[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
MORTGAGE LENDING REFORM: A
COMPREHENSIVE REVIEW OF THE
AMERICAN MORTGAGE SYSTEM
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
MARCH 11, 2009
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-11
----------
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota THADDEUS G. McCOTTER, Michigan
RON KLEIN, Florida KEVIN McCARTHY, California
CHARLES A. WILSON, Ohio BILL POSEY, Florida
ED PERLMUTTER, Colorado LYNN JENKINS, Kansas
JOE DONNELLY, Indiana
BILL FOSTER, Illinois
ANDRE CARSON, Indiana
JACKIE SPEIER, California
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Financial Institutions and Consumer Credit
LUIS V. GUTIERREZ, Illinois, Chairman
CAROLYN B. MALONEY, New York JEB HENSARLING, Texas
MELVIN L. WATT, North Carolina J. GRESHAM BARRETT, South Carolina
GARY L. ACKERMAN, New York MICHAEL N. CASTLE, Delaware
BRAD SHERMAN, California PETER T. KING, New York
DENNIS MOORE, Kansas EDWARD R. ROYCE, California
PAUL E. KANJORSKI, Pennsylvania WALTER B. JONES, Jr., North
MAXINE WATERS, California Carolina
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
CAROLYN McCARTHY, New York Virginia
JOE BACA, California SCOTT GARRETT, New Jersey
AL GREEN, Texas JIM GERLACH, Pennsylvania
WM. LACY CLAY, Missouri RANDY NEUGEBAUER, Texas
BRAD MILLER, North Carolina TOM PRICE, Georgia
DAVID SCOTT, Georgia PATRICK T. McHENRY, North Carolina
EMANUEL CLEAVER, Missouri JOHN CAMPBELL, California
MELISSA L. BEAN, Illinois KEVIN McCARTHY, California
PAUL W. HODES, New Hampshire KENNY MARCHANT, Texas
KEITH ELLISON, Minnesota CHRISTOPHER LEE, New York
RON KLEIN, Florida ERIK PAULSEN, Minnesota
CHARLES A. WILSON, Ohio LEONARD LANCE, New Jersey
GREGORY W. MEEKS, New York
BILL FOSTER, Illinois
ED PERLMUTTER, Colorado
JACKIE SPEIER, California
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
C O N T E N T S
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Page
Hearing held on:
March 11, 2009............................................... 1
Appendix:
March 11, 2009............................................... 69
WITNESSES
Wednesday, March 11, 2009
Amorin, Jim, President, Appraisal Institute...................... 52
Antonakes, Steven L., Commissioner, Massachusetts Division of
Banks, on behalf of the Conference of State Bank Supervisors... 7
Aponte, Graciela, Legislative Analyst, Wealth-Building Policy
Project, National Council of La Raza (NCLR).................... 36
Berenbaum, David, Executive Vice President, National Community
Reinvestment Coalition......................................... 29
Braunstein, Sandra F., Director, Division of Consumer and
Community Affairs, Board of Governors of the Federal Reserve
System......................................................... 5
Gordon, Julia, Senior Policy Counsel, Center for Responsible
Lending........................................................ 31
Jones, Stephanie, Executive Director, National Urban League
Policy Institute............................................... 34
Kittle, David G., Chairman, Mortgage Bankers Association (MBA)... 47
Lampe, Donald C., Partner, Womble Carlyle Sandridge & Rice, PLLC. 37
McMillan, Charles, President, National Association of Realtors
(NAR).......................................................... 51
Middleton, Michael, President and CEO, Community Bank of Tri-
County, on behalf of the American Bankers Association.......... 46
Platt, Laurence E., Partner, K&L Gates, on behalf of the
Securities Industry and Financial Markets Association and the
American Securitization Forum.................................. 56
Robson, Joe R., Chairman of the Board, National Association of
Home Builders.................................................. 54
Saunders, Margot, Counsel, National Consumer Law Center.......... 32
Savitt, Marc S., President, National Association of Mortgage
Brokers (NAMB)................................................. 49
APPENDIX
Prepared statements:
Amorin, Jim.................................................. 70
Antonakes, Steven L.......................................... 85
Aponte, Graciela............................................. 117
Berenbaum, David............................................. 124
Braunstein, Sandra F......................................... 149
Gordon, Julia................................................ 162
Kittle, David G.............................................. 183
Lampe, Donald C.............................................. 186
McMillan, Charles............................................ 193
Middleton, Michael........................................... 203
Platt, Laurence E............................................ 212
Robson, Joe R................................................ 218
Saunders, Margot............................................. 228
Savitt, Marc S............................................... 246
Additional Material Submitted for the Record
Gutierrez, Hon. Luis:
Written statement of New York Attorney General Andrew Cuomo.. 264
Cleaver, Hon. Emanuel:
Letter from Sidney L. Willens, Attorney at Law, dated March
4, 2009.................................................... 265
MORTGAGE LENDING REFORM: A
COMPREHENSIVE REVIEW OF THE
AMERICAN MORTGAGE SYSTEM
----------
Wednesday, March 11, 2009
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:33 p.m., in
room 2128, Rayburn House Office Building, Hon. Luis V.
Gutierrez [chairman of the subcommittee] presiding.
Members present: Representatives Gutierrez, Maloney, Watt,
Sherman, Moore of Kansas, Waters, McCarthy of New York, Green,
Clay, Miller of North Carolina, Scott, Cleaver, Ellison,
Wilson, Foster, Minnick; Hensarling, Castle, Capito,
Neugebauer, McHenry, Marchant, Lee, Paulsen, and Lance.
Also present: Representative Donnelly.
Chairman Gutierrez. This hearing of the Subcommittee on
Financial Institutions and Consumer Credit will come to order.
Good afternoon, and thanks to all of the witnesses for agreeing
to appear before the subcommittee today.
Today's hearing will examine the current state of the U.S.
mortgage system with an eye toward comprehensive mortgage
lending reform legislation that the Financial Services
Committee is expected to take up later this month.
The subcommittee has asked our witnesses to recommend
changes to H.R. 3915, the Mortgage Reform and Anti-Predatory
Lending Act of 2007, from the 110th Congress. H.R. 3915, which
was passed by the Financial Services Committee and approved by
the House of Representatives in November 2007 will be used as
the starting point for today, for this year's mortgage lending
reform.
We will be limiting opening statements to 10 minutes per
side, but, without objection, all members' opening statements
will be made a part of the record.
I yield myself 5 minutes.
The last time this committee addressed legislation to
restrict predatory mortgage lending was in November 2007. The
world has changed dramatically since then. Mortgage
delinquencies and foreclosures are now at record levels.
Since late 2007, my home City of Chicago has seen a 37
percent increase in new foreclosures, and in 2000 alone,
Chicago saw 20,000 new foreclosure filings. Some of the areas
in Chicago have seen more than a 300 percent increase in
foreclosures since 2006.
Not unrelated, our communities are suffering from the
highest unemployment rate since 1982, and those who do have
jobs are experiencing falling real wages. Tumbling home prices
have destroyed much of the wealth stored in what is often a
family's only real investment, their home.
How did we get here? Some have tried to pin the housing
crisis on fair lending laws and regulations, but such arguments
downplay or even ignore the role that derivative instruments
played in the current crisis by exponentially compounding the
mortgage losses.
We do know that, in many cases, greedy, unscrupulous, and
sometimes illegal subprime mortgage lending practices
significantly contributed to the problem. These lending
practices, combined with microeconomic/macroeconomic factors
that only exacerbated this greed, have combined to create the
perfect economic storm that now threatens our communities and
our economy as a whole.
Cheap credit, derived from overseas foreign currency
reserves, encouraged many in the banking and finance industry
to disregard their normally prudent lending standards and
finance poorly underwritten and often predatory mortgages.
These subprime mortgages were then securitized into mortgage-
backed securities and the corresponding credit default swaps
that have caused the crisis that our world economy has been
dealing with since last March.
While changes in the system and other aspects of the
mortgage finance process must and will be addressed, this
hearing will focus primarily on how to create fair and prudent
mortgage origination standards to prevent this tragic cycle
from ever happening again.
I have called the subcommittee hearing today to return our
attention to comprehensive mortgage lending reform. In the
110th Congress, this committee and the House passed H.R. 3915.
This bill was not signed into law, denying many of our most
vulnerable communities the protection they needed from
predatory mortgage lending. Now the fight has turned into one
of keeping working families in their homes and out of
foreclosure or bankruptcy court.
But it is important that we act with a sense of urgency to
pass comprehensive mortgage lending reform that will keep us
from repeating the mistakes of the housing boom and bust of the
last few years.
I look forward to hearing from our witnesses, and to a
spirited debate on these issues.
I yield the ranking member, Mr. Hensarling, 5 minutes.
Mr. Hensarling. Thank you, Mr. Chairman, and thank you for
calling this important hearing. I mean, clearly, we still have
many of our fellow citizens who are suffering in this economy,
who are struggling to pay their mortgages, struggling to fill
up their gas tanks, struggling to send their kids to college,
and have a high level of anxiety about the future of their
jobs.
So, number one, it is a very topical issue for us to
discuss. It's one, as we well know, in which this subcommittee
and this committee have been quite active.
I recall some words that our President shared with us
during the State of the Union address, and were somewhat
reflected in the chairman's statement.
Our President said, ``It is only by understanding how we
arrived at this moment that we will be able to lift ourselves
out of this predicament.'' And I agree with our President.
As we're looking down the road to future and further
mortgage market reforms, we must understand how we entered into
this economic turmoil in the first place. I believe there are a
number of causes.
I think with the hindsight of 20/20, the easy money
policies of the Federal Reserve exacerbated a housing bubble
that otherwise could not exist without them.
Mortgage fraud ran rampant for a decade, on the lenders'
side and on the borrowers' side as well.
But we also have to take a clear look at government
policies, no matter how noble the intent, that ultimately
attempted to incent, cajole, or mandate financial institutions
to lend money to people to buy homes who ultimately could not
afford to keep those homes. Again, I know the intent was noble,
but the effect has been devastating.
One need only look at the Community Reinvestment Act.
Again, very noble in intent, designed to deal with a very
serious problem of red-lining at the time, but ultimately, it
helped put the Federal Government seal of approval not so much
on helping raise the economic opportunities of the borrower,
but instead, bringing down the lending standards of the lender.
We certainly know the infamous role that was played in the
government-sanctioned duopoly of Fannie Mae and Freddie Mac.
For years and years and years, Chairman Greenspan, the former
Chairman of the Federal Reserve, came before this committee and
said that there was huge systemic risk, and unfortunately, this
committee did not act; previous Congresses did not act.
And again, they were given an affordable housing mission,
I'm sure a most noble intent, but it led to essentially having
an off-budget HUD where people were incented to lower their
lending standards, Fannie and Freddie securitized this, and
what might have been a localized problem in one segment of the
economy was spread throughout, not only the national economy,
but the global economy, as well, and we have to take a very
serious look at those particular policies.
So as we embark upon this quest again, to look at
successful mortgage lending reform, I believe I have several
ideas of what successful mortgage lending reform ought to look
like.
Number one, we ought to let competitive markets work. We
want to ensure that the consumer has effective disclosure, not
necessarily voluminous disclosure. We need transparency, and we
need to make sure that we're working to make markets more
competitive, not less competitive, as was done in the case of
Fannie and Freddie.
Again, we do not need laws to incent, mandate, or cajole
financial institutions to loan money to people who otherwise
may not be able to afford it. We need to ensure that we do not
deny an informed consumer's choices that they may need to
realize their American dream. With full disclosure, let the
consumer choose, not the all-enlightened Congress.
And then there is the issue of fairness. We should never
forget that 95 percent of America rents, owns their home
outright, or are current in their mortgage.
Now, there are many people worthy of financial assistance
who are having mortgage problems, and there are many who
aren't. We know that mortgage fraud ran rampant, speculation
ran rampant, many used their homes as an ATM, many lived beyond
their means. And when families are struggling to pay their
mortgage, they shouldn't be forced to pay their neighbor's, as
well.
So, Mr. Chairman, I appreciate you calling this hearing. I
look forward to the testimony of all of our witnesses on three
different panels, and with that, I yield back the balance of my
time.
Chairman Gutierrez. Two minutes for Mr. Castle.
Mr. Castle. I thank the ranking member and the chairman
very much for this important hearing.
And I think there is unanimity in this room and in the
United States at this point that the subprime lending issues
and the foreclosures that have arisen from that have
contributed to the economic downturn we currently face.
In this body we have obviously considered proposals to help
those facing foreclosures, and to restore the housing market,
but many of us here are equally concerned with looking more
precisely at this problem, to prevent it from reoccurring.
To what extent did lenders convince unknowing borrowers to
enter into mortgage agreements they couldn't afford; how did
borrowers lie or tweak their income to qualify for high-cost
loans; how prevalent were these practices? These questions may
need to be answered before we can craft effective legislative
solutions.
I welcome hearing the testimony of our witnesses, and I'm
particularly interested in hearing from Ms. Braunstein, not
only because she is from Delaware, but also because she's an
expert on consumer financial services issues.
And I yield back the balance of my time, Mr. Chairman.
Chairman Gutierrez. I thank the gentleman.
We'll introduce the panel. Our first panel is--yes? The
gentleman from Minnesota for 2 minutes.
Mr. Paulsen. Thank you, Mr. Chairman, for holding this very
important hearing today.
You know, both in this Congress and last year in Congress,
this committee, I know, has been trying to address some of the
many problems in the mortgage system that have created great
pain now for many of our constituents. While I think we need to
remedy the problems caused by the bad actors, we also need to
acknowledge the fragile condition of our current credit markets
and make sure we do no harm with future legislation.
You know, many certainly can argue and say that the
legislation that was passed in Congress here over the past few
years has helped put us into this crisis by pushing the concept
of homeownership onto those who financially and inevitably
could not sustain that concept of homeownership themselves, and
so I think we need to get ultimately back to the principles of
common sense in terms of lending principles, so that we have
requirements for reasonable downpayments, so that the borrowers
actually have skin in the game themselves, and that we also
have traditional gross income to payment percentages that can
help alleviate some of those changes and problems.
So I thank the witnesses for being here today and I thank
you, Mr. Chairman, for holding this hearing.
Chairman Gutierrez. I thank the gentleman.
Our first panel consists of Sandra F. Braunstein, the
Director of the Division of Consumer and Community Affairs at
the Board of Governors of the Federal Reserve System; and
Steven Antonakes, the Commissioner of Banks for the
Commonwealth of Massachusetts, who is speaking on behalf of the
Conference of State Bank Supervisors.
Please, you're each recognized for 5 minutes.
STATEMENT OF SANDRA F. BRAUNSTEIN, DIRECTOR, DIVISION OF
CONSUMER AND COMMUNITY AFFAIRS, BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Ms. Braunstein. Chairman Gutierrez, Ranking Member
Hensarling, and members of the subcommittee, I appreciate this
opportunity to discuss the Federal Reserve's regulatory actions
to address mortgage problems and potential legislative
responses to these issues.
The Federal Reserve is committed to promoting sustainable
homeownership through responsible mortgage lending. While the
expansion of the subprime mortgage market over the past decade
increased consumers' access to credit, too many homeowners and
communities are suffering today because of lax underwriting
standards and unfair or deceptive practices that resulted in
unsustainable loans.
Last July, the Board issued final rules to establish
sweeping new regulatory protections for consumers in the
residential mortgage market. The new rules apply to all
mortgage lenders, not just depository institutions.
The Board's rules contain four key protections for a newly
defined category of higher priced mortgage loans:
First, lenders are prohibited from making any higher priced
mortgage loan without regard to the borrower's ability to repay
the obligation from income and assets other than the home.
Second, lenders are prohibited from making stated income
loans and are required to verify the income and assets they
rely upon to determine the borrower's repayment ability.
Third, the final rules ban prepayment penalties in cases
where the borrower faces payment shock.
And fourth, creditors are required to establish escrow
accounts for property taxes and homeowners' insurance for all
first lien mortgage loans.
In addition to the rules for higher cost loans, the Board
adopted other protections that apply to all mortgages.
Currently, the Board is engaged in robust consumer testing
to improve the content and comprehension of cost disclosures
for mortgage loans and home equity lines of credit.
Consumers receive an overwhelming amount of information at
the time they close a mortgage loan. The truth in lending
disclosure, however, is a single-page form, and we are hopeful
that new requirements for providing this form earlier in the
application process will distinguish the disclosure from the
many legal documents presented at loan closing.
However, it is important to note that the effectiveness of
a disclosure is best judged through the results of consumer
testing and not by the length of the disclosure alone.
In 2007, the House of Representatives passed the Mortgage
Reform and Anti-Predatory Lending Act. We commend Congress'
work on the bill, which represents a significant contribution
to the public debate about these issues. Although some of the
details regarding implementation differ, both the House bill
and the Board's rules set minimum underwriting standards for
higher priced loans.
The bill would also provide consumer remedies for
violations of the bill's standards and consumers would be able
to seek remedies against creditors, assignees, and
securitizers.
In order for assignee liability to increase market
discipline, the law must be clear about what acts or practices
are prohibited so that assignees can detect violations before
purchasing loans.
Assignees may have difficulty in determining a creditor's
compliance with a broad prohibition against making loans that
do not provide a net tangible benefit unless that term is
clearly defined in either law or regulation.
The bill also seeks to establish the Federal duty of care
that would require loan originators to present a range of loan
products for which the consumer is likely to qualify and which
are appropriate for the consumer's circumstances.
Because these standards are broad and originators would be
liable for violations, we believe that the establishment of
clearly defined safe harbors may be appropriate in implementing
the law and the statute should clarify that.
I would also like to comment on the bill's delegation of
rule writing. Several provisions of the bill would be
implemented by regulations that are promulgated jointly by the
Federal banking agencies. In our experience, inter-agency
rulemakings may provide an opportunity for different
perspectives, but the joint rulemaking process generally is a
less efficient, more time-consuming way to develop new
regulations.
In closing, the Federal Reserve is continuing its efforts
to enhance consumer protection in the residential mortgage
market. As we develop more useful consumer disclosures for both
closed-end loans and home equity lines, we are mindful that
improved disclosure may not always be sufficient to address
abuses.
Accordingly, we will carefully consider whether additional
substantive protections are needed to prevent unfair or
deceptive practices. We look forward to working with Congress
to enhance consumer protections while promoting sustainable
homeownership and access to responsible credit.
Thank you.
[The prepared statement of Ms. Braunstein can be found on
page 149 of the appendix.]
Chairman Gutierrez. Thank you.
Ms. Antonakes.
STATEMENT OF STEVEN L. ANTONAKES, COMMISSIONER, MASSACHUSETTS
DIVISION OF BANKS, ON BEHALF OF THE CONFERENCE OF STATE BANK
SUPERVISORS
Mr. Antonakes. Good afternoon, Chairman Gutierrez, Ranking
Member Hensarling, and distinguished members of the
subcommittee. My name is Steven Antonakes, and I serve as the
commissioner of banks for the Commonwealth of Massachusetts. It
is my pleasure to testify today on behalf of the Conference of
State Bank Supervisors to discuss Federal predatory lending
legislation, and more broadly, reform of our system of mortgage
regulation and supervision.
My written statement provides you with a detailed
discussion of dramatic regulatory reforms occurring at the
State level and suggestions for Federal reforms. In my oral
presentation, I would like to highlight two key points: First,
an explanation of why federalism matters. And second, how a
system of cooperative federalism can work and why it is in the
best interests of the public, the industry, and our economy.
For the past decade, it has been clear to the States that
our system of mortgage finance and mortgage regulation was
flawed and that a destructive and widening chasm had formed
between the interests of borrowers and of lenders. Over that
decade, through GAO reports and congressional testimony, one
can observe an ever-increasing level of State concern over this
growing chasm and its impact on the State and Federal
regulatory relationship.
Chairman Gutierrez, you are clearly one of the leading
voices in Washington who saw how destructive this break between
consumer, industry, State, and Federal interests was becoming.
I would like the committee to consider how the world would
look today had the OCC and the rating agencies not intervened
and the ASNI liability and predatory lending provisions of the
Georgia Fair Lending Act had been applicable to all financial
institutions.
I would suggest we would have far fewer foreclosures and
would have avoided the need to bail out our largest financial
institutions.
It is worth noting that the institutions whose names were
attached to the OCC's preemption--National City, First
Franklin, and Wachovia--were all brought down by the mortgage
crisis.
Regulatory reform must foster a system that incorporates
the early warning signs that State laws and regulations
provide, rather than eliminating them. I'm not suggesting a
status quo solution or a return to a balkanized system of
regulation. Instead, Congress needs to forge a regulatory
system of high standards that more successfully coordinates
among State and Federal regulators.
