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U.S. House of Representatives,
Committee on Banking and Financial Services,
Washington, DC.

    The committee met, pursuant to call, at 9:40 a.m., in room 2128, Rayburn House Office Building, Hon. James A. Leach, [chairman of the committee], presiding.

    Present: Chairman Leach; Representatives McCollum, Roukema, Baker, Castle, Campbell, Ney, Ose, Biggert, Terry, LaFalce, Vento, Waters, Sanders, C. Maloney of New York, Watt, Bentsen, J. Maloney of Connecticut, Meeks, Lee, Inslee, Schakowsky, Moore, Jones and Capuano.

    Chairman LEACH. The hearing will come to order.

    The committee meets today in response to concerns that have been raised in recent months in various parts of the country about certain practices by a small number of lenders, including allegations that senior citizens and low-income persons have been targeted for fleecing or abusive tactics. We will hear from representatives of consumers, the industry, as well as State and Federal regulators.

    Before introducing the first panel, let me say that this is not the first time this issue has been before this committee. Six years ago, Congress approved the Home Ownership and Equity Protection Act, HOEPA, in an effort to address abusive practices aimed at unsophisticated homeowners who were encouraged to use equity in their homes as security for additional credit. That law passed about 410-12, and by a voice vote in the Senate. It gave Federal regulators the authority to promulgate additional regulations to deal with new concerns as they arose.
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    In terms of regulators, today we will hear from a number, including the Comptroller of the Currency, representatives of HUD, as well as a whole spectrum of Federal regulators. We have a number of people who want to speak on this subject, and I want to get to the hearing process as soon as possible.

    I will say that, because this issue and the distinction between subprime lending and what might be considered predatory lending is such a difficult one to parse through, that I have been working for several weeks trying to develop some basic principles that I think we ought to be concerned about. I would like to read a series of precepts that I believe should be considered as part of addressing the predatory practices issue.

    The first is that consumers deserve meaningful and clearly understandable disclosures of loan agreements so that borrowers are informed, rather than confused, by all the paperwork before them.

    Second, lenders should not extend credit to a borrower unless they have applied appropriate analysis to determine that the borrower is capable of repayment under the terms of the loan.

    Third, lenders should not require a borrower to finance points and fees associated with a high-cost loan. The consumer should receive a clear disclosure that the financing of points and fees is optional.

    Fourth, a lender should not charge a borrower points or fees to renew, extend, or otherwise modify a high-cost home loan if, after the modification, the loan remains a high cost loan; or if it is no longer a high-cost loan, the APR has not been decreased by at least 1.5 percentage points.
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    Fifth, lenders should not use misleading or deceptive sales and marketing practices that induce consumers to enter loan agreements they cannot afford.

    Sixth, attempts to curb abusive practices should not be made at the expense of credit availablity in underserved neighborhoods.

    Seventh, frequent refinancings, or ''loan flipping,'' which unnecessarily increase the loan balance and eliminate equity should not be acceptable. Points and fees associated with refinancing of a high-cost loan should result in a net benefit to the borrower.

    Eighth, greater efforts should be undertaken to educate the public about borrowing. For example, consumers should be able to easily comprehend that a drop in their monthly payment may not translate into owing less over the long term, and may, in fact, increase their overall costs.

    In addition, lenders should provide disclosures prior to closing, which encourage consumers to seek credit counseling.

    Regulators should take necessary measures to ensure that an institution's CRA rating does not improve as a result of loans that were made to low- and moderate-income individuals, but have predatory terms.

    Finally, the secondary market should not be a facilitator of predatory lending, but should take measures to ensure that loans which contain predatory terms are not purchased.
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    I would just lay out these precepts. I know there are others that may be placed on the table as a beginning point of trying to distinguish between rules and regulations that apply to predatory lending, as contrasted with rules and regulations that apply to a more commercial set of circumstances.

    At this point, let me recognize Mr. LaFalce.

    Mr. LAFALCE. Thank you, Mr. Chairman.

    I appreciate the fact that we are conducting a hearing today on predatory mortgage lending. I really think we need to conduct many, many more hearings on issues of concern to consumers. Too, I think in the next Congress, we should consider changing the name of this committee to something like the Committee on Consumer, Housing and Financial Services to give emphasis to the fact that the primary concern of this committee should be the consumer.

    With respect to predatory lending, for several years now I have been concerned with the rapid growth of an alternative financial services structure, one consisting largely of less-regulated entities that provide higher cost credit and services to predominantly lower income and minority households and persons with inadequate or impaired credit.

    I fear that too many Americans are being relegated to the permanent status as subprime borrowers and trapped with perpetual high-cost debt. The process can begin when they are encouraged to take on excessive credit card debt as students and may only end when they are robbed of the equity in their homes in old age.
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    The expansion of subprime markets to provide credit to more Americans is, in itself, a positive development. Certainly not all subprime lending is predatory. We all want financial institutions to reach out to those too long outside the financial mainstream, but we must be concerned with the manner in which the growth in subprime lending is occurring.

    It should be of major concern to our committee that the fastest growing segment of our financial sector is not the large banks, nor even the credit unions, but the chains of check cashing and payday lending businesses. It should be a concern of our committee that for the first time the Federal Reserve reports that regulated financial institutions owed less than half of all consumer debt and that commercial banks have been replaced by less regulated mortgage companies as the primary source of mortgage and credit to consumers. The magnitude and speed of the growth in subprime lending alone, growing by nearly 1,000 percent over the past five years, requires detailed hearings by our committee.

    The fact that recent studies by HUD and separately by the Woodstock Institute both show that subprime lending is predominantly targeted to minority neighborhoods, possibly overturning years of progress on fair lending, also demands detailed examination by our committee.

    The rapid growth in this alternative subprime market and the flaws or gaps in our traditional banking sector that are feeding this growth should be a fundamental concern in our committee's oversight of the banking system.

    Of the many consumer issues which merit greater attention by our committee, the problem of predatory lending may well be the most pressing issue that needs to be addressed. I fear this problem has reached epidemic proportions in many parts of the country and in many communities. However, we lack detailed statistical data to document the extent of this problem. We do know though that American families are being stripped of billions of dollars in equity each year, and that too many families are losing their homes in foreclosure.
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    I believe this problem requires strong legislative remedies. I have introduced legislation with a number of my Democratic colleagues that I believe combines the best of a number of different approaches that have been proposed by State and national organizations. Senator Sarbanes, the Ranking Democrat on the Senate Banking Committee, has introduced companion legislation in the Senate.

    I am encouraged by the fact that all the financial regulatory agencies that will testify today have recognized the problem of predatory mortgage lending and are now proposing steps to address it, at least within the scope of their current authority.

    The Federal Reserve Board has established a special working group to address the issue and the Treasury Department and HUD are in the process of conducting regional hearings to help document the extent and scope of the problem. The issue is also being addressed by the States. North Carolina was the first State to enact comprehensive legislation to combat predatory mortgage practices last year. My own State of New York also has led the Nation on this issue. Our Attorney General, Elliott Spitzer, has initiated a number of major actions against predatory lenders, and the New York Superintendent of Banks, Elizabeth McCall, has issued the most comprehensive regulations to curb predatory practices of any State.

    I appreciate the fact that today's witness panels include a representative of the New York Attorney General's Office, Mr. Andrew Celli, from Rochester, New York, Bureau Chief for Civil Rights, and also includes Martin Eakes, who led the effort to enact legislation in North Carolina. I believe we can learn a great deal from both States' experiences.

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    Finally, let me extend a special welcome to Under Secretary Gensler, Comptroller Jerry Hawke, Chairman Donna Tanoue, Director Ellen Seidman, and other representatives of the regulatory agencies who will testify on the first panel, and also to all of today's witnesses. I appreciate the fact that this is going to be a long day with many witnesses and I look forward to your testimony.

    Today's hearing is going to be the beginning, not the end, to our committee's inquiry into subprime markets and predatory lending practices, and other important consumer concerns.

    I thank the Chair.

    Chairman LEACH. Thank you, Mr. LaFalce.

    Let me say, I would like to begin as rapidly as possible, but if there is someone who wants to make a brief opening statement, I would be happy to welcome it at this time. We have a five-minute rule, but that applies to the general witnesses.

    Mr. VENTO. Mr. Chairman, I will just place my statement in the record and thank you for holding the hearing.

    I would posit that one predatory loan that unjustly denies someone's equity is one too many, especially when there is no practical recourse. I think with the growth of the subprime market, the misclassification and all the other problems that are visited upon people, I would hope we would end up with tougher standards.
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    I appreciate the States trying to do what they are trying to do, but I want to commend the federally-chartered secondary mortgage institutions for attempting to add standards. Obviously, they are part of the problem if they were not to add such standards, and our other programs like the FHA and others. I think especially since these tend to focus around home ownership, it becomes even more important that we look to try to establish standards.

    I might also say I think this is part of the same issue with the under-banked and unbanked sort of phenomena that is going on with the check cashing operations. We need to pay closer attention to bring individuals and families into the financial marketplace in a way that they can receive the services and the benefits that we associate as necessary for consumers.

