C.
The subcommittees met, pursuant to call, at 10:08 a.m., in
Room 2128, Rayburn House Office Building, Hon. Robert Ney and
Hon. Spencer Bachus [chairmen of the subcommittees] presiding.
Present: Representatives Bachus, Ney, Baker, Royce, Kelly,
Biggert, Fossella, Gary G. Miller of California, Hart, Capito,
Tiberi, Hensarling, Garrett, Kanjorski, Waters, Sanders,
Maloney, Gutierrez, Velazquez, Watt, Ackerman, Sherman, Meeks,
Lee, Lucas, Crowley, Israel, McCarthy, Miller of North
Carolina, Scott, and Davis.
Chairman Ney. [Presiding.] Today, the two subcommittees
meet to continue our look at the subprime market and its
importance to consumers. Last year, Chairman Bachus and I began
holding roundtables to discuss abusive lending practices in
subprime lending and how we can assure credit availability for
those who need and want it. We are pleased to also have
Chairman Baker with us today who has a wealth of knowledge on
this issue and has spent a long time looking at this issue.
Last fall, we held our first joint hearing to examine
abusive lending practices. This spring, we followed that by
holding a hearing looking at the subprime lending market. For
the first time in the predatory lending discussion, we looked
at the growing class of subprime borrowers and their role in
the mortgage marketplace. Today, we will look at another vital
piece of the subprime market. The United States mortgage market
is the deepest and most affordable in the world. Due to the
evolution of unique funding structures for mortgages, Americans
pay less for mortgages than almost anywhere else in the world.
As a result, this country has the world's highest homeownership
rate, although there is a lot more that can be done, especially
in areas of minority homeownership.
However, the unique funding structure that has been long
established for the prime mortgage market is far less mature
for the subprime mortgage market. Only recently has it become
common for a majority of subprime loans to be packaged and sold
to investors. I believe that this evolution has led to lower
and more uniform rates for subprime loans, saving consumers
money while making credit more widely available. However,
states and cities have begun passing laws that dramatically
affect the availability of funds for subprime lenders.
In a well-intentioned attempt to end abuse of lending
practices, some State and local governments passed laws
extending liability for fraudulent origination practices to
those in the secondary market that purchased the loan in a
pool, but had no hand in actually writing the loan. These
strict assignee liability laws threaten the availability of
credit in the subprime market. I think we saw this most evident
in Georgia at the time when it caused such a problem, people
said, fine, we are just not going to do business. And of
course, the legislature came back, there were some editorials,
and they changed parts of that law. These strict assignee
liability laws threaten the availability of credit, frankly, in
the subprime market. Acting as a usury cap on mortgage lending,
these laws effectively prevent people from receiving mortgages.
The recent case study on the problems with assignee
liability, and I mention, of course, recent case studies in
Georgia, where the State legislature passed an incredibly
onerous law with strict assignee liability. That law led many
secondary market players to withdraw from the Georgia market,
drying up the credit for the borrowers. Of course, I mentioned
the rest about the editorials that followed, and then the
Georgia legislature passed a partial fix to the problem that
provided some lending opportunities, but we still do not know
what will be the lasting effect of these predatory lending
statutes on the availability of credit.
In order to better understand the impact of laws like
Georgia's, this hearing will give our subcommittees a chance to
hear from a distinguished group of witnesses on the
availability of subprime mortgages. I think this hearing is
timely and important to this committee's duty of ensuring
access to credit for Americans. I also want to thank
Congressman Lucas and a wide variety of other members on both
sides of the aisle, Congressman Sherman and others, who have
expressed interest in this issue. We appreciate it. I know it
can be a controversial and tough issue, but I think it has to
be looked at and dealt with. So I again appreciate members who
have been willing to look at this.
With that, I will recognize Congressman Sherman.
[The prepared statement of Hon. Robert W. Ney can be found
on page 52 in the appendix.]
Mr. Sherman. Thank you, Mr. Chairman.
The recent actions by the OCC have created an absurd
situation where a certain class of lenders has the lowest
common denominator of virtually no restrictions, and that will
eventually lead to some bad actors, if it has not already, that
will tarnish the image of all lenders and result in a backlash
that will be harmful even to that subset of lenders, the
national banks that think they enjoy the OCC's liberation from
State regulation.
The answer is that Congress needs to take action. The most
immediate action we should take is to get rid of what the OCC
has done, which is to substitute itself for this committee and
this Congress. It may be necessary for us to do that as part of
a package where we establish real solid consumer protections,
not lowest common denominator, and at the same time preempt
this glowing plethora of state and even local regulation. We
need good regulation for all Americans, and not a patchwork
city-by-city, county-by-county, or even state-by-state.
We need the competition that comes from efficiency, which
comes from offering a product nationwide. I hope that both
sides in this debate will not grab onto their own definition of
nirvana; that consumer groups will not say, well at least in
Berkeley, we have every regulation we want; God forbid we
should lose that paradigm. And some national bank should not
say, well, we have the OCC for now; we do not have to worry
about anything. And instead unite behind solid consumer
protections that represent a middle ground.
I hope these hearings lead to that result, and I yield
back.
Chairman Ney. Thank you.
Mr. Chairman, Mr. Bachus?
Mr. Bachus. Thank you, Mr. Ney.
First of all, I want to commend you for having this hearing
of our two subcommittees. By way of review, this is the third
hearing we have had on this matter. Our first hearing, we
addressed ways to combat abusive lending practices in the
nonprime or subprime area, and to address them without
jeopardizing the availability of nonprime or subprime loans to
those with less than perfect credit.
Our second hearing, we focused on looking at actually who
the nonprime or subprime borrowers were, their profiles, and
the advantages that nonprime and subprime mortgages, the
benefits and advantages to those borrowers, and also some of
the risks inherent in the nonprime or subprime market, and the
risks posed by predatory lenders.
Today's hearing we are going to look at the secondary
market, the role that it plays in adding liquidity to the
subprime lending industry, and the benefits it provides of
expanded homeowner opportunities.
The nonprime market, I think the most surprising thing to
me is the explosive growth in nonprime or subprime lending. In
1994, there were $34 billion in subprime mortgages. By 2002,
that was $200 billion, so you are talking about a five-fold
increase in 8 years in nonprime loans. A lot of this increase
in the number of loans is because of development of the
secondary market where the originators are selling loans into
the secondary market, rather than retaining them in their own
portfolios. When they do this, we found that they create
mortgage pools and as a result of this there have been assignee
liability problems, where people who purchase these mortgage
pools are held liable as assignee's.
I think maybe that will be part of the focus at this
hearing today, to determine the fairness of assignee liability
provisions that require purchasers of mortgage pools to
determine as part of their due diligence whether the lender or
mortgage broker involved in originating the individual loans
that make up the portfolio misrepresented loans terms or
engaged in other deceptive practices in dealing with the
borrower.
There is a question about the fairness of imposing
liability on secondary market participants for violations, and
I know we have someone here from Standard & Poor's that is
going to be a witness. They have simply refused to rate
mortgage-backed securities if they contained non-prime or
subprime loans because of what sometimes is described as vague
or open-ended assignee liability standards that some States
have imposed. As a result of the assignee liability question,
Congressman Ney and Congressman Ken Lucas introduced H.R. 833.
What it does is it contains consumer protections in
disclosures. It is intended to serve as a uniform national
standard for combating abusive and predatory lending.
At the same time, it addresses this assignee liability by
amending the Homeownership Equity Protection Act. The approach
that their legislation takes, I am sure the witnesses are
familiar with that and will address whether they think that is
the right approach. It at least has the possibility, if it is a
fair approach, of establishing some legal certainty to the
secondary market, which is lacking in a lot of State and local
anti-predatory lending laws.
With that, I will just close. Thank you for having this
hearing. I am convinced that nonprime loans allow many people
to participate in homeownership or to purchase a home that
would otherwise be unavailable to them. I would like to allow
us to find a way to preserve this market, preserve this
opportunity that many middle-and low-income citizens need to
have homeownership, and at the same time establish some legal
certainty in a fair way concerning assignee liability, and to
do it in a way that is fair to all parties.
I yield back the balance of my time.
[The prepared statement of Hon. Spencer Bachus can be found
on page 54 in the appendix.]
Chairman Ney. I want to thank the gentleman, and I thank
the gentleman for chairing this hearing today with us.
The gentlelady from California.
Ms. Waters. Thank you very much, Mr. Chairman.
I have a Statement that I am going to submit. I am here
today to try and discover what the crisis is as indicated by
this hearing. I think there is liquidity in the subprime
market. I want to be clear. I am not opposed to subprime
lending, and I know the difference between subprime lending and
predatory lending. It does not have to be one and the same, but
far too often it is. I am interested in making sure that in the
subprime lending market, we do not have abusive practices, high
interest rates and marketing techniques and practices that
deceive and get people hooked into loans that they do not
understand and cannot afford.
So I am very careful about making sure that that is
understood; that subprime lending can be lending that can be
helpful, but it is not always helpful and I think we find a
disproportionate amount of the predatory lending in the
subprime market. I am opposed to preemption. I do not know if
you are aware that Los Angeles is one of the cities that has
passed some local predatory lending laws. I want to be careful
to do nothing that would preempt the kind of work that they are
doing and some of the other states. I understand there are
about 29 states and at least 18 municipalities that have
enacted laws to address the problem of predatory lending.
So I am going to listen to the witnesses here today to see
what they have to say. I do not know what the crisis is.
Perhaps there will be some information here that can help me to
understand exactly what is meant by the subject of this
hearing. So with that, Mr. Chairman, I am just going to yield
back the balance of my time.
[The prepared statement of Hon. Maxine Waters can be found
on page 65 in the appendix.]
Chairman Ney. I thank the gentlelady.
Chairman Baker.
Mr. Baker. Thank you, Mr. Chairman, for your leadership and
interest in this matter, as well, of course, as Chairman
Bachus. I know both of you have had longstanding concerns about
this market issue. I understand the focus of the hearing today
is the potential causes of liquidity impairment and abusive
practices that may occur in the subprime mortgage market. I
certainly agree with your interest in need for review, however
I just want to make a very narrow observation about a concern I
have today, which is that mentioned by Mr. Bachus as well, the
potential imposition of liability on assignee's of mortgage
loans.
This imposition would, I think, place a burden on the
secondary market participants that would affect and have a
disruptive affect on the flow of legitimate credit to many
underserved communities. The advent of securitization certainly
has assisted in the liquidity of mortgage markets, lowered cost
of credit, significantly increased the availability of subprime
mortgage credit, and has resulted in benefits, not necessarily
associated with that described as predatory lending. But the
consequences of assignee liability would cause potential buyers
to forego purchasing subprime or high-cost mortgage loans.
Certainly if this were the case, with fewer buyers and less
money, legitimate lenders would ultimately impair the ability
of low-and moderate-income customers to participate in
homeownership.
The public policy challenge, I believe, is to strike a
balance between limiting abusive lending practices, while
ensuring the flow of credit to borrowers who cannot obtain
loans in the primary market. Consumers obviously need to be
protected from unscrupulous lenders, particularly those who are
financially unsophisticated. I do believe there are
sufficiently strong standards currently in existence and they
should continually be reviewed to determine their adequacy of
protection of the unsophisticated borrower.
Extension of these sanctions, however, to assignee's risks
the future of our current market structure. To assure that
assignee's are not made liable for abuses they cannot
reasonably discover and correct, I have been at work for some
time drafting my own approach to a remedy and I will be
introducing later this week, that would recognize that
commercially reasonable responsible actions called due
diligence, which would not enable discovery, ought to be a
sufficient defense. Sanctions such as class action civil
liability, loan rescission, are matters which should be
discussed. Assignees should be allowed to take some time to
take corrective actions upon appropriate discovery of a
compliance failure.
These are I believe important issues deserving of the
committee's time, and I look forward to working with you, Mr.
Chairman and Mr. Bachus, over the coming weeks as we move
forward in trying to provide balance in a very important market
that provides a service to many underserved consumers, and
certainly a very important part of our overall economic
recovery.
I thank you, Mr. Chairman.
Chairman Ney. I want to thank the gentleman.
Mr. Sanders, the gentleman from Vermont.
Mr. Sanders. Thank you, Mr. Chairman. I thank you and
Chairman Bachus for holding this important hearing.
According to the Center for Responsible Lending, predatory
lending is costing American families $9.1 billion every year. I
am happy that Michael Calhoun from the Center is here with us
today to talk about that study.
Mr. Chairman, in the richest country on earth, there is
something wrong when so many foreclosures are taking place.
Between 1980 and 1999, both the number and the rate of home
foreclosures in the United States have skyrocketed by 277
percent. According to an article in the New York Times, over
130,000 homes were foreclosed in the spring of 2002, with
another 400,000 in the pipeline. Many of these foreclosures are
a direct result of predatory lending practices in the subprime
mortgage market that must be put an end to immediately.
According to the Mortgage Bankers Association, while subprime
lenders account for 10 percent of the mortgage lending market,
they account for 60 percent of the foreclosures.
Mr. Chairman, the title of this hearing is Promoting
Homeownership by Ensuring Liquidity in the Subprime Mortgage
Market. That is a very interesting title. The title seems to
assume that there is a lack of liquidity in the subprime market
that is somehow depressing homeownership in this country. But
Mr. Chairman, according to figures compiled by the National
Mortgage News, new subprime loans totaled $290 billion in 2003,
more than double the total loan volume for 2000.
Mr. Chairman, we have a subprime industry which has more
than doubled their loan volume over the past 3 years, but
accounts for 60 percent of all foreclosures in this country. I
have to ask, by providing even more liquidity in the subprime
market, would we be promoting homeownership or would be
promoting foreclosures? Everyone wants to promote
homeownership. Homeownership is the American Dream. But having
your home taken away from you because you cannot pay the bills
charged by predatory lenders can quickly turn the American
Dream in to the American Nightmare.
Also in this discussion, importantly, let us not forget
that predatory lending is being perpetrated by the likes of
just not small-time operators, but by the likes of Citigroup
and Household International. As a result of legal actions filed
by the FTC, Citigroup agreed in September to reimburse
consumers $215 million for predatory lending abuses which
represents the largest consumer settlement in FTC history.
Household International has agreed to pay $484 million to
reimburse victims of predatory lending, representing the
largest direct payment ever in a State or federal consumer
case.
Mr. Chairman, when we are talking about predatory lending,
we are not just talking about mortgage lending. Let us take
finally a hard look at the abuse in credit cards, where many
working people are paying 25, 28 percent a year in interest
rates on credit cards, and as a result are going even further
into debt. In my view, that is predatory lending as well.
Lastly, Mr. Chairman, I know there is an effort to preempt
states and localities from passing strong anti-predatory
lending laws. Mr. Chairman, the Republican Party has got to get
its act right. Either they hate the big bad federal government
or they love the big bad federal government. You cannot have it
both ways. You cannot tell us how we love local government and
State government. The word, Mr. Chairman, is laboratories of
democracy. That is what it usually is, something like that, and
then we preempt them every single day. Let's get our act
together. Either the Republican Party wants to be the spokesman
for the big strong federal government taking away power from
local government or not, but let's be a little bit consistent
in that area.
I yield.
Chairman Ney. I want to thank the gentleman for his kind
comments.
[Laughter.]
Mr. Miller?
Mr. Gary G. Miller of California.Thank you, Mr. Chairman.
I want to commend you, Chairmen Ney and Bachus, for having
this hearing. This is an extremely important issue in the
subprime market out there. This is a very important issue
particularly in the passage of State and local predatory
lending laws which have assigned liability to the secondary
market.