A centralized, top-down, or consolidated system will set us
up for future catastrophic boom or bust cycles similar to the
ones that we're currently experiencing. The wisdom of our
forefathers in recognizing the necessity of checks and balances
and grassroots innovation is timeless, and should be heeded.
The model for this regulatory system is already in
development. Thanks to the leadership of Ranking Member Bachus,
who first introduced legislation, and to Chairman Frank, and
Senators Feinstein and Martinez, who embraced it and helped it
become law, a coordinated nationwide mortgage regulatory system
is taking shape.
With the passage of a SAFE Act: nearly every State is now
in the process of raising mortgage originator licensing
standards; a centralized system of record and enforcement tools
is up and running; and unprecedented State and Federal
cooperation is beginning to evolve.
The work that began at the State level in 2003 to create
the nationwide mortgage licensing system was empowered and
enhanced by Federal law in 2008 and has compelled significant
State to State and State to Federal cooperation. This is how
the regulatory system should work.
We believe that H.R. 3915 also provides an example of how
our system of federalism can work. The Miller-Watt-Frank-Bachus
bill drew from the State laws and refined them. It does what
only Congress can, which is ultimately make uniform applicable
minimum standards.
We suggest Congress confirm that H.R. 3915 serves as a
minimum standard for all institutions and that it allow for
State enforcement of State and Federal law.
I'm not suggesting a regulatory free-for-all, but rather, a
more coordinated and cooperative system of applicable law and
enforcement.
I must also recognize and thank my fellow witness, Sandy
Braunstein of the Federal Reserve Board, for the Board's
leadership in creating a model of cooperative supervision
through our joint pilot project to examine non-bank mortgage
lenders. This project is an example of cooperative federalism.
CSBS looks forward to continuing to work with this
committee and our Federal counterparts to reform our system of
mortgage regulation.
Thank you for the opportunity to testify, and I would be
glad to answer any questions the committee may have. Thank you.
[The prepared statement of Mr. Antonakes can be found on
page 85 of the appendix.]
Chairman Gutierrez. Thank you, Mr. Antonakes.
Let me begin with you, Mr. Antonakes. I want to first
applaud you for recommending in your testimony that we attend
the National Bank Act to make it clear that State consumer
protection laws can apply to national banks. As you alluded to,
I have been fighting for years, and I appreciate you bringing
it to the forefront today.
In your testimony, you also advocate for a bifurcated
supervision system, one for the large systemic institutions,
and one for community banks. This is intriguing, and this issue
is front and center, as we're dealing with the fallout from the
FDIC's premium increases that apply to all banks of all sizes,
and as we consider a systemic risk regulator.
Could you expand a little bit on your proposal? For
example, where would the cutoff be between a systemic bank and
a regular bank, and how would you make that determination?
Mr. Antonakes. Well, thank you, Mr. Chairman.
The point I think we're trying to make here is that the
diversity of our banking system has always been a strength in
this country, a system which allows community banks, credit
unions, also to compete with large money center banks.
The community bank system has been, and continues to be, a
strength in the system today, very important, providing credit
to local communities, to consumers, and small businesses. To
the extent that they can be allowed to effectively compete with
these largest institutions that pose systemic risk to the
system, I believe is no longer a certainty.
Moreover, I think the concern is, if regulatory reform is
more beneficial to our largest institutions, then I think
continued consolidation of our industry will be harmful for our
consumers ultimately, as well as for our businesses and for our
local communities.
The opportunity here I believe is to ensure that we have a
diverse banking system and one in which our smaller
institutions that are very heavily invested in the communities
within which they operate are allowed to effectively compete
with behemoth institutions that pose less risk.
That being said, while I don't propose to have all the
answers for this, or where the direct cutoff can be, I think we
can determine which institutions pose the greatest risk to our
country's financial system, those that do not, and determine
whether or not separate rules in separate areas can be applied.
Chairman Gutierrez. Thank you.
Ms. Braunstein, how long have you been at the Federal
Reserve system?
Ms. Braunstein. Twenty-one years.
Chairman Gutierrez. Twenty-one years. Good. I just wanted
to make sure it was during the last 8 years, and put that into
the record.
So one of the arguments is that the government said
everyone should own a home, and so everyone said, ``Since
that's what the government wants me to do, since the government
is encouraging me to do it''--and no one ever has come to me
and said, ``I bought my house because the government encouraged
me to buy a house.'' They said, ``I wanted a home,'' for a lot
of other reasons. But that's one of the arguments, and so,
therefore, part of the reason we're in the current situation.
And so if that's true, what policies during, I don't know,
from, let me see, 2001 to 2008, during the last 8 years, has
the Federal Government forced on the American people so they
could buy a home that has caused this problem? Is there such an
entity that has caused this, such as the Community Reinvestment
Act?
Ms. Braunstein. There are obviously a lot of reasons as to
why we're in the economic crisis we are in. It's a very complex
situation. But I can state very definitively that from the
research we have done, the Community Reinvestment Act is not
one of the causes of the current crisis.
We have run data on CRA lending, and where loans are
located, and we found that only 6 percent of all higher-cost
loans were made by CRA-covered institutions in neighborhoods
targeted--which would be low- and moderate-income
neighborhoods--by CRA. So I can tell you, if that's where
you're going, CRA was not the cause of the subprime crisis.
Chairman Gutierrez. But it is somewhat because, as I
remember my stay here, my short stay during the last 17 years
here in Congress and on this committee, we have attempted to
expand homeownership to the American public, but every time I
evaluate the loans that have been given to communities of
color, African-American and Latino and emerging immigrant
communities, it hasn't been the CRA-covered institutions.
Actually, it has been the subprime lending industry bringing
about those loans.
I mean, if they were CRA, they might have gotten 5\1/2\ and
6 percent regular mortgages, but that is not what happened in
those communities.
So I look forward--because I want Mr. Hensarling to be able
to have his 5 minutes, I'm just going to end by saying, look, I
would like especially Ms. Braunstein to--when we look at
underwriting, let's set so that we could also go back to some
sanity in the way we do this.
When I first bought my home in 1981, it was at 14\1/2\
percent. I had to come up with a 20 percent downpayment. I had
to show my last 2 years of income taxes. I mean, there were
requirements. I had a stake. Had the home diminished in value,
I still would have had a stake in it, and I looked at it as a
home.
So maybe we could look at some of those underwriting rules,
so that the purchaser has something there, given that the
government is many times the guarantor.
I thank you both.
Ms. Braunstein. Congressman, just one quick statement to
that.
That is what we have attempted to do with our HOEPA rules--
Chairman Gutierrez. Well, good.
Ms. Braunstein. --is to afford those protections to
homeowners.
Chairman Gutierrez. And now, Mr. Hensarling, my colleague,
is recognized for 5 minutes.
Mr. Hensarling. Thank you, Mr. Chairman.
In assessing the various contributing and ``but for''
causes of our economic turmoil, I understand your opinion on
CRA. I assume you haven't drawn the same conclusions with
respect to the GSEs, or do you differ from former Chairman
Greenspan in that respect?
Ms. Braunstein. Well, I think that the Federal Reserve
recognized that there were issues around the GSEs and their
portfolios. I can't really comment on the impact of what--I
think what you're talking about were the goals they were given
for homeownership, and that, I cannot comment on whether that
was a contributing cause or not.
Mr. Hensarling. Let me ask you to comment on this.
In your testimony, you said, we are well aware that
consumers receive an overwhelming amount of information at the
time they close a mortgage loan.
And in trying to, again, provide the consumer with more
effective disclosure, I understand, and I believe in your
testimony you talk about more results from consumer testing
being needed. Just exactly where is the Federal Reserve in this
process?
Ms. Braunstein. We actually initiated the consumer testing
of mortgage disclosures last year. We are currently testing. We
are redesigning disclosures, and we plan to have a proposal out
with recommended new disclosures sometime this summer.
Mr. Hensarling. This has been an ongoing process for a
number of years; has it not?
Ms. Braunstein. Well, TILA, the Truth in Lending Act, has
been an ongoing process, but we first, as I think you know, we
issued recently comprehensive rules on open-end credit, which
is credit cards, and that was the first chunk that we tackled,
and then we went into the HOEPA rules, which we finalized in
July, and during that process, we also initiated the look at
the closed-end lending or mortgage loans and home equity lines,
and that's what we're trying to complete now.
Mr. Hensarling. On page 10 of your testimony, you speak of
assignee liability with respect to the earlier version of H.R.
3915.
I believe you say that laws must be clear about what acts
or practices are prohibited, so the assignees can perform due
diligence and detect violations before purchasing the loans.
Assignees may have difficulty in determining a creditor's
compliance with a broad prohibition against making loans that
do not provide a ``net tangible benefit,'' unless that term is
capable of being clearly defined in law or regulation.
Given the problems we have had in the meltdown of our
secondary mortgage market, given how many people are struggling
to refinance their homes now, if we went forward with a fairly
indefinite standard such as ``net tangible benefit,'' do you
have an observation or impression on what that impact may be on
the secondary mortgage market?
Ms. Braunstein. Well, I think that it could be problematic,
because if the markets cannot determine what would be an
allowable loan and what loan they would have, especially when
they're carrying liability for those loans, I think they would
be very hesitant to participate in the markets.
So we're saying that it's important to make sure that there
are some bright lines drawn, that there is a clear definition,
and whether that's done through statute or regulation, there
needs to be some way of determining when you're evaluating what
you're going to buy whether or not you're going to get in
trouble for those loans.
Mr. Hensarling. In mentioning the market, what has the
Federal Reserve observed as far as the lending standards of
lenders today?
My point would be this, in speaking your testimony, about
there having to be a balance in some of the prescriptive acts
that may come out of Congress or the Federal Reserve, but
everything I read, see, and hear anecdotally is that already
the market is adjusting to the excesses of the past, and I
observe that those who may be accused of being the worst
players and taking the greatest risk, for example, Countrywide,
or New Century, they received the ultimate punishment of the
marketplace; they no longer exist.
So is the market responding to the excesses of the past?
Ms. Braunstein. Well, I think it's true that the kinds of
excesses we saw in the past we're not seeing today, but also,
we're not seeing, frankly, a whole lot of lending today. So
this is not what we would call a normal marketplace.
Our concern in writing the HOEPA rules was that we wanted
to make sure, because we know the markets will revive at some
point, and when they do, that there are responsible loans being
made.
And so, it is important to put a structure in place that
will take care of the market when it does revive.
Chairman Gutierrez. Thank you. We should be back in about--
we have one 15-minute vote, of which we have 5 minutes left,
and two 5-minute votes, so we will be back in about 20 or 25
minutes. We will be back as quickly as we can, so we would ask
the witnesses to stay for questions from other members.
Thank you so much.
[recess]
Chairman Gutierrez. Thank you very much for that short
recess, and we're going to go to Mr. Moore for 5 minutes.
Mr. Moore, you are recognized.
Mr. Moore. Thank you, Mr. Chairman, and I guess Mr.
Hensarling is not here, but I thank him, too, and I want to
thank the witnesses for their testimony.
We all know, and we have talked about this, nobody needs to
tell you our economy faces some of the biggest challenges we
have had since the early 1930's, and the crisis in our housing
sector is certainly part of this problem.
I'm glad our subcommittee is taking a broad view of the
U.S. mortgage system, so we can discuss how Congress might
improve it and curb abusively predatory lending practices.
The last time the housing market was this bad, Congress set
up the FHA, or Federal Housing Authority, to insure mortgages
that lenders wouldn't otherwise make.
This past decade, however, Americans were drawn to
aggressive lenders, were seduced by easy credit and loans with
no upfront costs and a few basic underwriting requirements,
such as verifying income, but the subprime mortgage market has
crashed and borrowers are flocking back to the FHA, which has
become the only option for those who lack large downpayments or
good credit scores.
The FHA's historic role in backing mortgages is more
crucial now than at any time since its founding. With all the
new FHA-insured loans, we are seeing a sharp increase in quick
defaults where some borrowers are failing to make more than a
single payment before defaulting.
In response to this, HUD's Inspector General, Kenneth
Donohue, said, ``If a loan is going into default immediately,
it clearly suggests impropriety and fraudulent activity.''
That's a quote.
What are your thoughts on this matter? Should Congress be
increasing funding in the Inspector General's office as well as
the FHA to keep up with demand and ensure that basic FHA
lending requirements are being met?
In a Washington Post article, the reporter indicates Wells
Fargo and Bank of America are increasing their requirements on
certain FHA loans to ensure homeowners can afford the mortgage.
Should Congress consider tightening the FHA's standards to
minimize defaults?
Either witness. Yes, ma'am?
Ms. Braunstein. I would just say that I think FHA has a
very important role to play in the mortgage markets, and maybe
more so than ever now, given the crisis.
So, whatever needs to be done in order to make sure that
credit flows, that it's available to people, and that people
are getting safe and sound loans, I think it would be important
to do.
Mr. Moore. All right. Second question. Second and last
question. I have concerns with adjustable-rate mortgages, or
ARMs, as they're called, that start with a low monthly payment
that rises over time. Personally, I don't have a problem with
that, but I think some people get into those not understanding
exactly how they work.
What role have adjustable-rate mortgages played in the
current housing crisis? Is there a legitimate purpose for
allowing these kinds of mortgage products to exist? Should we
put any kind of controls or limitations or regulations on
adjustable-rate mortgages?
Ms. Braunstein. We have done that through the HOEPA rules
that the Fed issued in July. Adjustable-rate mortgages were a
big problem in the marketplace. A lot of people did not
understand the terms, did not understand the payment shock, and
that their loan would reset, and there was a huge difference,
oftentimes, between the initial rate and the reset rate.
A couple of things that we did for the loans we define as
higher-cost loans, include--the HOEPA rules will require that
they be underwritten at the ability to repay, which means that
you look at the highest payment that would be made within the
first 7 years of the mortgage, whereas we heard before that
loans were often being underwritten at those teaser rates, and
people couldn't afford the resets.
We also put a lot of restrictions on prepayment penalties,
and basically any loan that resets in the first 4 years is
banned from having a prepayment penalty attached, which would
allow people to get out of loans much easier, not having a
prepayment penalty.
Mr. Moore. Right. Sir, do you have any comments?
Mr. Antonakes. Yes, Congressman. I would add that I don't
think traditional ARM products were the focus of the problem,
and I would hate to cut those products out of the marketplace:
3/1 ARMs; and 5/1 ARMs.
As my colleague indicated, it was the option ARM products,
no-interest loans, that caused the problems and created
tremendous payment shocks that weren't properly underwritten.
In Massachusetts, we actually passed a law as part of a
foreclosure prevention bill signed by Governor Patrick in 2007
that, for subprime ARMs, it requires a consumer to actually opt
out of a subprime fixed-rate product, and then there's
mandatory counseling if they want to proceed with a subprime
ARM, to ensure that they truly do understand the terms and
conditions of that credit.
Mr. Moore. Thank you. Thank you, Mr. Chairman.
Chairman Gutierrez. And we have the gentleman from Delaware
for 5 minutes, Mr. Castle.
Mr. Castle. Thank you, Mr. Chairman.
Mr. Antonakes, you heard Ms. Braunstein talk about the
rules that the Fed has issued, which I guess will go into
effect in October, or something of that nature. We have passed
legislation, I think it was 3195, here in the House, that was
not acted on in the Senate, I don't believe.
Obviously, you have indicated in your testimony otherwise;
the States have done a few things.
Can you either, by the use of data or anecdotally, tell us
if the lending, mortgage lending habits of our banks have
changed as a result of that? Obviously, they have changed
somewhat. But is there any clear evidence that there have been
very substantial changes in terms of some of both the subprime,
ALT-A, and other mortgage problems that have existed?
Mr. Antonakes. I think lending habits have changed
dramatically, primarily because of the collapse of the mortgage
market. I think there has been a mortgage correction, and many
loans aren't being written anymore, be they subprime loans,
ALT-A loans. But that's not to say they won't be written again
once the market returns and once housing values improve.
So I think the real opportunity here, you know, we were
supportive--I testified in support of the Federal Reserve
Board's HOEPA regulations. I do think there's a historic
opportunity here for the Congress to act on predatory lending
legislation, action that has been taken in 35 States to date,
plus the District of Columbia, but been blunted by Federal
preemption. We haven't had the opportunity for those laws to
apply uniformly across the spectrum.
I think the opportunity here is that Congress can act to
set a minimum floor and allow States to continue to experiment
and create laws that further protect the consumers if they so
desire, as long as they do in fact apply to all entities within
the jurisdiction of that State.
Mr. Castle. Okay. Thank you.
Ms. Braunstein, you said earlier, and we just heard Mr.
Antonakes say, that mortgage lending is obviously way down at
this point.
Is there any evidence that mortgage lending is beginning to
recover at all, even talking about the last 2 weeks or 4 weeks,
or whatever? I mean, I was amazed to see, I think it was
CitiGroup actually had a profit in the last couple of months,
or something of that nature. I don't know if that came from
anything dealing with real estate.
But my question is, is there any--are you tracking that? Is
the Fed tracking that? Is there any way of judging that it's
beginning to actually recover?
Ms. Braunstein. I'm sure that there are people at the
Federal Reserve who are watching the markets very closely, but
actually, I'm not prepared to comment on that.
Mr. Castle. That's okay.
Another question to you. You testified in your testimony,
you spelled out the rules that the Fed is looking at for
adoption in the fall of this year.
If we were to pass legislation here with some similarities
to it--you're familiar, I think, with some of the legislation
that we have dealt with in the past, in 3195, and some of the
propositions for that--would this complement the Fed rule or
would it be helpful or harmful, as far as you can ascertain?
Ms. Braunstein. Some of the provisions in the legislation
that was dropped in November last year actually mirror what's
in our HOEPA rules. There are other things that go further and
other things that are different. And certainly, if you pass
legislation, we would have to look at what we already have done
in the HOEPA rules, and we'll have to reconcile that in some
form or another.
But the HOEPA rules are scheduled to go into effect in
October of 2009, so we're hoping that will move forward.
Mr. Castle. All right.
Mr. Antonakes, I wasn't going to ask this, but I will. Do
you, in your position, have any thoughts or anything that we
should be looking at or considering that we are not doing here
at the Federal level, either in direct legislation, the kind of
things that we do in Congress, beyond anything you may have
testified to?
Mr. Antonakes. Congressman, I don't believe so. Again, I
think the most important thing from my perspective is to ensure
we truly have a level playing field in terms of what the rules
are, that all entities, be they State licensed, State
chartered, or federally chartered, are abiding by those rules,
and that there's universal enforcement.
Mr. Castle. Very good. Thank you.
Ms. Braunstein, we are concerned about the need to
strengthen loan underwriting criteria and standards, but also
to ensure that borrowers can afford their homes. We would like
to get the real estate market moving again, to some degree.
Are these two items completely, at this point,
counterproductive, or do you feel that we can blend it together
so that we can have good lending practices, but we can have the
markets open up again?
Ms. Braunstein. Yes, I do think that both are possible. I
do not think that they're mutually exclusive at all.
In fact, I think the markets will work even better if there
is responsible lending in the markets and people are able to
afford their loans and keep their homes.
Mr. Castle. Thank you.
I yield back, Mr. Chairman.
Chairman Gutierrez. Thank you very much.
Just for the institutional memory of everyone, the HOEPA
rules are the same ones that came about as a result of the 1994
legislation that we passed here in Congress.
Ms. Braunstein. Correct.
Chairman Gutierrez. Okay. I just want everybody to know it
took quite a while; I got here in 1994, and the rules finally
have come about.
Mr. Sherman, you are recognized for 5 minutes.
Mr. Sherman. Thank you, Mr. Chairman, and Mr.--author of
the 1994 bill. What was the name of that bill again, Mr.
Chairman?
[laughter]
Mr. Sherman. Can you see any reason not to simply ban
stated income, low doc, and no doc loans?
Ms. Braunstein. We--the HOEPA rules that we issued in July
do ban these products for higher-cost mortgages. Are you
talking about across the entire spectrum?
Mr. Sherman. Across the board.
Ms. Braunstein. I think we would have to look at that and
see if there were unintended consequences
Mr. Sherman. Is it an important national priority to make
sure that people can cheat on their taxes and still get good
home loan financing?
Ms. Braunstein. No, I don't think it is. I think that
stated income, my understanding of stated income loans is that
they were used in a small segment of the market for a number of
years without any problem. However--
Mr. Sherman. Except for the fact that people could cheat on
their taxes and get good home financing, which the home
financiers didn't regard as a problem.