    I was especially appreciative of the criteria and precepts that you set down and hope we can work with you on that. I think we are going to need, in my judgment, a concentrated effort to deal with this. I had hoped we could act on legislation this year, at least in the House, on the LaFalce legislation and the Sarbanes legislation as a starting point.

    I am pleased to see our colleague from the Senate here, a former Member and good friend, Senator Chuck Schumer, who is taking a keen interest in this matter as well.

    Thank you, Mr. Chairman.

    Chairman LEACH. I would like to turn to Bob Ney next if I could. Congressman Ney has introduced legislation on the subject and Ms. Schakowsky has introduced legislation on the subject, as well as Mr. LaFalce. All will be reviewed as the day goes on, I am sure.
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    Let me recognize Bob Ney at this point.

    Mr. NEY. Thank you, Mr. Chairman.

    I realize we have witnesses, so I will put my opening statement in the record.

    I just wanted to say I do have H.R. 4213. There is a lot of different opinions on these different pieces of legislation. I am sure almost everyone will dislike these for one reason or another. I think this is a good hearing and airing out issues is good for the consumers and good for the country.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you.

    Ms. Schakowsky.

    Ms. SCHAKOWSKY. Thank you, Mr. Chairman.

    I also will be brief in deference to the witnesses and Mr. Schumer.

    I do want to thank you for laying out the precepts; Mr. LaFalce, for introducing his bill, of which I am a co-sponsor, and I also have a bill with some differences; and Mr. Ney for his bill. It gives me hope with all of the interest that we will pass legislation.
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    I just wanted to note that in Chicago, it is a very big problem. The National Training and Information Center has shown that home foreclosures have doubled since 1993, going from 2,000 to 4,000, and that the subprime loans have increased in that period from just about 3,000 to almost 51,000.

    We have a particular problem there, although it is a national problem. The Mayor of the City of Chicago has made this a priority, our State legislature has begun work on this, but my hope is that we can deal with this on a national level. I would hope we would have consideration of my bill as well, H.R. 3901, which has provisions to address this problem.

    I would ask that my statement be put in the record.

    Chairman LEACH. Without objection the gentlelady's statement and the statements of all Members of the panel will be placed in the record.

    Mr. LAFALCE. Would the gentlelady yield?

    First of all, I want to commend the gentlelady, she has been a real leader on the issue of predatory lending and I have worked very, very closely with her and look forward to working even more closely in the future as we come to grips with this.

    Second, Mr. Vento referred to our first witness, Senator Schumer, as being the Senator from the State of New York. Where I come from, we refer to him as the ''Senator from Upstate New York.''
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    Mrs. ROUKEMA. Mr. Chairman, I do want to ask unanimous consent to have my opening statement included in the record and particularly to ask unanimous consent, because it has become quite an issue, the question of whether or not Freddie Mae and Freddie Mac have written guidance in terms of predatory loans, I would ask that their standards and guidance written statement be included in the record.

    Chairman LEACH. Without objection, so ordered.

    Chairman LEACH. Ms. Lee.

    Ms. LEE. Let me ask unanimous consent to put my statement in the record also.

    Chairman LEACH. Without objection.

    Ms. LEE. I want to thank you and our Ranking Member, and Congresswoman Schakowsky for all of your focus and hard work on this issue and for the hearing today.

    All of us recognize the fact that in many communities here in this country we do have an economic boom. However, in low-income areas where banks have disappeared, we have seen the emergence of check cashing facilities, and sometimes in California, we have seen banks actually getting into the check cashing business.
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    Low-income residents have an opportunity and a right also to access credit, to be able to purchase homes, but they should not be victims to what really amounts to loansharking activities. So, predatory lending is a big issue for those of us who represent especially urban and low-income districts.

    I want to thank you on behalf of my constituents and consumers in the country for actually holding this hearing and giving us a chance to really look at how to make sure this stops and how to make sure that low-income residents do have access to reasonable credit mechanisms and vehicles.

    Thank you very much.

    Chairman LEACH. Mrs. Jones.

    Mrs. JONES. Thank you, Mr. Chairman.

    I am glad to be able to join with my Ranking Member, Mr. LaFalce, as original co-sponsor in his legislation. I thank you for sponsoring this hearing this morning.

    In the City of Cleveland that I represent, we have had the greatest number of housing starts than since the Korean War. It has been a wonderful opportunity for people of all incomes to have housing in our community. We have even had a lot of renovation and backfill in housing.

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    My concern, as well as my colleagues, is the whole issue of predatory lending and the senior citizens who are doing reverse mortgages and are not quite sure what it means to have a reverse mortgage. I am pleased to be a part of this hearing and I would ask my statement be admitted to the record as well.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you.

    Let me first ask unanimous consent to place the testimony of the following groups into the record: the Mortgage Bankers Association, the National Credit Union Administration, the National Association of State Credit Union Supervisors, the National Association of Federal Credit Unions, the American Land Title Association, and the National Neighborhood Housing Network. Without objection, their statements will be put in the record.

    Let me say briefly, before introducing the witnesses, that we will shortly have a vote on the House floor, so it would be my hope to hear from Senator Schumer, then probably proceed to the vote and then we will go to the next panel.

    Before introducing Senator Schumer, the Chair has to place a statement of a conflict of interest on the record. That is that my niece has recently become engaged to Mr. Schumer's campaign manager.


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    Chairman LEACH. It is a matter of some sensitivity in the family, but she is a wondrous young woman. Someday she will, hopefully, become more Republican in her instincts.

    I would also say we are always delighted to welcome Chuck. He is a graduate of this committee; he is one of the most distinguished United States Senators.

    Please proceed as you see fit.


    Senator SCHUMER. Thank you, Mr. Chairman.

    It is great to be back, and I want to thank you for your courtesy and everything else. Yes, we look forward to that marriage, and if it is anything like American politics, it will probably move both sides to the middle. I thank you for that, and thank you for your great work as Chair. As always, you have been fair and even-handed and on top of every issue this committee ought to be on top of, I think. Both sides of the aisle salute you for your stewardship as Chairman of the Banking Committee.

    I also want to thank my good friend, John LaFalce, who has been a leader on these issues for a very, very long time. His intelligence and dedication—and I can tell you, as much as I aspire to be a well-known figure in Upstate New York, I am in Western New York in his shadow, and that is a good place for me to be.
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    I also want to just say it is so good to see my friend, Bruce Vento, here today and looking well. I thought I heard your voice in the gym this morning. I don't know if that was the case, but I heard that Minnesota Vento and I went around the aisles looking for you just to say hello, and I am glad we found each other here.

    I thank all the Members of the committee for their indulgence and to see the committee has expanded, to see there is a Mr. Gonzalez on the committee once again is good news too. In any case, I will be brief, because I know you have the vote, Mr. Chairman, and would ask that my entire statement be entered in the record.

    Chairman LEACH. Without objection, that will occur.

    Senator SCHUMER. Mr. Chairman, this is a huge problem throughout our country and certainly in my State of New York. The problem of predatory lending has paralleled the increase in subprime lending, as everyone here has noted. Subprime lending is not the same as predatory lending. There are decent subprime lenders, and subprime lending plays an important role in financing mortgages, but while not all subprime lending is predatory, all predatory lending is subprime. While not all predatory lending is in minority neighborhoods, they seem to be the target of the worst loan scams.

    I have sat with people who lived by the American dream. They saved their $25 a week for five or ten years, a subway motorman or a clerk in a supermarket. We told them ''play by the rules,'' and finally that great day came when they could have their little piece of the rock, a home. And in swoops a predatory lender, and two years later, they have no money, no home, no dreams. That is a dagger in the heart, not only of that family, but to all of us who believe in the American dream for everybody. So we have to move with alacrity on this subject.
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    Let me just point out one of the reasons that we have such predatory lending in minority communities—there are many, and I am just beginning to learn them. I am exploring the role of brokers, which sometimes, because of RESPA, are encouraged to use the predatory or subprime lender rather than the commercial lender; I am looking at credit histories and how Fannie Mae and Freddie Mac could help in that area. One thing that happens—and this is something that is troubling—is a vacuum is created in many communities with commercial lending and that is why the subprimes, and particularly the predatory subprimes, can come in.

    We just did a study using HMDA data, a law we all worked to pass, in New York City, and it was incredible. This was talking about conventional lending. A black family with an income of $60,000 was more likely to be turned down for a loan than a white family with $40,000. You went to beautiful middle class, even upper middle class neighborhoods that were primarily African-American, Laurelton, Queens, average income $60,000-$70,000, half their lending was subprime. You go three miles north to Bayside, another neighborhood in Queens, whose income was a little lower, $57,000, but it is all white, and only 9 percent of their lending is subprime. I have been meeting with the leading bankers in New York to try and figure this out, why is it that the vacuum created that allows the subprime and often the predatory to come in?