There is basically a housing crisis in this country,
particularly in my State of California. The California
homeownership rate is 56.9 percent in 2000. That lags the rest
of the nation by over 10 percent. We also have the highest home
prices in the nation. Housing finance is so vital to Americans
and the overall health of our economy that the best public
policy is for Congress to ensure that we have a fair workable
uniform national lending standard. We must eliminate abusive
lending practices, while preserving and promoting access to
affordable housing credit.
There is no question that in some nonprime borrowers, they
basically have been abused and we need to deal with abusive
practices, but we should do everything we can at the same time
to prevent them. There is also no question of the vast number
of borrowers who are not victims of such practices can become
victims by poorly crafted protective legislation that restricts
nonprime credit availability and basically creates an
unnecessary situation.
State and local anti-predatory lending laws are
inconsistent and sometimes ineffective and nonexistent, and
often arbitrary and unduly burdensome. This has been an effect
of limiting nonprime credit availability. These laws have
forced the mortgage industry to restrict access to credit or
exit markets entirely. You cannot have a system whereby if you
go one city, you have one requirement, and another city, you
have another requirement. There is litigation on many of these
ordinances that have passed locally that have not been
implemented.
From what I am hearing, if they are implemented, that the
impact is going to be disastrous to local economies. That is
unfair. You should not be discriminated against because you
want to buy a home in a certain area. If you are looking at the
subprime market, if you eliminate that, people are really in
serious trouble when it comes to financing homes in those
areas. So you have to be very cautious. You have to understand
that there is a need for subprime and the predators in that
marketplace need to be eliminated.
We need to do everything we can in this nation to give
people an opportunity to own a home. It is becoming more and
more difficult to provide housing for people in this nation as
time goes on. We have to be proactive in this area. Sometimes
you have to look at what happens at the local level. We do that
in housing all the time. HUD is looking at eliminating local
red tape that exists out there that precludes people from being
able to build homes in certain areas. We have to be proactive
in doing that. You cannot sit there and ignore local policies
that are just absolutely abusive towards people wanting to buy
homes.
You look at some of these areas, and the assessment against
builders who want to build homes is so outrageous and generally
passed on to homebuyers, that the federal government has to say
this is wrong; that you are abusing people and perhaps federal
policy has to establish certain guidelines that preclude some
of these abusive policies. In subprime lending, we need to look
at predatory. And when it is being abused, we need to move
proactively
So Chairmen Ney and Bachus, I applaud both of you for your
efforts on this and I look forward to hearing the testimony
from our panel. I yield back.
[The prepared statement of Hon. Gary G. Miller can be found
on page 63 in the appendix.]
Chairman Ney. I thank the gentleman.
The gentleman, Mr. Miller from North Carolina.
Mr. Miller of North Carolina. Thank you, Mr. Chairman.
I agree with those members who have said that it is vital
that we make credit available for homeownership to those
borrowers, those consumers who have less than perfect credit.
It is also vital that they use the equity in their home, their
life savings to provide against the contingencies of life. That
is how they have saved for a rainy day.
But I strongly agree with those members who say that there
are sufficient consumer protections now for what is happening
to some of the most vulnerable consumers when they try to
borrow money against the equity in their home to provide for
life's rainy days. There is outrageous conduct going on. In the
words of Woody Guthrie, they are being robbed with a fountain
pen. There are lenders who steal their life savings, the equity
in their homes, from the most vulnerable of consumers in the
most difficult of circumstances. I certainly think that we can
strike a balance between making credit available to those in
that subprime market, including a liquid secondary market, and
providing reasonable protections to those consumers.
It is true that Standard & Poor's have said that the
subprime loans coming out of some States require additional
credit enhancements. North Carolina was the first State, and it
is not our nature to be first in anything; we were the 12th of
the 13 states to ratify the Constitution; I think we were among
the last of the States to join the Confederacy. We did ratify
the constitutional amendment guaranteeing women the right to
vote. I think we did that in the 1980s. But we were the first
with this, and our statute has held up pretty well.
There is readily available credit for the subprime market.
Standard & Poor's has said that there is no enhancement
required for North Carolina's subprime loans. I think it is
perfectly possible to craft legislation here that will protect
consumers against those outrageous practices that are
occurring, and assure the continuous availability of credit.
I join Mr. Miller, the other Mr. Miller, in his opposition
to poorly crafted legislation. I strongly oppose poorly crafted
legislation. I may put that on my campaign literature this
year. I am strongly opposed to poorly crafted legislation. But
it is simply the case that we have legislation arising from the
States that show us what can work.
Thank you, Mr. Chairman.
Chairman Ney. Mr. Royce.
Mr. Royce. Thank you, Chairman Ney. I would like to thank
you, Mr. Chairman and Chairman Bachus for holding this very
timely hearing on issues in the secondary mortgage market. I
would like to also thank our distinguished witnesses for
appearing today.
I think it goes without saying that the housing economy has
been quite resilient for a number of years. I think this
strength has occurred because of a number of factors, but one
is asset allocation away from equities. Certainly, friendly
government policies have helped, and low interest rates.
What concerns me is that problems in a sector can often be
hidden or overcome in a boom cycle. All of that being said, I
think that we need to start thinking about what happens when
that housing market cools, because today we have Fed funds rate
at 1 percent, but if we believe Wall Street economists, they
say that the Fed fund rate will reach 4 percent by the end of
2005. If these predictions prove true, unless we have a very
flat or inverted yield curve, mortgage rates are going to be
much higher in the not too distant future. Higher interest
rates are going to have a very adverse impact on the housing
market.
I do not know how much we can do about that possibility,
but we can address structural issues that unnecessarily add
costs to consumer mortgages. In my view, assignee liability is
one issue that we should address. Congress should encourage
more investment in the secondary mortgage market. Assignee
liability provisions do just the opposite. Fixed income
investors are not excited to become the next target for trial
lawyers, and that is a big problem here in the United States.
Until we act, billions of dollars of capital investment will
likely stay away from the subprime market. That is going to
harm the very people assignee liability laws are intended to
help.
So once again, I thank Chairman Ney and I thank Chairman
Bachus for having this hearing today, and I look forward to
working with my colleagues on this very important issue. I
yield back, Mr. Chairman.
Chairman Ney. I want to thank the gentleman.
The gentleman, Mr. Scott.
Mr. Scott. Thank you very much, Mr. Chairman.
I, too, am very much looking forward to this hearing. As
the Congressman from Georgia who was very much involved in the
predatory lending legislation in the State, going all the way
back to the beginning with the Fleet Finance fiasco, our State
has been a major player in this debacle.
I have heard from some representatives from the mortgage
industry that subprime lending provides homeowner opportunities
for many individuals who normally would not qualify for prime
loans. I have also heard from consumer advocates that subprime
mortgage lending provides ample opportunity for predatory
lending practices and gives incentives to liberally approve
loans to individuals who cannot afford a loan. Advocates from
consumer advocates and subprime lenders both would like to see
the creation of a national predatory lending law, and I
certainly commend the leadership of our financial services
committee for moving in that direction.
As a former member of the Georgia General Assembly as a
State Senator, I can speak of the impact that an overly strong
regulatory measure can have on a housing market. For a little
bit of history, the Georgia Fair Lending Act had several
provisions, including assigning liability to secondary markets,
which caused financial companies to pull out of our State and
withdraw some lending products. The Georgia legislature had to
revisit the law last year to prevent additional companies from
leaving the State.
In an effort to stop unscrupulous lending practices, the
Fair Lending Act caused hardship to legitimate lenders. It
triggered an immediate reaction from both mortgage lenders and
secondary market entities. Once that Act extended assignee
liability to potentially thousands of covered loans, with
interest rates approximately 4 percentage points below the
HOEPA interest trigger. Major mortgage lenders announced their
plans to stop making both the high-cost loans and cover loans
in Georgia. Standard & Poor's announced it would not rate
mortgages covered by the law, and both Fannie Mae and Freddie
Mac indicated they would not purchase mortgages that qualify as
high-cost loans under the Act.
Assignee liability, then, presents us with quite a
challenge. The central question, of course, is what is the
effect of making assignee liability for the predatory lending
practice of originators? Should assignee's be required to bear
the responsibility for the predatory practices of those from
whom they purchase loans?
One side of the argument is that it is clear that if the
liability is broad and does not provide solid safe harbors and
limits on liabilities, lenders will refrain from purchasing a
broad category of loans. This is because the risk of acquiring
the loan has become too great, not because of each of the loans
in that category may be predatory. This means that many lenders
will not originate high-cost loans and purchasers will not
purchase them. They will not be securitized and the secondary
market will not produce the liquidity that fuels additional
lending in the high-cost loan market.
Yet, assignee liability is critical to successful efforts
to address predatory lending. It helps to protect responsible
investors from misperceived risk and provides incentives for
the market to police itself, curbing market inefficiencies. The
argument is, without assignee liability an unscrupulous lender
can increase the value of the loans it sells by engaging in
predatory practices, and packing the loan with unnecessary
fees, excessive interest rates and large prepayment penalties.
The lack of assignee liability provides little incentives to
purchasers of such loans to determine if the loans were
originated illegally or are so out of line with market norms
that they present a substantial likelihood of abuse.
What a dilemma; what an issue. How do we resolve it? How do
we get an end to predatory lending? That is on our plate today
and I look forward to an excellent meal.
Thank you.
Chairman Ney. I want to thank the gentleman.
Mr. Hensarling from Texas.
Mr. Hensarling. Thank you, Mr. Chairman, and thank you and
Chairman Bachus for holding this hearing.
Since coming to Congress, I have heard a lot of bad ideas,
but assigning strict liability to assignee's of mortgages in
the secondary market--strict liability--strikes me as one of
the worse. I mean, where those who purchase the mortgage do not
even have any knowledge of a potential underlying violation
strikes me as a truly, truly bad idea.
One thing we have consensus on in this committee is that we
all believe that predatory lending is a problem. Unfortunately,
we cannot seem to come to any consensus on what predatory
lending is or is not. I hope that we as a committee do not
conclude that predatory lending is tantamount to a commercial
transaction between consenting adults with full disclosure, but
because we do not like the terms, we decide in our infinite
wisdom that we should outlaw these transactions.
Now, as we debated the Fair Credit Reporting Act, we heard
testimony after testimony that we in America enjoy the most
accessible, lowest-cost credit in the world. I think it is
undisputed we have the highest rate of homeownership in the
entire history of our nation, and that includes homeownership
opportunities for low-income individuals and those who have
either poor credit records or no credit records.
If we do not legislate properly, we risk all of this. I
certainly found the comments from my colleague Mr. Scott of
Georgia very instructional, very enlightening. To some extent,
it seems to me we have a case study of what happened in Georgia
and I look forward to hearing some testimony from the witnesses
on this. But what I saw happen in Georgia was that Ameriquest,
Chase, City Financial, Fannie Mae, GMAC, National City, Option
One, Freddie Mac, Wachovia, the list goes on and on and on, all
pulled out of the market because of uncertainties with respect
to the liability.
If we want to be pro-consumer on this committee, I would
suggest that we work hard to make sure that we increase market
competitiveness and not sow the seeds of the market's
destruction. It is critical that we figure out what predatory
lending is, that we agree on the definition and we isolate it
from those reasonable players in the commercial market who are
making homeownership opportunities available to low-income
Americans.
I yield back the balance of my time.
Chairman Ney. The gentlelady from New York, Ms. Velazquez.
Ms. Velazquez. I ask that my statement be included in the
record.
Chairman Ney. The gentlelady asks for unanimous consent. I
would note for all members, unanimous consent if there is no
objection for their statements to be entered into the record.
Mr. Lucas.
[The prepared statement of Hon. Nydia M. Velazquez can be
found on page 64 in the appendix.]
Mr. Lucas. Mr. Chairman, in the interest of time, I would
like to associate myself with the remarks of my colleagues
across the aisle, Mr. Miller of California and Mr. Royce, and
also with Mr. Scott of Georgia. Thank you.
Chairman Ney. I thank the gentleman.
The gentleman, Mr. Garrett.
Mr. Garrett. Thank you, Mr. Chairman.
Just very briefly, first of all, I thank you for holding
the hearing today. I think for both sides of the aisle, we are
concerned about the same thing, and that is the victims,
whether they be defined as some us are concerned, the victims
of abusive practices, or also those people who are the victims
of good intentions.
I come from the State of New Jersey where the victims in
that case are the victims of good intentions of the State
legislature who, as in Georgia as well, had the best of
intentions, I am sure, to look after those folks who may be
victims of abusive lending practices. But at the end of it,
they become victims themselves, whether they are those who no
longer are able to enter into the subprime market, the families
involved who are no longer able to get those loans; and finally
those legitimate lenders who are now precluded from being in
that marketplace because of the actions that the State
legislature took.
I am also mindful of the Ranking Member's comment at the
outset of these discussions with regard to a Statement saying
we have to get our act together here. Would that be true, that
we get there, and make a decision from either side of the aisle
as to where the appropriate responsibility lies, whether it is
on these areas of State concern or federal concern.
I think at the end of the day, the hearings that we hold
here at the very least should shine the light of day both on
the abusive practices, but also on the very debilitating effect
that the State legislative actions in several States have
already taken, and fortunately they have begun to take remedial
actions on these various facets.
Mr. Chairman, again I appreciate your holding these
hearings and I yield back the balance of my time.
Chairman Ney. Thank you.
The gentleman from New York, Mr. Israel.
Mr. Israel. Thank you, Mr. Chairman.
I will take less than a minute. There is an old saying here
in Washington that we cannot define pornography, but we know it
when we see it. The same rule cannot be applied to predatory
lending and below-prime lending. It clearly means different
things to different people. I have a community in my
congressional district that has been tragically undermined by
predatory lenders. The fact of the matter is that bad actors in
predatory lending are negatively defining reputable below-prime
lenders.
I have a very simple bottom line, Mr. Chairman, and that is
that I believe that we need to work on a bipartisan basis to
create an appropriately regulated federal marketplace that
allows the subprime industry to give more people access to
homeownership, while completely shutting down the bad actors. I
look forward to working with my colleagues towards that end.
Thank you, Mr. Chairman. I yield back.
Chairman Ney. Thank you.
Mr. Davis of Alabama.
Mr. Davis. Thank you, Mr. Chairman. Let me also thank the
Ranking Member for her comments at the beginning.
I will not take anywhere near the full 5 minutes, but I
want to define the problem from my perspective. On both sides
of the aisle, we have a very strong commitment to a free market
in this country. That is a bipartisan commitment that we have.
The challenge of predatory lending and excessive subprime
lending is that it distorts the market. I have to consider a
market to be distorted when upper-income African Americans and
upper-income Hispanic Americans with good credit are finding
themselves pushed into the subprime market. That is a
distortion of the way the market should be working in this
country. It is a distortion that limits homeownership
opportunities. It is a distortion that locks people into a vise
from which they often cannot escape.
We are struggling for a solution. I think a number of us
would like to see a national standard, but it has to be a
national standard that has some teeth to it. It is a reality
that the efforts of the Department of Treasury, the efforts of
the Office of Comptroller of the Currency have frankly not made
any real headway. One of the reasons why some of us on this
side of the aisle are troubled by the OCC's efforts at
preemption several months ago is because the efforts of HUD,
the efforts of OCC in the last several years have not made any
significant dent, as Chairman Bachus said at the outset, in the
incidence of subprime lending. I think illegitimate subprime
lending is only continuing to rise in this country.