Ms. Braunstein. Well, and that the problems in the markets,
though, the mortgage markets, ensued when they became
widespread.
Mr. Sherman. Until then, we just had the problem I--can you
think of any reason why we shouldn't ban what I call teaser
rate ARMs? That is to say, where the adjustable-rate mortgage's
initial payments are below what they would be if the--at
today's index and today's spread?
Ms. Braunstein. As with many products, I guess there could
be a case where these could be helpful to somebody, but if
you're going to keep these products, there need to be
protections around them, which we have done with the HOEPA
rules.
You need to prevent prepayment penalties, which lock people
in and make it much more difficult for them to get out of the
loan before--
Mr. Sherman. If something has lots of harms, and whether it
ever serves a good purpose at all is simply conjectural, as a
matter of fact. We can't even figure out what benefit it would
have, why wouldn't we ban it?
Ms. Braunstein. Well, I guess, you can always draft a case
where somebody actually knows that they have a lower income
right now, but their income is going to rise in the next couple
years, and it allows them to buy a home that they ordinarily
would not be able to buy.
Mr. Sherman. I think that--
Ms. Braunstein. So you could always construct that
argument.
Mr. Sherman. --an awful lot of people are getting
foreclosed now because they were sure they were going to get--
Ms. Braunstein. I agree.
Mr. Sherman. --a couple of promotions, and I think that we
ought to qualify people based on their current income, not
based on, ``Well, I'm going to graduate from school, unless I
flunk out, and I'm going to get a high-paid job, unless there's
a recession when I graduate.''
The chairman of the full committee has suggested that we
prohibit loan originators, that first lender, from being able
to fully sell without recourse the loan into the secondary
market. He has proposed, if I got this right, that they retain
at least 15 percent ownership of the mortgage or 15 percent,
the first 15 percent of the risk.
I would like both witnesses to comment on this. Do we want
to abolish the business plan where a financial institution with
limited capital is able to lend money and then sell the entire
loan--lend money, sell the entire loan, and in that way, with
limited capital, be able to originate a lot of loans?
Do we want, instead, only to have a business model where a
portion of your capital is used up as you originate and sell
off loans?
I would like both witnesses to respond.
Ms. Braunstein. As business models are developed for the
mortgage market going forward, I think it's going to be
extremely important to look at the incentive structures, and
certainly some of the problems that we are seeing in the
current markets or that we saw in the markets are due to the
fact that there was not an incentive on the part of brokers and
others to take due diligence and do good underwriting because
there was no skin in the game, so to--
Mr. Sherman. So you are saying not only should the loan
originator have skin in the game, but the independent mortgage
broker--
Ms. Braunstein. Possibly. There needs to be incentives.
Mr. Sherman. --would have skin in the game? These are small
businesses. Remember, they have to get audited financial
statements to prove they have $75,000 in capital.
Are we basically then going to ban the small mortgage
broker--
Ms. Braunstein. Well, I'm not saying it would be easy to
figure out how to structure it, but certainly the incentive
structure is going to be important going forward, to make sure
that people are making responsible decisions.
Chairman Gutierrez. The time of the gentleman has expired.
The gentleman from Texas for 5 minutes.
Mr. Marchant. Ms. Braunstein, my concern is the lender who
has 100 percent of the skin in the game, and that is a person
who sells their home and takes the note back, and is the
lender, and keeps the note, and does not try to securitize it.
Do the rules sweep this whole class of people who make that
kind of loan into a regulation scheme that puts them at risk of
being drawn into court?
Does it contemplate that a lot of the loans that are made
in America are made by the sellers, and the loan is--of the
property, and the loan is actually retained by them and is not
a conforming loan, and has, you know, the underwriting criteria
used was the person that sold it found the person that bought
it to be creditworthy?
And are we putting a lot--and I think across America, there
are a lot of transactions like this that take place. Are we
putting that lender in the same category as a mortgage broker
at a mortgage company?
Ms. Braunstein. Well--are you talking about your--the
legislation that was introduced in the House--
Mr. Marchant. Yes, the rules or the legislation. I mean--
Ms. Braunstein. The HOEPA rules do not deal with that
issue, the new HOEPA rules that we introduced. The legislation
that was introduced in 2007 by the House deals with assignee
liability, and in particular, that was to try to close a gap
and put some responsibility for the products onto the
securitizers and assignees.
Mr. Marchant. So as long as a person has no contemplation
to securitize, then they need not worry about this legislation?
Ms. Braunstein. Well, if they're holding the note, they're
holding--they have plenty of skin in the game.
Mr. Marchant. Yes. My next question has to do with that
group of--can you make a loan that specifically on its face is
prohibited by law to be securitized, so that a life insurance
company that intends to originate mortgages for their own
portfolio, which used to happen, and banks for their own
portfolio, can know that, when they originated that loan, that
it's specifically prohibited being put into a pool and
securitized and sold in the secondary market, and if that
happens, are banks and lenders going to be prohibited from
making loans that they might make just for a business reason,
for wanting to have a portfolio loan?
Ms. Braunstein. I have to admit, I'm not sure I understand
the scenario.
Mr. Marchant. Well, if you securitize--maybe Mr.--
Ms. Braunstein. I don't think he does.
Mr. Marchant. Okay, I'm sorry. Do you have an answer for
that? No. Okay. I'm not explaining myself properly.
What I'm concerned about is the small lender that makes
loans for their own portfolio, and I'm afraid that these small
lenders will get captured in some of these rules and in future
legislation, that will basically curtail a great part of real
estate business out there that never enters into the banking
scheme and commercial banking. That's my biggest concern.
Ms. Braunstein. If lenders are doing responsible lending,
then there should not be a problem. They should not be
prohibited. There should be nothing in the rules or--either our
rules or legislation, that would prohibit that.
I think it is always important to look at any potential
regulation or statutes to make sure that there are not
unintended consequences that would inhibit responsible lending.
Mr. Marchant. And that would be my word of caution, because
in many instances, the--I have had people call my office and
say, ``Can I do--under these new rules, will I be able to owner
finance, under these rules, will I be able to make loans on a
property that I sell?''
And I've said, ``I don't think you will be affected.'' But
it has had kind of had a chilling effect on some of the owner-
sellers.
Thank you, sir.
Chairman Gutierrez. The gentlelady from New York, Ms.
Maloney, is recognized for 5 minutes.
Mrs. Maloney. I thank the gentleman for yielding and for
organizing this hearing, and I welcome both panelists.
Beyond working on mortgage reform, this committee is
working on regulatory reform, including a discussion of
creating a systemic risk regulator, and I would like to ask
each of the witnesses, could you discuss how you see these
mortgage reforms working in concert with regulatory reforms?
How do you see a systemic risk regulator overseeing parts of
the mortgage market?
Mr. Antonakes. I believe that a systemic risk regulator
would be complementary to regulatory reform and structure on
the mortgage side where the States are most closely focussed.
You know, we are working through a number of initiatives,
including the nationwide mortgage licensing system, to increase
transparency and effectiveness for consumers, and increase and
improve upon a partnership with Federal regulators.
However, what we're doing is more focused, I believe, on
the model of institutions that we're supervising. Certainly, I
believe there are institutions that have either been largely
Wall Street institutions, that have been largely unregulated,
and that pose tremendous risk to our financial system, and
there should be a regulatory structure in place which better
captures that risk, and is frankly more stringent, given the
risk to the financial system.
So I think the system has to be tailored very carefully to
ensure that the greatest degree of oversight exists for our
highest-risk institutions, and that there continues to be
collaborative State and Federal action on those institutions,
as well as those that frankly pose less risk to the system. And
the model hopefully is flexible enough to ensure that those
institutions that have less risk can continue to exist and
compete well in the marketplace.
Mrs. Maloney. So you see the systemic risk regulator
overseeing a level of regulatory relief, say, across the board,
or regulation, even-playing-field regulation that would protect
them before getting to systemic risk?
Mr. Antonakes. I think they would have to work in a
complementary fashion. I don't think you could remove all the
risk in an entity and just have it solely based within the
systemic risk regulatory. I think there would have to be
coordination between the different agencies to ensure proper
oversight, and I think that is achievable.
Mrs. Maloney. And Ms. Braunstein? Nice to see you again.
Ms. Braunstein. Nice to see you, too.
I also think a systemic risk regulator would have to be
cognizant of all the risks in an organization, and that would
include consumer protection risks.
As we have certainly seen in the current situation,
consumer protection was actually somewhat like the canary in
the coal mine in terms of other things going on, so it would be
very important that that be a strong component of whatever is
developed going forward.
Mrs. Maloney. Some say that maybe we should have a separate
regulator for consumer, separate from the systemic risk. Do you
think it should be all together, or do you think it should be
separate?
Ms. Braunstein. Well, I don't have an answer to that
question. I think that, obviously, these are issues that we're
going to be exploring, all of us, in the agencies and on the
Hill, going forward.
I think while there is a certain appeal to having a
separate agency, I would say that I also think that there is a
lot to be gained in terms of crafting rules that do not have
unintended consequences and interrupt the flow of credit; there
is a lot to be gained from the research analysis and the
supervision that is done in the banking agencies.
Mrs. Maloney. A number of States, including my home State
of New York, have really been at the forefront of State-level
mortgage reform.
Which States would you suggest the committee look towards
for best practices and what advice would you give the committee
as we discuss enacting nationwide reforms vis-a-vis existing
State laws?
Mr. Antonakes. I think there are a number of States you
could look to for those initiatives. I think certainly New York
is one. North Carolina is another. I believe my State of
Massachusetts has been very progressive in this area, as well
as the Commonwealth of Pennsylvania, and several other States,
and we would be happy to provide a more exhaustive list, as
well as a list of initiatives from those States to the
committee, as well.
Chairman Gutierrez. I'm sorry. I can't see. It is getting
to be that time of life.
Mr. Lance, for 5 minutes, is recognized.
Mr. Lance. Thank you, Mr. Chairman.
Good afternoon to you both.
Regarding the issue of the systemic regulator, to follow up
on the questions of the gentlelady from New York, it would seem
to me that I would favor one shop in this regard, and then
perhaps have within that area several different agencies
underneath it, and I would ask you to follow up further on
that.
Do you have an opinion as to whether it just should be one
overall, as opposed to having a separate place for consumers in
our society?
Ms. Braunstein. As I say, I don't have a specific
recommendation at this time. I mean, these are issues that we
are certainly discussing, at the Federal Reserve, you know,
were certainly being discussed in many venues.
I would say that there are a number of things that need to
be looked at, in the benefits of where that is, and there are,
you know, pros and cons on both sides of the argument.
Mr. Lance. And from your experience at the State level in
Massachusetts--and I come from a State legislature in New
Jersey, where I served for 18 years, and I have great respect
to what States are doing in this regard--do you have an opinion
based upon your experience in Massachusetts?
Mr. Antonakes. Yes, I do, Congressman.
I don't believe you can divorce the safety and soundness
and compliance risk. I think they have to be housed in the same
entity.
Mr. Lance. That would be my thought process, as well.
Mr. Antonakes. But also, I believe checks and balances are
incredibly important, and I would think that one single Federal
regulator, while perhaps eliminating some redundancy, would
have enormous power, and that would create risks in its own
right.
Mr. Lance. I suppose, but I would not want to see a system
where we didn't know where to go, and a confusing system, and
an overlapping system, and from my experience in the State
capitol, sometimes you don't know where to go, and certainly
this is an area where there has to be continuity across the
board, given the fact of what has occurred over the last year.
Mr. Antonakes. I don't disagree with you. Each agency has
to have a charge that is well understood by the public,
certainly, and by consumers.
I mean specifically that it should be a cooperative effort
between the State and Federal agencies that share supervision,
as opposed to just one simple Federal agency that makes the
final call on all decisions.
Mr. Lance. And from your perspective, given your expertise
at the State level, are you concerned regarding a Federal
system where, if there is not technically preemption, there is
the view that all is wise that comes from Washington and not
from the various State capitals?
Mr. Antonakes. Well, I certainly do have concerns in that
area. I believe that the advantage of a local regulatory is
that I am closest to my consumers. If there's an issue
somewhere in my State, I can have examiners at that facility
within hours.
And I think while we have great working relationships,
generally, with our Federal counterparts, I think an issue that
occurs in my State probably gets my attention quicker than it's
going to from a Federal agency in Washington.
Mr. Lance. Thank you. And of course, because our banking
system is, to some extent, State regulated and Federal
regulated, so long as that continues, it seems to me there has
to be some sort of recognition of your responsibilities and the
responsibilities of your counterparts across the country.
Thank you, Mr. Chairman. I yield back the balance of my
time.
Chairman Gutierrez. The gentleman yields back.
The gentleman from Charlotte, North Carolina, Mr. Watt, for
5 minutes.
Mr. Watt. Thank you, Mr. Chairman.
I will start by complimenting Mr. Lance. I thought we had
lost all of our States' rights advocates, and I'll be looking
forward to adding him to my States' rights caucus, as one of
the people who has been trying to convince multiple members on
your side that we should not set a Federal preemptive standard,
but set a Federal floor standard that continues to allow State
attorneys general and State regulators to be involved in
regulating these loans. So it's wonderful to know that I have
an ally on that side on that issue.
I was going to ask about that, but he did a magnificent job
of fleshing that issue out for me, and so I will let your
answer, Mr. Antonakes, stand on that point. It's probably
better made to him than it would have been made to me.
Ms. Braunstein, there has been a relative sea change in
this whole area of regulation of mortgage lending since my
colleague, Brad Miller from North Carolina, and I started this
discussion about--how many years ago was it, Brad?--6 years
ago, and we finally got the regulators, after the horse was out
of the barn, to issue some regulations that move in the
direction of regulating the players in this industry.
The one question I want to be clear on is whether you all
have an opinion as to whether those regulations ought to
preempt any additional legislation that is being contemplated
by Congress. Do you think you have exhausted the whole field,
or is there more to be done, in your estimation?
Ms. Braunstein. Well, I think that we should constantly be
vigilant and look for opportunities to improve any law or
regulation that's out there, so I think that there may be some
additional things.
As I said in my testimony, we applaud a number of the
things you have done in the bill. A lot of it overlaps with
things that we have done. And we are just saying that if you
intend to move forward with this, there are some areas of
clarification that would be needed.
Mr. Watt. And have we gotten the benefit of your written
comments about those areas of clarification, rather than just a
general statement that there are some issues?
Ms. Braunstein. I know that when the bill was introduced
back in 2007, we had Fed staff working closely with your staff
on the Hill, and we are happy to do that again as you move
forward on reintroducing it.
Mr. Watt. And there are some things, I take it, that you
cannot do in a regulatory fashion, such as determining what the
private rights of action and the penalties and the--
Ms. Braunstein. --liabilities.
Mr. Watt. --things of that kind. We have to do that at the
legislative level; don't we?
Ms. Braunstein. Yes.
Mr. Watt. Okay. All right.
I think that's what I wanted to establish. I didn't want to
proceed with the assumption that we were doing something that
was good, that--when other folks were saying we have done
enough, so we will keep moving, or trying to move in the
direction of tightening up these regulations, and I would
welcome, I'm sure, the chairman of the full committee and the
chairman of the subcommittee and Mr. Miller and I in
particular, since we have been at this for a long time, would
welcome those clarifications to which you made reference.
Thank you. I yield back.
Chairman Gutierrez. The gentleman yields back.
Mr. Neugebauer, please, for 5 minutes.
Mr. Neugebauer. Thank you, Mr. Chairman.
Ms. Braunstein, recently HUD has gotten a revised
disclosure statement out. In House Bill 3195, I introduced an
amendment that basically would bring forward a universal
disclosure box.
My opinion is that we don't need longer disclosures, we
need better disclosures, and somehow somebody got the message
that a long disclosure was a better disclosure for the
borrowers.
And, you know, the other piece of it is, it would help, I
think, everybody if HUD and the Fed maybe had coffee together
and sat down and maybe tried to figure out, have a universal
consumer disclosure so that there's more clarity.
And what needs to be on the front of that form, you can--if
the lawyers want to lawyer up, let them lawyer up the back, but
what we need to do is, while the lawyers are at coffee, we need
to sit down and let people that are actually in the business,
get consumers and lenders together, and talk about what are
really the important things.
And there are 10 or 12 things that a consumer needs to know
about, you know, the contract that they're about to sign, and
it needs to be in big letters, and, you know, what's the actual
interest rate, what's the payment, you know, some of those
things, the highest interest rate during this contract can be
X, if it goes to that, you would not qualify for this--I mean,
sitting down.
Why do we need two disclosure statements, and why can't we
look at thinking outside of the box with a new box?
Ms. Braunstein. Well, we issued a mortgage reform report
back in the 1990's that also recommended one joint disclosure,
so we have been an advocate of that. We have made overtures to
HUD over the last few years. We have offered to work with them
on their RESPA reform. And I can just say that we stand ready
to do so.
Another comment I would like to make, in terms of us moving
forward on our TILA disclosure, which we're doing now, another
important part, I agree with you that more disclosure is not
necessarily better.
It is our strong opinion, based on our experiences in
working on mortgage disclosures, as well as previously working
on credit card disclosures, that consumer testing is a very
important part of developing disclosures, because you can't
really know if consumers are going to understand these and get
the information they need until you go out and test them, and
that's what we're doing now.
The new disclosure we plan to bring forward mid-year is
going to be consumer tested--will have been consumer tested--
and we will continue to do that with disclosures.
It's not the length of the disclosure that's as important
as making sure it's well tested.
Mr. Neugebauer. Well, then, I would say that what would
make sense to me is, let's test the disclosure, let's sit down
with the consumers, let's ask them what is the information that
they think they need to know in order to make an informed
decision.
Ms. Braunstein. That is the first part of the testing
process, is we do interviews with consumers to ask them, ``When
you are going to buy a mortgage, or when you are going to get a
credit card, what are you looking for, what is important to
you?''
And from that information is how we then design disclosures
that we then go in and test again, and make sure the consumers
are actually getting that information.
Mr. Neugebauer. And so you said you have made overtures to
HUD in the past, and you have not gotten a positive response,
evidently?
Ms. Braunstein. Well, I think they were on track to get
RESPA done by the end of last year, and they were moving on
that track to do so.
Mr. Neugebauer. Well, this is the change age, and maybe
what we need to do, Mr. Chairman, is look at seeing if we can
get some of these agencies to sit down together, because I
think, you know, a uniform, universal disclosure for consumer
credit, it almost makes too much sense, and also being able to
get the people at the table who are borrowing money to find
out, you know, the things that they need. On the front, you
know, then you have these 10 boxes or however many boxes that
is, and then if you need to let the lawyers cover themselves on
the next 25 or 30 pages, well, let them do that.
But the borrower doesn't really have a good way to shop
consumer credit, because these disclosures are so convoluted,
so long, that you're trying to compare 3 pages of a good faith
estimate to 3 pages of another lender's good faith estimate,
really, where if we had the hull of that in a consolidated way
on the front page, at least, I think it makes sense.
So I look forward to working with--the chairman left me--
look forward to working with the other side to do that.
Mr. Clay. [presiding]. I thank the gentleman from Texas.
I recognize the gentleman from Texas, Mr. Green, for 5
minutes.
Mr. Green. Thank you, Mr. Chairman.
And I would like to continue where my colleague from Texas
left off, because Representative McHenry and I introduced an
amendment that passed by voice vote out of this committee to
have a one-page disclosure. It was a part of H.R. 3915.
H.R. 3915 passed the House of Representatives on November
15, 2007, but did not pass the Senate.
So I would look forward to continuing the effort that we
have put forth to get that one-page disclosure that
Representative McHenry and I introduced and that passed out of
committee, was in fact a part of a bill.
Moving on from disclosure to originator compensation, you
did not prohibit certain originator compensations, one known as
the yield spread premium. What you did was move to disclosure
of originator compensation.
And in so doing, I am moved to ask, what happens when the
disclosure requirement is not met?
Ms. Braunstein. Well, actually, what we did is we proposed,
when we put out proposed HOEPA rules, in December of 2007, we
had in there a disclosure provision for the yield spread
premium for broker compensation.
We then, between then and when we finalized our rules in
July of 2008, we consumer tested that idea, and frankly, it did
not work well, because that is a very complex concept, and we
found that not only did consumers not understand what a yield
spread premium was, it not only confused them, it actually
could hamper them in decision making, so we--
Mr. Green. Permit me to intercede--
Ms. Braunstein. Well, I just want to say we withdrew that
from the final rule, so we did not mandate disclosure of yield
spread premiums. We are working--
Mr. Green. Let me do this, if I may, because I'm going to
lose my time in just a moment.
Ms. Braunstein. Okay.