    I am not going to ask that the record have our entire study, but we have a summary of it which is only three pages. We took six neighborhoods in New York City, six black and Latino neighborhoods, and six primarily white neighborhoods of the same income levels, and this pattern was exactly the same in each one. You might be on two different planets in terms of mortgage lending. So that is one issue I think we have to look at in terms of CRA and everything else.
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    The second thing we have to do after trying to deal with the vacuum is to look at the relationships in communities. As I mentioned, what is the role of brokers and realtors? Do they steer people to subprime lenders? How can the banks get more trust in communities? We heard a story where an African-American doctor, very high-income level, bought a home in White Plains, which is a well-to-do suburban neighborhood, and his broker referred him to a lender and the lender was subprime. He has a cousin who works for a bank and she said, ''My bank can get you a loan at a much lower rate,'' but he was so afraid that he would be turned down by the bank that he went ahead with the subprime. So there is an issue of establishing trust as well.

    Finally, the other thing we have to do is go after the predatory lending practices. I know there is legislation here from a good number of my colleagues from New York, along with my friend and Senator from Maryland—Senator Sarbanes has introduced excellent legislation. I have introduced a bill which has many of the same practices. We can, I believe, thread the needle, Mr. Chairman. We can keep subprime lending and yet go after predatory lending which is through the roof and has been unexplored. I have introduced legislation, as well, which goes a little further, but is the same basic template as the legislation that has been introduced.

    I hear the bells ringing and I know today is a very, very busy day in the House, so in conclusion, I would urge the committee to explore three things. One, why a vacuum is created, even in middle-income and upper middle-income minority neighborhoods in terms of mortgage lending? Two, what kinds of relationships exist there, and have existed for a long time, so that even if conventional mortgages are available, they are not being used? Three, going after the predatory lenders who are really the bottom-crawlers—when you hear the stories, it turns your stomach of what they do to people—going after them with a hammer so that we can clean up the subprime lending industry.
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    With that abbreviated testimony, I want to thank the committee, not only for the opportunity and the courtesy always extended, but for the great work you are doing in this area which is going to be groundbreaking and is going to help make the American dream much more available to many more Americans, particularly Americans of color.

    Chairman LEACH. Thank you, Senator.

    We do have a vote on the floor, but if we have time, I have one question from Mr. LaFalce.

    Mr. LAFALCE. Senator, I look forward to working with you and Senator Sarbanes on this as we have in the past. One very important question for today.

    Senator Moynihan and Mr. Lazio, and Hillary Rodham Clinton have given us a recommendation to vote yes on PNTR, do you want to give any counsel and advice?

    Senator SCHUMER. Far be it for me to give such wise Members counsel on such an important issue. I am watching the House very carefully.

    Mr. WATT. Mr. Chairman, may I just ask a question of the Chair?

    Chairman LEACH. Yes, of course.

    Mr. WATT. I don't seem to have Mr. Schumer's testimony and I would dearly like a copy of the study he referred to and to know who did it, if we could get that information.
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    Chairman LEACH. Without objection, the summary of the study will be placed in the record. Second, perhaps you could respond now?

    Senator SCHUMER. I would like to send every Member of this committee a copy of the entire study we did. My guess is if you did it in Chicago or in smaller communities, like Charlotte——

    Mr. WATT. Smaller communities?

    Senator SCHUMER. Smaller than Chicago.

    Mr. WATT. It is quite obvious Mr. Schumer never knew where Charlotte was and still doesn't know.


    Senator SCHUMER. Somewhere south of Brooklyn. I know that much.

    In any case, my guess is you would find this study would be replicated throughout the country, big communities and even bigger ones.

    Chairman LEACH. Chuck, we thank you very much for your testimony.

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    The hearing is in recess pending the vote.


    Chairman LEACH. The hearing will come to order.

    Our first panel will consist of: Gary Gensler, Under Secretary for Domestic Finance, Department of the Treasury; Bill Apgar, Assistant Secretary for Housing, FHA Commissioner, Department of Housing and Urban Development; Edward Gramlich, Board of Governors of the Federal Reserve System; Ms. Ellen Seidman, Director, Office of Thrift Supervision; John D. Hawke, Jr., Comptroller of the Currency, Office of the Comptroller of the Currency; Donna Tanoue, Chairman, Federal Deposit Insurance Corporation; David Medine, Associate Director, Division of Financial Practices, Federal Trade Commission; Thomas Curry, Commissioner of Banks, Commonwealth of Massachusetts on behalf of the Conference of State Bank Supervisors; and Andrew D. Celli, Bureau Chief for Civil Rights, Office of the Attorney General for the State of New York.

    This is an extraordinarily large panel and the Chair would ask unanimous consent that all statements will be placed in the record in full and without objection, so ordered. Each of you are entitled to proceed as you see fit.

    Let me begin with Secretary Gensler. Welcome back to the committee. You have a wonderful reputation here. Please proceed.

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    Mr. GENSLER. Mr. Chairman, I will try to be brief and summarize my remarks.

    It is good to be here with this committee and all of you, Representative LaFalce and all the Members.

    I appreciate the opportunity to talk about this critical issue and how to contain and combat the prevalence of abusive lending practices and predatory lending.

    At Treasury, we believe this is one of the most important issues that we can work on. Our mission is to ensure all Americans can participate in this great economic advance that our Nation has been participating in.

    That is why Secretary Summers, working with Secretary Cuomo, has convened a Joint Task Force on Predatory Lending. We are conducting field hearings, we have had four and will have one more this month. The hearings will culminate with a report to Congress, not only on the practices of predatory lending, but with a specific plan and recommendations on behalf of the Administration on how best to combat these abusive practices.

    These practices, I would say, hurt not only individuals and families, but whole communities, threaten the economy and threaten to undo enormous progress that we have made in the past several years.

    Before I talk about some of these abuses, I just wanted to say a few words about the subprime market that I know you will hear much about today.
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    Subprime lending, which is a commonly used term for lending to individuals who have either impaired credit or have not been a part of the credit market yet, tends to be primarily for debt consolidation—70 percent of subprime lending is for consumer credit card consolidation—and borrowing against a home.

    Subprime lending generally is characterized by higher risk, lower loan amounts, higher loan origination costs and faster prepayments, meaning people keep these loans out for a shorter period than prime loans. As a consequence of this, they tend to have higher fees and costs, but there are also predatory practices that lead to yet even higher costs.

    Since Congress last looked at this in a serious way and passed the HOEPA laws in 1994, subprime lending has grown in a five-year period tenfold and is now a very large market at $370 billion of subprime lending in aggregate.

    While the large increase of subprime lending has expanded access to credit for many borrowers, abusive practices have also grown. In our public forums, we have found a number of trends. I will just highlight some of these and the testimony has more detail.

    One area is ''loan flipping.'' This is the practice of repeated refinancing, which has the unfortunate consequence of stripping equity out of an individual's home.

    Two is excessive fees. Sometimes these excessive fees pack in unneeded services to the individual, such as single premium credit life insurance. It is often rolled into the loan and the individual doesn't even understand the fees.
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    Three is the prevalence of asset-based lending, where there is not enough focus on an individual's ability to repay from either their income or other assets.

    Four is outright fraud. I am sorry to say there is a great prevalence there. In my hometown of Baltimore, we had a hearing last week. As one example, there is a particularly pernicious form of fraud called ''asset flipping,'' where a local broker or home improvement contractor will actually buy a home, do a little spit and polish with a paint job, get a fraudulent appraisal, double the price—or sometimes more—and then package it all together and sell the home. I am not talking about one or two examples, but in Baltimore, of hundreds of examples of this that are well documented. HUD has held a series of hearings on this and the FHA is actually taking action.

    These patterns have emerged for several reasons. First, certain actors prey on the most vulnerable in our society, whether the elderly, recent immigrants, minorities or individuals of lower income and less education.

    Second, borrowers in these markets often have limited access to mainstream financial services. This leads to two things, as the Senator said earlier. Some borrowers who really would qualify for prime loans—we estimate anywhere between 15 and 35 percent of the subprime market could qualify for prime and cannot get that prime loan. Second, the rate and term competition is limited. Subprime lenders don't tend to compete as much on price.

    The third theme, beyond preying on vulnerable populations, beyond the limited access to mainstream financial services, is that abusive practices tend to be coupled with high-pressure sales tactics, whether by a mortgage broker, a home improvement contractor, sometimes a lender themselves in the local community.
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    In terms of where HUD and Treasury are going with this report, we plan to have a report for Congress next month, but there are certain areas that we wish to highlight. Let me name four areas very briefly.

    First is consumer financial literacy, consumer education, clear disclosure of the possibility of reforms on the various laws, RESPA and the others and better consumer counseling.

    Second is sales practices. While enhanced consumer literacy is a start, we must recognize it is not enough. In terms of sales practices, unscrupulous actors in this market are still engaging in deceptive and fraudulent practices and they victimize the most vulnerable amongst us. We are looking very closely at this and also are considering how to encourage good sales practices in these markets.

    Third, because we believe that literacy and sales practices are not enough, we are also looking very closely at specific abusive practices, such as the prevalence of single premium credit life insurance or balloon payments, to name two as an example.

    Lastly, we are looking specifically at market structure, how to bring more competition into this marketplace, not only amongst the subprime lenders, but all the way through the chain and looking from the primary market to what is called the secondary market as well.

    In conclusion, as we work with HUD to finalize our report. We hope to develop very specific recommendations that will appropriately balance preventing these abusive practices, which really have no place in our society, with the important promotion of access to capital to all Americans to participate in the great economic success of our Nation.
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    Thank you.