The short of it is that we have to find a strategy to
address this serious market distortion and we have to rise
above anecdote. What we often hear is that, well, we have made
progress in Baltimore; we have made progress in L.A.; we have
made progress in New York. Nobody ever wants to quantify this
problem. Nobody wants to find a way to really, number one,
identify what practices are illegitimate lending and what we
can do about it.
So I hope the focus of this hearing will lead us toward
some consensus on what an across-the-board approach ought to
look like, but I hope that we do not leave here without a
genuine recognition that this is a market distortion and it is
something that ought to concern both sides of the aisle.
I yield back the balance of my time.
Chairman Ney. I thank the gentleman.
With that, I want to thank also the witnesses and the
members for their opening statements. We will move on to the
panel. Our first witness is Micah Green, who is president of
the Bond Market Association, an association representing
approximately 220 securities firms and banks that underwrite,
trade and sell debt securities. Mr. Green joined the
association in 1987, having previously served as the staff
director and general counsel with the House Subcommittee on
Human Resources of the Committee on Post Office and Civil
Service.
Frank Raiter is a managing director of Standard & Poor's
Credit Market Services, a division of the McGraw-Hill
Companies. The company assigns credit ratings to financial
institutions such as loan guarantees, bank loans and mortgage-
and asset-backed securities.
I will defer at this point to Mr. Miller of North Carolina
to introduce the next witness.
Mr. Miller of North Carolina. Thank you, Mr. Chairman. I am
very pleased to introduce Mike Calhoun to this committee. Mr.
Calhoun is the general counsel and vice president of the Center
for Responsible Lending. They are headquartered in Durham,
which adjoins my district, and I believe Mr. Calhoun lives in
Durham as well. The Center for Responsible Lending is an
affiliate of Self-Help, and Mr. Calhoun is also a general
counsel of Self-Help.
I am very proud of the work that Self-Help has done in
making credit available, providing financial services generally
to low-income consumers, and has done it on reasonable terms.
Their approach is, how to provide a product at a reasonable
price, taking risk into account, and make a fair, reasonable
profit off of the transaction, as opposed to when a consumer
walks in their offices, taking the approach of just how much
money can we they make off that consumer. Self-Help has grown
dramatically and has done great things for folks in North
Carolina.
Mr. Calhoun has practiced consumer law for more than 25
years. He is a graduate of the law school at the University of
North Carolina at Chapel Hill, an outstanding academic
institution. I understand that Mr. Calhoun also has a college
degree.
Chairman Ney. Thank you.
The next witness is Pamela Kogut, who is the Assistant
Attorney General in the Office of Massachusetts Attorney
General Thomas F. Reilly; and Richard DeMong is the Virginia
Bankers professor of bank management at the McIntire School of
Commerce at the University of Virginia, where he taught since
1977. Dr. DeMong is a registered investment adviser and has
lectured extensively on issues relating to equity evaluation of
subprime loans and financial analysis.
I want to welcome all the witnesses today. We will start
with Mr. Green.
STATEMENT OF MICAH S. GREEN, PRESIDENT, THE BOND MARKET
ASSOCIATION
Mr. Green. Thank you very much, Chairman Ney. I really
appreciate your kind introduction. I congratulate you and
Chairman Bachus and Ranking Members Waters and Sanders for your
leadership and continuing your review of this important issue.
I also would thank Chairman Baker for his constructive work on
this issue.
Let me just say, too, to the entire subcommittees, I know
typically a hearing is when those of us who are witnesses
impale ourselves to you about what we think needs to be done. I
will tell you, I just sat through 20 opening statements of
people who have thought about this issue, people who understand
this issue, people who have strong feelings on this issue. We
have heard from you. I think I can speak for my other
panelists. We know what we have to do now. We know that we have
to be responsible on this issue. We cannot understate the
problem of predatory lending, nor should we overstate the
market issues.
We also need to be very careful to be very clear about what
the problem is with assignee liability, and we need to make
sure that we fully understand and together define clearly what
a good subprime marketplace is all about and what bad predatory
lending is all about, and agree that we have to stop predatory
lending, but not at the cost of people who need access to
capital just merely because they have had a tough lot in recent
years and their credit rating may not be stellar.
So I will tell you as a witness at this hearing, I have
heard your Statements and I will take them back to our
community to make sure that we take the charge very seriously,
to come together constructively on something that can hopefully
advance the ball here.
But there is a problem. There is a problem, and to pick up
on Congressman Sanders's point about the States being a
laboratory the States have, in fact, been a laboratory. The
States have been an excellent laboratory. States have tried to
deal with this issue in ways they sincerely knew and felt that
they could best deal with this issue. And they learned that
there was a problem. There was a problem that if you go too
far, it can have a cost to people who need legitimate capital
at the most affordable cost.
Keep in mind, all these statistics about the growth of the
subprime market have been at a time when interest rates have
been very low. The subprime market has grown just as the other
mortgage market has grown tremendously, both the refinancing
market and the original issue market for home purchases. We are
about to enter a period of rising interest rates. We are also
about to enter a period where people who may have been out of
work during a recession may be coming back to work. What
happens when people are out of work? Their credit rating, their
own personal credit quality could go down during that period of
stress in their life.
So they may now be back at work and need to access capital
for the purchase of a home or for whatever reason, and because
of a blemish on their record may need to access the subprime
market at the most affordable level. If a viable secondary
market is not working well to help reduce the cost of that
subprime marketplace, real people will be hurt, not by a loss
of liquidity, which is a favorite term of art in the
marketplace, but by higher costs. The way liquidity translates
itself to the average person is a higher cost of that
borrowing, a higher cost of that mortgage. So we are at a time
where this issue has grown in importance because of a potential
rising interest rate environment, as Congressman Royce
indicated.
But I will say that the real problem with the laboratory
experiment in the States has been not only any one particular
state experience, like what happened in Georgia or New Jersey
or any one of numerous states, but the fact that we have a
patchwork quilt of various types of state regulations and state
requirements. Some of them are clear and objective. Some of
them are vague and uncertain.
The marketplace is a national marketplace. In order to
quantify the risks, you need clarity and objectivity.
Imprecision and unclearness results in the inability to value
those risks and quantify those risks. That is why when a very
objective observer like S&P looks at this issue, they say it is
difficult for them to quantify the credit-worthiness, as you
will hear from S&P.
So we come here today wanting to be a partner. We want to
work with these committees to try to arrive at a solution. In a
perfect world, no assignee liability would probably be the
ideal, but we recognize, as Congressman Scott said, that you
need some way to enforce these rules in a way that will get at
the predatory lender. So we would support clear objective
assignee liability, because at the end of the day if it is
clear and objective, it can be implemented in a precise and
less costly way.
So we would look forward to working with this committee to
try to figure out where that line is, but clearly the status
quo, particularly at this stage of the market cycle, is not a
good place to be.
So I thank you, Mr. Chairman and members of the committee,
and I look forward to answering your questions.
[The prepared statement of Micah S. Green can be found on
page 98 in the appendix.]
Chairman Ney. I thank the gentleman.
Mr. Raiter.
STATEMENT OF FRANK RAITER, MANAGING DIRECTOR, STANDARD & POOR'S
CREDIT MARKET SERVICES
Mr. Raiter. Good morning, Chairman Ney, Chairman Bachus and
members of the subcommittees.
As an independent and objective commentator on credit
risks, Standard & Poor's generally does not take a position on
questions of public policy. Thus, while Standard & Poor's
strongly supports efforts to combat predatory lending and other
abusive practices by lenders, it does not take a position on
what legislative or regulatory actions would best accomplish
that goal.
Nevertheless, Standard & Poor's has been closely following
legislative and regulatory initiatives designed to combat
predatory lending in order to determine how those laws might
affect its ability to rate securities backed by residential
mortgage loans. Standard & Poor's appreciates the opportunity
to discuss the factors that it considers when evaluating the
impact of anti-predatory lending laws on rated transactions and
in particular the issue of assignee liability.
Increased access to mortgage loans has led to increased
homeownership across the United States. While this growth in
homeownership is positive, it has become evident that some of
this increase has unfortunately occurred simultaneously with
the rise in predatory lending practices. Among others, these
predatory practices include the following: charging excessive
interest or fees; making a loan to a borrower that is beyond
the borrower's financial ability to repay; charging excessive
prepayment penalties; encouraging a borrower to refinance a
loan notwithstanding the lack of benefit to the borrower; and
increasing rates upon default.
Anti-predatory lending laws are designed to protect
borrowers from these unfair, abusive and deceptive lending
practices, and Standard & Poor's strongly supports efforts to
eliminate predatory lending. However, in its role as a provider
of opinions on credit risk, Standard and Poor's must evaluate
the impact of these laws on the return to investors in
mortgage-backed securities.
Indeed, given the expansion of individual investment in
securities through various retirement and pension plans, these
investors might actually be the same borrowers the laws are
intended to protect. Standard & Poor's has determined that some
of these laws may have the negative affect of reducing the
availability of funds to pay these investors. This reduction
could occur if an anti-predatory lending law imposes
liabilities on purchasers or assignee's of mortgage loans
simply because they hold the loans that violate a law, even if
they did not themselves engage in predatory lending practices.
In performing its evaluation of anti-predatory lending
laws, the two most important factors that Standard & Poor's
considers are whether an anti-predatory lending law provides
for this assignee liability, and if so what penalties the law
imposes on assignee's for holding predatory loans. If Standard
& Poor's determines that there is no assignee liability,
Standard & Poor's will generally permit loans covered by the
law to be included in rated transactions without any further
considerations or restrictions.
If on the other hand, a law does permit assignee liability,
Standard & Poor's will evaluate the penalties under the law. If
damages imposed on purchasers are not limited to a determinable
dollar amount, that is the damages are not capped, Standard &
Poor's will not be able to size the potential liability into
its credit analysis. Therefore, these loans cannot be included
in rated transactions.
If on the other hand, monetary damages are capped, Standard
& Poor's will be able to size in its credit analysis the
potential monetary impact of violations of the law. Standard &
Poor's looks at all types of potential monetary damages,
including statutory, actual, and punitive damages. It should be
noted, however, that even if capped damages can be sized, it
may not be economical for a lender to make such loans if the
credit support that Standard & Poor's would require equals or
exceeds the monetary value of the loan. For example, if a law
provides for punitive damages, even if these damages are
capped, the amount of the damages may well exceed the loan
value.
In making these determinations, above all Standard & Poor's
looks for clarity in the law. Specifically, Standard & Poor's
looks for statutory language that clearly sets forth what
constitutes a violation, which parties may be liable under the
law, and as noted, whether any monetary liability is limited to
a determinable dollar amount. Absent clarity on these issues,
in order to best protect investors in rated securities,
Standard & Poor's may adopt a conservative interpretation of an
anti-predatory lending law and may, in instances where
liability is not clearly limited, exclude mortgage loans from
transactions it rates.
In offering these comments today, Standard & Poor's
reiterates to the honorable members of the subcommittee that as
a public policy matter, Standard & Poor's supports legislation
that attempts to curb predatory and abusive lending practices.
Standard & Poor's also notes, however, that its role is to
evaluate the credit risk to investors associated with anti-
predatory lending legislation, and not to recommend public
policy.
This concludes my testimony. I will be happy to answer any
questions. Thank you.
[The prepared statement of Frank Raiter can be found on
page 111 in the appendix.]
Mr. Bachus. [Presiding.] Mr. Calhoun.
STATEMENT OF MICHAEL D. CALHOUN, GENERAL COUNSEL, CENTER FOR
RESPONSIBLE LENDING
Mr. Calhoun. Chairmen and members of the committee, I
appreciate the opportunity to testify today, and I thank
Congressman Miller for his kind introduction and his respect
for his college rival, Duke University.
Self-Help has provided over $3 billion of financing for
first-time homebuyers across this country. We regularly
purchase, securitize and hold loans in the secondary market.
Our mission is to help families create financial net worth. In
the late 1990s, we found that many of our borrowers that we had
helped put into homes were being solicited to refinance into
predatory loans. We also found that many loan applicants had
already been trapped in predatory loans and were unable to
qualify for a loan to help them.
We and other lenders and many other groups worked together
in 1999 when North Carolina enacted the country's first
predatory lending law. It has worked very well both protecting
consumers and maintaining access to credit. I was one of the
principal drafters of the law and I also serve as general
counsel for Self-Help in its lending programs, and have
previously directed Self-Help's secondary market program.
I will address three points this morning. First, assignee
liability is presently a part of our national mortgage market
and a necessary part. It is not something new. Second, the
North Carolina law which has substantial assignee liability has
worked very well. And finally, I will address the impact of the
subprime market on homeownership.
Today, it is a fact that most home loans are sold. You end
up making your payments to somebody totally different from
whomever you took the loan out with. Assignee liability simply
means if the loan is illegal, can those violations of law be
enforced against the party collecting or even foreclosing on
your loan?
Assignee liability is commonplace in mortgage transactions
presently under a number of State and federal laws. It is the
general rule in many consumer transactions, such as car
purchases, furniture purchases that are regularly securitized,
that paper is securitized. At the most critical point, with a
family facing the threat of foreclosure, the absence of
assignee liability means that the purchaser of the illegal loan
can foreclose and evict the family and force them to try and
find the original lender and seek redress against a party that
may be gone or bankrupt. We will hear examples of that today
from other witnesses. In short, significant assignee liability
is central to protect families and protect the integrity of our
mortgage market.
The North Carolina law did not contain a separate assignee
liability provision because assignee liability for certain
mortgage violations was already part of existing North Carolina
law. North Carolina's subprime market has remained strong,
growing more than 50 percent under the law. A UNC Business
School study of the law's impact found no reduction in subprime
home purchase loans in North Carolina under the law. It found
the effect on refinancing loans was overwhelming on those loans
with predatory features. It concluded the law was having its
precise purpose and was working well. New Jersey and several
other States have even more limited assignee liability than
North Carolina and we expect that there will be positive
experiences there as well.
As noted by the Chairman and several other members, the
subprime market has been exploding in volume. It is important
to remember, though, the subprime market when we look at its
impact on homeownership is overwhelmingly a refinance market.
Over three-fourths of these loans are refinancings of existing
mortgages where somebody is already in a home, not loans to
purchase a home. Foreclosure in the subprime market, as noted,
is exploding at a rate 10 times that of the prime market. As we
sit here today, fully 5 percent of all subprime loans are in
foreclosure right now.
Moreover, these loans tend to refinance repeatedly and have
an average life of only 3 to 4 years. If a lender charges five
up-front points or more and/or a 5 percent prepayment penalty,
with each loan and each refinancing, quickly a family's long-
earned home equity is gone. This has a very disparate impact on
minority families. While the reasons can be debated, it is a
fact that minority families are much more likely to have and be
affected by subprime loans than other families.
Moreover, the loss of home equity is even more devastating.
There is a tremendous equity gap in the United States today,
with African American families having only one-tenth the net
median wealth of majority families. That is currently about
$10,000.
The continuation of unchecked predatory loan practices
gravely threatens homeownership and equity of families. I urge
this committee to enact effective federal protections like
those in North Carolina. These federal protections should be a
floor, not a ceiling so that the States and Congress can work
together to protect American families.
Thank you.
[The prepared statement of Michael D. Calhoun can be found
on page 67 in the appendix.]
Mr. Bachus. I appreciate that.
Assistant Attorney General Kogut.
STATEMENT OF PAMELA KOGUT, ASSISTANT ATTORNEY GENERAL, OFFICE
OF THE ATTORNEY GENERAL, COMMONWEALTH OF MASSACHUSETTS
Ms. Kogut. Thank you, Mr. Chairman and members of this
committee. I am so pleased to be here today to present the
views of Massachusetts Attorney General Tom Reilly and our
office's work concerning subprime mortgage lending cases. I
bring to this hearing the perspective of a law enforcement
office which has a long history of bringing cases against
mortgage lenders that have engaged in unlawful practices,
including cases against subprime mortgage lenders.