Mr. Green. What I would like to know is this. If you move
to disclosure, what is the penalty for failure to disclose, if
there is a penalty?
Ms. Braunstein. Well, I'm not sure we are moving towards
disclosure. I mean, that's what I'm saying. We are working on
that issue now. We are considering other options--
Mr. Green. What other options are you considering?
Ms. Braunstein. --including restrictions about having--
Mr. Green. What other options would you consider, other
than disclosure or elimination?
Ms. Braunstein. Restrictions--
Mr. Green. Say again?
Ms. Braunstein. Restrictions on yield spread premiums,
potentially bans on yield spread premiums. We are looking at
all possibilities--everything is on the table.
Mr. Green. So right now, it's safe to say that you have not
come to a conclusion as to how yield spread premiums--
Ms. Braunstein. No.
Mr. Green. --should be addressed?
Ms. Braunstein. That will be addressed in the rules that
will be coming out this summer.
Mr. Green. All right. Thank you.
Let's move next to a provision for people who can pay a
monthly payment, and who don't have traditional credit.
We have some people who can afford a mortgage payment, but
they don't have traditional credit.
We have had the circumstance wherein persons didn't have to
reveal what their income was, and they were able to get some
loans, no doc loans, but we do have a class of people who can
actually make a monthly payment, but they don't have
traditional credit.
Has anything been done to address this class of people?
Ms. Braunstein. Well, in our HOEPA rules that we just
issued, in terms of people documenting income, we allow
flexibility in there that--
Mr. Green. No, no, no. Excuse me. I need to intercede. And
I don't want to be rude, crude, and unrefined, but I have to
use the time efficaciously.
I'm talking now about people where you can clearly document
that they can afford the loan, they can make the payment, but
they don't have traditional credit. They pay light bills, gas
bills, water bills, and phone bills, but they don't have a car
note, they don't have a house note, and some other things.
Ms. Braunstein. And that's what I'm saying. There's
flexibility in the current HOEPA rules to look at alternative
means of documentation of credit.
Mr. Green. So alternative credit scoring is something that
you're looking at?
Ms. Braunstein. It is definitely not prohibited. It can be
looked at by lenders to make their decisions.
Mr. Green. Okay. And my final comment would be, as you
embrace yield spread premium, if you move to the concept of
disclosure, ask yourself what is the penalty for failure to
disclose. I think that's going to be important, because my
suspicion is that we'll get a certain amount of failure to
disclose.
And I would like for your fellow witness to testify, if you
would like to give a commentary.
Mr. Antonakes. Congressman, I would only add that, in our
examinations, if a disclosure is not provided, then it has been
the consistent position of our agency that any fee collected
has to be reimbursed to the consumer in full.
Mr. Clay. The gentleman from Texas' time has expired, and I
recognize the gentleman from North Carolina, Mr. Miller, for 5
minutes.
Mr. Miller. Thank you.
Ms. Braunstein, if you--I strongly discourage using
disclosure as the remedy for yield spread premiums. The
borrower relies upon the broker to tell them what it is they're
signing, and I do not think disclosure, having them sign a
form, is going to work.
I know after the proposed rules in December, there were
many commenters who said roughly that. I was one of them. Do
not remedy the problem with disclosure. It is not going to
work.
If you allow a payment at all, at closing, because the
borrower is paying a higher interest rate than the interest
rate, the par interest rate, what they qualified for, it should
be a payment made directly to the borrower and not to anybody
else.
You mentioned that the CRA was not the cause of our current
financial problems. I think there has been a study by the
Federal Reserve Board that 6 percent of subprime loans in the
period were by institutions subject to the CRA, the depository
institutions, banks and thrifts with federally insured
deposits, in neighborhoods or to borrowers that the CRA
encouraged lending to.
Ms. Braunstein. Yes.
Mr. Miller. Is that correct?
Ms. Braunstein. That is correct.
Mr. Miller. Six percent. And how has been the default or
foreclosure rate among that 6 percent, as opposed to other
subprime loans?
Ms. Braunstein. I think that we have found that the
foreclosure, the delinquency rates in those areas are no
different or no worse than those that you find in higher-income
areas that are not CRA targeted areas.
Mr. Miller. Okay. On assignee liability, I have been
generally sympathetic with the argument that someone buying a
loan can't know everything that happened at closing, can't know
ever oral representation, every discussion between the borrower
and the lender, and that not all the sins of the originator
should necessarily be attributed to an assignee.
But looking at the loans made in 2004 to 2006, there's a
theory at law of constructive knowledge: if you didn't actually
know something, you had other facts that should have let you
know something was going on.
Ninety percent of the loans made, subprime loans, which
jumped from 8 percent of all loans to 28 percent, 90 percent of
them had a reset, a quick adjustment after 2 or 3 years, that
went up 30 to 50 percent in monthly payments; 43 to 50 percent
did not have full income documentation; 70 percent had a
prepayment penalty.
Do you think the assignees--the people buying those
mortgages--didn't know something was up at the retail level?
Ms. Braunstein. Well, obviously, it is hard to speak for
them, but it is hard to imagine that if due diligence was done,
that you wouldn't see something amiss.
Mr. Miller. Thank you. I have no further questions.
Mr. Clay. The gentleman yields back. I recognize the
gentleman from Georgia, Mr. Scott, for 5 minutes.
Mr. Scott. Well, I have a, kind of like a two-pronged
question that I would like for you to respond to, if you would.
I'm concerned about this just sort of reviewing this issue
about the spread and increase of predatory lending practices,
and I understand that subprime mortgages have allowed for a
large number of families to purchase homes that they would not
otherwise have been able to do, which conceivably is a good
thing.
However, I'm concerned about the nature and the targets of
these loans and lending practices. There has been an inordinate
percentage of minority families who have been tied up in what
we can affectionately call a mess, and the facts are
disturbing, at best, as black and Hispanic and individuals have
been disproportionately borrowing in the higher-cost subprime
market.
That has been because there have been certain incentives in
place that steer people to these subprime lending markets, and
I think in all of this area, this is sort of the meanest part
of this predatory lending that, you know, I don't think we're
really addressing enough; and that is, you have people here who
don't need to be steered into subprime lending, but are steered
into subprime lending.
And I'd like--you know, families with perfectly good
credit, in some instances, have been swindled, they have been
blindsided into these less than sound mortgage deals, and I
want to know what steps are being taken towards stopping this,
and what your thoughts are on having a mandatory standard for
mortgage companies, having an increased number of people
available to help people, and to be able to stop this
purposeful effort of targeting Hispanic and black families and
people, and short-circuiting them, and steering them into an
area where they ought not be.
I mean, this is a terrible thing to do, and I would like to
get your thoughts on that, and maybe a mandatory standard would
work, or just how you feel about that. Are we doing enough
about it?
Ms. Braunstein. The HOEPA rules that we issued in July of
2008 will hopefully address a lot of these problems, because
the features of these products that people were steered into
will no longer be allowed to occur in these markets, in the
higher-cost markets, and the markets where people were steered,
and that does serve as a floor. It is not a ceiling, so there
is also room for the States to improvise and to experiment and
to go further with those rules.
Mr. Antonakes. Congressman, I would add that, and agree,
that responsible subprime lending was advantageous to the
market, but what has occurred over the past few years is hardly
responsible lending, and yes, folks have been targeted by
unfair and deceptive acts and practices.
We continue to examine lenders and brokers now on an only
surprise basis to try to ferret out fraud. We have taken
numerous enforcement actions and have numerous criminal actions
pending with law enforcement agencies.
Also, I reject the notion that CRA caused this problem.
Quite to the contrary, in Massachusetts, Governor Patrick
signed legislation to extend our State CRA law, which already
exists, and applies to banks and credit unions for the first
time to non-bank mortgage lenders, so that they do have a
responsibility to lend on appropriate terms throughout the
communities within which they do business, including low- or
moderate-income communities.
We're starting our CRA exams of non-bank mortgage lenders
next month.
Mr. Scott. Okay. Just finally, I know my time is winding
down, but do you think that as we move to get some reform to
the mortgage system, that in a way, as we move to correct some
of these things and address some of these issues, by bringing
forth some of the reforms that were in our previous legislation
that did pass the House, did not pass the Senate, Mr. Frank
provided leadership on that last year--which I thought was
needed--so that in tightening up in these areas, making people
more responsible, making sure people can pay back the loan,
putting these kinds of restraints to prevent the abuses, would
that in fact, in your mind, lessen the credit availability to
some of the very people that we're protecting?
In other words, would we come out of this thing having
responded by over-responding, and then drying up the credit,
and then the very people that we're trying to get homes, we've
tightened it up so that a lender is not going to lend now,
because they think it's risky, and we--
Mr. Clay. The gentleman from Georgia's time has expired.
Mr. Scott. Would you answer that for me--
Mr. Clay. And I recognize--no--I recognize the gentleman
from Missouri. We have to respect his time, too. Mr. Cleaver is
recognized for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
Exhaustingly, I have been running from Homeland Security. I
apologize for not being here.
I only have one question, maybe two parts to it, which is,
as we are contemplating legislation, should we consider some
part of this legislation as a regulatory mandate on brokers and
appraisers? Should they be regulated?
Yes?
Mr. Antonakes. The mortgage broker industry is regulated,
on a State basis, and we have taken numerous actions to improve
standards within the mortgage broker business.
In addition, I would submit that there's something called
third-party risk, and that is that the lenders or the banks
that choose to outsource their origination to mortgage brokers
have a duty to oversee those brokers, and to the extent that
bad acts or practices are allowed to exist, then I believe
supervision of those entities doing business should also be
brought to task, as well.
Mr. Cleaver. In Missouri, we have a real estate board, but
I guess the question is, do you believe we need to have a
national, uniform regulation of mortgage brokers?
Mr. Antonakes. Well, the SAFE Act, which was part of 3915,
is what was enacted, creating this uniform platform for
licensing and supervision of all mortgage originators
throughout the country.
We now believe that 40 States will be on the system by the
end of next year, and I believe the standards are in place and
the oversight will be in place, as well, to ensure higher
standards from the mortgage origination side. I think there
still needs to be work on the funding side, as well as the
securitization side.
Mr. Cleaver. What about appraisers?
Mr. Antonakes. Appraisers, there are a lot of folks who
were involved in the bad practices that existed, and I wouldn't
limit it to mortgage brokers or to appraisers. Certainly, there
were bad acts that existed there, but I would suggest closing
attorneys, real estate brokers, Wall Street investment firms,
securitization, and the rating agencies were involved, as well.
Ms. Braunstein. I would also add, on appraisers, that we
did, when we enacted the HOEPA rules, we also enacted a general
prohibition for all mortgages on the coercion of appraisers or
in any way trying to influence the value that they come to.
Mr. Cleaver. Is there a penalty provision? I mean, how do
we--
Ms. Braunstein. Well, anything under TILA is subject to
truth in lending penalties, and we would certainly, when we're
out examining financial institutions, we'll be looking at those
kinds of issues.
Mr. Cleaver. Thank you, Mr. Chairman. I yield back the
balance of my time.
Mr. Clay. The gentleman from Missouri yields back his time.
Let me thank the two witnesses for your testimony, as well
as your responses. This panel is dismissed and now we will take
a slight break to set up for the second panel.
[recess]
Mr. Clay. The committee will come to order.
On our second panel today, we have David Berenbaum, who is
the executive vice president for the National Community
Reinvestment Coalition. Thank you for being here today.
Julia Gordon is the senior policy counsel for the Center
for Responsible Lending. So good to see you.
Margot Saunders is counsel of the National Consumer Law
Center, and is testifying on behalf of both the National
Consumer Law Center and the National Association of Consumer
Advocates. And welcome today.
Stephanie Jones is the executive director of the National
Urban League Policy Institute. Welcome to the committee.
And Gracia Aponte--did I say that right? Okay.
``Graciela,'' I'm sorry, Aponte is an analyst at the National
Council of La Raza. Welcome to the committee.
And our final witness is Donald C. Lampe, who is a partner
with the firm of Womble Carlyle Sandridge & Rice, PLLC, in
Charlotte, North Carolina.
Thank you all for being here today, and we will start with
Mr. Berenbaum. You may begin. You have 5 minutes.
STATEMENT OF DAVID BERENBAUM, EXECUTIVE VICE PRESIDENT,
NATIONAL COMMUNITY REINVESTMENT COALITION
Mr. Berenbaum. Thank you, Mr. Chairman, Ranking Member
Hensarling, and members of the committee. I'm honored to
testify today on behalf of the members of the National
Community Reinvestment Coalition on the subject of mortgage
lending reform, a comprehensive review of the American mortgage
system.
Yesterday, Federal Reserve Chairman Ben Bernanke, in his
remarks before the Council on Foreign Relations, stated that
the financial system must be regulated, to quote him, ``as a
whole, in a holistic way,'' and acknowledged that the current
financial crisis has, ``revealed some shocking gaps in our
regulatory oversight.''
To speak candidly, the sharp economic decline and distress
in the mortgage market resulting from the foreclosure crisis
can be traced both to out-of-date consumer protection laws and
failed regulatory oversight.
Loopholes in the law and inadequate regulatory enforcement
allowed abusive and problematic lending to flourish. The
foreclosures that arose from predatory lending have not only
severely undermined the financial stability of working families
and communities, but also are now weakening the credit markets
and diminishing overall activity and performance.
Massive foreclosures are spurring a self-reinforcing cycle
of defaults, now compounded by rising unemployment. Multiple
studies by Credit Suisse and others have documented the impact
of, in fact, this reality. Over 600,000 jobs were lost last
month, and in fact now unemployment is at 8.1 percent, the 14th
consecutive month of job losses in our Nation.
The foreclosure crisis has destroyed significant amounts of
national and family wealth, and, since the onset of the crisis,
home prices have declined by at least 25 percent nationwide.
We request that you consider four emerging issues at this
time:
First, we call for an investigation with regard to spikes
in foreclosure within the FHA loan program. It is completely
unacceptable at this time that a number of consumers who are
simply 1 month into their FHA loan program payments are now
defaulting. That documents widespread fraud, ongoing fraud,
regardless of loan product in our system today, and the need
for anti-predatory lending ordinances.
Second, since 3915 was originally enacted, there is
substantial evidence that the rating agencies played a crucial
role in the entire crisis. NCRC has filed letters of grievance
to the SEC and three discrimination complaints to the United
States Department of Housing and Urban Development, documenting
the impact, the foreclosure impact, in minority, predominantly
African-American, low- to moderate-income, and Latino
communities.
Third, the widespread availability of foreclosure ``scams''
represented to be foreclosure assistance programs to consumers.
Consumers again and again today are going to these for-profit
con artists and having tens and tens of thousands of dollars in
communities across the country stolen from them.
And then the abusive use of broker price opinions. It's a
race to the bottom right now. In fact, real estate
professionals are playing a role in managing REO, and also
selling that property, a clear conflict of interest,
compounding appraisal valuation issues, originally pushing to
increase value, now in fact lowering the tax base around the
Nation.
We believe that 3915, when it passed the House, was a
significant step forward. However, we would like you to take a
serious look at, in fact, the companion bill that, in the
Senate, though it did not move, was, in fact introduced, that
looks at some very difficult issues, such as assignee
liability, looking at servicing, and other areas. We believe
that that review would be extremely positive, in fact, moving a
bill ahead.
I would like to address the issue of the Community
Reinvestment Act, which also emerged in the first panel. There
are any number of solutions to where we are in the current
mortgage crisis.
CRA was not, I say again not, a factor in the current
crisis. Multiple studies, not solely out of the Fed, have
documented that CRA played a positive role in sustainable
mortgage loans, and in fact, NCRC strongly argues for what
Massachusetts has done, on a national level, to expand the
Community Reinvestment Act to reach many in the marketplace:
investment bankers; large credit unions; financial service
corporations; Wall Street; and others.
Last, we also recognize that there's a need for a national
financial product safety commission to really take a look at
what is in a consumer's interest. I respectfully submit to you,
with my 10 seconds of remaining time, that what is in a
consumer's interest is in corporate America's interest.
Responsible lending benefits all.
Thank you.
[The prepared statement of Mr. Berenbaum can be found on
page 124 of the appendix.]
Chairman Gutierrez. Ms. Gordon.
STATEMENT OF JULIA GORDON, SENIOR POLICY COUNSEL, CENTER FOR
RESPONSIBLE LENDING
Ms. Gordon. Thank you, Mr. Chairman, Ranking Member
Hensarling, and members of the committee. Thank you so much for
inviting me to speak about mortgage lending reform.
I am senior policy counsel at the Center for Responsible
Lending, a nonprofit, nonpartisan research and policy
organization dedicated to protecting homeownership and family
wealth.
We're an affiliate of Self-Help, which makes responsible
home mortgage loans to people who have not been able to access
mainstream credit.
Our lending record amply demonstrates that carefully
underwritten mortgages, with fixed rates and full payments, can
create sustainable homeownership. Even in the current economic
climate, our mortgages are still performing far better than the
dangerous subprime or non-traditional mortgage products.
I need not belabor the point, but the mortgage market looks
vastly different today than it looked when this body passed
H.R. 3915 in November of 2007. That's why we think we need to
start from scratch, in crafting smart, sensible rules of the
road for the mortgage market.
There are several important principles that should underlie
any new legislation:
First, the law must be simple and straightforward. Last
year's law had a structure not unlike one of those Russian
nesting dolls. Although it established some important
protections, we feared that it would have been hard for
consumers to understand, tricky for industry to follow, and all
but impossible for regulators to enforce.
Where possible, bright lines and clear rules will benefit
all market participants, from the consumer through the
investor.
Second, the law should ensure that mortgage originators
serve the best interests of their customers by putting them
into appropriate products with sound terms and conditions. No
loans should be made on the basis of stated income. We should
ban prepayment penalties and yield spread premiums. These fees
reward lenders and brokers for locking families into loans that
are bad for them and bad for the economy. And for heaven's
sake, originators should have to check whether the customer can
afford a mortgage before giving it to them.
Third, the secondary market should share responsibility for
the terms of the loan. A lesson from the recent meltdown is
that every player in the mortgage chain needs to have skin in
the game. When Wall Street purchases high-risk mortgages and
receives the corresponding financial benefits, it also needs to
accept responsibility for the risk placed on consumers and what
its purchases will encourage at the origination level. In that
way, the market can accurately price risk and police itself.
Fourth, the law should require mortgage servicers to
attempt to save a family's home before foreclosing. Had this
requirement been in place 2 years ago, it could have saved
hundreds of thousands of homes. FHA and VA already require this
of their servicers, and with the streamlined loan modification
templates developed recently by the Treasury Department,
there's no reason why all servicers cannot easily comply with
such a requirement.
Fifth, consumers need to be able to assert their rights in
a timely and meaningful way. While public enforcement is both
powerful and necessary, there will never be enough public
resources to take effective action against the whole universe
of players in the mortgage system.
Finally, States should be able to protect their residents
quickly and effectively. While Congress was still discussing
whether to pass a so-called first generation anti-predatory
lending law, the market had already moved on to new risky
practices, which the States quickly recognized.
Ohio enacted its second generation law in 2006, soon
followed by Minnesota and approximately 10 other States. As for
Congress, we are still here 3 years later discussing whether to
pass a second generation law, despite the fact that the market
self-destructed in the meantime and the former subprime lenders
are now moving to trying to push new products and services.
Despite the current state of the economy, we believe that
long-term homeownership remains one of the best and most
reliable ways that families can build a better economic future.
We urge Congress to strengthen the mortgage system, not by
creating impediments to sensible home loans, but by focussing
on market-based solutions that result in profitable mortgage-
backed investments and sustainable homeownership.
Thank you, and I look forward to your questions.
[The prepared statement of Ms. Gordon can be found on page
162 of the appendix.]
Chairman Gutierrez. Thank you.
Ms. Saunders, please, for 5 minutes.
STATEMENT OF MARGOT SAUNDERS, COUNSEL, NATIONAL CONSUMER LAW
CENTER
Ms. Saunders. Thank you, Chairman Gutierrez, and members of
the subcommittee. Thank you for inviting me to testify today on
behalf of the low-income clients of the National Consumer Law
Center and the National Association of Consumer Advocates.
We are the attorneys who are representing the homeowners in
foreclosure proceedings and trying to help maintain homes.
You asked first that we comment on H.R. 3915. This was an
aggressive bill, for its time. This bill essentially maintained
the current complex structure of regulation of mortgage
origination, while tweaking--sometimes significantly--the law
to enhance the obligations of the parties. Stronger consumer
protections, however, were limited by the fear that too much
regulation would limit access to credit.
We propose to you today a new approach, with three key
criteria.