    Chairman LEACH. Thank you very much, Mr. Gensler.

    Mr. Apgar.


    Mr. APGAR. On behalf of HUD Secretary Andrew Cuomo, I want to thank you for the opportunity to testify today on what HUD believes to be the widespread abusive lending practices commonly termed ''predatory lending.'' While abusive practices unfortunately occur in all segments of the mortgage market, my testimony focuses today on the subprime market.

    While we have heard that the rapid growth of subprime lending has many positive features, unfortunately predatory lending threatens to undermine all that is good about subprime lending. Recognizing these growing problems, HUD Secretary Andrew Cuomo joined forces with Treasury Secretary Larry Summers to form a HUD Task Force, hold hearings and develop a series of recommendations. I co-chair the task force at HUD with my colleague, Gail Laster, our General Counsel.

    At each forum, we have heard from the victims of predatory lending. More powerful than statistics or analysis, these victims tell us what the problem is. In California, we heard a story of a 62-year-old woman who owned her house dead free, that was until she signed up for a $30,000 subprime reverse mortgage loan. The initial loan terms looked good, but unbeknownst to her, the method of calculating the interest rate would change after four years and the lender would obtain a 55 percent equity stake in her home. When she sold her home six years later, the lender took $126,000, more than half the equity in her home. Remember, this was for a $30,000 loan.
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    In Atlanta, we heard from a 70-year-old African-American woman who is about to lose her home to the practice of loan flipping that Gary Gensler described. In 1989, this woman had $40,000 in equity. Today, after a series of costly refinances, she is burdened with a $97,000 mortgage that she cannot pay and is about to lose her home.

    We also heard from a woman who wanted to finance the purchase of a $1,500 gas heating system. Rather than getting appropriate consumer credit, a mortgage broker convinced her to refinance the $26,000 mortgage she had on her home into a new $33,000 mortgage with high interest rates and excessive fees. She is struggling to meet the payments on that loan.

    These are just some examples of the predatory practices that were identified in the recent HUD/Fed report on RESPA, TILA and other matters. As detailed in the HUD/Fed report, predatory practices include charging illegitimate fees, employing bait-and-switch tactics, aggressive sales solicitation, targeting low-income, minority and elderly homeowners and racial steering to high-rate lenders and home improvement scams.

    Admittedly, it is difficult to get detailed information on the current extent of each of these practices, but there can be little doubt that these practices are on the rise. This is the consistent report of State consumer affairs organizations, housing counselling agencies and legal services agencies. When we go to a town for one of our forums, people say they are now overwhelmed with folks coming in who are victims of these predatory practices.

    The most dramatic evidence of the growth of predatory practices is the wave of foreclosures that is now coming out of the subprime market. These foreclosures, as Secretary Gary Gensler mentioned, not only ruin the financial futures of families, they threaten to destabilize entire communities.
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    You will hear testimony today from Gail Cincotta. Her group documented that foreclosures on subprime mortgages rose dramatically in Chicago from 1993 to 1998. In Atlanta, we heard the same story. Between 1996 and 1999, overall foreclosures rose by 7 percent. Foreclosures by subprime lenders grew by 232 percent. Abt Associates, who did that study, also found that subprime's share of foreclosures is the highest in the lower income and predominantly minority communities.

    The HUD report last week targeting Baltimore area issues identified the same pattern. Their subprime loans made up 33 percent of the 1998 market share for loans and loan communities. By early 2000, subprime lenders accounted for 50 percent of the foreclosures in these areas. Moreover, many of the subprime loans were in foreclosure only months after they originated. In Baltimore, on average, subprime foreclosures occurred less than two years after the loan was originated.

    These local studies mirror a national report that you will hear about this afternoon from Cathy Lesser Mansfield, who will testify on the explosion of foreclosures coming out of subprime lending across the country. Now is the time for action. The foreclosure data shows the tremendous cost imposed by predatory practices.

    At HUD, we are working on a task force formed at the request of Senator Barbara Mikulski. Last week we announced a series of reforms to make sure that subprime lending did not gain a foothold in the FHA programs.

    Our work in Baltimore and in the public forums with Treasury have underscored for us the urgency with which we must act.
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    I would like to highlight eight areas for your consideration. First and foremost, we need better information on high-cost lending. To me it is simply unacceptable that Congress and this committee and others charged with the oversight of the Nation's housing finance system, and the public do not have readily available data on the extent of high cost lending in our communities.

    As the President stated last year, we also need to extend HOEPA protections to cover a larger share of high-cost loans. Congress could consider restricting certain loan features strongly associated with abusive lending, including single premium life insurance.

    We must improve consumer protection by increasing enforcement against fraudulent loan practices.

    Fifth, we must review whether creditors making high cost loans should be required to take into account the consumer's ability to repay. Setting the consumer up for a quick foreclosure has no place in today's marketplace.

    The task force is also looking at how best to provide borrowers more accurate and meaningful disclosures. We are taking a careful look at the role of secondary markets in purchasing and securitizing predatory loans.

    Finally, we need to expand consumer education. This year, the Administration requested $24 million for counseling and Congress should fully fund this request.
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    These are just some of the recommendations that will be forthcoming from the HUD/Treasury Task Force and I look forward to submitting the complete report to the Congress in the middle of June.

    Chairman LEACH. The hearing will recess briefly.


    Chairman LEACH. I apologize. A lady in the audience needed some medical attention and the staff is ensuring that she gets it.

    Please proceed.

    Mr. APGAR. I have completed my testimony.

    Chairman LEACH. Thank you, Mr. Secretary.

    Governor Gramlich.


    Mr. GRAMLICH. Our testimony includes a lot of the information that is also in the other testimonies on what predatory lending is and how difficult it is to define. In the interest of time, I will pass over that and just go right to the part of the testimony that says what the Fed is doing about the issue.
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    Let me start with the report that Mr. Apgar just referred to that we made to the Congress in July 1998. The Board and HUD submitted a report to the Congress on the issue of how certain lending and housing laws might be reformed. This report included a detailed analysis of the problem of abusive practices in mortgage lending and we had several recommendations in that report. We have attached it to our testimony.

    The report noted that any regulatory scheme involves tradeoffs. Overly broad rules could unnecessarily burden the entire home equity credit industry in an effort to regulate the minority of unethical or dishonest players. Any legislation should try to focus on abusive practices without interfering with the legitimate credit transactions. If I may say, that is the trick in this. This is a difficult issue for that reason.

    Given the wide range of practices that are included in the notion of what is ''predatory,'' a multifaceted approach is likely to be the most effective policy procedure. The Board has convened a nine agency working group that has been referred to by various speakers and includes most of the agencies sitting here today.

    The aims of the group are to tighten enforcement of existing statutes and to establish a coordinated approach to predatory practices across all the nine agencies.

    The Board is also required to hold periodic hearings on the effectiveness of HOEPA in curbing abusive lending. We last did so in 1997 and that formed the basis of our 1998 report. We are planning another round of hearings this year and we are actually leapfrogging on the hearings that have already been held by Treasury and HUD to try not to go over well-trodden ground. We are planning these new hearings and we are enlisting our Consumer Advisory Council in forming the specific questions and preparing for specific recommendations.
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    We are also pursuing other strategies. Trade associations for subprime lenders and mortgage brokers have been actively engaged in developing self-regulatory guidelines. Secondary market participants such as Fannie Mae and Freddie Mac are developing their strategies for ensuring that they do not finance predatory loans.

    Finally, a big problem in this—and we have all stressed this in our testimony, but I would like to end on this note—that consumer education is very important. Community outreach efforts including many of our own, consumer education, counseling and all of these types of things should be used to increase consumer understanding of their credit options and to make sure they don't get themselves involved in credit transactions that become very unfavorable to them.

    Thank you very much.

    Chairman LEACH. Thank you very much.

    Ms. Seidman.


    Ms. SEIDMAN. Good morning.

    Thank you for having this hearing and for the forward-looking precepts that you, Mr. Chairman, have enunciated this morning and for the thoughtful legislation that Members of this committee have introduced.
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    Predatory lending is an issue of serious concern to OTS, not only from a consumer perspective, but also because both directly and indirectly, it can have a negative impact on safety and soundness.

    I appreciate the opportunity to add our voice to those raising the alarm about predatory lending. I will skip over the description of what constitutes predatory lending. Our best efforts at it are in our testimony and there has already been a lot of discussion.

    Let me talk to you about what OTS is doing. To learn more about predatory mortgage lending practices and how to address this problem, on April 5, we published an advance notice of proposed rulemaking. The ANPR sets forth six goals that we will balance in considering whether changes to our lending regulations are appropriate.

    These include encouraging safe, sound and innovative lending activities; averting lending that preys upon consumer lack of knowledge or limited options; and enabling thrifts to compete responsibly with other lenders. We hope you will have an opportunity to review the ANPR and we welcome your comments and suggestions.

    We will share the information we gather from the ANPR with our fellow regulators and with you.