I am going to highlight a recent case which our office
brought against, First Alliance Mortgage Company. This case
illustrates that even when we have reasonably strong consumer
protection laws on the books, in straightforward egregious
violations of the law, consumers may not be made whole by a
lawsuit at the end of the day unless the laws are made stronger
and the secondary market entities are held accountable. If the
secondary market entities are not held accountable, at the end
of the day the consumers are going to be left holding the bag,
and the bag will be empty. That is what our experience has
shown us.
So to focus on the First Alliance Mortgage Company case,
this Irvine, California-based lender obtained a license from
our Division of Banks to do business in Massachusetts in 1997.
After a routine examination a year into their license, our
Division of Banks found that this lender was routinely charging
borrowers 20 points and more for mortgage loans. Our Division
of Banks was concerned and referred the matter to our office
for enforcement. We filed a lawsuit fairly soon after the case
was referred to us. We filed a lawsuit in October of 1998. We
focused on a State regulation that prohibits mortgage lenders
from making mortgage loans with terms which significantly
deviate from industry-wide standards or which are otherwise
unconscionable.
The focus of the lawsuit was intended to focus really
cleanly and swiftly on the points overcharges which were
clearly unconscionable by Massachusetts standards. We expected
that this was a lawsuit that would be wrapped up quickly. This
turned out not to be the case at all. A little more than a
year-and-a-half after the case was brought, First Alliance
Mortgage Company filed for bankruptcy protection in California,
which extended the litigation in our case by years. The case
did not end up getting resolved until 2002. At the end of the
bankruptcy case, the Massachusetts consumer saw only cents on
the dollar.
Here is what we learned about First Alliance Mortgage
Company's practices. During the year when they made loans in
Massachusetts, and after we filed our lawsuit and obtained a
preliminary injunction against first alliance which limited
them to charging no more than five points per loan, they closed
up shop in Massachusetts and left. So they only did business in
Massachusetts for one year, making 299 loans. Of these, more
than 35 percent of the loans contained points charges in excess
of 20; two of our borrowers paid more than 30 points.
Although First Alliance characterized itself as a subprime
lender, of the 299 loans made, 20 percent were made to
borrowers whose credit ratings were A or A-minus according to
FAMCO's own standards. What does this mean in practice? This
means that for example one of our borrowers, a woman aged 61,
borrowed the sum of $47,000, a little more than that. She had
an adjustable rate note that had an initial rate of interest of
9.49 percent, and she paid more than 25 points, or more than
$11,000 in points for her loan, but she was rated as an A
borrower, that is, a consumer whose credit history and debt-to-
income ratio should have qualified her for a conventional
conforming mortgage loan with competitive rates and costs. She
was a middle-class borrower who lived in a good community
outside of Boston, and she paid more than 25 points for a
mortgage loan.
Twenty-eight of our borrowers had their loans flipped which
means that within about a year after they obtained their
original refinanced loan from FAMCO, they got another FAMCO
loan and paid the same level of points the second time around.
For example, one couple in their 60s paid more than $15,000 in
points, or as it turned out, more than 20 points for the first
loan they got with First Alliance Mortgage Company, and just 14
months later got a second loan from First Alliance Mortgage
Company and were required to pay more than $15,000 in points
the second time around. There is no reason for that level of
points payment, obviously.
We learned that FAMCO telemarketers were taught to urge
consumers to get new FAMCO loans at every opportunity. So if a
consumer called this mortgage lender to get a loan payoff
figure, the telemarketers tried to sell them a new loan. If
they were late making one payment, telemarketers tried to get
them to get a new FAMCO loan. Our Massachusetts consumers did
not seek out this lender. They were solicited. They ended up
with this loan not having needed it or looked for it in the
first place.
We also learned that this lender got its loan originators
to memorize and follow a deceptive sales pitch called the loan
officer track. Without going into the details, this was
basically a handbook on deception and specifically taught the
loan originators to deflect questions about points charges. We
learned that this lender did not hire experienced mortgage loan
originators. They drew from car sales people who had proven
track records in car sales. It is significantly that they were
not taught about mortgage lending laws when they were trained.
They were only taught to memorize this deceptive program.
Ultimately, after First Alliance filed for bankruptcy
protection, the Massachusetts AG's office was joined by a
number of other AG offices, Minnesota, Illinois, Florida,
California and Arizona, and the New York State Banking
Department, as well as the FTC and private class actions, and
we worked in a coordinated fashion to get a result in
bankruptcy court. The result was very good: 18,000 borrowers
got consumer redress. The consumer redress fund was ultimately
approximately $85 million, but still this was not enough money
to go around at the end of the day. Massachusetts at the time
that this lawsuit was filed did not have assignee liability and
the First Alliance Mortgage Company entity did not have enough
money at the end of the day to make our consumers whole.
One last point is that the coordinated plaintiffs in this
case did make an important decision to sue Lehman Brothers, the
investment firm that had securitized FAMCO's loans and a jury
did fine Lehman Brothers was liable for aiding and abetting
FAMCO in its fraudulent scheme, and was ordered to pay the sum
of $5.1 million.
The point that we come here to make is that this is a
lender that engaged in egregious violations of law. We had a
clear law in Massachusetts, but we did not have assignee
liability. The secondary market entities did not contribute
sufficiently and consumers were not made whole. Our consumers
at the end of the day were seriously harmed and there was
nothing we could do to protect them.
Thank you.
[The prepared statement of Pamela Kogut can be found on
page 104 in the appendix.]
Mr. Bachus. Thank you.
Professor DeMong.
STATEMENT OF RICHARD F. DEMONG, VIRGINIA BANKERS PROFESSOR OF
BANK MANAGEMENT, MCINTIRE SCHOOL OF COMMERCE, UNIVERSITY OF
VIRGINIA
Mr. DeMong. Thank you, Mr. Chairman and members.
The nonprime mortgage lending has increased dramatically in
recent years, providing billions of relatively low-cost loans
to millions of borrowers whose risk profiles prevent them from
qualifying for so-called ``conventional'' or ``prime'' loans
that offer somewhat lower rates. Without the availability of
nonprime loans, most of these borrowers would not be able to
obtain credit to buy a home or to utilize some of their home
equity for a variety of important financial needs.
The continued availability of critically important consumer
credit is highly dependent on retaining a healthy and efficient
securitization market for nonprime mortgages. Liquidity can be
lessened significantly, especially for higher-risk borrowers,
by unclear, overly restrictive and conflicting laws,
particularly when purchasers or assignee's of nonprime loans
are subjected to broad liability for errors that may have been
made by loan originators While it is now generally recognized
that additional legislative safeguards are needed to protect
nonprime borrowers from certain potentially abusive lending
practices, it is critical that such legislation does not have
the effect of reducing credit availability.
This is an extremely important issue for millions of
Americans, and I therefore commend Chairman Ney and Chairman
Bachus for their continued leadership in scheduling this
hearing to help address it. I also commend Representative
Baker, who has voiced special concerns over preserving nonprime
lenders's access to the capital markets, and Representatives
Lucas, Watt, Miller, Kanjorski and others for seeking to
develop workable legislative proposals.
The origination of nonprime mortgages in 2003 was estimated
to be $325 billion, representing about 10.5 percent of all
mortgage originations. Just as is true with the prime mortgage
market, the nonprime mortgage market has become national as the
large national institutional lenders have replaced banks and
small finance companies as the primary source of funds.
Loan originators no longer need to hold a mortgage loan
until maturity or sell whole loans to other financial
institutions. With the development of the mortgage securities
and an active secondary markets, lenders can sell entire pools
of loans to a diverse set of investors such as pension funds,
mutual funds, life insurance companies or individuals. By
bringing new investors to the market, securitization has
dramatically increased funding for housing finance, reduced
margins, lowered costs and interest rates, and increased access
to credit across the country. Two-thirds of nonprime mortgage
loans are now securitized in the secondary market.
To be most efficient, investors that are the source of
funding for mortgage debt desire reliable risk analysis of the
potential borrower, good reputations of all those involved in
the mortgage lending process, transparency of the process,
standardization of the process, and clarity in the laws.
Just as prime mortgage interest rate spreads dropped in the
1980s after the development of securitization, as well as the
continued active secondary market, so have nonprime interest
rate spreads dropped over the last 6 years, especially during
the last 2 years. I have two exhibits. Exhibit one shows the
subprime interest rate spread between nonprime loans and the
10-year constant maturity treasury rate, and you see the
dramatic drop in the last 2 years. The second chart shows the
difference between B credit and the 30-year FHA-insured FRM,
the fixed-rate mortgage. Both of them show the shrinking
spreads.
As economic theory suggests, nonprime interest rate margins
for the lenders have decreased with growing efficiency, which
partially came from the standardization, and competitiveness in
the market. Borrowing rates have therefore decreased for
consumers.
The investors evaluate all investments on a risk-adjusted
basis. If an investment becomes uncertain or risky, investors
will find other more certain and less risky investments. They
demand a higher return for increased risks. All the financial
markets crave certainty and similarity. A law that is not clear
or certain may cause nonprime market liquidity to drop
dramatically. An example of that is a study that I did in New
Jersey after it implemented the New Jersey Home Ownership and
Security Act of 2002, for the 2 months after the implementation
of the law, as compared to the 2 months prior to it. Lending to
subprimes dropped by over 60 percent. Any vagueness in the law
will disrupt funding sources.
So as Congress evaluates a uniform nonprime lending
standard, there are lessons from the development of the prime
mortgage securitizaton market. The success of the conforming
securitization market depends on standardization of the legal
framework, including preemption of state usury laws; and
predictable and limited risks for the ultimate investors in the
securities, in other words, no broad assignee liability.
In closing, I urge Congress to pass a well-crafted federal
law that prevents undesirable lending practices, while at the
same time preventing disruptions to nonprime lending. That is,
a law with clear, reasonable, and objective uniform national
standards to prevent improper lending practices, and one that
does not impose broad liability on assignee's. Such a federal
law will not only protect borrowers, but will help promote
continued liquidity in the nonprime mortgage lending market
Thank you for this opportunity to testify. I would be
pleased to respond to any questions members may have.
[The prepared statement of Richard F. DeMong can be found
on page 90 in the appendix.]
Mr. Bachus. I thank the witnesses. For the record, without
objection your entire written, statement, prepared statement
will be made a part of the record.
The committee has established a procedure where members are
called on to question the witnesses in the order that they
arrived at the hearing. Therefore, Mr. Garrett is the first
member to be recognized.
Mr. Garrett. Thank you, Mr. Chairman.
Just a couple of questions, first, in line with the most
recent testimony from the professor, can you delve into a
little bit more with my home state, New Jersey, your findings
after the two-month period, and were you able to do anytime
after that? Because as you have heard testimony here and
elsewhere, there is no impact, and the impact has only been a
negligible one or positive as far as the legislative actions in
New Jersey, but the findings that you have just indicated seem
to go counter to that.
Mr. DeMong. Thank you, Mr. Congressman. I have not done a
follow-up study. I am collecting data to do that right as we
speak. You are exactly right. The greatest impact is going to
be immediately after the law is passed until the market sorts
it out and figures out whether additional costs are necessary
or additional fees are necessary or interest rates or anything
else. It will be interesting to see the results.
However, I should point out that the legislature in New
Jersey is presently amending the law, which may very well
change the whole study dramatically. I guess I was trying to
use the study just to illustrate that a State law could, and
did in this case, have dramatic effect immediately, and that is
why I would argue for a very thoughtful national standard which
would prevent disruptions in the market as investors search for
more certain and less risky investments.
Mr. Calhoun. If I may, briefly, there was a special
circumstance in New Jersey immediately following the passage of
the act, and that was that the rating agencies had not yet had
time to evaluate the act. So while they were undertaking that
evaluation, they announced that they would not rate mortgages
from New Jersey. They subsequently completed that evaluation
and decided that for the overwhelming majority of loans, there
was not a problem and that they would rate those loans. As you
noted, as to the final category of loans, New Jersey created
this intermediate threshold of covered loans. As to that final
category, the legislature is debating now whether it should
remove that category, as they did in Congressman Scott's State
of Georgia. They tried that category. It turned out to be a
major problem and they quickly removed it.
Mr. Garrett. Yes, but that is exactly the point. The rating
agency said that for everything outside of what the intention
of the Act was going to cover, in essence they are still okay.
It is for exactly what the legislature was aiming at that they
still had the question as to what should we be doing with that
area.
Mr. Calhoun. Under the Homeowners Equity Protection Act,
HOEPA, there is full assignee liability on high-cost loans and
the rating agencies for the last 10 years have taken the
position generally that they do not rate those loans. So that
is not different from what we have had previously, the New
Jersey approach.
Mr. Garrett. Okay. Professor?
Mr. DeMong. The study that I did was actually after
Standard & Poor's had decided how to rate the New Jersey paper.
So the 2 months I did were December 2003 and January 2004, as
compared to September and October of 2003. So it was after
Standard & Poor's had decided that it would rate paper from New
Jersey. The markets were reacting to the implementation of the
law. A rating agency action is just one more disruption, and
that is the type of thing that I would urge Congress to look
for and come up with a national standard so you would not have
a State-by-state disruption.
Mr. Garrett. I know Mr. Green wants to answer that, then I
have a question for the Deputy Attorney General.
Mr. Green. I was just going to supplement that one of the
elements in the New Jersey law is that the borrower enjoy a net
tangible benefit from the transaction, but it is ill-defined. I
think one of the things that the New Jersey legislature is
looking at is that area, because again getting back to the need
for clear and objective standards, an ill-defined or even
undefined net tangible benefit analysis will be impossible to
do. It simply increases the risk that the assignee's liability
will have a real-world effect on the ability to purchase that
mortgage and make it part of the pool, which has the effect on
the overall pool.
Mr. Raiter. If I could just add, having been at Standard &
Poor's at the time, the reason that upon initial review of the
New Jersey Act, there were some incredibly vague language that
implied that any use of proceeds from a refinancing that went
into home improvement would open up the investor to a liability
that was undefined or capped. There was no way to in fact
determine at the time that someone refinanced the house and
took cash out that they may or may not engage in home
improvements. Therefore, we could not rate any refinanced loan
in New Jersey until we got clarity on exactly what the intent
was.
Mr. Garrett. I thank you. I did have another question. I
will not do the questions as my time is allotted. I just will
say that I have met with used car salesmen over literally the
last past week and they are looking for some prime lenders to
come into the industry. I am just kidding.
[Laughter.]
Mr. Bachus. I thank the gentleman from New Jersey.
I have just been informed that Mr. Sanders will not be
back. I am trying to cope with that loss.
[Laughter.]
I am going to recognize the gentleman from Illinois, Mr.
Gutierrez.
Mr. Gutierrez. Thank you.
I guess my first question is to Mr. Raiter. The OCC keeps
saying that national banks are not predatory lenders. You
indicate in your testimony that you can easily rate subprime
loans and make allowances, and that you can do this despite,
although I just heard you say that you had a little difficulty
in New Jersey, that you can easily rate these loans despite
different state laws governing them.
If you can in your agencies as you have testified, can rate
these loans and therefore assess risk on these loans, do you
see a need for the OCC to issue a predatory lending rule at
all, with the claim that it was crucial to avoid a crisis in
liquidity? In other words, the OCC came here and said, we are
going to have a crisis in liquidity if we do not issue these
preemptive laws on predatory lending. But I read your testimony
and listened to you, and it sounds like you figured out a way
to rate those loans, so if you can rate them, then investors
can know the risk. So what is the issue of liquidity if there
is one?