One, simplicity. The rules should be easy for everybody to
understand. Multiple categories of creditors, borrowers, and
types of loans result in confusion, without establishing a
clear structure designed to facilitate affordable and safe
mortgage lending.
Two, transparency. The rules governing the transaction
should be clearly disclosed and easy to understand.
Most importantly, appropriate incentives. The current
system rewards originators for making bad loans, because
originators are paid, regardless of whether the loan is unfair
or unaffordable.
This is how we would do this:
One, realign the incentives. Pay the originators from the
payment stream only. Insurance brokers are paid their
commissions entirely from the stream of payments made by the
consumer for the insurance product in the first few years. The
insurance model should be the model for the mortgage industry.
Require that originators recover their costs associated
with originating the loan only from the monthly payment stream.
The homeowner's regular monthly payments are the sign of a
sustainable mortgage.
The origination process is the only source of profit for
the mortgage broker, and this current system encourages loan
churning. Making new loans is the only way originators make
money. If instead, the originator received a percentage of each
payment for the first several years of the loan, the originator
would have a very strong incentive to make sure that homeowner
would make the first several years of payments.
Two, mandate a uniform mortgage offer. Originators should
be required to offer every homeowner applicant a uniform
mortgage, which is a 30-year, fully amortizing, fixed rate, no
prepayment penalty mortgage. Alternatives could be offered as
well, but they would always have to be compared to this 30-year
uniform mortgage.
The mortgage would thus be simple for consumers to
understand, and the only variable would be the change in rate
which was based on the consumer's credit risk.
Three, common-sense rules should be required. Homeowners
must be underwritten for their ability to repay all payments
that can be due on the loan. No loan should be made for more
than the home is worth. Foreclosures should only be permitted
when the investor makes more money from the foreclosure than an
affordable loan modification.
Public and private enforcement is essential. Government
administrators enforcing the laws simply do not protect
consumers. If you have private enforcement, it enhances
compliance. It also allows the individual consumer who has been
harmed to use those rules to protect themselves.
Fifth, full responsibility. The rules should be simple.
There should be no enforcement of a loan made in violation of
these rules.
And most importantly, preemption. Please do not preempt the
State laws. We have seen in the last few years that it's the
State laws that have been used to protect consumers from
foreclosure, repeatedly. One of the most serious problems with
3915 was that it did preempt a series of State laws as they
were applied to holders, and I would point you to a report that
we did that detailed how 3915 actually would have cut back
significantly on consumer protections.
Thank you. I would be happy to answer any questions.
[The prepared statement of Ms. Saunders can be found on
page 228 of the appendix.]
Chairman Gutierrez. Thank you.
Ms. Jones, please, for 5 minutes.
STATEMENT OF STEPHANIE JONES, EXECUTIVE DIRECTOR, NATIONAL
URBAN LEAGUE POLICY INSTITUTE
Ms. Jones. Thank you, Mr. Chairman, and Ranking Member
Hensarling. I appreciate the opportunity to testify before you
today on this critical issue of mortgage lending reform.
My name is Stephanie Jones. I am an executive director of
the National Urban League Policy Institute, which is the
research and policy arm of the National Urban League based here
in Washington.
Through our front-line housing counseling services in Urban
League programs throughout the country, the National Urban
League received first-hand insight into the brewing mortgage
housing crisis long before many in the country saw it coming.
Our findings led the National Urban League president, Marc
Morial, to release our Home Buyers' Bill of Rights in March of
2007. I have attached a copy of the Home Buyers' Bill of Rights
to my testimony for inclusion in the hearing record. At that
time, unfortunately, policymakers and government officials were
reluctant to support greater regulation.
But today, I will focus my testimony on three of the six
rights in the Home Buyers' Bill of Rights that address problems
in the lending process and their impact on low- and moderate-
income homeowners and mortgage applicants: One, the right to be
free from predatory lending; two, the right to fairness in
lending; and three, the right to fair treatment in case of
default.
The National Urban League has long called for the
elimination of incentives for lenders to make predatory loans,
a fair competitive market that responsibly provides credit to
consumers, access to justice for families caught in abusive
loans, and the preservation of essential Federal and State
consumer safeguards.
The National Urban League supports legislation that
promotes these objectives and that works to better protect the
consumers, such as the Mortgage Reform and Anti-Predatory
Lending Act of 2007, H.R. 3915, that was passed by the House in
2007.
In fact, we in the nonprofit counseling industry strongly
feel that we have a fiduciary responsibility to our clients to
see that this bill is enacted into law.
We support the measure strongly, but believe that it can
and should be improved, and so we would like to offer some
suggestions on how we believe that it can be improved.
First, we believe that it should protect those States that
have stronger anti-predatory lending laws. It should hold Wall
Street accountable for buying abusive loans. And it should
provide effective remedies for homeowners when brokers and
lenders break the law.
Bottom line is, we really do need to get some of these bad
eggs out of the business, when it comes to lending and mortgage
brokers, and we find that broker licensing doesn't necessarily
need to be nationwide, but it should be stricter.
Currently, as Sy Richardson, the National Urban League's
vice president for housing, says, in most States, if you can
fog a mirror, you can get a broker's license.
But education, qualification, and testing should be
tougher. Individual mortgage brokers and loan officers must be
licensed and registered and required to act in the best
interest of the consumer, under guidelines comparable to those
that financial advisors are subject to.
Penalties for bad behavior need to be strong enough to have
a deterrent effect, and H.R. 3915 should increase enforcement
capabilities even further.
The bill should also have stronger compensation disclosure
requirements.
And we see that the current housing crisis that is
threatening our entire economy is proof positive that these
measures are absolutely necessary.
In addition, policymakers should pay particular attention
to communities that have traditionally been underserved or at a
disadvantage when obtaining credit, including communities of
color and the elderly, to ensure that they have full access to
the most appropriate loan products that can help them build and
maintain wealth.
Those who are shown to have taken advantage of vulnerable
populations, by offering inappropriate products or charging
unjustified fees, should be held fully accountable for their
actions.
The National Urban League believes there must be strict
limits to prepayment penalties.
We also assert that steering borrowers qualified for prime
loans into subprime loans is an unfair and deceptive practice.
Numerous studies have documented that middle- and upper-income
minorities are significantly more likely than middle- and
upper-income whites to receive subprime loans, and that a
significant number of minorities who were steered into subprime
loans actually qualified for conventional mortgages.
Lenders must be held liable for deceptive and fraudulent
practices committed by brokers with whom they do business.
We're generally pleased that many lenders, as well as the
big mortgage gatekeepers, such as Freddie Mac, FHA, and the VA,
have amended their approach to managing delinquencies, having
fully realized that it's usually more cost-effective to help a
borrower to stay in his or her home than to pursue foreclosure.
But in the case of default, the National Urban League
believes that we must afford some protection to home buyers,
including the opportunity to restructure the loan if the loan
is determined to be onerous, and an opportunity, or access to
the holder of the loan for development of reasonable workout
plans, where the objective is preservation.
Chairman Gutierrez. The time of the gentlelady has expired.
Ms. Jones. Okay. Thank you.
Chairman Gutierrez. You are welcome.
Ms. Aponte, for 5 minutes.
STATEMENT OF GRACIELA APONTE, LEGISLATIVE ANALYST, WEALTH-
BUILDING POLICY PROJECT, NATIONAL COUNCIL OF LA RAZA (NCLR)
Ms. Aponte. Thank you. Good afternoon.
My name is Graciela Aponte. I handle NCLR's legislative and
advocacy work on issues such as affordable housing and
foreclosure prevention.
Prior to joining NCLR, I worked with low-income families,
constituents, community-based organizations, for congressional
representatives in Maryland and in New York City, and for 4
years, I worked as a bilingual housing counselor.
I would like to thank Chairman Gutierrez and Ranking Member
Hensarling for inviting NCLR to testify on this important
issue.
Forecasters are predicting that 400,000 Latino families
will be losing their homes in 2009, at the height of the crisis
for the Latino families during 2009 and 2010 when more loans
are scheduled to be reset.
NCLR provides funding to more than 50 housing counseling
agencies across the country. Despite the counselors' skills and
the clients' best efforts, many are still losing their homes
and financial security.
We are pleased Congress is beginning to turn their
attention to mortgage reform. However, this effort will have
limited success unless Congress and the Administration follow
through on their plans to reduce foreclosures.
In my brief time today, I will share with you three
principles on which to organize strategy, a strategy to reform
and revitalize our mortgage markets: Number one, reforming our
loan servicing system; number two, reforming the mortgage
market; and number three, the role of nonprofits.
Let's start with changes needed to our loan servicing
system.
Last week, we gathered the heads of our housing counseling
agencies and they shared stories about loan modifications that
are being denied, even when a family can afford to make
payments, loan modifications that are being approved days after
the home has gone to foreclosure auction, borrowers that are
given unaffordable loan modifications that leave them even
worse off.
Housing counseling agencies are overburdened and
underfunded, and foreclosure scam artists have stepped up their
marketing efforts.
President Obama's foreclosure plan takes several steps to
address these issues. However, parts of the plan must be
strengthened to keep borrowers from falling through the cracks.
We also need legislation to raise the level of service
provided to all borrowers.
Second, I will turn to reforming the mortgage market.
By now, it's clear that borrower protections are closely
linked to safety and soundness. Latino families were routinely
targeted by predatory lenders. They were steered toward
expensive and risky products, even when they had good credit.
Take the case of the Rodriguez family, who went to our
housing counseling agency in Stockton, California. They worked
with a mortgage broker to help them purchase their first home.
The broker told them that they qualified for a fixed-rate loan.
Four years later, their mortgage bills increased, and they
realized that their broker had sold them an option ARM. Worse,
even though the Rodriguez family could document all their
income, the broker used Wite-Out to write in a higher income.
They had paid a premium to be in a stated income loan, even
though they had all their documentation.
We have seen this story repeated across the country.
Brokers were paid more for risky loans, so it's no surprise
that they steered families toward these products.
A reformed market must connect borrowers to products they
can afford. One step would be to increase accountability
measures throughout the process.
And finally, I want to discuss the role of nonprofits.
Credit unions, CDFIs, and community lenders have been
providing safe and affordable mortgages to underserved
communities for years. Housing counselors prepare families for
homeownership and match them to good loans.
Another one of our counseling clients is a great example.
Maria Martinez is a single mother from West Humboldt Park,
Chicago. Maria came to the Spanish Coalition for Housing 4
years ago. She was displaced and facing homelessness.
The counselor was able to find her an apartment. She also
put her on a plan to build her credit and savings. After years
of working together, a door opened for Maria when a community
land trust program offered an affordable homeownership
opportunity. She went to closing 2 weeks ago.
The nonprofit lenders and organizations understand how to
lend to underserved communities. Their work should serve as a
model of what is possible when considering reform.
Ultimately, any effective response to our current crisis
must include reforming the servicing system so that homeowners
who are struggling to keep up with their mortgage payments can
secure affordable and sustainable mortgages, reforming the
mortgage system to protect future home buyers and keeping safe
and affordable lending products available to underserved and
vulnerable communities.
In my written testimony, I provide specific
recommendations, with special attention to reforming the loan
servicing system, restoring balance to the mortgage market, and
promoting positive lending models.
I will be happy to answer any questions you may have. Thank
you.
[The prepared statement of Ms. Aponte can be found on page
117 of the appendix.]
Chairman Gutierrez. Thank you, Ms. Aponte.
Mr. Lampe, for 5 minutes.
STATEMENT OF DONALD C. LAMPE, PARTNER, WOMBLE CARLYLE SANDRIDGE
& RICE, PLLC
Mr. Lampe. Mr. Chairman, Ranking Member Hensarling, and
members of the subcommittee, thank you for the opportunity to
appear today.
My name is Don Lampe, and I am a partner in the Charlotte,
North Carolina, office of Womble Carlyle Sandridge & Rice. I
have been practicing consumer credit law for 25 years, and I
have been involved on behalf of trade organizations, mortgage
lenders, and others in the enactment of many significant State
and local mortgage lending laws and regulations, over the past
10 years.
Because the legislation that the committee is reconsidering
today, H.R. 3915, is based on residential mortgage lending laws
from various States, I hope to be able to respond to the
committee's questions regarding our experience with similar
State laws.
Obviously, any assertion today that Congress should not act
to reform the regulation of consumer mortgage lending is
untenable, but then, what should Congress do to accomplish two
things: protect consumers now; and make sure that we never have
to endure this kind of a crisis again?
In the brief time that I have, I want to make three points.
These points are built around a central theme.
First and foremost, it is critically important, as other
panelists have said, that any legislation provide strong and
effective consumer protection. That is the beginning point. We
also must be mindful of preserving access for consumers, future
consumers, for fairly priced, non-discriminatory, lawful, and
appropriate mortgage credit.
The three points are as follows:
First, the Federal Reserve Board. There have been
superseding events since the passage of 3915 by the House. One
of the significant superseding events, which you heard about
earlier, was the Fed exercised the powers that had been granted
in 1994, and Chairman Bernanke was praised for that, to enact
comprehensive unfair and deceptive trade practice laws.
It's important for Congress to give due regard to these
groundbreaking rules, to consider carefully whether these rules
already address fundamental consumer protections, and likewise,
consider whether the rules should serve as a basis and/or
complementary to additional consumer protection legislation.
Second, reform of consumer mortgage lending laws should be
real reform, and not just the adding of additional layers of
conduct requirements, disclosures, and liability to existing
laws.
There is a real opportunity now, more than ever, for
Congress to overhaul what many describe as a broken system of
mortgage regulation, of loan origination.
Third, and very importantly, it is widely believed that too
much credit created, if not outright caused, the current
housing crisis. It's all too easy for all of us to believe
right now that all you have to do is ban certain products and
certain features, and make less credit available, and we won't
have these problems in the future.
But I urge the subcommittee to give serious, thoughtful,
and heartfelt consideration to the needs of current homeowners
who wish to refinance, often out of unfair and potentially
predatory loans, and also to new homeowners looking for loans.
Let's not forget that fair lending and anti-discrimination
is based on credit being available to all Americans on fair
terms.
In the moment that I have left, the most resonant point I
could make has already been touched on by this panel. The
disclosures now required by Federal law are virtually
incomprehensible, and this is the case across-the-board.
Subprime, FHA, confirming, jumbo--what the disclosures have
brought to mortgage lending is more information, but much less
understanding.
It's very difficult, in my mind, to justify more
disclosures and additional liabilities related to disclosure
violations. At this time, Congress has an enormously unique
opportunity to reconsider the overly complex system, where you
have disclosures that are inconsistent between Federal
agencies, even.
If consumers understand a transaction that is put before
them, are capable of determining that the loan is fair and is
affordable, and that they can afford to pay it back, if that is
understood from the beginning, that outcome is the best way for
us not to repeat the mistakes of the past.
In short, as has been said many times, sometimes seriously,
sometimes tongue-in-cheek, that a crisis is a terrible thing to
waste.
Thank you.
[The prepared statement of Mr. Lampe can be found on page
186 of the appendix.]
Chairman Gutierrez. Thank you very much, Mr. Lampe.
HOEPA was passed in 1994. This is my 9th term, so that was
my first term in Congress. And let me say, there are 38 Members
I have here--no, 39 Members on my side of the aisle--Frank,
Kanjorski, Waters, Maloney, Gutierrez, Velazquez, and Watt--
those are the only survivors of this panel, of this committee,
when we passed--all of us voted to pass that law. Now, we have
32 new Members.
In other words, there is no institutional memory, because
the Federal Reserve, you spoke very eloquently, Mr. Lampe,
about how great the regulations were that the Federal Reserve--
it took them 14 years.
Now, if they are so great today, and everybody likes them
so much, can you imagine what would have happened if we
actually had that regulation on the books, as they should have
done?
But here is what the Chairman of the Fed consistently said
to us: ``It's ideological.'' Sometimes he was even berated by
members of this committee on this side of the aisle, asking him
to please promulgate the rules, the same rules that today we
thank Mr. Bernanke for. A little late, though.
So it wasn't as though people didn't see things that could
come about in a bad fashion for the consumer and for the
mortgage industry. The fact is that it's very hard, and there
are some very powerful interests out there that stop us from
promulgating the rules, until it is actually too late.
I don't know how many members on the minority side were
here, but not many. I think that's a very shameful action of
the way government works.
So I know that people always complain that government does
too much, that we should have smaller, less government. But in
this case, it seems that everybody says, where was the
government in this certain area, in not promulgating those
rules?
Having said that, we have called this hearing so that we
could hear from people about how it is we take on our anti-
predatory lending bill, which we're going to mark-up from the
last Congress. We're going to use it as our base bill to see
how we can improve it.
We're not simply going to--I hope the ultimate product
isn't simply the Z regulations. I don't think they go far
enough. I would like to see other kinds of rules and
regulations put into place.
And I won't take my complete 5 minutes, but I do want to
thank all of the panelists, especially those engaged in helping
consumers go through the mire. It's overwhelming in
congressional district offices across this country, people
losing their homes and filing for bankruptcy, and the dire
situations that they find themselves in.
And I know that there are those who want to blame the
victims, that is, those who took out the mortgages, but I think
there is a lot greater blame.
And there are those who want to blame government, and
specifically the Community Reinvestment Act. And I'm almost--
maybe make an amendment that says to anybody who provides a
mortgage that not only does the recipient of the mortgage have
to sign, but those issuing the mortgage: ``The government
didn't make me do it. I hereby sign that the government didn't
make me do it,'' so that from here forward, this issue would
never come up again. And the consumer would sign somewhere on
these documents, ``The government didn't ask me to take this
loan, and the mortgager never told me the government made me do
it.''
Because I, in my 17 years in Congress and 8 years on the
Chicago City Council, have never called a financial institution
and asked them to make a mortgage for any one specific
individual. We have implored, we have cajoled, begged, used
every possible manner, to ask them to please make mortgages,
and they have resisted.
So given all of that resistance, I just find it a little
mind-boggling that those who did get a mortgage, all of a
sudden, it was the government that made them do it.
I'm going to ask the next panel, which is the industry, I'm
going to ask them if the government ever made them issue a
mortgage. I want to know about that mortgage and I want to know
who called them, because I want an investigation into that
official who made them issue that mortgage.
I thank all of the panelists and I yield 5 minutes to the
ranking member, Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman. Thank you for
yielding me 5 minutes.
In 1997, Wall Street firms, the GSEs, and the CRA converged
in a landmark event, the first securitization of CRA loans, a
$384 million offering guaranteed by Freddie Mac, which de facto
encouraged lenders and underwriters to relax their traditional
underwriting practices, as did later the GSEs.
We have heard from the Federal Reserve. In 1993, they
issued guidelines entitled, ``Closing the Gap, a Guide to Equal
Opportunity Lending,'' that says, in part, ``Lack of credit
history should not be seen as a negative factor.''
Furthermore, in May of 1998, Bear Stearns--and we know what
happened to Bear Stearns--published an article on guidance of
why and how lenders should package CRA loans into mortgage-
backed securities.
The document advised lenders that, ``Traditional rating
agencies view loan to value ratios as the single most
determinant of default. It is more important at the time of
origination and less so after the third year.'' ``Explaining
the credit quality of a portfolio to a rating agency or GSE, it
is essential to go beyond credit scores.''
My point is again, regardless of how noble the intent may
have been in CRA--it has a very proud legacy, I have no doubt--
the question is, has it served us well today?
Maybe there are different options. One is to try to bring
down the lending standards of the lender. Another option is to
attempt to improve the economic opportunities of the borrower.
Now, clearly, CRA, as far as volume of loans, was low. As
far as putting the imprimatur, or, if you will, the Good
Housekeeping Seal of Approval of Uncle Sam, on bringing down
traditional lending standards, I believe that its impact was
critical, and did play a role in where we find ourselves today,
and I'm sure that the chairman and I will have ample
opportunity to continue this discussion in further hearings.
Ms. Gordon, I have a question for you. In your testimony,
on page 5, you state, ``bright lines, such as bans on
prepayment penalties and yield spread premiums and a
requirement of income verification and escrow will redound to
everyone's benefit.''
Let me ask you specifically about prepayment penalties,
prepayment fees. And one, it underscores a broader question.
I have seen a number of studies that have convinced me--
maybe you have seen similar studies, maybe you are
unconvinced--that the right to prepay, that those who want that
feature in their mortgage end up paying a higher rate of
interest than they otherwise would.
So one, have you seen studies, and if so, do you believe
that to be true?
Ms. Gordon. There was a time--there are a number of
features in the, you know, historic prime market, that you
could put into a loan to buy down your rate. What we have seen
happen, though, as the market moved over the past decade or so,
was that prepayment penalties became almost exclusively a tool
of the subprime market. Only about 2 percent of prime market
loans have prepayment penalties.