    We have identified three interrelated approaches to combat predatory lending, what I call the three ''E's'': examination for enforcement of existing laws and regulations; encouragement of responsible subprime lending; and education of consumers and investors.
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    For Federal banking agencies, ensuring enforcement of existing laws that govern predatory practices begins with fulfilling our supervisory role. Consumer compliance exams are a standard part of OTS oversight. Examiners follow interagency procedures to ascertain an institution's record of compliance with Federal consumer protection laws and regulations.

    Our approach emphasizes the need for institutions to establish and implement proper policies and maintain internal controls appropriate to their particular business operations and operating risks. This approach has a sound track record.

    When an examination identifies management deficiencies that allow illegal predatory lending practices to develop, and I must say we have seen very little of this, but we have seen some, less in the mortgage area than the credit card area, OTS can take action to prevent or remedy a problem.

    Some believe that the problem of predatory lending can be sufficiently controlled by beefing up disclosures. As demonstrated in my written testimony, while enhanced disclosures may be useful, we cannot rely on them. Those targeted by predatory lenders often do not have the background to understand the impact of technical and sophisticated loan terms. Pressure tactics that dissuade borrowers from taking the time to ask for help from an independent source are part and parcel of predatory practices.

    While enforcement is a piece of the solution, unfortunately it is generally after the fact and limited in scope. At best, it provides restitution, not restoration of the home ownership, and functions as a preemptive warning to others.
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    A systemic approach requires attention to the other two ''E's'': encouragement of responsible subprime lending and education of consumers and investors.

    Perhaps the best way to fight predatory lending is in the marketplace itself. An environment that encourages responsible competition in underserved markets will weed out predatory lenders. One of the reasons these lenders are successful is the absence of competition in markets where they operate.

    Many retailers have discovered that historically unattractive markets have been undervalued in terms of business opportunity and overestimated in terms of risk. Retailers are opening profitable businesses in neighborhoods like Harlem, South Central Los Angeles and Chicago's Little Village. The opportunities only seem to be expanding.

    Seeking responsibly priced business with responsible terms in these underserved markets is a matter of enlightened self-interest for depository institutions. We are encouraging thrifts to look hard at their changing marketplace and to think about their future strategically. Institutions must figure out who their customers are today, who they will be tomorrow, and how to deliver the products and services they need to meet this challenge.

    The third element of our solution is education. Providing consumers information about their options for obtaining credit from responsible lenders, and about the abuses of those who prey on the vulnerable, can be a strong bulwark against the predatory lender.

    Community-based organizations play a critical role in this area. Together with financial institutions, they can teach not only perspective homeowners, but also those who have owned their own homes for years, often free and clear, how to avoid potential home equity scams.
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    Education can also help investors to be more discerning in their purchase of securities backed by high-cost loans. The activities of large predatory lenders will quickly shrivel if they are denied financing. Participants in the secondary market, in particular, Fannie and Freddie, are beginning to recognize that predatory loans are not good business, not simply because they are unethical, but because they can damage reputations and hurt stock prices.

    It is critical, however, not to pursue this in a manner that threatens the viability of responsible subprime markets.

    The American dream of home ownership is at the heart of the progress we have made as a Nation toward the goal of giving all citizens the opportunity to earn their share of our prosperity. During the first quarter of this year, we achieved a new record of 67 percent of all families owning their homes.

    In the last few years, the pride we have all taken in the steady increase in home ownership has been tempered by stories about some lenders who have preyed on homeowners who are least-able to defend themselves. Let us look back on this year as the turning point in the fight against predatory lending, knowing that future home ownership records will be even more impressive, because fewer new and existing homeowners will be at risk of losing what they have always dreamed of.

    Thank you.

    Chairman LEACH. Thank you, Ms. Seidman.
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    Our next witness is the Comptroller of the Currency, John Hawke. Please proceed.


    Mr. HAWKE. Mr. Chairman, Ranking Member LaFalce, and Members of the committee, I appreciate this opportunity to appear before you today to testify on issues regarding predatory lending practices in the consumer credit industry.

    A number of witnesses have made the point that a distinction needs to be drawn between subprime lending and subprime lending that carries abusive practices. I will not go over that ground again.

    I will simply say that those lenders who engage in abusive practices undermine the objectives of longstanding national social and economic policies. In particular, the promotion of home ownership and the corresponding benefits of stronger neighborhoods and the building of wealth for a broader spectrum of American families. This committee's focus on abusive lending practices is therefore of significant national importance.

    The OCC is fully prepared to use its authority to combat abusive, unfair and deceptive lending practices if they are engaged in by national banks. We will employ our supervisory powers through our safety and soundness, fair lending and consumer compliance examinations, our licensing and chartering process, and individual enforcement actions to deter lending practices that can be characterized as abusive or predatory.
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    One common characteristic of predatory lending that we can address through our supervisory process is the practice of making home equity loans under circumstances where the lender cannot reasonably expect repayment other than through a foreclosure sale of the borrower's home. This is a classic type of unsafe and unsound lending.

    To help address this problem, we plan to issue guidance that directs examiners to carefully review lending policies and practices to ensure that they would not permit loans to be made without a reasonable expectation of repayment without resort to the collateral. If the review indicates a heightened risk of problems in this area, our guidance will direct examiners to take appropriate action. Loans predicated on home equity where the borrower does not demonstrate the capacity to repay the loan as structured would be adversely classified, and further accrual of interest on the loan may be disallowed.

    Through our supervisory process, we can also address the adverse fair lending implications of predatory loans. In the near future, the OCC will be issuing additional guidance emphasizing that abusive lending practices can involve unlawful discrimination. Our examiners will be directed to look at factors associated with abusive lending practices that may indicate an increased risk of illegal discrimination. This guidance will help set the scope and focus for our fair lending examinations and may lead to targeted fair lending investigations.

    On a related issue, a significant concern has been raised about the appropriate consideration under the Community Reinvestment Act of loans—both originations and purchases—that can be characterized as abusive or predatory. Certainly, it is fair to ask how an institution can be helping to meet the credit needs of its entire community if it engages in lending that is designed to strip equity from low- or moderate-income homeowners. We need to address how loans with these characteristics can be identified in a CRA exam. We also need to address the CRA implications of such loans, specifically, whether they should receive no, or even negative, CRA credit. This is a subject that needs to be addressed on an interagency basis by all of the agencies having CRA supervisory responsibilities.
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    Because of the limitations of the current legal framework, we believe it is important for Congress to address these issues. The bills that are now before the committee would fill gaps in the current law and address many of the concerns that have been raised, and we believe they are worthy of prompt and serious consideration.

    It is important to ensure that any reform be carefully crafted to avoid unintended consequences. While we clearly need to address real abuses that exist, particularly in connection with home-secured loans, we also need to preserve and encourage consumer access to credit, meaningful consumer choice, and competition in the provision of financial services to low- and moderate-income families. Determining how to draw the line between predatory and legitimate credit practices in a way that will both combat abuses and advance these other objectives is a major challenge. I commend the committee for beginning the debate on these important concerns.

    Thank you for allowing me this opportunity to present the OCC's views, and I will be happy to take any questions the committee may have.

    Chairman LEACH. Thank you.

    Ms. Tanoue.


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    Ms. TANOUE. As your letter of invitation and the various legislative proposals put forward by the Members of this committee suggest, abusive lending practices in the home mortgage industry do exist. Unfortunately, they are often directed at low-income, elderly and minority borrowers.

    While the FDIC recognizes that predatory lending practices raise a number of consumer and safety and soundness concerns, we believe that federally-insured institutions have a good record of avoiding involvement in such activities.

    Nonetheless, the FDIC is concerned that insured institutions, like other institutional investors, may be involved in the predatory loan market in an indirect fashion. The FDIC is currently addressing the issue of predatory lending in a number of ways.

    First, we are writing guidance for insured institutions describing effective practices to keep them from inadvertently acquiring loans that have predatory features or acquiring securities backed by such loans.

    Second, we will work on an interagency basis to revise CRA exam practices so that a bank's purchase of loans or securities backed by such loans that have predatory terms or features cannot be used to improve a bank's CRA rating.

    Third, we are giving positive CRA consideration to bank-sponsored programs that combat predatory lending by fostering financial literacy.

    Fourth, we are working with the other agencies to review certain consumer protection laws and regulations to determine whether changes may be warranted.
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    Fifth, the FDIC also is working on a financial literacy campaign to educate consumers about the risks of predatory lending.

    Sixth, and finally, we are holding several public forums in which community organizations, Government officials and members of the financial sector can meet and explore effective means to protect consumers. We held one such meeting in Boston yesterday, hearing from twenty-two panelists.

    Interestingly, Nick Retsinas, Harvard University's Director of the Joint Center for Housing Studies, someone familiar to this committee, told us about a novel type of predatory loan that is showing up—cash leasing. Intended to circumvent State usury laws, predatory lenders lease cash at 30 percent interest rates for fifteen days.

    We heard from the panelists that predatory lending is a complex problem not susceptible to a quick and easy fix. It will require a multifaceted approach involving many institutions and organizations individually and collectively.

    It has become increasingly clear that the only way to really fight predatory lending is to take the incentives away, to do this from all directions using legislation, regulation, effective and vigilant enforcement and perhaps most importantly, public education. Also, mainstream financial institutions must make a greater effort to serve markets that predatory lenders target.