Mr. Raiter. When we analyze a loan and include it in a
rated security, as I think I indicated in the testimony, in
some cases the risks to the investor exceeds the value of the
loan. So if you lend somebody a dollar, but you have to put up
$1.50 in order to get your dollar back, you are very likely not
going to be lending a dollar.
Mr. Gutierrez. I guess, Mr. Raiter, but you have been able
to figure that out.
Mr. Raiter. Correct.
Mr. Gutierrez. My question is not whether there is a lot of
risk to the loan. You are answering my question. You have been
able to tell the market, hey, listen, this loan for a dollar
could cost you $1.25 or $1.50 in the end.
Mr. Raiter. Right.
Mr. Gutierrez. I am just trying to see if I understood your
testimony correctly, and that is you have been able to assess
risk. If you are able to assess risk, could you tell me how
that could affect liquidity then because I guess everybody
knows what the risk is?
Mr. Raiter. The way it has affected liquidity, if
``liquidity'' is the term that you all want to use, is those
loans are not getting made. Those borrowers are not receiving
the loans under those terms that would put them in a category
of a high-cost or a covered loan.
I might just add that we are getting reps and warranties
from everyone that uses S&P's mortgage ratings desk that
provides that they are not making high-cost loans under any
jurisdiction in which they are operating. So the loans that are
covered by the law are at this point not being financed in the
secondary market. If they are making the loans, they are
putting them in a portfolio.
As to your point on the OCC, and I am not a government
regulatory expert, but I do believe their issue is with
leveling the playing field for financial institutions that they
regulate from one jurisdiction to another, not necessarily
liquidity.
Mr. Gutierrez. I am sorry. You were not here, as you state,
for the hearing and you are not a government official and not a
member of this committee, so you would not be knowledgeable on
the point. We are, as they have come to testify before us. So I
think the record is pretty clear that they said we have a
crisis of liquidity.
As a matter of fact, since you are an agency that wants to
bring clarity, the OCC did not only do that, they did it in a
rushed manner. They did it in the stealth of night. They did it
under cover of congressional recess. We asked them, we said,
OCC, do not issue the rule until Congress comes back to
session, and 2 weeks before we got here, they issued the rule.
So you can imagine how we might be suspect after we have
written them letters. As a matter of fact, this committee,
Republican and Democrat, passed an amendment on the budget that
basically is saying that the OCC does not have jurisdiction to
do this.
So I understand and maybe I asked the wrong person, but it
is just that when I read your testimony about being able to
rate things, I figure, well, people will know what to buy and
not to buy. From my perspective, that is a good thing. People
know, a pension fund, do not buy these loans. Maybe they should
not buy them because they are bad loans, because you at
Standard & Poor's have assessed such a risk to those loans that
maybe you have assessed that risk to those loans because they
should not have been made in the first place.
I do not think we should get into the kind of argument of,
well, they did not issue the loans. Well, maybe they should not
have issued the loans. Maybe they were bad loans and we should
not just have a system that says, we are going to have rules
that allow all kinds of loans, and then in the end kind of see
where those loans fit. Because as I have heard testimony here
this morning that in the predatory lending, it is 10 times as
high; the foreclosure rate. That is a lot of people that are
going to suffer. I mean, it is not like a small mistake. Ten
times higher than conventional mortgages? That is a lot. That
is a lot of people that are going to suffer.
So if it was a small calculation in the market, maybe we
could take a look at it, but I think that we should really be
careful when the rate is 10 times as high. I think you have
answered my question. You can rate these loans. So the
marketplace has a reliable place they can go to before they buy
or sell loans, because you can rate them. That basically was my
question.
Mr. Bachus. Mr. Gutierrez, you are over 1 minute, but if
you would like another.
Mr. Gutierrez. Thank you so much. In the absence of Mr.
Sanders, I am trying to fill in a little bit for him.
[Laughter.]
Mr. Bachus. Okay. I have learned some things. I did not
realize the OCC issued that thing late at night under the cover
of darkness.
[Laughter.]
Mr. Gutierrez. Maybe you have not read the letters from
your side of the aisle asking them. And since the gentlelady
from New York is here on your side of the aisle, and she and
others wrote them the letter.
Mr. Bachus. Was it 2 or 3 at night? What time was it? I am
just kidding with you. Please go ahead.
Mr. Gutierrez. We can laugh and we can be silly about this
experience all we want. The fact is that people, we have had
testimony here today that people are losing their livelihoods,
and that is a very serious issue. When we have an Assistant
Attorney General from Massachusetts who says that she is a law
enforcement officer of the State of Massachusetts, elected
directly by the people of Massachusetts, and we have a
philosophy being groomed here in Congress that at the local
level they do it best, and that Washington, D.C. does not
necessarily have all the answers.
And we have had Mr. Green come and testify about how
wonderful all these laboratories are at the different state
levels, I just think that it is a serious thing, because if you
lose your house and you are getting ripped off, it is a crime.
What we are discussing here are not dollars and cents. We are
discussing crimes against people, and I think that is a very
serious thing. So I characterized it that way, and I do not
know that we should impugn my interpretation in that way, but
that is the way that I see it. That is what I will submit for
the record.
Mr. Bachus. I appreciate your wrapping up. I will say that
the institutions that the testimony has been about, none of
them are federally insured under the regulations of OCC, at
least according to OCC.
Mr. Gutierrez. Mr. Chairman, if I could ask the Attorney
General a question, maybe we can clear this up, because we have
had testimony here that when the New York Attorney General,
elected by the people of New York, attempted to engage a
nationally chartered bank, that nationally chartered bank told
the Attorney General, a law enforcement officer in New York, we
do not have to deal with you; we are going to talk to the OCC.
And Mr. Chairman, you know, the OCC is only open from 9 to 4,
Monday through Thursday.
Mr. Bachus. Mr. Gutierrez, what I am saying is the
institution that we have heard testimony about today was not
regulated by the OCC. Thank you.
Ms. Capito?
Mrs. Capito. I do not have any questions. Thank you.
Mr. Gutierrez. Thank you, Mr. Chairman. I can see this
committee who it is being run by and for.
Mr. Bachus. Ms. Kelly?
Mrs. Kelly. Thank you, Mr. Chairman. I have no questions.
Mr. Bachus. My first question is for Mr. Green. Mr. Green,
you have heard testimony from the Assistant Attorney General
and from Mr. Calhoun and others that there is a situation where
there is a predatory or abusive practice or tactics employed
that harms consumers, and the lender or the broker is, as in
the case of Massachusetts, was bankrupt, so they are not really
subject to legal recourse. You have a situation where you
either have a, let's say, innocent assignee or innocent victim.
At least in the case of predatory lending, wouldn't it be
better to hold the assignee liable than the innocent victim, in
that the assignee at least should have been in a position to
know?
Mr. Green. I think it is a great question because that is
precisely why we have come to the conclusion, after looking at
all of what is going on in the marketplace now, after looking
at what the various States have done, to that a national
standard--one that provides clear and objective assignee
liability that can be identified.
And picking up on the gentleman from S&P, focusing on the
damages side, that if you had a national standard that
accomplished that in an objective and clear way, in fact there
ought to be assignee liability and that assignee liability
ought to be enforceable. But when it is not clear, when it is a
patchwork quilt around the country, it makes it very difficult
to operate in an efficient, cost-effective, or even just-
effective way.
Mr. Bachus. I guess what you are saying is as long as they
are able to price the liability risk?
Mr. Green. If liability is going to be accepted, you have
to know what is going to impose it, and that clear and
objective standard makes that doable.
Mr. Bachus. And as long as there are clear standards as to
what the liability would be?
Mr. Green. Yes, we would support and look forward to
working with you. I know there are several pieces of
legislation in the works just among this committee, Congressman
Ney, Congressman Watt, and Congressman Baker today. We would
look forward to working with all of you to try and find what
that right definition is.
Mr. Bachus. Okay. The GAO found in a study they released
earlier this year that by separating ownership of a loan from
its originator, the secondary market for subprime loans may in
some instances undermine efforts to combat predatory lending. I
am going to quote from the GAO report, ``The existence of a
market that allows originating lenders to quickly re-sell
subprime loans may reduce the incentive these lenders have to
ensure that borrowers can repay.'' How do you respond to the
GAO suggestions that the secondary market may, at least in some
instances, facilitate predatory lending?
Mr. Green. The analogy that comes to mind, if that was a
question for me, is a way of reducing car accidents is to
prohibit driving. The fact is there is a big market for people
who need credit, who need access to capital, and they may not
have pristine, clean track records. The subprime markets
provide them access to credit.
It should not be surprising to anyone that the foreclosure
rate is higher in the subprime market. They are riskier loans.
That is why they are made in the way they are made. That is why
they do pay a higher interest rate because they are a riskier
credit, and riskier credits do have a higher risk of failure,
so the fact is that there is a higher foreclosure in that
category of loans. But if the foreclosure rate, which I heard
earlier is 5 percent, that means 95 percent are people who
needed credit are not facing foreclosure. Without that deep
liquid secondary market, they may not have the same access to
credit that they currently have to be able to reach their own
life's dream.
So I would say that while the GAO may be technically
correct, it is losing the forest for the trees. The important
thing is you want to create access to capital for those who
want it and deserve it and need it, and you have to deal with
the problem of predatory lending more straight-on.
Mr. Bachus. What about the North Carolina law? Do you all
find that to be a fair law? I would ask you, Mr. Green.
Mr. Green. I guess we have found that the North Carolina
law, specifically on predatory lending, has less vagueness in
the assignee liability and frankly the body of their specific
predatory lending stays away, as the previous witness said,
from assignee liability specifically. So it has been a law that
most of the marketplace has perceived to be a more workable
standard than what we found in other states.
Mr. Bachus. So you found that the North Carolina model at
least does not inhibit the mortgage capital?
Mr. Green. I never say never.
Mr. Bachus. It does not appear to be. I mean, we have
experience with it now.
Mr. Green. Right. But I think it would be a good standard
as this committee furthers its look at potential legislation.
It would be a good standard to look at.
Mr. Bachus. Okay.
Mr. Calhoun. Mr. Chairman, may I clarify two things? First
of all, Mr. Green was referring to the 5 percent foreclosure
figure. I want to make it clear, that is 5 percent of subprime
loans which are currently in foreclosure. That is this year.
Next year, there are going to be more loans. It is not that 95
percent of these loans are going to stay out of foreclosure. It
is this year, 5 percent are in foreclosure. Given the average
span of a foreclosure process, which is in the range of a year,
next year we are going to get another 5 percent of them. We are
talking about huge numbers of families losing their homes in
this market.
The other one point is, on the North Carolina model, I want
to be clear. North Carolina was the State that developed the
prohibition against flipping, that there has to be a net
tangible benefit. That applies to all loans in North Carolina.
We also have a couple of safeguards. You have to prove that it
was an intentional violation by the lender, and some other
safeguards. We went through a lot of time trying to come up
with a very specific standard. Both lenders and consumer
advocates found that all of those standards were over-or under-
inclusive.
Mr. Bachus. Let me ask you this, my time has run out, I
think what Mr. Green is saying is that the industry can live
with the North Carolina law.
Mr. Green. I am saying it is a good starting place to look
because their approach----
Mr. Bachus. Has it limited liquidity to any great extent? I
am not trying to put you on the spot.
Mr. Green. You are doing a good job.
[Laughter.]
I would say that the North Carolina law has examples in it
that the industry does feel are more precise and objective than
what we have experienced in other states.
Mr. Bachus. Okay.
Mr. Green. The right place to be on a national standard is
probably not going to be exactly where the North Carolina law
is.
Mr. Bachus. I understand. I am just saying it is workable.
I think Mr. Calhoun is saying, at least what I hear, is that it
is protecting consumers.
Mr. Calhoun. That is correct, Mr. Chairman.
Mr. Bachus. Maybe I am oversimplifying this process, but
that is sort of what I am hearing.
Ms. Waters?
Ms. Waters. Thank you very much.
I think it must be understood that those of us who fight so
hard against preemption appreciate the fact that some States
work very, very hard to get rid of predatory lending. When we
move to so-called definitions at the national level, all of
that is going to be weakened. The whole idea, I have
discovered, of wanting to preempt state laws not only as it
relates to predatory lending, but in some other things, is
basically to weaken the laws of States that have strong laws to
protect their consumers.
I want to ask Mr. Calhoun because we keep hearing how much
folks care about folks with bad credit being able to have
access to credit and to get these mortgages. I am very grateful
for that, that people care so much about people being able to
have access to credit. As I said when I first started to speak,
I do not mind subprime lending that is fair, but there are some
other details that we have to look at with this subprime
lending. I want you to discuss for me two or three other things
that make subprime loans bad, that turn them into predatory
lending.
For example, you talked about loan flipping. I want to tell
you, we see a lot of loan flipping. I want to hear something
about late payments. I want to hear about some of the other
things that turn subprime lending into bad loans. We are not
opposed to somebody getting a percentage point more for a loan
because someone has shaky credit.
Now, if the credit is too bad, then I do not care who it
is, they should not have a loan because they are not going to
be able to pay it back. If you know that they do not have the
income by which to make these payments and they are going to
get in trouble because they simply cannot afford the loan, then
it is sinful, it is shameful to advance that loan because you
are simply going to cause people to lose a lot of money.
Also, Mr. Calhoun, I have had so many complaints, people
coming to my office. These loans are sold so many times they do
not know who they are paying. This is one of the tricks. Folks
do not know who the payment should go to because it has changed
hands so many times, and that is how they get caught, getting
late and getting behind trying to track down who this payment
is to go to, because the loans has been sold three or four
times.
Help me to understand and this committee to understand some
of the other factors that go into predatory lending, so that
people do not get the idea that we are just railing against
subprime lending.
Mr. Calhoun. I think one of the most important lessons that
has come from the homeowner protection act that this Congress
enacted 10 years ago, and the experience in North Carolina, is
that unscrupulous lenders will simply change tactics unless you
have comprehensive protections.
The North Carolina law is actually pretty modest. It sets a
threshold for high-cost loans at 5 percent lender fees. So we
are talking a $100,000 loan, $5,000 of lender fees, excluding
things like appraiser, attorneys fees, et cetera. We want to
make it clear, that is not a benchmark for a good loan. I do
not think many of us would be happy with a loan like that or
happy if our parents or our family received a loan like that.
It is meant to be a generous threshold so that it does not
restrict access to credit. But the important thing is that it
includes all of the fees. We leave the flexibility to the
lender and the borrower how they want to structure the loan. Do
they want to have small up-front fees but a big prepayment
penalty? Do they want to have a large origination fee and then
not many other fees? If you do not include all the fees, the
lenders' experience has been under the federal act simply
change the name of the fees or restructure the loan to evade
the law's protections.
We see that under your current federal law, HOEPA, in for
example prepayment penalties which are perhaps the biggest
looming problem in the subprime market. There are virtually no
prepayment penalties in the prime market. They have now
developed to be on the majority, almost 80 percent of subprime
loans, and they are often as much as 5 to 10 percent of the
loan amount. So when you go in to pay off $100,000 loan, they
take another $5,000 or $10,000 out of the equity.
Under the federal law, the size and presence of prepayment
penalties are not considered at all in determining whether it
is a high-cost loan. Today, a loan with a 20 percent prepayment
penalty is not a high-cost loan under the federal Act. If you
leave a fee like that excluded from determining whether it is a
high-cost loan, then the bill will just simply require people
to change how they structure the loans, change the names of the
fees, but will not end up at the end of the day protecting
borrowers. That is one of the most important lessons.