And what happened in the subprime market was, they were
misused. You had subprime borrowers not understanding the terms
of the mortgages, and they were buying--
Mr. Hensarling. I'm sorry, I think my time is running out,
but let me just ask you this one question. If a borrower
understood the terms of the mortgage product, and if he was
convinced that he could receive a lower interest rate by
agreeing to prepayment penalties, would you have Federal law
preempt his or her decision?
Ms. Gordon. Now I would, because--
Mr. Hensarling. Okay. Well, that's--
Ms. Gordon. --we know that--
Mr. Hensarling. --that's all--
Ms. Gordon. --there are anti-competitive practices--
Mr. Hensarling. I'm about to run out of time.
Mr. Lampe, real quick, can you state any similarities you
see in H.R. 3915 to the provisions in North Carolina and
Georgia?
Mr. Lampe. The way I have said it concisely is, the
similarities are the similarities between a zebra and a horse.
They look very much alike, but they are different animals. And
I can provide more information on that.
But the original Miller-Watt proposal, of course, which has
been on the table for quite some time, is based on North
Carolina, but not literally North Carolina, and it differs in
important features, such as the size of loans covered,
remedies, and the types of loans that are covered.
So the similarities, again, the analogy I draw is the
similarity between a zebra and a horse. They are different--
Mr. Hensarling. I see I am out of time, so perhaps we can
get those answers in writing at a later time.
Thank you, Mr. Chairman.
Chairman Gutierrez. Thank you, Mr. Hensarling.
The gentleman from Charlotte, North Carolina, Mr. Watt, for
5 minutes.
Mr. Watt. I will actually do Mr. Hensarling a favor,
because one of the questions I had on my list of questions was,
how did the North Carolina law fail?
I mean, we have massive foreclosures and the need for
modifications taking place in North Carolina, too, so maybe
that's the answer he was trying to get to. I hope that was the
answer he was trying to get to.
Mr. Lampe. Yes, sir. I think I can answer that question.
Number one is, North Carolina does not have one of the
nation's highest foreclosure rates, and there's not--none of
the 34 top counties are in North Carolina.
The genius of regulation in North Carolina was the Mortgage
Lending Act, which required licensing of all mortgage brokers,
all loan officers, and anyone who had contact with a borrower
in connecting with making a loan.
You cannot consider the North Carolina experience without
the whole portfolio of consumer protections, and I think our
banking commissioner and Martin Eakes of the Center for
Responsible Lending have said that the Mortgage Lending Act did
more to clean up the market in North Carolina than the
substantive regulations of credit terms.
Mr. Watt. So really, what you are saying is North Carolina,
if we would have had a similar regime at the Federal level as
we had in North Carolina, not only a predatory lending law but
the whole regime, we would be a lot better off today than we
were. Is that what I hear you saying, bottom line?
Mr. Lampe. I can't say a lot better off, but better off,
and this Congress did pass a step with the National Mortgage
Registry and Licensing System that very much emulates North
Carolina.
Mr. Watt. All right. Let me get to a couple of other
questions.
I hear both Ms. Gordon, Ms. Saunders, and Mr. Lampe
actually, to some extent, saying that we need a massive
overhaul, and suggesting possibly that the predatory lending
bill that we passed before out of this committee may not even
be an appropriate starting point.
I'm a little concerned about that, because I know how
difficult it was to get to that point, and I'm not suggesting
that the final product was where we ought to end up going
forward, but to scuttle the whole process and start over again,
I think, could possibly be counterproductive, if that's what
you're saying.
So clarify for me whether that's what you're saying, or
what are you saying?
Yes, Ms. Saunders, go first.
Ms. Saunders. It is what we're saying, for this reason,
that it was a great bill, for that time, but North Carolina, if
the North Carolina bill had been passed nationally, we still
would have had payment option ARM loans, unfortunately. We
still would have had a lot of the subprime loans.
What we can't do, what we believe is not possible to do at
any time, is to capture a certain type of loan and apply
regulation to that type of loan. That's what HOEPA did in 1994,
over my--I was there in 1994. I vigorously objected to that.
And then we tried to--
Mr. Watt. So basically, what you're saying is we need a
regime that covers all loans, regardless of the category--
Ms. Saunders. That's what we all--
Mr. Watt. --and a set of rules for the road that govern all
loans, whether they are subprime, prime, whatever?
Ms. Saunders. Yes, sir. And one other point.
Mr. Watt. Okay, go ahead.
Ms. Saunders. Rather than--we, of course, need specific
rules, ``You shall do this, you shall not do this.'' But we
should take a moment to think about the incentives. What about
the marketplace is actually making originators make the bad
loans? And let's try to address that.
Mr. Watt. We're going to run out of time, and I do want to
hear from Ms. Gordon, and I want to at least put one more
question out there, if I can.
Ms. Gordon. I'll just make two additional points.
One is, with respect to 3915, in addition to needing to
extend protections to all loans, the actual structure of 3915
was very complex, it was--you know, there was a safe harbor and
a qualified safe harbor, and a rebuttable presumption, and an
irrebuttable presumption. And it was so complex that literally,
if you asked everybody in this room how they understood it, I
think you would get different answers.
Structure-wise, we might--not talking about content--
structure-wise, you might look at the bill that was introduced
in the Senate by Chairman Dodd, which was--again, it may not be
the same substantive place we want to get to, but it was
clearer in its structure.
You know, the other substantive thing I'll say about 3915,
and this is true of the recently promulgated HOEPA rules, as
well, that the chairman has noted were 14 years late in coming,
is both of them ignore the market that contains the payment
option ARMs, and in fact, 3915 substantively last year would
have determined, as an irrebuttable presumption, that those
loans were affordable.
So that's why we need an approach that's more incentive-
based, rather than picking specific things and saying, ``This
is good today and this is bad today.''
Mr. Watt. Can I just ask, Mr. Lampe, not today, but at some
point, you mentioned that we need to do something different
with disclosures, and I agree with you. I just don't know what
we should be doing. So if you can submit some more information
to us on what you're proposing subsequent to today's hearing.
I yield back.
Chairman Gutierrez. Thank you very much. That would be
useful to all of us.
Without objection, I would like to enter into the record a
statement from the Attorney General of New York, Andrew Cuomo,
which describes the cooperation between the State of New York
and Fannie and Freddie to preserve appraiser independence
during the home appraisal process.
Without objection, it is so ordered.
I would also like to enter into the record, without
objection, a letter from the Chairman of the Federal Reserve to
Senator Bob Menendez, stating that the Federal Reserve found no
evidence that the Community Reinvestment Act caused high levels
of default in the subprime mortgage market.
Without objection, it is so ordered.
And the gentleman, Mr. Cleaver, is recognized for 5
minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
I'm curious. The chairman--actually, I was ready to second
his proposed legislation, but--because I do think that he made
a point that many of us have been struggling with, which is
that somehow we have done contortions to come up with the blame
being laid out over the people who have been wounded.
I guess what I would like to--Ms. Jones, in your experience
with the Urban League, are you finding, have you found that
there are people coming to you to complain that somehow they
were pushed into signing mortgages, that they actually were
misrepresented as they sought to make the most significant
purchase in their financial lives?
Ms. Jones. Thank you for that question, Mr. Cleaver. That
is something we definitely have seen on the ground across the
country.
One of the things we have found is that a significant
number of borrowers who actually qualify for conventional loans
are being steered into and have been steered into subprime
loans.
This is something that often isn't talked about, as we hear
the blame being passed around, and blame put on, particularly,
low-income and minority borrowers, or blame being placed on the
Community Reinvestment Act, which was designed to expand
homeownership opportunities to those borrowers.
What we found in looking at this is that a substantial
majority of the subprime loans were made by non-CRA compliant
companies and lenders, so the--most of this activity was done
outside of the regulatory scheme, and so it can't be blamed on
CRA. We took a very close look at it. In fact, we report on it
in our upcoming State of Black America Report, which will be
out in a couple of weeks.
And we have also seen that, even though some of the
standards were relaxed in order to make it easier for
creditworthy borrowers to participate in the conventional
market, we're seeing a lot of blame being passed over onto the
borrowers and the CRA.
But to go back to your question, we are seeing a
significant number of people who are just doing the best they
can, who have saved their money, who qualify for conventional
loans, being pushed into loans that they can't afford or loans
that Marc Morial refers to ``Jack-in-the-Box'' loans, that
start off okay, and they're told, ``No problem, you can pay
this,'' and then, later on, the interest rate jumps up.
Another thing we're seeing also is that people, a large
number of people qualify for loans, for conventional loans they
can afford, they can afford those payments, but other things
intervene, such as loss of a job or health care costs that
result in their being unable to pay.
So there are a number of factors that feed into this, but--
and we're very concerned about the blame, the blame game, which
is something that, again, Marc Morial refers to the ``weapons
of mass deception.''
And we have called on Congress, we have called on public
officials and commentators to help defuse that, because it is
problematic.
Mr. Cleaver. Janet Murguia brought before this committee
several months back actual cases of Ms. Aponte where this had
happened, but nothing will stop, it seems, people from saying--
I want this to go on the record. There was a story written on
the front page of my hometown newspaper last Friday, I believe,
with me dealing with this issue, and I'm not going to read the
whole story, I don't have the time.
But it's from a Sidney Willens, an attorney in Kansas City,
and he tells a story of a Sherrita Richardson, a 37-year-old
African American mother of 4, who has been a bus driver for 9
years, and she lives, of course, in my district, and she is
making just an inch above minimum wage, and in this letter, he
outlines the fact that she went into a house that was appraised
at $93,000, requiring a 10 percent downpayment.
I will quote here, ``A Kansas broker''--I'm from Missouri--
``A Kansas mortgage broker purchased a $9,300 cashier's check
payable to the seller, made a copy to show that 10 percent
downpayment was made, then redeemed the $9,300 check 24 hours
later.'' And he goes on to talk about what the woman's
condition is. I would like this to go into the record, Mr.
Chairman. It's a letter that--
Chairman Gutierrez. Without objection, it is so ordered.
Mr. Cleaver. --that points very clearly to the point you
made earlier, and the comments of Ms. Jones. Thank you.
Chairman Gutierrez. Without objection, the letter will be
made a part of the record.
We're going to just want to note a change. In the past, the
order was always the regulator, the consumer groups, and then
the industry, so today we changed it a little bit. We had the
regulator, the consumer groups, and then the industry.
But I just want to see how this best works, so the next
time we're not necessarily going to have the regulators first.
Maybe we'll have the community groups come first, and see how
we become much more knowledgeable, because many times, by the
time you guys get here, the room is empty. We want to make sure
that people had a dialogue and listened to one another.
I thank you so much for your testimony this afternoon.
We will now hear from the third panel:
Mr. Michael Middleton is the president and CEO of Community
Bank of Tri-County and is testifying on behalf of the American
Bankers Association. Mr. David G. Kittle is the chairman of the
Mortgage Bankers Association. Mr. Marc S. Savitt is the
president of the National Association of Mortgage Brokers. Mr.
Charles McMillan is the president of the National Association
of Realtors. Mr. Jim Amorin is the president of the Appraisal
Institute. Mr. Joe R. Robson is the chairman of the board of
the National Association of Home Builders. And last but not
least, Mr. Laurence Platt is a partner at K&L Gates, who is
testifying on behalf of the Securities Industry and the
Financial Markets Association.
Welcome to you all, gentlemen, and Mr. Middleton, please
proceed for 5 minutes.
STATEMENT OF MICHAEL MIDDLETON, PRESIDENT AND CEO, COMMUNITY
BANK OF TRI-COUNTY, ON BEHALF OF THE AMERICAN BANKERS
ASSOCIATION
Mr. Middleton. Thank you, Mr. Chairman, Ranking Member
Hensarling, and members of the subcommittee.
I'm honored to be here today on behalf of the American
Bankers Association to testify on possible initiatives to
improve mortgage lending standards, particularly related to
subprime mortgages.
I wish to make it clear from the outset that the Community
Bank of Tri-County is one of the many banks that has never
varied from traditional lending standards. We offer both prime
and affordable-based, affordable housing loan products.
Our residential owned portfolio is strong, with very low
delinquencies, especially among our affordable housing
portfolio. We have a high satisfactory rating for lending for
CRA purposes. We have a zero default rate on our affordable
housing portfolio.
Like other community banks, we work closely with the
Federal Home Loan banks to acquire grants and affordable
housing funding.
Many forces combined to create the problems we face today.
The greatest was the migration of household sector assets from
FDIC-insured institutions to Wall Street. This flow of funds to
the uninsured sector was driven in part by pressure to seek
ever-increasing returns.
The scope of the migration was extraordinary. Money market
mutual funds accounts grew by some $16 trillion from 1990 to
2008, while FDIC-insured deposits only grew by $2 trillion.
Much of that money was then directed to the housing sector,
where securitized credit helped to fuel a boom in home prices.
The vehicle of choice for this allocation of funds was largely
State-licensed, non-bank mortgage originators.
The frenzy that ensued--in the frenzy, sound underwriting
practices were sacrificed, for the most part, by non-bank
originators. Because the standards were relaxed, there was no
regulator to examine them. The result was catastrophic.
To address the problems in the mortgage markets, the
Federal Reserve has issued amendments to Regulation Z. The ABA
supports many of these changes, including regulations to
strengthen the integrity of appraisals and prohibit deceptive
advertising, in addition to requirements that mortgage lenders
properly consider a borrower's ability to repay the mortgage,
whether it is a fixed or adjustable-rate loan.
In fact, we believe some of the elements in these rules
codify the underwriting practices of many of our members.
The use of these practices throughout the mortgage industry
will help to ensure that future lending is done in a prudent
and safe manner. However, the new standards are so stringent
that some loans that were previously classified as prime will
now be part of a new category called ``higher-priced mortgage
loans.''
This definition in pricing may force State housing
authorities to change pricing to meet the new standards, which
could curtail their operations, and further limit the supply of
credit.
In the wake of these changes, conservative local banks like
Community Bank of Tri-County are reevaluating their lending
policies to assure that we are in compliance, and to consider
whether or not to exit the residential mortgage product line.
Because new legislation or regulation could have the
unintended effect of decreasing credit availability, the ABA
has formulated principles to keep in mind when considering
further legislative action on mortgages:
All new standards should be national standards, preempting
the myriad of State laws and regulations.
Terms should be specific and well-defined, limiting the
potential for unnecessary litigation.
Any new mortgage standards should give enough guidance to
regulators to ensure that the standard is both meaningful, as
well as measurable.
Prime loans should be given a safe harbor from additional
requirements, recognizing that the new amendments to Regulation
Z restrict the definition of prime to a well-defined loan
unlikely to be problematic for qualified borrowers.
Basic underwriting standards should be an important element
of the loan origination process, and at the time in the process
where the lender would reasonably expect to exercise judgment
and adhere to the standards.
While the SAFE Act has embraced the essential components of
H.R. 3915, we remain concerned that the Act's compliance hurdle
for non-bank originators is minimal and easily met.
Thank you, Mr. Chairman. I hope these suggestions will be
helpful.
[The prepared statement of Mr. Middleton can be found on
page 203 of the appendix.]
Chairman Gutierrez. Thank you, Mr. Middleton.
Mr. Kittle, please, you are recognized for 5 minutes.
STATEMENT OF DAVID G. KITTLE, CHAIRMAN, MORTGAGE BANKERS
ASSOCIATION (MBA)
Mr. Kittle. Thank you, Mr. Chairman.
I appreciate the opportunity to testify before you today on
proposals to reform mortgage lending.
After all that has transpired since the House passed H.R.
3915, we believe a fundamental reform of mortgage regulation is
needed. That reform should take into account not only the many
problems exposed since the end of 2007, but also the many legal
and regulatory changes that have occurred since then.
In July of 2008, the Federal Reserve Board undertook a
review of the mortgage process. The Board then finalized
comprehensive rules addressing the central issues in H.R. 3915.
These rules, which go into effect on October 1st, include
greater protections for subprime borrowers with new
requirements for underwriting, escrows, and prepayment
penalties. The rules also address appraiser coercion and abuses
in mortgage servicing and advertising.
MBA believes that the Board's rules, coupled with other
important requirements, should serve as the basis for a single
consumer protection standard that applies to everyone,
regardless of where they live.
As you know, many domestic regulatory agencies, as well as
the G-20 nations, have been working on regulatory reform
proposals. MBA has been studying and learning from these
proposals, and we believe that a comprehensive national package
would be most effective.
At the same time, we have been developing our own approach
to mortgage reform. While the mortgage industry is not the sole
cause of today's difficulties, we believe that our industry
must be central to solutions that restore faith in the market
and protect future borrowers.
We know that these proposals will constrain some in our
industry, but they will also help members and their customers
in the long run.
MBA is working to complete our comprehensive reform
proposal, and we plan to announce it shortly. In the meantime,
we want to share the principles embodied in that proposal.
Reform proposals directed to the mortgage lending industry
should be considered in a comprehensive, not piecemeal, manner.
While consumer protection, systemic risk, and safety and
soundness all deserve attention, MBA believes that assuring
sustainable homeownership demands that we pay special attention
to mortgage lending.
Reform legislation should provide a rigorous new regulatory
standard to protect consumers, regardless of where they live.
Just as emergency efforts to return credit to the market have
been national in scope, long-term solutions to mortgage lending
challenges must also be national, with an important role for
the States.
A new standard should build on the Fed's HOEPA rules, H.R.
3915, as well as MBA's initiatives.
A single set of consumer protection rules should be
dynamic, and able to quickly respond to new concerns. Federal
and State officials should work together to revise the national
standard to address new abuses and concerns.
Standards, including assignee liability restrictions, must
be clearly defined to facilitate the flow of affordable capital
into the mortgage market.
MBA favors effective regulation and enforcement, and
believes that regulated entities should pay reasonable costs to
assure sufficient funding.
All players in the mortgage industry should be subject to
consistent Federal regulation, including rigorous licensing,
education, net worth, bonding requirements, as well as regular
review and examination.
Regulatory reform must improve transparency for borrowers,
including harmonizing the RESPA and TILA disclosures.
And finally, regulatory reform should assure better
resources for counseling, financial literacy, and fighting
mortgage fraud. Should adequate resources become available, MBA
will even support mandatory counseling for some mortgage
products.
We look forward to providing the details of our proposals
to you shortly, and working with you to achieve efficient and
effective regulatory reform.
Thank you.
[The prepared statement of Mr. Kittle can be found on page
183 of the appendix.]
Chairman Gutierrez. Thank you very much.
Mr. Savitt, please.
STATEMENT OF MARC S. SAVITT, PRESIDENT, NATIONAL ASSOCIATION OF
MORTGAGE BROKERS (NAMB)
Mr. Savitt. Good afternoon, Chairman Gutierrez, Ranking
Member Hensarling, and members of the committee. I am Marc
Savitt, president of the National Association of Mortgage
Brokers.
In addition to serving as NAMB president, I am also a
licensed mortgage broker in two States, and like most of my
fellow NAMB members, I am also a small business owner.
Thank you for the opportunity to testify today on
comprehensive review of the American mortgage system.
NAMB applauds this committee's response to the current
problems in our mortgage market. NAMB shares resolute
commitment to protecting consumers throughout the mortgage
process.
I must first address the false allegations targeted at
mortgage brokers for the past several years.
Mortgage brokers do not create or develop loan products.
Brokers do not arrange or control the automated underwriting
system used to qualify borrowers. Brokers to not underwrite
loans, brokers do not approve the borrowers, brokers do not
fund loans.
NAMB commends this committee for its work on H.R. 3915 in
the 110th Congress, in particular, on the all originator
approach it incorporated.
Now, turning to some of the significant legislative and
regulatory changes that were enacted in 2008.
There are many provisions contained in H.R. 3915 that NAMB
supported, as they provided consumers with needed protections.
NAMB is very pleased that a major section of 3915 became
law last year as part of the Housing and Economic Recovery Act
requiring loan originator standards for licensing and
registration.
Under the SAFE Act, all originators will submit to a
background check and be placed in a national registry.
In addition, the Act created a floor for pre-licensing and
continuing education requirements for all State-chartered
mortgage originators.
This all originator approach is one that NAMB has advocated
since 2001, and we applaud Chairman Frank and Ranking Member
Bachus for their leadership on this issue.
There have been some implementation issues with regard to
the Act. Therefore, we recommend that HUD issue regulations
needed for implementing the Act. With July 31st fast
approaching, we believe each State should have the right to
exercise independent judgment in interpreting silent or
ambiguous provisions of the SAFE Act.
Turning now to RESPA and HOEPA rules.