    In conclusion, I would say that we at the FDIC look forward to working with this committee and all of our regulatory colleagues in combating predatory practices.
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    Thank you.

    Chairman LEACH. Thank you.

    Mr. Medine.


    Mr. MEDINE. Mr. Chairman, Members of the committee, I appreciate the opportunity to appear before you today on behalf of the Federal Trade Commission to discuss the serious problem of abusive lending practices and the subprime lending industry, commonly known as ''predatory lending.''

    The Federal Trade Commission is working in a number of ways to address abuses in the subprime market. First, the Commission has made halting subprime lenders who engage in predatory lending practices a top enforcement priority. This past March, the Commission announced a settlement, along with the Department of Justice and the Department of Housing and Urban Development, with Delta Funding Corporation, a national subprime mortgage lender.

    The Commission alleged that Delta extended high-cost loans to borrowers based on the borrower's collateral, rather than considering the borrower's ability to make the scheduled payments. The settlement provides for nationwide injunctive relief.
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    Last year, as part of Operation Home Inequity, the Commission settled cases with seven subprime mortgage lenders for violations of the Home Ownership and Equity Protection Act, the Truth in Lending Act, and Section 5 of the FTC Act.

    The HOEPA violations included failure to provide required disclosures, asset-based lending and use of prohibited terms—such as improper use of balloon payments, increased interest rates after default and prohibited prepayment penalties. The Commission obtained substantial remedies, including redress of over half-a-million dollars and in the case of one lender, a ban against any future involvement with high-cost loans secured by consumers' homes.

    Also last year, the Commission settled charges that a major mortgage lender, Fleet Finance, failed to provide accurate and timely disclosure of credit terms of home equity loans and failed to provide consumers with information about their right to cancel their credit transactions. The settlement provided for $1.3 million in consumer redress as well as injunctive relief.

    In January 1998, the Commission filed a complaint in Federal District Court against Capital City Mortgage Corporation, a Washington, DC. area mortgage lender and its owner, alleging numerous violations of a number of Federal laws resulting in serious injury to borrowers, including the loss of their homes. Many borrowers allegedly faced foreclosures on their properties after which the company would buy the properties at auction at prices much lower than the appraised value of the properties. That case is still pending in court.

    In addition to its enforcement activities, the Federal Trade Commission also has an aggressive consumer education program and has published a series of free publications specifically for homeowners and potential home buyers in order to help consumers avoid predatory lending practices.
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    While some of the predatory lending practices we have seen can be addressed through current laws and regulations, additional statutory changes would enhance consumer protection in this area. The Commission offers four recommendations.

    First, the Commission urges the committee to consider expansion of HOEPA to prohibit loan ''packing'' through the financing of single premium or lump sum credit insurance premiums, as well as other loan ''extras,'' in loans covered by HOEPA. A single premium scheme that commits consumers up-front to long-term credit insurance precludes them from ever making a separate decision about insurance, adding significant cost to the loan.

    We also recommend that lump sum finance credit insurance premiums and other extras count toward HOEPA's fee-based trigger so that predatory lenders will not be able to avoid HOEPA's requirements simply by shifting the cost of the loan to credit insurance.

    We also recommend that HOEPA provide the Commission and other law enforcement agencies with the power to impose civil penalties for HOEPA violations. In the absence of a specific civil penalty provision under HOEPA, damages and law enforcement actions may be viewed as simply a cost of doing business by predatory lenders.

    Finally, we recommend that the Congress prohibit mandatory arbitration clauses in loans covered by HOEPA. Mandatory arbitration agreements undermine consumers' ability to exercise statutory rights that protect consumers in the credit marketplace.

    At this time, the Commission recommends only these changes to HOEPA, although it is considering other possibilities and examining predatory lending generally and may have additional recommendations in the future, including imposing individual liability on lenders subject to HOEPA.
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    Using its enforcement authority, the Commission continues to work to protect consumers from predatory lending abuses. In addition, the Commission supports the expansion of HOEPA protections to enhance consumer protections against predatory lending.

    Thank you.

    Chairman LEACH. Thank you.

    Our next witness is Mr. Curry.


    Mr. CURRY. Thank you for the opportunity to testify today on high-cost lending and predatory practices associated with high-cost loans.

    I am Thomas J. Curry, Commissioner of Banks for the Commonwealth of Massachusetts and Chairman of the Conference of State Bank Supervisors. Today I am testifying on behalf of CSBS.

    As State regulators, we are keenly aware of the elements that make this issue so complex. These include the clear benefit to traditionally underserved consumers from the wider availability of credit through acceptable forums of subprime lending.
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    The abusive predatory practices that have at times been associated with such lending and the frustrations that States that pass laws and enact regulations to protect consumers, but which sometimes hinder their efforts by Federal law and preemptive interpretation.

    I can assure you that the issue of predatory lending is at the top of the agenda of many State legislatures and State regulatory agencies. However, I must add that all legislators and regulators, both State and Federal, should consider whether enforcement of existing laws is adequate before considering additional new laws or regulations to the books.

    As I have detailed in our written testimony, many States have responded through statute or regulation to protect consumers from predatory practices. Recently, States such as North Carolina through statute and New York through regulation have targeted responses aimed at emerging predatory practices. New York also has been unique in its focus on preventing the securitization of predatory loans. The New York State Banking Department is also currently working with the SEC on guidelines for the securitization of these loans.

    States have also focused on enforcement of existing laws to address abusive lending tactics. In my own State, we have aggressively reviewed the actions of subprime lenders and moved against those entities deemed to be engaged in predatory lending. Recently, my office has worked closely with our Attorney General's office on two egregious cases arising from our license lender examination program.

    Washington State's Department of Financial Institutions also recently took a lead in investigating and then revoking the license of a major mortgage lender engaged in predatory lending.
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    A number of States such as New Jersey and Virginia have expressed considerable frustration in their ability to enforce their State laws because of Federal preemption. It has been perhaps the unintended consequence of Federal preemption under the Alternative Markets Transactions Parity Act that has made it difficult for many States to offer the protection that their consumers demand. This result was illustrated by the February 7 General Accounting Office report to you, Mr. Chairman, on the Parity Act and OTS and OCC preemption.

    What we have concluded from this report is that preemption is a multifaceted issue requiring a deeper level of communication between Federal and State regulators than we have had in the past. Federal legislation and regulation must consider the consequences of preemption and recognize the important role States play in the area of consumer protection.

    We acknowledge that preemption may at times be necessary to facilitate a modern banking system, but preemption must be held to a high standard. It must be used under the principle that it is for the benefit of both businesses and consumers. That is why Federal preemption, we argue, must be done in the manner that clearly spells out both its necessity and its benefits.

    The States are the laboratory for innovation and for developing the best practices and products and services and consumer protections. States are often the first to see trends and problems and the first to develop safeguards that both protect consumers and allow depository institutions to thrive. Federal polices and procedures should support and not hinder the States' role.

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    Again, thank you for the opportunity to testify to the committee on behalf of CSBS and I look forward to responding to any questions you may have.

    Chairman LEACH. Mr. Celli.


    Mr. CELLI. I would like to thank everyone for inviting the New York Attorney General's Office. My name is Andrew Celli and I am Chief of the Civil Rights Bureau in that office.

    As you may know, the New York Attorney General has been investigating the subprime industry at both the lender and the broker levels for more than a year. In September 1999, our office entered into a detailed Federal court consent decree with a major subprime lender, Delta Funding Corporation. Along with the New York State Department of Banking, and with the assistance of a nationally known accounting firm, we continue to monitor Delta's compliance with that consent decree.

    This experience of investigating and litigating against, negotiating with and monitoring major subprime lenders has given our office some insights into the nature of predatory lending in New York and the principles and practices that work best to combat such abuses. Today, I want to talk about some of the issues we found in our investigation and continuous monitoring.
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    First, a principal point, good subprime loans can be an important mechanism for bringing credit to underserved communities and borrowers, but not all credit is good credit, even in areas where credit is scarce. Indeed, in this market, credit that is inappropriate to the borrower or extended on unfair terms is what predatory lending is all about.

    Predatory lending practices occur when subprime lenders, and mortgage brokers with whom they deal, exploit the vulnerability of higher risk borrowers, as well as the unavailability of other forms of credit, to take unconscionable profits. I will skip over all the details, because you have heard so much from the Federal regulators and move on to what we found in our investigation and what we are trying to do.

    Today, I want to discuss three practices that, in my view, are at the core of the problem with the subprime industry. First is the extension of credit without regard to the borrower's ability to repay; second, the practice of pressuring borrowers to refinance loans simply for the purpose of churning additional fees, even when a refinancing puts the borrower in a worse financial position than he or she had been before; and third, the charging of excessive broker fees.

    Turning to the issue of extending credit without regard to ability to repay, this is a practice sometimes referred to as asset-based lending. Homeowners—often those with little or no financial experience or sophistication, and in New York, too often members of racial or ethnic minority groups—are often pressured into taking subprime mortgage loans which they clearly have no ability to repay.