The other is that you need a flipping standard applying to
all loans. As we heard from the Assistant Attorney General,
virtually all of these lenders make money by refinances. They
collect a new set of fees and their loan officers are trained
and pushed to try and get a refinancing at every chance.
Repeated refinancings are what see currently under HOEPA, where
a lot of the lenders charge 7.99 points to stay under the 8
point threshold for high-cost loans under your federal law. If
you repeatedly refinance at 7.99 points, it does not take very
long to take away all of the home equity.
Again, that is totally legal under your current federal
law, and we have seen examples where people have been
refinanced three or four times in a year at 7.99 points. That
is not a high-cost loan. It is not a violation of any of the
federal protections at this time.
Ms. Waters. Are those the major kind of items that you have
covered in your North Carolina laws dealing with predatory
lending and that you would want to have covered in any federal
preemption? If there is going to be one, and I hope not, are
those the major concerns?
Mr. Calhoun. Yes, Congresswoman. To emphasize, the high-
cost loan threshold does not bar high-cost loans. There are
HOEPA loans made today by some lenders who specialize in that,
and there are some high-cost loans being made in North
Carolina. But again, under current standards for a high-cost
loan, you are talking about a loan with more than five points
up front, or interest rates in today's market of more than 13
percent. We feel like, and the experience in North Carolina has
been, that credit is readily available for almost all borrowers
within those constraints.
Ms. Waters. What about late payments?
Mr. Calhoun. Most States have some provision to protect
consumers in both mortgage transactions and other transactions,
on late payments. There are some lenders who try abusive
practices where they will extract one late payment and make all
your subsequent payments declared therefore late. Or they use
late payments as a wedge to try and force a refinancing and a
flip. So that is an important area to have protections.
Ms. Waters. Mr. Chairman, I am going to yield back the
balance of my time, but I would really like if at all possible
for Mr. Green to give me his ideal. You know a lot about this
subject. You have worked it quite some time. If you were going
to advance a federal law, a change, an improvement to deal with
predatory lending in the subprime market, what would you advise
us to do? What is acceptable to you? You kind of nodded your
head on Mr. Calhoun's North Carolina law, but you did not quite
say you support it. What do you support?
Mr. Green. At the end of the day, the specific criteria for
what is a predatory loan is something that the originators of
the loans and this committee and others need to figure out,
what are the best identifying criteria. From the secondary
market perspective, what criteria are utilized is less
important than the precision with which those criteria can be
identified.
Many of the criteria that are looked at in the North
Carolina law carry with them objective standards. It is when
the criteria becomes more vague and esoteric and theoretical
and less precise that it becomes much more difficult to value
and to identify a loan in a pool of hundreds, maybe thousands
of loans as to whether or not it meets that standard. Even if
you could identify it, you have no way to control whether or
not you have met that standard.
So to hold someone liable and assign them liability for
something they cannot identify and cannot control is where the
problem in the marketplace arises. If the criteria can be
identified and is objective, you can begin to implement
something. That is why we suggest a national standard. I do not
want to use the ``preemption'' word. I guess there is no way
around it if you are going to use ``national standard.'' I
think everyone agrees that this is a national problem. The
marketplace that you are focusing on is a national market, and
we have had experiences in the laboratory of state legislatures
where it has been difficult to establish that enforceable,
quantifiable objective standard.
Ms. Waters. I respect that, but let me just tell you,
bankers know how to count and they know junk when they see it.
Prior to coming up with ways by which to make money in the
subprime market and with predatory lending, they use the same
eye to tell people no, you cannot have credit because you do
not look like you can pay this back. You look like you are a
bad risk.
So they know it. They understand it. And when they are
protected and they can roll the dice on it and they can make a
lot of money with high interest rates and other kinds of fees
et cetera, and they have no liability, they will take a chance.
So I am not at all impressed with the fact that they just do
not know bad paper when they see it. They know it quickly and
surely.
Chairman Ney. [Presiding.] The time has expired. I would
note, Mr. Green, I believe, does have to leave, so if you have
a question.
Mr. Fossella of New York.
Mr. Fossella. Yes, to follow-up on that. Thank you, Mr.
Chairman.
Mr. Green, you talk about subjective triggers. ``Unintended
consequences'' is perhaps a phrase that comes to mind in our
efforts to curtail abusive practices, which I think we all
agree with, should be curtailed and ultimately eliminated.
But can you be more specific as to why a national standard
is necessary by quantifying perhaps how some people are
ultimately shut out of the market, if that is a conclusion from
all these nebulous, esoteric standards, as you in your
testimony call them, subjective triggers to assign liability?
How are people actually shut out by limiting access to capital
and the folks who are actually purchasing these loans?
Mr. Green. At the end of the day, the secondary market
succeeds because people pay their loans back. It is not in
anyone's interest to have loans in a portfolio that are not
going to perform. Now, there is a risk of nonperformance in any
loan, even the highest-rated credit has a risk of
nonperformance. But in higher and riskier borrowers, that risk
is higher.
In order to make sure that they are in compliance with the
law of a particular state, they will take certain actions. That
will have an effect on their ability to accept loans that
extend credit to that higher-risk category. If they do not
accept those loans, those loans are never made.
Now, where the line is between loans that should be made
and should not be made is a difficult public policy question,
because you do not want to draw the line so that nobody gets
loans because there are lots of people that deserve them. But
the viability of the secondary market ultimately defines the
extension of credit. If we can come up with tangible,
identifiable objective standards that can be enforced on a
national level, you can make the marketplace work much better
than the current situation allows us to have happen.
Mr. Fossella. So is it safe to say that ultimately if this
were to be left unaddressed that there are going to be people
who fit subprime criteria that would ultimately be shut out of
the market?
Mr. Green. I think as Mr. Raiter indicated that the risks
that are in the marketplace when you can or cannot get a rating
have an effect on whether or not credit is extended in the
first place. So the answer is yes. I dare say I think that the
risk of that is greater in a rising interest rate environment
when credit itself, by virtue of its cost, is less accessible.
Mr. Fossella. So to Mr. Raiter, are there situations, and
you may have said it in your testimony, forgive me because I
was not here, are there situations in which at the State level
laws were passed and ultimately you in your testimony indicate
that you support these measures, but at the same time recognize
again these unintended consequences that result? Did you notice
a pushback in some States that are considering legislation that
would be inconsistent or at odds with the federal standards
right now?
Mr. Raiter. At odds with the federal standard?
Mr. Fossella. Are there laws that have taken root in the
States where as a result of this liability imposed on the
purchasers, States have had to modify and change, and what, if
any, has been the impact in other states that have been
considering similar legislation?
Mr. Raiter. I can comment on the changes that were made in
Georgia.
Mr. Fossella. Yes, specifically yes.
Mr. Raiter. And the changes that were contemplated in New
Jersey, and after the original law was promulgated and enacted,
there was an Attorney General opinion on how it would be
interpreted that had an impact on how loans would be treated
when they came in for ratings out of the New Jersey markets.
What other jurisdictions may be doing when they see the impact
of changes in those two jurisdictions, we have not tracked. We
have looked at the individual laws as they become enacted.
I think the other answer to the first part of the question
is the high-cost loan categories in all the jurisdictions that
have gone into effect are not showing up. If they are being
made, they are not being financed in the secondary market with
transactions that are rated by Standard & Poor's, which may be
exactly the intent of these various laws and statutes, that
those loans are undesirable. Whether they are predatory or not
would depend again on whether we could identify exactly what
the requirements for falling into a violation were under the
statutes.
If it was clear and defined and we could size the risk,
then we would put a number on it. If it was not clear and
defined and we could not tell whether a loan was or was not
really predatory, then they would have to be excluded. So if it
is the intent to basically prevent these types of loans from
being financed in the secondary, then it would behoove the
legislators to be as specific as they can in identifying what
is a violation and what the penalty is, and the loans will not
make it to the secondary market because it will not be
economically feasible, as they are not making it now.
We do not have any issuers that are checking the blocks and
telling us that they are including high-cost loans. They are
giving us a warrant that if in fact they inadvertently acquired
a high-cost loan, they will immediately buy it back.
Mr. Fossella. This will be my last question. Are you
prepared to say whether it is a better public policy to ensure
that as many loans are allowed to flow into the secondary
market as possible, or are you neutral on that?
Mr. Raiter. We are neutral on public policy, but you all
should be quite aware that where you draw the line, it is
likely that the loans that fall above that line probably will
not be made.
Mr. Fossella. All right. Thank you, Mr. Chairman.
Mr. DeMong. Congressman, can I add to that?
Mr. Fossella. If you like.
Mr. DeMong. The study that I did in New Jersey showed an
absolute drop in certain subprime loans, including cash-out
refinancing, probably at least a 60 percent drop in the first 2
months after the Act. But to go directly to your question, can
you quantify the folks that do not get the loan; you are not
going to hear from them. It is tough to measure that folks that
do not get a loan. So we can see a change in lending based on a
law, and I would argue that we are better off with a national
standard because it is a nationally funding market.
But to address the second part of your question, yes it
does matter if a law affects the secondary market, affects
securitization, in that there are going to be less funds
available for potential borrowers in that state or in that
region. So there will be a direct impact if the secondary
market securitization market is cut off.
Mr. Calhoun. If I may add one thing, I think there is a
very important distinction here. This is a dynamic market. What
the experience has been under the federal law and under the
State laws, it is not that people stop making these loans.
Rather, the loans are restructured so they do not have the
predatory impact on the borrowers.
The main predatory feature of loans has been fees that
strip equity. So simply what a lender can do is structure the
loan with a higher interest rate, because for example the North
Carolina law follows the federal interest rate trigger, but
takes less money out of the fees. It is these high up-front
fees and high prepayment penalties that have encouraged all of
the equity stripping, the repeated refinancing.
It is important. In North Carolina, we advocated strongly,
do not change the interest rate threshold from the federal
standard. Allow plenty of room for these loans to be made.
Remember, for most subprime borrowers, hopefully these are
bridge loans so that they can improve their credit and move to
a better or a prime or closer to prime loan. If the loan is
loaded up with large up-front fees and prepayment penalties,
the borrower is blocked from doing that, from doing what I
would hope we would want to encourage these borrowers to do. If
instead the loan has more in the interest rate, the lender can
still make a fair profit, which they have to do, but the
borrower is not trapped long term in a predatory loan.
Mr. Fossella. Thank you.
Chairman Ney. Mr. Miller of North Carolina.
Mr. Miller of North Carolina. Thank you, Mr. Chairman.
Mr. Raiter, Mr. Green I think praised North Carolina's law,
but I think by faint damnation, and said it was not as
imprecise; the prohibitions were not as vague; not as
subjective as some other states. But in rating subprime loans
coming out of various states, you did not rate North Carolina's
loans. I do not want to talk you into doing that, but could you
tell me what was different about North Carolina? Did you do
that based on the provisions of North Carolina's law? Or did
you do that based upon the experience under North Carolina's
law? If it was based upon the provisions, what were those
provisions? And if it was based on the experience, what has
been the experience?
Mr. Raiter. Specifically, it was based on both. The
provisions of the law incorporated that violations, the
borrower had to prove that it was knowingly and intentionally
committed, and that they had a pattern or practice of violating
the law. At the same time, the North Carolina law had a
provision that if a plaintiff did not settle a reasonable
settlement to alleviate the issue, then I believe the plaintiff
could be charged with the legal expenses.
So the actual experience in North Carolina is there were no
actions brought under this law that were going to assignee
liability payment beyond where the loan was initially made. So
it was structured in such a way that the problems that did
arise were being solved and resolved locally, and that the risk
to the investors in the pool that held those mortgages had been
successfully mitigated. But there were still the high-cost
loans. There are still loans that we have not seen. People are
giving us the rep saying they are not doing loans that exceed
the thresholds that were incorporated in the North Carolina
law.
Mr. Miller of North Carolina. Okay. Mr. Green, I think you
have spoken of the burden of knowing what loans in a package
may be illegal under some State's laws. Does any State require
a duty of inquiry absent actual knowledge? Does any State
require a duty of inquiry that goes beyond the loan documents?
Mr. Green. I am not sure. I do not know the answer to that
question as it relates to states, but I do know there are clear
due diligence requirements that have to be done before
packaging the loans into a security. That due diligence is
really what we are talking about here, and whether or not the
due diligence can be accomplished in a way that is honestly
achievable.
When there is vagueness fulfilling that due diligence by
looking at the bond documents themselves, will not get you
there, because you have to look at what the intent of the loan
was, what the desire was, what the conversation that took place
between the loan originator and the person, as opposed to
something that will come through on the face of the bond
documents.
With a clear or objective standard, you will have something
that will come through on the face of the loan documents that
will allow for a much easier identification. As you said, I
think the goal here is to keep out of the pools the loans you
do not want in the pools, but to make sure that that which you
want to move forward and finance, can.
Mr. Miller of North Carolina. Which State or which locality
requires a purchaser of a loan to know about oral dealings
between a lender and a borrower? Isn't it all based upon the
written documents? The duty of inquiry under HOEPA is to be
what can be determined based on the documentation required by
this chapter. Isn't it all based on the documents?
Mr. Green. You look at the imposition of a vague, net
tangible benefit rule to determine whether or not there is a
net benefit. You have to get to what motivates someone to
refinance a mortgage. You have to get beyond the bond documents
because what we are talking about here are things that cannot
be reduced to words on paper. They get to subjective judgments.
It is those subjective judgments that are precisely the things
that we have a concern in certain States that are creating the
problem. A set of objective standards would be the solution to
that, because you would have something to look for, something
to identify and something to act upon.
I will tell you further that if you had such standards, and
in those states that do have such standards, if a packager of
mortgages in the secondary market has done their due diligence
and still has those loans in their pool, they should be held
responsible. We would support that. But the fact is, when it is
a vague standard, how possibly can you ultimately hold them
responsible for that which they cannot easily identify?
Mr. Miller of North Carolina. May I continue just a bit?
Chairman Ney. If we can wrap it up quickly.
Mr. Miller of North Carolina. I did notice that the light
was a fairly bright shade of yellow.
Chairman Ney. A whiter shade of pale. Go ahead.
Mr. Miller of North Carolina. One last question, and I
suppose also for Mr. Green, although perhaps Professor DeMong
as well. Mr. Israel quoted Potter Stewart's opinion earlier,
saying he did not know how to define pornography, but he knew
it when he saw it. John Hawke testified before this committee
earlier. OCC has preempted state predatory lending laws with
respect to OCC-chartered institutions and their affiliates. In
a speech to the Federal Society last year, he said his
definition of predatory lending was making a loan that the
consumer could not repay. It did not go beyond that definition.
It was making a loan the consumer could not repay.
I use an example that Self-Help has given here, and I
cannot recall all its details, but an elderly school employee,
probably not a teacher, probably a cafeteria worker in Durham,
borrowed $99,000 for home repairs that were desperately needed
to maintain the value of her home. To make that loan, she was
charged $23,000, I think it was, in up front points and fees.
She left the loan knowing how much money she was getting at
closing and knowing what her monthly payments would be. She
could make the monthly payments, but sometime later when she
went to Self-Help to refinance the loan, she learned that she
had lost $23,000 of the equity in her home, her life savings,
at the moment she signed those loan documents. Is that
predatory lending?
Mr. Green. I am not a Justice on the Supreme Court. There
are lots of scary anecdotal examples of what certainly sounds
like predatory practices. Frankly, I would hope that the
originating community would honestly try to define with
policymakers what a predatory loan is. In the secondary market,
whatever you decide it is, so long as those standards are
objective, we will be able to deal with that. But as those who
are involved in the secondary market, it is hard for us to
determine specifically what predatory lending is.