A significant component of the RESPA proposal addresses
broker compensation, YSP. Since 1992, brokers have been
required to disclose YSP, or yield spread premium, on the good
faith estimate in the HUD-1 settlement statement. The proposal,
however, reclassifies this compensation as a credit to the
borrower.
Many studies--two, incidentally, from the FTC--have shown
HUD's method of disclosure is very confusing to consumers,
causing them to choose higher-cost loans and put brokers at a
competitive disadvantage by imposing unequal disclosure
obligations among originators who receive comparable equal
compensation.
YSP or its equivalent is present in every origination
channel, regardless of whether a broker is involved in the
transaction or not.
In fact, with the originate to distribute model, most bank
and lender originators are brokering loans, yet fail to address
the converging roles of the mortgage originators in its
proposal.
NAMB encourages HUD to work with the Federal Reserve Board
to product an alternative disclosure proposal. The RESPA rule
should be withdrawn to allow both agencies to work together to
harmonize provisions.
We also urge this committee to examine and pass a Federal
standard of care based on good faith and fair dealing for all
originators, as articulated in H.R. 3915. We believe such a
standard would greatly enhance consumer protections.
On the issue of appraisals, NAMB commends and appreciates
the work of Representatives Kanjorski and Biggert for their
tireless effort to reform and strengthen oversight of our
appraisal system.
NAMB supports independent appraisal standards as contained
in 3915.
NAMB is not supportive of the Home Valuation Code of
Conduct, or the HVCC, which created a de facto regulation in
2008 by the New York attorney general and the GSEs' regulator,
which prohibits mortgage brokers and real estate agents from
ordering appraisals and communicating at all with appraisers.
Finally, NAMB is deeply concerned over recent fee increases
by the GSEs that are more than doubling consumer costs, based
on alleged credit risks of credit scoring, property
demographic, and/or loan to values.
At a time when consumers are experiencing a severe credit
crunch, efforts should be made to drive down mortgage costs,
not increase them.
These fees imposed on consumers are not what our mortgage
market needs in these turbulent times, and they fly in the face
of so many other efforts to help consumers and facilitate an
economic recovery.
We urge you to explore this troubling issue and consider
appropriate action when contemplating legislative reform.
NAMB appreciates the opportunity to appear before you
today, and we look forward to continuing to work with you to
craft solutions that are effective in helping consumers, but
not disruptive to the mortgage market or competition.
Thank you, and I'm happy to answer any questions.
[The prepared statement of Mr. Savitt can be found on page
246 of the appendix.]
Chairman Gutierrez. Mr. McMillan, for 5 minutes.
STATEMENT OF CHARLES McMILLAN, PRESIDENT, NATIONAL ASSOCIATION
OF REALTORS (NAR)
Mr. McMillan. Thank you, Chairman Gutierrez, Ranking Member
Hensarling, and members of the subcommittee. Thank you so much
for the opportunity to be invited here today to testify on the
need for mortgage lending reform.
I am Charles McMillan, 2009 president of the National
Association of Realtors, and I am also a practicing Realtor. I
am here to share the views of more than 1.2 million Realtors
who are involved in all aspects of the real estate industry
every day.
On behalf of all Realtors, I thank the subcommittee for
holding this hearing on an issue that is paramount to the
success of the housing market, and indeed, the U.S. economy.
Realtors have a tremendous stake in protecting consumers from
unfair lending practices.
As we have seen recently, abusive lending erodes confidence
in the Nation's housing system, strips equity from homeowners,
and damages our local and national economies.
In May of 2005, NAR adopted a set of responsible lending
principles. They include steps to ensure affordability, limited
stated income and assets underwriting, provide flexibility for
life circumstances, eliminate mortgage flipping, bar prepayment
penalties, improve the way lenders assess creditworthiness,
provide mortgage choice, strengthen enforcement, and promote
appraiser independence.
My written testimony includes specific details on each of
those principles, but my oral testimony today will focus on
just one of those, appraiser independence. Realtors believe
that a strong and independent appraisal industry is vital to
restoring faith in the mortgage origination process.
In November of 2007, the House passed a bill that we
believe would have struck an appropriate balance of oversight
and consumer protection. That bill, H.R. 3915, referenced here
several times today, would have strengthened the independence
of the appraisal process by ensuring appraisers serve as an
unbiased arbiter of a property's value.
More recently, Fannie Mae and Freddie Mac signed an
agreement with New York Attorney General Andrew Cuomo that
provides for a home valuation code of conduct, and like H.R.
3915, this code also attempts to strengthen appraiser
independence. However, it does have significant flaws.
We believe primarily that implementing the code on May 1,
2009, could lead to an over-reliance on automated valuation
models. Such models do not consider qualitative factors as well
as professional licensed and certified appraisers.
Additionally, the code also fails to address the cost of
the real estate transaction.
H.R. 3915 and the code also fail to address regulation of
appraisal management companies. It's an important issue that
must be addressed to assure that appraisals are based on sound
and fair appraisal principles and that they are accurate.
With that in mind, we recommend the following measures:
First, lenders should be required to inform each borrower
of the method used to value the property in connection with the
mortgage application, give the borrower the right to receive a
copy of each appraisal, and at no additional cost.
Second, the Federal Government also should provide
assistance to States to help strengthen regulatory and
enforcement activities related to the appraisals.
And third, we support enhanced education and qualifications
for appraisers.
Like all our responsible lending principles, we believe
appraisal independence is absolutely vital to the future
success of the housing market. However, Realtors also recognize
the need for the Federal Government to address the current
operational issues that are impeding the delivery of mortgage
credit.
Specifically, we ask that you encourage lenders and private
mortgage insurers to remove unnecessarily strict underwriting
standards, and urge consumer reporting agencies to move quickly
to correct errors in credit reports.
Realtors are proud to encourage responsible lending, and we
stand ready to work with you to ensure that the nightmare of
foreclosure does not overshadow the American dream of
homeownership.
I thank you for this opportunity to share our thoughts, Mr.
Chairman, and I welcome any questions from the subcommittee.
[The prepared statement of Mr. McMillan can be found on
page 193 of the appendix.]
Chairman Gutierrez. Mr. Amorin, please.
STATEMENT OF JIM AMORIN, PRESIDENT, APPRAISAL INSTITUTE
Mr. Amorin. Thank you.
A few years ago, the Appraisal Institute appeared before
this committee and warned that the lack of oversight and
enforcement in the mortgage lending industry was a ticking time
bomb threatening our economy. That was 2005.
Now that the bomb has exploded, with aftershocks heard
'round the world, what now?
Four measures can help us work our way back to the basics
and restore confidence in America's system of mortgage finance.
First, refine and reintroduce the concepts of H.R. 3915,
which emerged from this committee in the last Congress, and was
passed in the House.
A revised bill, with enhanced consumer protection, is
needed to provide additional resources for aggressive oversight
and enforcement.
Regrettably, too often, mortgage originators, who are only
paid if the transaction goes forward, have been in charge of
ordering appraisals. Such a system is ill-equipped to avoid
bias and manipulation to the detriment of the consumer, and
ultimately, the taxpayer.
As you are aware, the home valuation code of conduct,
prompted by Attorney General Cuomo, elevated the issue of
appraiser coercion to the national stage. This heightened
awareness is further evidence that a system-wide approach to
mortgage reform is needed.
Congress needs to look closely at the participation of
appraisal management companies under the code, as they are
unregulated entities and must be brought under control and
fully engrossed in the regulatory process.
Congress must also ensure that any insertion of middlemen
in the appraisal process does not come at the expense of
obtaining competent appraisals.
Ultimately, this comprehensive legislation is central to
curing a mortgage industry in distress.
Second, Congress should empower the oversight agencies for
appraisal regulation, the Appraisal Subcommittee, to act more
effectively in performing its functions. Legislation in
response to our last financial crisis, the savings and loan
disaster, created a system of licensing and certification for
appraisers, but the current regulatory structure can only be
described as feeble.
We can strengthen oversight by funding improvements for
State appraisal licensing boards and giving the Federal
oversight body the necessary authority to issue rules and
effective guidelines.
Currently, this oversight agency only has one tool at its
disposal to compel States to act. It can only decertify a
State.
We believe it should have additional and more realistic
enforcement authorities. Further, State appraisal boards must
be given additional resources to strengthen enforcement
activities.
Third, as indicated in our written testimony, the
Administration's recently announced loan modification plan
allows for home values to be determined by broker price
opinions and automated valuation models. Frankly, we are
shocked.
Once again, we are not treating the valuation process
seriously. Congress must immediately review this policy and
ensure it is consistent with longstanding bank regulations that
require or encourage the use of appraisals.
Our last recommendation is to create an independent
authority to oversee appraisal issues and keep them from
getting lost in the shuffle of industry restructuring. This
should be a high-level, senior position in an agency, such as
the Treasury Department, where the Office of Chief Appraiser
can effectively guide valuation policy and criteria across
agency lines, and ensure consistency in application and
oversight.
Members of this committee, just a week ago, the Treasury
Inspector General released a devastating analysis of what went
wrong in the Indy Mac mortgage meltdown. That lender shopped
for appraisers, and ordered multiple appraisals, until it found
a valuation that hit its desired numbers.
This is a systematic avoidance of the requirements, much in
the same way the now-infamous peanut supplier shopped for
laboratories and lab results until it found one willing to
endorse its tainted product.
In one case, Indy Mac picked a $1.5 million valuation, more
than double the lowest it was given, while regulators were
asleep at the switch.
Unfortunately, such an abuse of the system has been
repeated over and over again throughout the mortgage finance
industry.
The corruption of mortgage lending practices helped doom
Indy Mac to fail, ruining many innocent borrowers as it
collapsed. Sadly, Indy Mac typifies the abuses in the mortgage
industry, and ineffectual action by regulators before it was
too late.
We need to start today to close the loopholes, to refine
the regulations, and to empower enforcement that will return
the industry to solid fundamentals of safe and sound
underwriting with adequate oversight.
Thank you for your time today.
[The prepared statement of Mr. Amorin can be found on page
70 of the appendix.]
Chairman Gutierrez. Mr. Robson, for 5 minutes.
STATEMENT OF JOE R. ROBSON, CHAIRMAN OF THE BOARD, NATIONAL
ASSOCIATION OF HOME BUILDERS
Mr. Robson. Chairman Gutierrez, Ranking Member Hensarling,
and members of the subcommittee, I thank you for the
opportunity to testify today.
I'm a builder and developer from Tulsa, Oklahoma, and the
2009 chairman of the board of the National Association of Home
Builders.
The housing market, the financial system, and the economy's
performance continue to reel from the excesses earlier in the
decade. Soaring mortgage foreclosures and declining home prices
are interacting in an adverse feedback cycle that shows no
signs of diminishing.
While the Nation will continue to suffer these consequences
in the months ahead, the mortgage system itself has already
undergone radical changes.
Federal and State bank regulators have taken significant
steps to curb risky mortgage lending, strengthening
underwriting and loan management policies, and improved
consumer information and safeguards.
Congress has taken action to improve mortgage lending
standards and oversight.
In addition, the private label securities market, which was
a primary vehicle for exotic mortgages, has shut down, and
mainstream lenders have become extremely cautious.
The pendulum, in fact, has swung back well past center, so
that mortgage credit is currently available primarily to those
with unblemished credit histories and the resources to make a
significant downpayment on their home.
NAHB's members have supported steps to ensure that mortgage
lending occurs in a manner consistent with sound underwriting,
prudent risk management, and appropriate consumer safeguards
and disclosure.
Home builders and their customers, however, have been
significantly impacted by the upheaval in the financial
marketplace, and are highly focussed on what might lie ahead.
There is a great deal of uncertainty with regard to how the
mortgage lending system will function when the housing and
financial markets finally stabilize, and there is a deep
concern that additional market dislocations will increase the
depth and length of the current downturn.
Single family appraisal problems are also an area of
concern for home builders, and are contributing to the current
housing and credit crisis.
Appraisers have often used sales of homes and foreclosures
or other distressed properties as comparables of new homes,
without having made the appropriate value adjustments.
NAHB believes that many appraisers lack the training and
skills to perform the type of complex appraisals that are
called for during this economic crisis. NAHB is working with
the Appraisal Institute to raise the bar of appraiser education
and performance.
As Congress considers additional actions to avoid future
mortgage lending problems, NAHB urges careful evaluation of
steps already taken, the ongoing market impairments and
structural shifts in the housing finance system and the
immediate and longer-term impacts on the cost and availability
of mortgage credit for qualified borrowers.
As this subcommittee works to build upon legislation passed
in Congress in 2007, we offer two specific policy
recommendations:
First, NAHB urges Congress to implement a clear national
framework for mortgage origination standards to replace the
current--
Chairman Gutierrez. Excuse me, Mr. Robson. Could we please
table the conversation--the gentlemen on the right? Just a
little competition between our witnesses and the staff. I
apologize, Mr. Robson. We will give you more time.
Mr. Robson. No, that's fine. Thank you.
--patchwork of State and local laws, which often lead to
unnecessary restrictions on mortgage credit.
Specifically, Congress should establish a Federal
preemption statute creating central uniformity in the mortgage
market.
And second, as H.R. 3915 would have excluded the use of
arbitration as a means to resolve disputes, NAHB urges the
committee to refrain from limiting the use of alternative
dispute resolution techniques, including binding arbitration,
which we believe is the most rapid, fair, and cost-effective
means to resolving disputes.
NAHB opposes any attempt to prohibit the use of pre-dispute
arbitration in contracts.
Thank you again for this opportunity to testify, and NAHB
looks forward to working with Congress and the committee to
address these issues.
[The prepared statement of Mr. Robson can be found on page
218 of the appendix.]
Chairman Gutierrez. Thank you, Mr. Robson.
Mr. Platt, for 5 minutes.
STATEMENT OF LAURENCE E. PLATT, PARTNER, K&L GATES, ON BEHALF
OF THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION
AND THE AMERICAN SECURITIZATION FORUM
Mr. Platt. Chairman Gutierrez, Ranking Member Hensarling,
and members of the subcommittee, thank you for the privilege of
testifying here today on behalf of the Securities Industry and
Financial Markets Association and the American Securitization
Forum regarding reform of mortgage finance, and in particular,
certain mortgage origination practices that contributed to the
housing crisis affecting the Nation today.
We were pleased to have worked on this issue constructively
with the committee, as it moved toward the November 2007
passage of H.R. 3915, the Mortgage Reform and Anti-Predatory
Lending Act.
We appreciate the opportunity to highlight the key
considerations that guided the involvement of SIFMA and ASF in
the earlier legislative initiative, and that remain important
to SIFMA and ASF today.
And let me state the obvious: The market is very different
today than it was in the fall of 2007. We believe the House at
that time wisely sought to limit the majority of the bill's
provisions to subprime loans by focusing on the core practices
that it believed contributed to the subprime crisis.
The underlying premise was that every segment of the
market, from borrower and broker through to the investor, bore
some responsibility for the breakdown, but that loans to
subprime borrowers could be made in a responsible way, and that
the industry could continue to support this segment of the
mortgage market.
As such, the committee worked to make the new requirements
relatively understandable and provide penalties for violations
that maintained a sense of proportionality.
Since then, of course, the availability of subprime credit
has evaporated. This market has not returned. The conforming
prime market is functioning, but fragile.
Congress and the Administration have made several attempts
to address the foreclosure and housing crisis. When the Federal
Reserve Board adopted its final regulations to the Home
Ownership Equity Protection Act, it sought to address certain
of the major underwriting concerns that H.R. 3915 had covered.
As a result, it appears that this legislative initiative
will be largely an anticipation of the eventual return of a
private lending and securitization market, and one of the key
questions going forward is the extent to which policymakers
wish to encourage the return of private investment in housing
finance, particularly for borrowers who may not meet agency
standards.
Underlying the debate over H.R. 3915 back in 2007 was one
basic question. Would the private market make buyers securitize
subprime loans that were subject to those new restrictions,
given its reluctance to purchase high-cost loans under HOEPA?
We believed then, and we still believe today, that there
are certain principles that guide the willingness of the
industry to participate in the primary and secondary markets.
First, lenders, assignees, and securitizers need legal
certainty before being subject to potential legal liability.
Second, borrowers and market participants are looking
primarily for a system that works. That is, one that both
protects the legitimate interests of innocent consumers from
inappropriate lending products, and provides incentives for
investors to invest the funds needed to help get that borrower
a loan.
Although we had some concerns, we felt that many of the
provisions of H.R. 3915 provided a fair balance, and we hope
that any newly proposed legislation will do the same.
For the secondary market, H.R. 3915 basically attempted to
do two things:
First, it lowered the financial triggers that cause a loan
to be classified as a high-cost loan. In other words, certain
subprime loans that previously would not have qualified as
high-cost loans under HOEPA would so qualify under 3915.
Second, it created a whole new set of restrictions for
loans that cost more than prime loans but less than high-cost
loans. The House used cost as a proxy for borrowers who it was
perceived needed greater protection.
Please know that the final version of H.R. 3915 had many
provisions that we considered extremely helpful.
It properly differentiated between the new legal
responsibilities of mortgage brokers and mortgage lenders,
recognizing the inherent differences in the roles of those two
types of originators, and the related expectations of
consumers.
It limited its applicability, generally, to subprime loans,
recognizing that the lending abuses that afflicted the subprime
market were generally absent in the prime market.
It qualified the responsibilities of creditors to determine
a borrower's ability to repay and the presence of a net
tangible benefit in order to lessen the likelihood of
successful claims for errors in judgment made in good faith by
lenders.
And while it increased the monetary damages that would have
been available for violations, it limited the availability of
penalty damages to ensure some level of proportionality between
the violation and the remedy.
While it increased the availability of the extraordinary
remedy of recision, at least the bill offered a creditor the
ability to avoid recision by curing the violation, and the bill
also properly balanced the interests of assignees.
Underlying these positive measures was the belief that
consumers with troubled credit histories may have required
greater protection--
Chairman Gutierrez. Your time has expired.
Mr. Platt. Thank you.
[The prepared statement of Mr. Platt can be found on page
212 of the appendix.]
Chairman Gutierrez. That's quite all right.
I want to thank all of you, and just to go back to Mr.
Savitt from the National Association of Mortgage Brokers, and
just in general to respond to all of you, I personally can't
think of any one of your industries I haven't dealt with over
my last 30 years since I have owned a home, and paid for many a
year of college for the members of the Realtors Association.
You have done the best, as I look at the books. So I have had
wonderful experience dealing with members of your association
through the years.
That is not to say that there aren't issues within each one
of your groupings, whether it's bankers, whether it's
appraisers, whether it's--so I don't want anybody to think that
is the purpose of this.
We just want to get your information and want to tell you
that you're welcome to continue to address the members of this
committee and the chairmanship, as we go forward on this vote,
but we will go forward on this vote, and from what I have heard
from all of you, you think it's a good idea that we move, that
there are many moving parts of this legislation that are very
good, and so we're going to take that into consideration and
move forward with that.
I have just one question of Mr. Kittle and Mr. Platt, so
I'll ask both of you to answer just this one question.
There have been some extensive discussions in this
committee about the mortgage securitization process, and I
believe some valid concerns have been raised. Among those
concerns is the fact that, in the entire loan securitized, the
risk for the loan is passed on to the buyer, along with the
profit, leaving little incentive for the originator to make a
responsible loan.
Would you be in favor of a rule that requires part of the
securitized loan to be maintained on the books of the
originator in order to help keep them with what is called some
``skin in the game?''
So why don't you just both respond to that question in
general? Mr. Kittle first.
Mr. Kittle. Thank you, Mr. Chairman.
Well, our members, with the Mortgage Bankers Association,
most of our members are lenders, and we already have skin in
the game, so we underwrite the loan, we have to have warehouse
lines of credit, we have to have substantial net worth, minimum
net worth at HUD, but many of our lenders are required to have
a million-plus net worth. So the skin in the game is already
there.
We have buyback agreements with the investors. Fannie and
Freddie are sending loans back to our members right and left,
right now, for repurchase.
So the skin in the game for our members, Mr. Chairman, is
already there.
Chairman Gutierrez. Mr. Platt.
Mr. Platt. Thank you. I would like to really second what
Mr. Kittle said. There is risk retained already.
Non-depository institutions simply won't have the capital,
I think, to be able to retain that kind of risk, and there are
many securitization, asset-backed securitizations that
presently don't have that kind of risk retention feature and
work just fine.
SIFMA is looking at this issue, though, because it has been
raised more recently, and so I think there's not a formal
position yet of SIFMA on this.
Chairman Gutierrez. Thank you. I'm not going to pursue the
question. I'm going to yield back the time, and yield 5 minutes
to Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman.