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    For example, some owners are pressured to take out loans with monthly payments so high that they are left with less than $100 every month to meet their other expenses. Needless to say in these kinds of cases, which we saw repeatedly in our investigation of Delta Funding, default and foreclosure become all but certain.

    As this committee knows, the Home Ownership and Protection Act of 1994, HOEPA, forbids lenders from extending loans without regard to the borrower's ability to repay. HOEPA's prohibition covers so-called ''high cost'' loans, that is, loans on which the points and fees exceed 8 percent of the total. As important as this prohibition is, its powers in real world relevance are diminishing.

    We found that the number of HOEPA-covered loans is shrinking as lenders evade the HOEPA definition by bringing in loans under the statutory definition of ''high cost.'' We also found that HOEPA's standard of ''without regard to ability to repay'' is sufficiently vague that enforcing it in court raises real challenges.

    Our decree, the Delta decree, deals with these issues by applying strict residual income requirements to all Delta loans, not just HOEPA loans. Residual income requirements are designed to ensure that borrowers have the financial wherewithal both to make the payments on the proposed loan and to pay for life's essentials—food, clothing, utilities and so on.

    Before a Delta loan can be approved, Delta underwriters must demonstrate that after accounting for the expected monthly payment, the proposed borrower still has a certain absolute amount of income left over to cover other expenses. Residual income—which is pegged to the cost of living in a relevant geographic area and the number of persons within the household—is a fixed dollar amount, not a percentage.
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    To be sure, residual income requirements mean that some potential borrowers will not get loans, but our experience was that such consumers ought not get loans, because in all likelihood they will not be able to make their payments on a sustained basis.

    Turning to the issue of ''flipping.'' Flipping occurs when homeowners are pressured to refinance their existing loans and thus pay a new round of fees, even though the new loan provides virtually no material benefit. When flipping occurs, the new loan leaves the borrower worse off than she had been under the previous loan as the new fees generated for the lender and the broker create a greater total indebtedness and higher monthly payments.

    For example, in one case, the borrower with a $75,000 mortgage was pressured into refinancing that mortgage with a new $90,000 loan. The additional $15,000 all went to cover fees to the lender and the broker. The borrower did not receive a single penny.

    The Delta decree effectively prevents this by requiring that whenever a loan is refinanced, the borrower's monthly payments may not increase by more than 2.5 percent of the new funds which the borrower obtained from the loan. Because the lender cannot charge the commensurate increase in overall monthly payments that would ordinarily result from paying interest on new extra fees, the 2.5 percent rule bars pure flipping and creates a strong disincentive to make loans that provide only marginal benefits to the borrower.

    Finally, the third practice involves excessive broker fees. Many mortgage brokers in the subprime industry receive fees up to 10 percent of the total loan. Other brokers inflate their fees through what is known as a ''yield spread premium.'' I am sure the committee is very familiar with this.
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    A yield spread premium is paid by the lender to the broker whenever the broker convinces a borrower to take out a loan at an interest rate above ''par,'' that is, at a rate higher than the rate the lender would otherwise quote to a comparable borrower.

    Our investigation uncovered standing agreements between brokers and lenders, by which lenders automatically approved borrowers for higher-than-par interest rates—without telling the borrower—just so that broker can receive his yield spread premium.

    There are two changes to the law that we think would tend to eliminate these problems. First, given the grave abuse of yield spread premiums, we have supported State proposals to prohibit them entirely. In the alternative, we have supported a rule that permits lenders to pay and brokers to collect yield spread premiums only where they can show that such yield spreads result in a lower, up-front broker fee to the borrower. In other words, the lender must show that the borrower received a real benefit in return for the higher interest rate.

    In addition, we have advocated an outright cap on fees in the subprime market. In the regular prime market, a mortgage broker's fee of 1 or 2 percent is standard. Notably, even when Delta originates a loan and does the broker's work, it only charges a 2 percent fee for this work. Our investigation revealed no reason for allowing significantly higher broker fees when dealing with the subprime market and therefore, we advocate a 3 percent overall cap on broker fees and limiting the definition of what goes into a broker fee or expanding the definition so that it is a true 3 percent and not a false 3 percent.

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    Chairman LEACH. Mr. Celli, you have gone over quite a bit. Can you summarize?

    Mr. CELLI. In summary, these are proposals we have implemented. I am happy to be here and I am prepared to answer your questions.

    Chairman LEACH. Thank you very much.

    Let me make a couple of observations. One, even though the majority of problems aren't federally-insured institutions, we have some difference of judgment here. Mr. Curry, on behalf of the Conference of State Bank Supervisors, in his statement has indicated that according to data at the CSBS, as well as the General Accounting Office study, the Comptroller's Office and the Office of Thrift Supervision, two arms of the Executive Branch, have overridden, in effect, State laws in a number of areas.

    Using the GAO and CSBS information, they include as part of these laws reporting requirements for licensed lenders, prohibition on prepayment penalties, license and bonding requirements for subsidiaries, limitations and up-front fees for home equity loans, limitations on State charges, prohibitions and negative amortization, disclosures for high rate, high point mortgages, limitations on appraisal fees and prohibitions on balloon mortgages.

    We all understand there is a competition between who gets to be a regulator, the State or the Federal, but the Conference of State Bank Supervisors is saying that State laws that are strong in this area have been preempted by Federal regulators who want to bring people into the Federal system. How would you respond, Mr. Hawke and Ms. Seidman?
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    Mr. HAWKE. I think the suggestion that preemption has resulted in a widespread overruling of State laws is not accurate, Mr. Chairman. There has been, under what is called the Parity Act, some preemptive effect from regulations of the OCC and the OTS, but with the purpose of facilitating the offering of variable rate mortgages in the States.

    Before we can issue a preemption opinion on any matter of State law, we are required to give public notice and go through a notice and comment process. There have not been proceedings, to my knowledge, that have raised that kind of question with respect to most State consumer protection laws.

    Chairman LEACH. Ms. Seidman.

    Ms. SEIDMAN. First, with respect to the Parity Act, I would like to mention a couple of things. New York was one of the States that opted out. Delta Funding is a case from New York State. I don't think that we can say that having the Parity Act in action is what causes predatory lending.

    Second, the ANPR that we have published is, in fact, devoted in large part to the question of exactly what has happened with the Parity Act in the eighteen years since it has been passed. Is it a law that still makes sense, and is its goal—namely that State lenders have parity with federally-chartered lenders—something that is being taken care of in other respects by changes in State law?

    Third, let me say that even when we have the Parity Act at work, many, many, many things are not preempted. HOEPA is not preempted; Fair Lending is not preempted; State civil and criminal fraud penalties are not preempted; the Equal Credit Opportunity Act is not preempted. What we are talking about here are a limited number of loan terms and that is why we have the ANPR out to ask whether we should make some changes.
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    In 1996, OTS changed its regulations after a full notice and comment process. No State bank regulator participated in that full public notice and comment process. It was a 90-day comment period in the Federal Register, and we didn't receive a single comment from the State bank regulators.

    I wasn't here in 1996, most of the State bank regulators who are now in office were not in office in 1996 either, but I just want to say that we went through a full notice and comment process, we are going to do it again, and I certainly hope that this time we keep up the spirit of cooperation which we have begun to really build with the State bank regulators and we all participate together in making sure that the system works right.

    Chairman LEACH. I want to get out of this conflict between the State banks and national banks. I want to get into the subject at hand. I would say there is a footnote here. For whatever reason, OTS is not normally subject to the same comment regulations as the OCC, which is bizarre in my personal view.

    Having said that, the Congress, six years ago, passed a law which was very strong in its sense of purpose in outlawing predatory lending, in effect, and then, because Congress felt that the subtleties of this were beyond Congress, we gave to Federal regulators, most specifically the Federal Reserve Board of the United States, the authority to make definitions and to move in this direction.

    If there is a problem out there, generally speaking, one thinks the strongest response of Congress is to pass a law saying this is a problem and assigning to the regulators the discretion to come up with the subtleties.
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    Just to go back to this law, what we said, particularly to the Fed, is that the Board, by regulation or order, shall prohibit acts or practices in connection with mortgage loans the Board finds to be unfair, deceptive or designed to evade the provisions of this law, and in connection with refinancing of a mortgage loan that the Board finds to be associated with abusive lending practices or that are otherwise not in the interest of the borrower.

    So the question becomes, if there is a problem out there, if Congress has given very strong authority to regulators and the Federal Reserve, our regulators, is the Federal Reserve AWOL? That is a question I think demands a response. I would like Governor Gramlich to respond.

    Mr. GRAMLICH. What you say is true, and we did hold hearings in 1997, as I said in my statement, and we produced a report to Congress in mid-1998. The difficulty is that there are some things that can be done administratively and there are some things that must be done legislatively.

    Our 1998 report tried to take a broadbrush approach to this and get everything together. For example, if we moved administratively on HOEPA, there would be some inconsistencies with other statutes of the Congress.

    Chairman LEACH. We have other statutes that say we favor predatory lending?

    Mr. GRAMLICH. No. For example, there is the computation of the APR that sets the HOEPA trigger—which is actually done under TILA, the Truth in Lending Act. There are some costs—closing costs and so forth—that are statutorily excluded from the APR in TILA. We could have changed the HOEPA triggers, but then there would not be consistency with TILA.
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    Chairman LEACH. If I could interrupt, because I have limited time and I want to be fair to others.