That certainly sounds like a predatory practice. Up-front
fees and all the criteria that were mentioned, late fees, loan
flipping, balloon payments, the repayment ability, and you did
not mention negative amortization, all those things appear
predatory. They can be predatory. They do not necessarily in
and of themselves have to be predatory. That is the difficulty,
but I think we need to come up with that so that we can have
that objective criteria.
Mr. Miller of North Carolina. So in the eyes of Mr. Hawke,
he saw that loan as not predatory. Do you disagree with Mr.
Hawke?
Mr. Green. I have not read his entire statement, so it is
hard for me to know exactly what he said. Having said that,
predatory practices certainly sound like big up-front fees. I
think you need to look more deeply to see whether or not that
made that loan a predatory loan. There are lots of factors that
take place. So I would not agree or disagree.
Chairman Ney. The time has expired.
Mr. Miller of North Carolina. Mr. Chairman, Professor
DeMong had his finger right on the button. He was just itching.
Chairman Ney. I am going to take this time off Mr. Scott.
If you would like to proceed, you can ask him. Mr. Scott, do
you want to yield some time?
Mr. Scott. Right now, I have my own fish to fry on this
issue.
Chairman Ney. There you go.
[Laughter.]
Mr. Scott. If I have a little time, I certainly will. Let
me get my points out.
This has been a real fascinating hearing and very
informative. I am concerned about preemption. I am also
concerned about making sure that we move forthrightly with the
strongest efforts to stop predatory lending. Nowhere is it more
impactful than within minorities, the elderly, African
Americans, and we are all very much concerned about that.
I also happen to believe that assignee liability is
critical in my estimation to preventing predatory lending
practices. I think that Mr. Green has given us a shot into the
darkness as a way to kind of begin to move out of this. But I
believe that we are going to have to come to some illumination
between Mr. Raiter and Mr. Calhoun. Here is my point.
In my State of Georgia, we put forward predatory lending,
and Mr. Raiter came in and kind of negated that with the
Standard & Poor's rejection of rating these mortgages. Fannie
Mae, Freddie Mac would not purchase mortgages because we had
assignee liability. Yet in North Carolina, as Mr. Calhoun said,
he had assignee liability. These things did not happen.
Standard & Poor's did not come in and say they would not rate
these. Fannie Mae, Freddie Mac, they did not say anything at
all.
I think it would be interesting for you to just point out
very clearly, what is it within your application of assignee
liability did you do, and in your opinion, did Georgia go too
far in its application of assignee liability, and if so, where
did it go? First you, Mr. Calhoun.
Mr. Calhoun. Thank you. I think everyone here should know
what a critical role you played in making sure that the Georgia
law worked for both consumers and ultimately for the market.
For the record, the subprime market in Georgia is thriving even
with the remaining very strong protections in that law which
you helped very much shepherd through.
Shortly after passage of the Georgia law, since we have
been involved in assisting in that process, we were contacted
by secondary market players. They said, we have some concerns
about the assignee liability provisions. I think the real
message out of that and today is that these issues are largely
solvable. We reached agreement with those secondary market
parties.
And then initially, several of the rating agencies said, we
do not have a problem with the Georgia law; we are going to
allow what in the industry are known as reps and warranties. I
think it is important for everybody to understand that these
purchasers are not out there holding the bag. Whenever they
purchase the loans, they make the seller pledge that if this
loan is illegal and has liability, you have to indemnify me,
the purchaser.
So this assignee liability really comes up with the problem
of what happens when the originator disappears or becomes
insolvent. But you should know that usually the purchaser is
protected by these so-called reps and warranties that they
insist that the sellers of loans provide to them.
So initially, other rating agencies said, we are going to
rely on reps and warranties; we are fine with Georgia. S&P had
concerns in particular about the possibilities of unlimited
punitive damages, I think that was their major concern. To
their credit, we worked with S&P as well as Senator Cheek, who
you know well from Georgia, and S&P quickly reached agreement
on what were acceptable assignee liability issues, and those
were resolved.
The delay in passing those provisions was that it got
caught up in a bill where there were debates about what were
substantive triggers, what were the other provisions of the law
to look like. That is what slowed it down. The assignee
provisions that were acceptable to S&P are not the ones that
finally came in there. Those got changed some. But the assignee
liability issue was resolved relatively easily. The important
thing is that there be comprehensive standards. I would urge
you that it is not an either/or on the preemption. If you have
strong federal standards, you will find the States backing off.
There have been questions about municipal ordinances. I
think one of the lessons from North Carolina is, we had no
proposed municipal ordinances ever in North Carolina. The
reason is there was not a need for it. There was no void for
municipalities to mess with. They have plenty of other things
to do. We had a good state standard. I think you can have the
same effect at the federal level if you pass a good federal
standard. The states will have no need to move in here.
The Truth-in-Lending Act is that way. It does not have
preemption, but you passed a comprehensive, strong standard,
and the States, I think there is one state out of the 50 that
has some mild supplemental provisions, but there is no move and
there has not been in 30-something years for states to move
into that area, even though they have the authority to do that.
Truth-in-Lending is a floor, not a ceiling, but it provides
comprehensive protections and there is no need for the States
to move in.
Mr. Scott. Now, Mr. Raiter, that was your major concern,
unlimited liability. That was the only difference between
Georgia's assignee liability and North Carolina's was the
unlimited liability. That is the reason why you would not rate
the mortgages.
Mr. Raiter. That was the most significant issue, the
punitive multiple damages that were unlimited. There is some
mitigating language, as I mentioned earlier, in the North
Carolina law that makes it much more friendly to resolving the
issues so that the ultimate assignee does not get involved in
the transaction, but it again goes back and relies on the reps
and warranties that Mr. Calhoun was just describing.
Chairman Ney. The time has expired.
Mr. Scott. Just one final little point, thank you, Mr.
Chairman, just to get a summation. Is it the consensus of
everybody on this committee that our Financial Services
Committee should come up with a uniform federal standard for
assignee liability?
Mr. Green. Yes.
Mr. Scott. Everybody?
Mr. DeMong. I would support that. Just as it was pointed
out that it is important to define predatory lending for the
secondary market, it is also important for the originators.
Having a clear law serves both purposes well, and will enable
the credit to flow to those that should have it and deserve to
have it.
Mr. Scott. Thank you, Mr. Chairman.
Mr. Calhoun. For the record, States have traditionally
through the Uniform Commercial Code, which is close to uniform
in the various states, made the decision about assignee
liability, including in mortgages. There currently is liability
for assignee's in certain circumstances under the law of almost
all of the States. We would suggest if you have the uniform
standard, that that is going to take care of this issue.
I think the States have learned their lesson. No one will
be more responsive to an interruption of the credit market than
State and local officials because they are the first people who
get called, as you know well, if there is any disruption in the
market. Local officials have learned from these state
laboratories. They are not going to disrupt their markets.
Chairman Ney. I have let things slip a little bit. We are
going to stay on time so everybody gets their questions in.
The gentlelady from New York, Ms. Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman.
Mr. Raiter, Standard & Poor's recently announced that it
would require credit enhancement for loans governed by anti-
predatory laws in 14 states, including high-cost loans in New
York State. Can you comment on how the New York anti-predatory
lending law is affecting the ratings, and consequently the
purchase of loans in the State?
Mr. Raiter. In a nutshell, we are not seeing high-cost
loans from New York State.
Ms. Velazquez. You are not seeing them.
Mr. Raiter. No, we are not.
Ms. Velazquez. What about the New York City ordinance?
Mr. Raiter. I believe that was overturned. I do not believe
that is in effect any longer.
Ms. Velazquez. So is it true that your new credit
enhancement criteria will affect a very small portion of the
subprime loans originated in New York and across the nation?
Mr. Raiter. We have no way of going back in time and
determining how many loans that would have failed the test
before the law went into effect. All we know is that the
lenders that are operating in New York, as has been pointed out
here, they are either changing the fees or they are changing
the rates, or they are not granting the loans, but they are
giving us the rep that they are not engaged in high-cost
lending in New York State.
Ms. Velazquez. Thank you.
Skyrocketing defaults and foreclosures are devastating many
low-income communities around the nation. In some areas like in
my district, many of the foreclosures are on subprime loans,
and we have been hearing about that all morning. Wouldn't you
agree that requiring that recipients of subprime loans are
simply made aware of the availability of counseling could go a
long way in decreasing the number of defaults and foreclosures?
Please note I am not talking here about mandated counseling,
but the availability of counseling. Mr. Calhoun, would you like
to start?
Mr. Calhoun. I favor the approach that is in the North
Carolina law that has worked well. That is that the North
Carolina law requires counseling for high-cost loans only. That
is the whole philosophy of the law. The high-cost loan is a
loan that is not always a bad thing, but it is very susceptible
to abuse. So you should have special protections when somebody
wants to charge more than five points or more than 13 percent
interest on a loan secured by a person's home. The truth is in
most of the foreclosures, these are gold-standard loans. They
are backed by people's homes, and we know from 20 years of
lending experience that most people will do about anything to
keep their home.
Ms. Velazquez. Would you support legislation that required
lenders to make subprime borrowers aware of the availability of
counseling?
Mr. Calhoun. Yes, but we do think it also needs to require
counseling on high-cost loans. That is done presently under the
law in a number of States for reverse mortgages, because again
they are very susceptible to abuse. In those rare
circumstances, the counseling should be required.
Ms. Velazquez. Dr. DeMong, would you like to comment?
Mr. DeMong. As a professor, I am always in favor of
education. I have done some work with 401(k) plans, and having
people know what they are investing in is always better than
not. So to the extent that you could have education that will
help people better understand the provisions of the loan, what
it obligates them to, is always better than not.
Ms. Velazquez. Would any of the other witnesses like to
comment?
Ms. Kogut. Yes, I would just add that in the First Alliance
Mortgage Company case, we would have loved to have had our
victims undergo counseling. Sometimes we were the first people
to tell consumers that they paid points in the amount that they
had paid. It was painful and horrible to let them know that the
equity in their house had been lowered as dramatically as it
had been. We were frankly shocked that we were the people
breaking that news to them. If they had only taken their loan
papers and had them reviewed by a third party, a lot of the
abuses we think could have been avoided. So we it would be very
useful.
In Massachusetts right now we have a bill that is working
its way through our legislature that would incorporate some of
North Carolina's provisions into it. We would have mandated a
credit counseling provision for high-cost loans, which we think
would be a good idea.
Ms. Velazquez. Thank you. Any other comments?
Mr. Green. I would only say the Bond Market Association is
a strong advocate of investor education. In fact, on our own
Web site, investinginbonds.com, we get over three million hits
a month about what people should know about bonds. The
questions you are asking are really in the loan origination
side. What kind of education is undergoing between the borrower
and the lender? So I would hope that that level of education
would increase.
On the question of whether or not it should be a criteria,
not to sound overly bureaucratic, but I would come back to how
objective and clear that criteria can be in determining whether
or not that criteria was met.
Chairman Ney. The time has expired.
Ms. Velazaquez. Thank you, Mr. Chairman.
The gentlelady from New York, Ms. Maloney.
Mrs. Maloney. I would like to thank you all for your very
thoughtful testimony on this important issue. I would like to
ask Mr. Green, we have a number of laws across the country that
are different in States. Given the fact that the reports that
have come back show that the subprime lending is growing, it is
strong, it is out there helping people, why do we need a
national standard? We just passed, as you know, the Fair Credit
Reporting Act, and there was a very clear need for access for
credit that was really critical. It was a staunch need.
I do not see a staunch need for a strong federal standard.
Why is there such a need for a federal standard here? It seems
like the market is strong and there are many loans being given,
and it does not seem like it is a big, big problem to the bond
market or to the industry in a sense. Could you elaborate?
Mr. Green. I can try. The market has certainly grown over
the last several years, as has the mortgage market, as has the
municipal markets. That is in large part because of low
interest rates, rising home values, the ability for people to
tap equity. So a rising size of a marketplace does not
necessarily translate itself into all those who need and want
access to capital and deserve access to capital can get that
capital.
Particularly now that we are on the cusp of a rising
interest rate environment, when the sheer cost of capital is
likely to go up, those access questions become even more
relevant. I think what we are talking about here a national
standard would ensure that you get it as close to right as
possible, so that where you draw the line of the loans that you
want to stop versus the loans that you want to encourage, which
is really what we are talking about here, is as close to right
as possible.
What we have experienced in both the numerous state laws
and some local laws is that the effects of that being more
right or wrong is not manifesting itself in nationwide volume
of subprime lending, but it is manifesting itself in whether or
not you are getting any high-cost loans in these pools. If you
are not getting any high-cost loans, you might say, well, that
is good. Except, what is a high-cost loan? If the standard is
wrong by how you are identifying what these loans are, you in
fact may be cutting off capital to those to whom you do not
want to cut off capital. That is why we believe a national
standard will set a more consistent national policy,
particularly since the secondary market is a national market.
That is where we see the consistency in the argument.
Mr. DeMong. Congresswoman, can I add to that and support
Mr. Green's point?
Mrs. Maloney. Yes.
Mr. DeMong. I also want to point out that, as Mr. Green
stated, the market has grown, but has it grown to the point
that it is satisfying all those who need and deserve credit?
That is the question. The other reason for a national standard,
besides making sure that the credit is available to those who
need and deserve it, is that you end up with a more efficient
market, and when you have more efficiency you can have lower
costs, therefore lower interest rates for the borrowers that do
qualify for loans.
Mrs. Maloney. But if state standards are unworkable, then a
State legislature would act to change it. We have seen that
happen. How would a national standard increase access to
capital? Would a national standard increase the number of
people who could get subprime loans? I do not see the
correlation there. Explain it more clearly. I am for access to
capital. I believe in homeownership. I want more Americans to
own their own homes and apartments and so forth, but how does a
national standard increase that? Maybe Mr. Calhoun would like
to comment, or maybe others.
Mr. DeMong. Thank you, Congresswoman.
Mrs. Maloney. How does it increase it, a national standard?
Mr. DeMong. It increases it in that investors have a choice
of investing in all kinds of different investments in the
United States, stocks, bonds, real estate, you name it. So if
you have an efficient market for mortgages, then more of those
funds will flow from one asset to mortgage lending. The more
efficient the market is, the clearer the risks are, the more
willingness that investors will have of taking money that they
could have invested in the stock market or the bond market or
the international stock and bond market, and put it into
mortgage markets.
Mr. Green. Congresswoman, that gets to the contribution of
the whole mortgage-backed securities market and the
securitization market generally. By pooling mortgages and by
selling the mortgages from the originator, you create more
capital, because they get money for that mortgage and that loan
and they turn around and loan it out again. The more supply of
capital, ultimately the lower the cost, but the only way you
can do that is you have to have someplace to sell that
mortgage.
Chairman Ney. The time has expired.
Mr. Davis of Alabama.
Mrs. Maloney. Would anyone else like to comment, if we
could, just for 2 seconds?
Mr. Calhoun. If I may, very quickly. I think the evidence
shows that the liquidity is very high in the market and that
states are very sensitive to cutting off any liquidity. So I
agree with your premise that a federal standard would not
change the liquidity. The states will make sure there is
liquidity. We support strong federal standards that are a
floor, not a ceiling, to increase protection for consumers
under the Homeownership and Equity Protection Act because right
now lenders have learned how to largely evade that act and
commit predatory lending that does not get caught or protected
by that act.
Chairman Ney. Mr. Davis of Alabama.