I actually share a number of the concerns that you
articulated. Clearly, there were a number of problems and
shortcomings in the mortgage finance system that helped lead to
this economic crisis. I'm somewhat fearful, though, that we may
go from one extreme to the other, as is often the case in
public policy.
My fear is particularly, as I looked at the original
version of H.R. 3915, I'm having a hard time concluding at the
end of the day that it's not going to make credit more
expensive and less available precisely at a time when a number
of people are trying to desperately refinance their homes and
stay there.
I'm particularly concerned--I think, Mr. Middleton, you
used the phrase that you were concerned about unnecessary
litigation. And I know that you, under the provisions of 3915,
would be held liable for, ``net tangible benefit.''
Can you tell me what a net tangible benefit is, to the
borrower?
Mr. Middleton. I was struggling with that definition
myself.
Mr. Hensarling. Well, I'm concerned, and I know that we
have a process to work through, but for example, in retrospect,
there were a number of borrowers who originally were renters,
and opted to buy a home, ended up they couldn't afford the home
that they bought, and I suppose one could make the case that
they didn't have a net tangible benefit, they had a net
tangible detriment.
Some people may be financially better off to rent, but it
could be that they want to have their part of the American
dream and own a home.
Might some very creative attorney decide that somebody came
to you, they want to buy a home, they want to move from rental
status, and you have to crunch a bunch of numbers and say,
``You know what? I've decided that you will not receive a net
tangible benefit from becoming a homeowner, therefore, I have
to legally deny you credit''?
I mean, is this off the wall, or might this have--
Mr. Middleton. No, sir. If you look at the Fair Credit Act,
the Fair Lending Act, you almost have that condition now.
If John Doe applies for a fixed-rate mortgage, you must run
that through and decline and counter-offer. So that's a rule
we've been living with for all the years, ever since that bill
has been in effect.
So the detail of the definition is what bothers me the
most, because it becomes very subjective, and it really doesn't
look at the four ``C's'' of credit that one always follows in a
traditional lending, you know: capacity; character; collateral;
and credit.
It just seems to be inconsistent with prudent underwriting.
Prudent underwriting answers that, when you get into judgments
about, ``Is this really going to fit your tangible net benefit,
Mrs. Jones?'' I don't think that's something that we would like
to see in this bill.
Mr. Hensarling. Well, again, I think that sometimes we see
public policy excesses, and I think we've gone from an
atmosphere where a lot of you people would be brought before
this committee and publicly slapped around for not making
credit available to low-income people, and now to some extent,
you're being slapped around for providing financing to low-
income people.
I'm also concerned, besides the net tangible benefit--let
me ask you this question, Mr. Middleton, since I started with
you. How many of the loans that your bank makes are HOEPA
loans? Do you have a rough percentage?
Mr. Middleton. We have never--
Mr. Hensarling. Never?
Mr. Middleton. Never, ever.
Mr. Hensarling. Well, under H.R. 3915, as I understand it,
we're going to essentially expand the scope of definition of
HOEPA, and so a much greater universe of loans will now be
HOEPA loans.
Representing your organization, should I conclude from that
that there will be a whole new universe of loans that will not
be made at a time when many borrowers again are trying to
refinance?
Mr. Middleton. At our institution, we would not approach
that level of pricing, so the HOEPA loan criteria would not
negatively affect us, because that is not our business model.
We're not doing high interest rate loans, irrespective of the
reason.
Mr. Hensarling. Do you have an approximation of,
representing your organization, how many of the loans are made
by your member organizations that might be HOEPA loans?
Mr. Middleton. By my organization, none.
Mr. Hensarling. I'm sorry. Referring to the ABA.
Mr. Middleton. Oh, I'm sorry.
Mr. Hensarling. Not your individual bank. I'm sorry if I
was not clear.
Mr. Middleton. The reputational risk of being a HOEPA loan
lender would not be in the business model or the interest of
the member of the ABA. There's so much risk with that.
Additionally, we live with every loan. Every year, we have
an examiner onsite going through the entire alphabet of
compliance laws and safety and soundness laws, so we have no
interest--and I think I speak for many of the community bank
members and a large majority of members--we have no interest in
being known as a HOEPA loan provider.
Mr. Hensarling. I see I'm out of time. Thank you.
Mr. Ellison. [presiding] The gentleman from North Carolina.
Mr. Watt. Thank you, Mr. Chairman. You look great over
there in that chair.
Mr. Ellison. Thank you, sir.
Mr. Watt. I didn't want to pass up this opportunity to
compliment you on that.
We're kind of getting down to serious brass tacks. Brad
Miller and I have been working on this for years now.
And while I don't normally do this, I know that you all
have severe time constraints, and 5 minutes really won't allow
me to get to all the issues that I would like to raise with
you.
So what I think I will do, and this is unusual for me, is
ask you all to, if you don't mind, give me some written
responses to some things that are on my mind.
Mr. Middleton, you say at the bottom of page 6 and the top
of page 7 of your testimony, ``We also believe that had the
secondary market provided for some degree of skin in the game
for all market participants, there would have been far less
abuse and fewer bad loans.''
So obviously, Mr. Kittle says he has skin in the game; Mr.
Platt said everybody has skin in the game.
Skin in the game, as I understand it, is kind of like a
proposal that, if you make a loan, whoever makes that loan, got
to retain 5, 10, 15 percent of it on their books, rather than
selling it off into a secondary market, so that--so my question
to you is, and if you can just give me something in writing on
this, how do you do that, how do you require people to have
skin in the game without increasing interest rates? Because I
think that probably will have some impact on interest rates.
And how do you do it without it just becoming a cost of doing
business, which I think a lot of credit card companies assume
that there will be some loss on--so, I mean, you know, they
just factor it into what they're doing.
Give me a comment on that in writing.
Second, you say at the bottom of page 8 of your testimony
that there should be terms that should be specific and well-
defined, limiting the potential for unnecessary litigation.
And I know what unnecessary litigation--that's litigation
that--against whomever--you know.
So I hope you're not suggesting there not be some means,
either through attorneys general, regulators, or private
participants to enforce whatever these specific and well-
defined terms are, and if you are saying that, or if you're not
saying that, tell me what those enforcement mechanisms should
be, and if you can, give me something on that in writing, and
how you both write a safe harbor provision, and not make that a
hiding place for people to be irresponsible.
Mr. Savitt, please tell me your reaction in writing to the
proposal that was made on the last panel for spreading yield
spread premium or broker fees over a period of time, rather
than paying them up front, as a means of making brokers more
responsible in the process.
If you can tell me your reaction to, and if you are against
it, tell me why, and what detriment there would be. I would
like that.
The reason I'm doing this is because I mean, I think we're
down--I could sit here and talk to you for 5 minutes about some
of these issues, but we're down to the end of the road now, and
I need you all to be constructive with me.
I'm particularly appreciative for the tone of Mr. Platt's
testimony, but I hope he will continue to give us some way of
making the securitization market have some responsibility for
assuring that lenders don't make irresponsible loans and just
sell them over and over and over into secondary, tertiary,
100th markets.
I know my time has expired, and that is why I did it this
way, because I knew nobody was going to have time to respond.
Thank you, sir. Thank you, Mr. Chairman.
I thought if I called him ``Mr. Chairman,'' he would give
me more time, but it didn't work.
Mr. Ellison. You got a little extra.
The gentleman from New York.
Mr. Lee. Thank you. Good evening, gentlemen. Thank you for
coming.
I don't want to pick on Mr. Savitt, but whether you like it
or not, I believe the mortgage broker industry is taking
probably some of the brunt of this, and I'm always for not
looking backward, I'm for looking forward and finding ways
that, going forward, we can find a better solution that
protects taxpayers and keeps a system that gets people back
into their homes, so I appreciate your comments as we go
forward.
I know you're here representing the brokers, and there have
been some very good actors, but there have also been some bad
actors in the industry.
I would be very curious to hear your ideas and thoughts,
outside of a registration process that has been put in place.
What else should we be legislating or initiating to help
eliminate some of these individuals who really shouldn't have
been representing the industry.
Mr. Savitt. Well, first of all, when you say registration,
you're talking about the SAFE Act?
Mr. Lee. Yes.
Mr. Savitt. Okay. Mortgage brokers would not be registered
under the SAFE Act. They would be licensed under the SAFE Act.
They would go through, as many States now require them to
do, they would have to pass a test, they would have 20 years of
pre-education, they would have continuing education, background
investigations, fingerprinting, both State and Federal.
They would have to have either a surety bond, a net worth
requirement, or pay into a recovery fund. And mortgage brokers
are the only ones that would be licensed that extensively under
the SAFE Act.
Many of us now do have those very similar requirements in
the States. I'm licensed in the State of West Virginia and also
in the State of Maryland, and I went through those very same
procedures that I just cited to you.
I think one of the things that we can do that can really
help this industry is we have to regulate the practice, not
regulate the license. We have to treat all originators,
regardless of how they're licensed, the same, I mean, as far as
disclosure.
In other words, on a good faith estimate, mortgage brokers
have taken quite a hit, as you know, for the yield spread
premium that they receive. It's an indirect compensation.
All originators, regardless of how they're licensed,
receive some type of indirect compensation. The only difference
is, with mortgage brokers, is that mortgage brokers have been
required, under HUD regulation, since 1992, to disclose that to
consumers. It's very confusing. The FTC has come out and said
it's confusing.
And I think what we need to do to give a level playing
field to the consumer, all originators should have to disclose
all of their indirect compensation.
All originators should disclose, in the exact same manner,
on the exact forms, because when you don't--you know, a
consumer comes to shop, and they do shop. It doesn't matter if
they're at a broker's office or a bank or a lender. They don't
understand the difference. What they understand is they're
applying for a mortgage loan. So we have to level the playing
field for the consumer.
Mr. Lee. If I can continue on for one more point.
You also, I believe, in your testimony, mentioned there
were some problems with the SAFE Act, and I'd like you to
expound upon those and where you see that there is a problem.
Mr. Savitt. Well, as far as the implementation, also the
SAFE Act is silent as far as things like grandfathering.
I have been a mortgage broker for a little over 28 years,
and I would be required to take a test for something that I
have been doing for 28 years, and have 20 hours of pre-
education, when I have gone through 7 hours of continuing
education each year for, I think, 10 years.
I think there needs to be a certain provision spelled out,
even though it is silent, and my understanding is that it was
left silent to leave it up to the States, but the States have a
different interpretation based upon what they have been told by
CSBS, that there is no provision for grandfathering, and if
Congress wanted grandfathering, they would have spelled it out.
I think the stronger argument is, since there is nothing
spelled out, that again, it's being left up to the States.
It's--there needs to be a delay in the implementation, I
believe--first of all, let me just say this. The SAFE Act was
something that we have been supporting, or what's now the SAFE
Act, we have been supporting since 2001.
The brokers were the first ones that came up with the idea
for a registry. We backed off on that in the beginning, because
it was only going to be for brokers, it wasn't going to be for
all originators, which it now is, even federally chartered
banks, their originators are in the registry.
Our model State statute from 2002 is almost a mirror image
of what is in the SAFE Act, so we had a lot of input as to what
goes into that, but HUD has not even written their regulations
yet.
HUD told us it will take them 18 months to write their
regulations, because they don't have the funds for it right
now, so I think what we need to do is not rush into this. It
should be a slow implementation, give the States a chance to
get a handle on this, and make sure that, you know, if they do
change their laws in the States, they don't have to go back and
do it again because the HUD regulations say something
different.
Mr. Lee. I'm not sure how much time I have left.
Mr. Ellison. You're out, but make it quick.
Mr. Lee. I will make it really quick, because I appreciate
that.
The gentleman who just left, from North Carolina, had
talked about the yield spread premium and the fact of the skin
in the game concept. You didn't have a chance to reply. But I
did think that was an idea of trying to spread that.
I came from the business world, have been in Congress now
for 2 months, but I worked in the private sector exclusively,
and our sales people were compensated, but they're always
compensated.
Typically, a bonus was paid at the end of the year, so
there was time to actually evaluate and ensure that the
products were sold and we were paid, and I like the concept of
trying to do some form of a holdback or something.
I would like your comments on what kind of a system would
work effectively.
Mr. Savitt. I don't think that would work, for several
reasons.
First of all, those who receive their compensation over a
period of time right now also receive additional fees,
servicing fees, over the period of time.
The other thing is that mortgage brokers have absolutely no
control--let me back up even further. The loans are not our
products. We have no say in the guidelines of those loans. We
do not underwrite or approve those loans. That comes from the
GSEs and also from the lenders. We have no control or say in
the approval of products.
So that would be asking us to take a risk on something that
we have no control or no say over.
Mr. Lee. My biggest concern was just ensuring that we get
accurate data that's passed along so that, through an entire
system, that, at the end of the day, we have qualified loans
that will be paid.
Mr. Ellison. The gentleman's time is up.
Mr. Robson, I was intrigued by your idea of a preemption
statute that might add uniformity to mortgage law, and I think
that does have the advantage of lending uniformity, but I
wonder what your views are about a floor, a basic law that
could leave room for States to apply their own local standards,
and also, in order to have, you know, 50 attorneys general
regulators to keep their eyes on fraud, waste, abuse, and
things like that.
Mr. Robson. I think a lot of it has to do with the
transparency of securities and that sort of thing, as much as
anything, not necessarily oversight on abuses, but how do you
analyze a loan from one various State under certain rules and
regulations versus another, and have some sort of uniformity
throughout the country.
So certainly you could have, I guess, every State attorney
general kind of watching out after that, but I mean, some
uniformity I think would go a long way in correcting some of
the problems.
Mr. Ellison. Also, I like the idea of alternative dispute
resolution as well, but my problem is that I've received
reports that in some cases, where there are binding arbitration
clauses, there are companies that do arbitration, and that's
their business, and they're paid by the person with the greater
market power in the transaction, and things always seem to go
their way.
I mean, do you see any opening or any flexibility in how,
between the consumer and the lender, that we might arrive at an
alternative resolution method that might be amenable to both
sides?
Do you have any ideas on how we can make that more
flexible?
Mr. Robson. The whole idea of arbitration is having a fair
game.
Mr. Ellison. Yes, it is.
Mr. Robson. And so if there is some need to tweak the
arbitration rules so that everybody is playing fair, that's
fine.
But it's certainly a lot quicker and easier and less
expensive, if you want expense and that sort of thing to enter
into it, to go to court.
Mr. Ellison. Thank you, sir.
Mr. McMillan, could you share with me whatever ideas you
may have about initiatives that you could recommend to help
low-income families rehabilitate their credit score so that
they don't have to be susceptible to predatory lending in the
future?
Mr. McMillan. Certainly, Mr. Chairman.
A number of those things have been addressed here, but one
of the things that studies have shown is that most renters,
which most low-income persons are, pay substantially more
proportionate toward rent than someone owning a home;
therefore, the flexibility in underwriting guidelines and being
able to consider someone who has paid their rent on time for
years, while that may be 40 percent of their income, to receive
a conventional type loan and therefore improve their credit by
having credit in the normal marketplace.
With your permission, I would like to opine as well, if you
don't mind, on the arbitration issue, because many of us in
States have included arbitration provisions which bind the
parties to arbitration should there be a dispute or any number
of alternative dispute resolution procedures--
Mr. Ellison. Reclaiming my time. But, Mr. McMillan, maybe
in that case, the parties could somehow jointly pick an
arbitrator. I get concerned when, you know, the lender, the
person with the greater market power and the more access to
more information, gets to sort of designate who that person is.
Any response?
Mr. McMillan. Absolutely correct, sir.
What normally happens when someone purchases a home using
the builder's contract, with the bias that you've just
addressed, is that they supersede any State-mandated contracts
and the borrower has those provisions as a take it or leave it
type of process.
Mr. Ellison. Reclaiming my time. Thank you, Mr. McMillan.
Mr. Savitt, could you offer your views on what powers a
systemic risk regulator might have with respect to mortgage and
consumer protections, particularly given that the current
crisis was in many ways fueled in part by weak standards in
that regard?
Mr. Savitt. You are talking about an overall regulator? I
think an overall regulator is a good idea, but something that I
heard in the second panel I would agree with, also, is that
there needs to be checks and balances.
So you may have an overall regulator who supervises other
regulators, and I think that would be a very appropriate idea.
Mr. Ellison. Thank you. My time has expired.
The gentleman from Minnesota.
Mr. Paulsen. Thank you, Mr. Chairman.
You know, this committee has heard from the oversight
authorities as well as representatives of the communities that
are affected by lending rules, and I'm just wondering, for the
bankers, you know, Mr. Middleton and Mr. Kittle, can you tell
us the current lending conditions right now that you are
facing, given the challenges right now that the markets are
facing?
Mr. Middleton. The economic conditions?
Mr. Paulsen. Correct.
Mr. Middleton. The borrower, the prospective borrower?
We're seeing what we would consider a prime-A credit that
has sufficient downpayment, good credit history, are the ones
that are venturing back into the market, so that I think we're
seeing jumbo conforming, but they all have the same
underwriting criteria, meet the same traditional underwriting
criteria that we've always had.
So it's a fairly competent borrower who has the means to
support the purchase.
Mr. Paulsen. So in general, are homes being purchased and
sold and under what conditions in general?
Mr. Middleton. In southern Maryland, I can tell you that it
is gradually moving--we feel a bottom has occurred in the
pricing, and we're getting more seekers. I'm hearing good
reports about traffic over the weekend, significantly higher
visits to houses in the southern Maryland region. So that's
good news.
Did I answer your question, sir?
Mr. Paulsen. You did. Please, Mr. Kittle.
Mr. Kittle. Well, we're finding that lending right now is
more robust. We're coming into springtime. I agree with what
Mr. Middleton just said. I mean, our business is cyclic, even
though it's been tough over the last couple of years.
The biggest problem our members are facing right now is
warehouse lines of credit. There are major banks that have
decided to get out of the space. Chase. The rumor is, the
announcement since the merger of PNC buying National City, that
they will exit that space. National City is a huge warehouse
lender.
So the small lenders, the independent mortgage bankers who
take the risk, who have the skin in the game, are not able to
get lines of credit.
We have a brand new housing program that the President just
initiated on the modifications and to help with refinancing.
There's not going to be the capacity out there to fund these
loans.
And the problem is, if I may take just one more moment,
that when you fund a loan on a warehouse line of credit, it's
treated as a commercial loan, and it has certain cash
requirements by that bank that must be set aside for that loan,
and those cash requirements are restrictive.
So MBA, we took a group of our lenders to Treasury last
week, to ask Treasury to help maybe the GSEs to get into
possibly a participation with them. Fannie and Freddie will
most likely end up with these loans, anyway. And if they could
come in and do a participation on those lines of credit, it
would free that cash up.
But clearly, our biggest problem facing us right now, other
than the cramdown legislation, is warehouse lending.
Mr. Paulsen. Well, that kind of leads into my question;
have the underwriting rules changed since the credit crisis?
Mr. Kittle. Well, we're making the best loans we have made
in 15 years. We have tightened the underwriting. And now, there
is even some criticism that we're too tight. So the pendulum
has swung back. We're making good loans, and now we're in some
cases being criticized because we're not loose enough.
Mr. Middleton. To respond to that question, as well, we had
not changed our underwriting criteria when things were loose.
We're just consistent with the way we always did it. So there
was really no tightening or loosening of any criteria.
Mr. Paulsen. And just one more question.
How are the regulatory requirements of CRA, the Community
Reinvestment Act, affecting the way that you do business in
this economic environment right now?
Mr. Middleton. Like I mentioned, we're a satisfactory CRA
lender. We really find the CRA as a tool, not an obstacle.
And I mentioned also that all of our affordable housing
loans are current, none of them are in default. We work with
CDCs, and of particular interest to meet the CRA requirements,
we work with our community development corporations to be a
partner in the layering of funds with other sectors, HUD and
various grant folks, and we are finding that to be a very
effective partnership with a highly productive outcome
Mr. Paulsen. No other questions, Mr. Chairman. I yield
back.
Mr. Ellison. Thank you. The gentleman yields back.
I would like to enter into the record written testimony by
Terry Clemmons, executive director of the National Credit
Reporting Association.
Without objection, it is so ordered.
I want to thank the witnesses and the members for their
participation in this hearing. The Chair notes that some
members may have additional questions for the witnesses, which
they may wish to submit in writing.
Therefore, without objection, the hearing record will
remain open for 30 days for members to submit written questions
to the witnesses and to place their responses in the record.
This subcommittee hearing is now adjourned.
[Whereupon, at 6:48 p.m., the hearing was adjourned.]
A P P E N D I X
March 11, 2009
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