Mr. Davis. Thank you, Mr. Chairman. I will try to be brief
so Mr. Ackerman gets an ample amount of time.
Let me try to focus with the panel on something that we
have not talked about at all today. There is a lot of
agreement, and the statistics are pretty undisputable, that
there are racial disparities in the incidence of subprime
lending between blacks and whites and Hispanics. Some of that
is presumably attributable to a class difference, the fact that
obviously you may have higher rates of poverty; you may have
those kinds of issues around the minority community. But I want
to focus for a moment on the disparity that exists with respect
to high-income blacks and Hispanics and low-income whites.
As I understand it, the incidence of subprime lending right
now is twice as high in the affluent African American community
or the level is double in the affluent African American
community than what it is in the low-income white community.
There is no good statistical evidence I have seen that suggests
that affluent blacks have worse credit than poor whites, or
that affluent Hispanics have worse credit than poor whites. So
again, there is no market basis for that distinction.
Now, in the field of Title VII law, as Ms. Kogut of
Massachusetts is aware, in the field of Title VII law there is
a presumption that if you have a lot of disparate impact
lurking behind the door, it is some evidence of disparate
treatment. So can some of you speak for a moment about what it
is that lenders are doing that is targeting or
disproportionately affecting high-income blacks or Hispanics?
Mr. Calhoun. Let me respond. First, there have been, and we
cite in our written testimony, a study, specifically one by a
Harvard professor, looking at broker fees paid by borrowers
after you settle-out credit score, et cetera. It showed that
African American borrowers tended to pay $500 more in broker
fees than similarly situated white borrowers; the same for
Hispanic borrowers, actually I think it had $600 more per fee.
The same types of results have come up in recent studies and
litigation concerning car financing, where it has been shown
that, sorting out for credit characteristics, that minority car
purchasers are paying more for the financing.
A lot of it is there has been a change in this market. You
used to go in for a home loan and the expectation would be that
you would get the best loan that you could qualify for. That is
no longer the case in this market because the originator, and
this is one of the features that has been alluded to about the
secondary market, is compensated more if they up-sell you to a
higher interest rate. If you qualify today for a 6 percent loan
and the loan originator, and this applies unfortunately to most
banks as well as----
Mr. Davis. Let me jump in for 1 second, Mr. Calhoun,
because I agree with everything you are saying, but I want to
try to drive to a conclusion a little bit. We agree that there
is a disparity and that it is one that does not have an
economic basis or a credit basis. What I am trying to get at is
what we can do about it.
Maybe I should direct this question to Ms. Kogut, since she
is the attorney on the panel. If we have a problem with primary
lenders going out there and steering these products or steering
excessive lending rates to black or Hispanic Americans, first
of all, doesn't it seem that we already have something called
section 1981 that may provide a remedy for that? Is it possible
that we need to be making more aggressive use of our existing
civil rights laws, particularly section 1981, to address this
problem?
Ms. Kogut. You raise very good questions. In fact, even in
our own office when we have looked at these cases, our Civil
Rights Division which is in charge of enforcing our fair
lending laws, and we look at federal fair lending laws also,
which do exist to protect in communities in this area, we have
tried to figure out what is the best approach in terms of
bringing cases and getting remedies.
The one thing that I will say, which is just a fact, these
loans, you said this in your opening statement, there is no
competition going on. The consumers who end up with these high-
cost loans are not comparing prices with other loans. For
whatever reason, there is something, there is a problem with a
fair market in terms of how these loans are given to consumers.
In Massachusetts, our Mayor in the City of Boston has used
lots of educational opportunities to try to make members of our
communities aware that they do not need to be taking loans like
this and that they should be seeking legal advice when they go
to get mortgage loans.
Mr. Davis. Let me stop you for one second because my time
is running out. Mr. Green, let me specifically point this
toward you since you are to some extent representing the
industry here today. What does your industry need to do to deal
with what in some instances seems to be clear-cut intentional
discrimination? I am not just talking about disparate impact.
Doesn't it seem that the industry has a significant
responsibility, number one, to figure out what your agents and
what your lenders are doing to obviously target a lot of these
subprime rates toward high-income blacks or Hispanics? Isn't
that just a clear-cut instance of plain old discrimination and
prejudice a lot of the time?
Mr. Green. Congressman Davis, I will answer your question,
but I will just clarify that I am here representing the
secondary market of these mortgage securities, not the
originators.
Mr. Davis. I understand that.
Mr. Green. I think you raise an excellent point. One of the
things the Bond Market Association has done is we created and
are very supportive of the Bond Market Foundation, which
operates a family of Web sites geared toward basic financial
literacy targeted to women, young people, and the Hispanic
community. We are working with State Treasurers around the
country to reach into states. We are also working now with the
NAACP to set up a program that will reach into other
communities to educate people about basic finances and where to
get money, where to borrow money, and what are the proper
practices that ought to be followed.
We represent the secondary market side of it. So I cannot
agree with you more. We are trying to do what we can, and our
foundation Web site and the work that we are doing is really a
way of increasing the education base of various communities.
Mr. DeMong. Congressman, I spent some time last year
studying this issue and studying some of the studies that have
been done. They are not as clear-cut as many would expect to
find. I think it is ripe for another study that really goes
into some of the issues that you have raised. I would support
trying to find out if there is discrimination and if so, what
is causing it so that it can be resolved. But the studies that
have been done so far have been somewhat contradictory on the
issue of income, on the issue of net worth, and the issue of
race.
Chairman Ney. I thank the gentleman.
Mr. Ackerman, the gentleman from New York.
Mr. Ackerman. Thank you very much, Mr. Chairman. I will be
brief, as I notice that we are about to be outnumbered by the
witnesses.
[Laughter.]
I was listening intently, and Mr. Green made the important
point that if 5 percent of the mortgages that were written, it
meant that 95 percent of the people were enabled to become
homeowners because of the subprime market, which is something
that is very good.
Mr. Calhoun then pointed out, without contradiction, that
that is 5 percent a year. So I went back to thinking, 5 percent
of what? I did, being a broken down old math teacher, use the
old math and said if we start with a model of 100 loans made, 5
percent would mean 95 people were in houses that were supported
by lenders in the subprime market, and five homes or five
families were foreclosed upon. That would leave 95 people.
If you took 5 percent of the 95 the following year, that
would be 4.75, leaving 90.25 from the first group of numbers.
And if you took 5 percent of that the next year, 4.56 percent
would be foreclosed upon, and the next year, 4.28 percent and
the next 4.07 percent. In the sixth year, it would be 3.38
percent. So after the end of 6 years, if you add those
foreclosures, you have 26.53 families or homes, more than one
in four at the end of 6 years from the original group
foreclosed upon.
Is there something wrong with my math? Or was there
something wrong with the 5 percent, depending on whose 5
percent it was?
Mr. Green. Congressman Ackerman, I think your example would
be correct if only those 100 loans were made and that in each
succeeding year more loans were not made.
Mr. Ackerman. That is correct. I would assume out of the
next 100, the same percentage would apply, more or less, unless
the statistics changed. Of the next 100, at the end of 6
years----
Mr. DeMong. Congressman, I do not have those statistics so
I cannot speak to them directly. However, I will point out that
I know the life of the subprime loans tends to be relatively
short, I do not know whether it is 3 years or 4 years, but if
the life of the loan goes out only 3 or 4 years, the average
loan is paid back within that time period and thus the percent
foreclosed is down.
Mr. Ackerman. Do you know what percentage of the loans are
that short? Are there any 15-year loans?
Mr. DeMong. Again, I do not have that statistic, and I
would be glad to try to get that for you, but if the average
subprime loan is refinanced in 3 or 4 years, then that would,
even at the numbers you are talking about, would not equate to
the large number that you had calculated by going out 6 years.
Mr. Ackerman. If I go out 3 years, 14.31 percent.
Mr. DeMong. Again, I do not have the statistics, but I
would like to find it for you.
Mr. Ackerman. If they were all 3-or 4-year loans, at the
end of 3 years, that 5 percent a year would be 15 percent. The
5 percent diminishes because you are starting with a smaller
base than 100.
Mr. DeMong. I do not have that number. I would like to get
it for you.
Mr. Ackerman. So even based on 3 years, 14 percent at the
end of 3 years of people losing their homes is really a
staggering number if that number is correct.
Mr. DeMong. And that is an important point, if that number
is. Right.
Mr. Ackerman. It is a big number, whatever it is. So it is
not really the 5 percent. It is 5 percent a year.
Mr. Calhoun. To clarify the numbers, first I want to say
your analysis is essentially appropriate in that even those
loans that are again pre-paid, they are refinancing. They are
jumping back in the pool and are at risk again to this 5
percent foreclosure. But the numbers, to clarify for the
record, come from the Mortgage Bankers Association's regular
tracking of foreclosure. The current statistics were that 5
percent are currently in foreclosure and they track it by
quarter. For this quarter, the first quarter, an additional
1.8-plus percent again went into foreclosure during the first
quarter. At the end of the quarter, you had 5 percent in
foreclosure process.
Whatever the precise number is, I think it shows, and we
cite several other foreclosure studies in our testimony, there
is an explosion in foreclosures going on across this country
fueled mainly by subprime loans.
Mr. Ackerman. At the end of the term, what percentage of
the people who have loans in the subprime market refinance
within the same market? Is that a big number? You are shaking
your head.
Mr. Calhoun. Yes. I think the data show that most of the
loans are refinanced back into the subprime market.
Mr. Ackerman. Are most of them in the subprime until their
house is paid off? Do we know how many actually get out of the
subprime market?
Mr. DeMong. I think that is an excellent question. One of
the things that I want to do at some point is study that exact
issue. I understand from some of the lenders that folks do move
from the subprime to prime, but I do not have a good statistic
for you.
Mr. Ackerman. Okay. If you would, professor, I think that
would be very helpful for us to understand the industry and
what is going on, which leads me to my second question, similar
to the question or following up on the question that Mr. Davis
had raised. People in the subprime market are people with poor
credit, people in the minority communities and less-educated
communities tend to have poorer credit. They also have less of
an education, of which at least several people spoke
previously.
I know that I have a fairly good interest rate. I have a
fairly good credit rating. It is because of that, I presume,
that I get solicitations because people want my business and
they keep offering me lower and lower and sometimes free
mortgage money for a period of time. I take advantage of that.
Less-educated people do not go out and actively seek and test
the market for different rates.
Is there an active program such as the one for people who
are more economically advantaged, presumably better educated
and better financial risks, a similar program for people who
are in the subprime market? Does anybody send them a
solicitation and say, hey, we reviewed your credit, the way
they did mine, and you are pre-approved to get such-and-such an
interest rate, and please fill out the application or call and
we will do it over the phone in 22 minutes? Does such a program
exist for those people? Or is it just those of us who are
fortunate?
Mr. Calhoun. I think the industry information is clear that
if anything there is more solicitation of loans in the subprime
market. It is hard to believe given the volume in the prime
market.
Mr. Ackerman. Is that solicitation for another loan or
solicitation for a lower interest rate?
Mr. Calhoun. It is solicitation typically for another loan,
because again in the subprime market, most of these loans are
originated by brokers.
Mr. Ackerman. I can appreciate that, because if it is only
3 years, everybody is looking for that business, because if it
is being written at 9 percent or whatever, people are going to
want to write 12 percent or whatever it is, 15 percent, write
that business.
But my credit report gets reviewed by people with green
eyeshades somewhere, and I get all these promotions. I know a
lot of other people that do as well. It floods our mailboxes,
and they are offering us a better deal. I am not asking you if
they are getting another deal, because everybody wants to give
them another deal if they are paying that rate. Statistically,
it pays to make the bet.
But does anybody go to these people and say, hey, based on
your credit report recently, you are a better risk and
therefore we are going to offer you four points lower or three
points lower?
Mr. Calhoun. The challenge has been that the market has
shifted and gotten turned on its head so that in these
situations most of the money for the originator is being made
in up-front fees. So the incentive, particularly since they
know somebody else is going to come and try and sell another
loan a year or 2 later is to try and get as much up-front fees
and capture profit there, instead of having free market forces
work that would compete to lower the interest rate. That is one
of the reasons that we want the market to work better by having
people compete on interest rates, and let lenders offer a rate
that reflects the risk.
Mr. Ackerman. And the current system does not permit that?
Mr. Calhoun. The current system turns it on its head and
says the most successful lender is the one who can extract the
most points at each lending.
Mr. Ackerman. That system basically locks these people, who
tend to be more minority and poorly educated, into expending a
greater portion of their income than anybody else in our
society on their housing needs, although their housing needs
might be much more modest. Is that accurate?
Mr. Calhoun. Yes, Congressman.
Mr. Ackerman. Should there be something, and I am finishing
up now, Mr. Chairman, should there be something in the
counseling process which tells these people that if your credit
position improves and if you make all your payments on time,
that there is a reasonable possibility that when your loan
comes to the end of its term that you will be able to get a
better rate, and here is what you should do about it, or do we
just tell them other things?
Mr. DeMong. Congressman, I have actually seen some ads that
Fannie Mae has done arguing that people can improve their
credit if they take the certain steps.
Mr. Ackerman. Does this go out to those people specifically
or is it advertising in the papers?
Mr. DeMong. I have only seen it on television.
Mr. Ackerman. And that is Fannie Mae.
Mr. DeMong. I think the point is that that education is
always more valuable, and helping people better understand
their own credit and their own abilities to improve their
credit is very worthwhile. I know some of the industry has done
that, with such programs as ``BorrowSmart''.
Mr. Ackerman. Last question, should we be looking at a
requirement or encouraging the industry to when they make re-
solicitations or initial solicitations of the people who are in
the subprime market, that if their credit is good from that
point on, if they are paying their bills, including their
mortgage, and are not late, specifically to these people during
the counseling process, and perhaps a written notice be
required to them towards the end of their term that they should
investigate that? Would that be helpful?
Mr. DeMong. Again, as a professional educator, educating
folks is always important. If it became a written notice, the
point I would make is make sure it is easy to read and
understand that it is there to help them.
Mr. Ackerman. Mr. Calhoun or Mr. Green or anybody?
Mr. Calhoun. The mortgage process is inherently complex and
can be easily manipulated. The time you need counseling is at
or near the time of closing. That is why the North Carolina
law, one of its most effective provisions has been to say, if
you are going to get a very high-fee mortgage, that you should
go to counseling at that point, get a certificate, and then go
through with the mortgage if you want to. But almost
invariably, what happens is they are advised they can get a
better mortgage and they in fact do get a better mortgage
rather than one of these very high-fee mortgages.
Mr. Ackerman. Mr. Green, any comment?
Mr. Green. No. The experience that we have had with
investor education on the bond market side has been a very
positive thing. So education is a good thing.
Mr. Ackerman. Indeed it is. With that, I thank the Chair.
Chairman Ney. I thank the gentleman, and thank the panel
for your patience and participation, also our members for
coming today, and Mr. Ackerman.
I have for the record some hearing enclosures. I have a
Statement of the Coalition for Fair and Affordable Lending; a
Statement of the Housing Policy Council; and a Statement of
Freddie Mac which I would like to enter for the record, if
there is no objection. Hearing no objection, I enter it for the
record.
[The following information can be found on pages 117, 135
and 127 in the appendix.]
I would also like to note that some members may have
additional questions for this panel which they may wish to
submit in writing. Without objection, the hearing record will
remain open for 30 days for members to submit written questions
to these witnesses and place their responses in the record.
Again, I want to thank Chairman Bachus and most of all, all
of you who came here today. Thank you.
[Whereupon, at 1:05 p.m., the subcommittees adjourned.]
A P P E N D I X
June 23, 2004
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