    I issued a set of guidelines this morning. Are any of those in conflict with other statutes? You are accountable, the Federal Reserve Board of the United States, unfair and deceptive practices. What you have just referred to seems to me to be outside the scope of the profoundness of the problem.

    Let me ask you specifically, the guidelines that I laid out this morning, do they seem reasonable to the Fed?

    Mr. GRAMLICH. They do, Mr. Chairman.

    Chairman LEACH. If they are reasonable, can the Fed adopt them?

    Mr. GRAMLICH. The Fed is thinking of adopting all of those. We are having new hearings. HUD and the Treasury have had new hearings. We are now considering using our rulemaking authority under HOEPA to limit predatory practices and we don't want to jump in irrationally without due consideration. We are now in that process.

    Chairman LEACH. Fair enough.

    My time has expired. We want to work cooperatively with you. I would only stress that we have in place in statute very powerful words on this subject. Congress certainly has the authority to pass more legislation. It is my view that any additional legislation is profoundly at the margins and that doesn't mean that it isn't possible and appropriate, but that a great deal of authority rests already with you. I hope that as we go forward in the future that we go forward with that understanding.
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    Mr. LaFalce.

    Mr. LAFALCE. Thank you, Mr. Chairman.

    Let me first address the always-present tension between Federal law and State law, Federal regulation and State regulation. I think, as a general rule, we must understand that Federal law can preempt actions of the State, but that very, very frequently, it is not the intent of Federal law to preempt, especially when consumer protections are concerned and the State is advancing greater consumer protections than might exist under Federal law.

    Further, in order for the Federal law to preempt, usually we must speak explicitly to the issue of preemption. In the absence of explicit language, in dealing with a State consumer protection, it is my judgment that deference should be given to the State consumer protection, as a matter of general construction. We will have more dialogue about that in the future. That is not always the case, but it seems to me that should be a general rule of construction.

    To go to the specific issue of predatory lending, we have some individuals who say there is ample regulatory authority to deal with the problems of predatory lending if only the regulators would use it. We have some who say it is imperative that we have new legislation. I suspect that both are correct, but what I would like from you is a delineation.

    What regulatory authority do you think you might have and have not used so far? As I read the 1998 report, it seemed to me, Mr. Gramlich, that there was almost a statement that you had no further authority to act. I just don't think that is accurate.
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    Are there areas where you think you have authority to act, but would like clarification, buttressing of that and other areas where you think you just don't have the adequate authority and you clearly want legislative imprimatur to go forward? Would any of you care to comment on that?

    Mr. GRAMLICH. I may have to get back to you with specifics.

    Mr. LAFALCE. I think that would be a good idea. I would like your tentative responses now and then I would like each and every one of you to get back to me with specifics on that issue. So I officially request it.

    Mr. GRAMLICH. We will certainly do that, but I should say our primary focus in 1998, since this was a report asked for by Congress, was on what could be done legislatively. We took a rather broadbrush approach to it, but there are things we can do on our own. We are looking at them and there may be some areas where we need clarification. We are looking at that too. We will certainly get back to you with a specific list of what we need from you, what we can do on our own, what is in doubt and we will try to be fairly precise about that.

    Mr. LAFALCE. Any others wish to comment on that?

    Mr. Hawke.

    Mr. HAWKE. Mr. LaFalce, I would like to simply focus on the difference between approaching these problems on an individual case basis and approaching them on an across-the-board statutory or rulemaking basis.
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    We have a number of different sources of authority to address practices on an individual case basis. Our examiners can look at individual loans and determine whether lenders have underwritten them properly, including whether they have determined that the borrower has an ability to repay without recourse to the collateral—which is a very fundamental precept of sound lending. That is necessarily an examiner-by-examiner, bank-by-bank kind of approach, as is the approach of looking at unfair and deceptive practices on a case-by-case basis. We don't have rulemaking authority regarding unfair and deceptive practices.

    One of the advantages of legislation would be to set across-the-board, substantive rules that would really stake out what the appropriate standard of conduct is for everybody at one time.

    Mr. LAFALCE. Ellen Seidman.

    Ms. SEIDMAN. Let me say a couple of things in this regard.

    First of all, with respect to the Parity Act. One of the things we will be very much trying to work our way through, after we receive the comments from the ANPR, is how Congress' direction that we must give parity to State-regulated, State-supervised entities over which OTS has no authority, that OTS never supervises, never examines, how that meshes with the peculiarities of the Federal system where the Homeowners Loan Act tells us we must have national best practices and it is a Federal system and we are in there examining every year, every two years for compliance. It is quite a different system. Some States regulate tightly, some don't. So that will be a big issue for us.
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    Mr. LAFALCE. Mr. Vento and I are the only two Members of this committee who were co-sponsors of that Parity Act. That is why I articulated what I thought to be the appropriate rule of construction.

    Ms. SEIDMAN. And we heard you.

    The second thing is that, as with the OCC, we are putting together examiner guidance. We have at least one pilot exam going on right now to try to see if we can find whether predatory practices exist, without having our examiners look at every single loan application that has been made in the institution since the prior exam, to see if there is some way to screen this and to understand it. We will be working through this throughout the summer and doing some training.

    When we get those results, we will have a much better idea of whether there are problems we cannot reach, either under existing consumer protection rules and regulations, or under our safety and soundness jurisdiction.

    Mr. LAFALCE. Mr. Gensler.

    Mr. GENSLER. I was going to say we share your view that some of this can be done on the regulatory front. In terms of the report that HUD and Treasury will come forward with, we perceive several categories that would call for new legislation, but also several categories that would be in the regulatory regime today. We hope we can help this committee when we forward that report.
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    Mr. APGAR. Just to amplify on that, six years is a short time maybe in terms of legislation, but it is forever in the financial services market. The data suggests that six years ago, subprime lending was a minuscule portion of our market areas and it just exploded. A large share of what we classify as subprime loans don't fall within the HOEPA triggers, less than a percent. So I think we have to look at what has happened in the last six years and that will give us new eyesight as to why.

    Mr. LAFALCE. Of course, my bill and the other bills change the triggers.

    Mr. APGAR. Absolutely.

    Ms. TANOUE. I would just say it seems clear that current law doesn't fully address a number of the predatory practices that we see in the mortgage market today. I think it is clear that all of us here at the table are looking at ways to refine and tweak the laws and regulations.

    Having said that, the FDIC is looking within our current authority to refine guidance not only for the institutions, but for examiners as well in terms of CRA exams.

    Mr. LAFALCE. Thank you.

    Chairman LEACH. Mr. Baker.

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    Mr. BAKER. Thank you, Mr. Chairman.

    If I am understanding the observations of the panel concerning predatory practices, there seems to be an inability of the borrower to understand sophisticated financial terminology as an element. Misunderstandings about particular aspects of the loan closing document, for example, unexplained acceleration clauses, unexpected costs at the closing table like discount points or others, and a failure to obtain the best credit based on the individual's history in the current market conditions.

    I don't know if any of you have had occasion to sit through a first mortgage loan closing in Louisiana lately, but I will guarantee you there are very few attorneys and absolutely no consumers who go through the 63 pages that are required to close a first mortgage loan document and fully understand what they are doing.

    It would seem to me the circumstances which are being outlined as predatory are very difficult to segregate from appropriate subprime lending. Mr. Apgar, you just indicated that six years ago, it was a minuscule portion of the economic activity and today it is a burgeoning part of the economy. To me, that is good news. It means that people who previously had no access to legitimate lines of credit are now being afforded opportunities for home ownership or to do modernization to an outdated home.

    The idea that the Federal Government needs to increase regulatory oversight in the financial marketplace I find rather extraordinary, given the demonstration that, in most cases, subprime is not equal with predatory. It would appear to me—and this is not a question, but a venting of my frustration with the subject—nobody has defined what constitutes ''predatory.'' It depends on the individual's own credit history, the value of the asset being acquired and the terms of that loan document.
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    We cannot say that an additional point over traditional current market rates is inappropriate until you know the risk related to the borrower's profile. I think that individuals would much rather have access to the credit and move into their own home as opposed to continuing to pay outrageous levels of rent in a dilapidated housing project.

    I would just say, let us be very cautious before we move ahead in this arena and understand the consequences of additional regulation. There are people today in homes in America, because of the subprime lending activity, who otherwise would continue to live in less-than-desirable circumstances if they were not afforded—albeit higher-priced—credit that did not exist a few years ago.

    If anybody can give me three points that consistently constitute predatory practices and tell me that we don't have sufficient regulatory capacity to stop it, I am for it. I will co-sign. I don't believe that there is a regulatory inability to stop what is an abusive consumer practice once there is proof that the credit terms extended were inappropriate, abusive, deceptive or fraudulent. Let us go get them, but let us do it on a case-by-case basis and not stop the overall performance of the market which, in my opinion, is responding to a worthwhile credit need of consumers across the country.

    Thank you, Mr. Chairman.

    Chairman LEACH. Mr. Vento.

    Mr. VENTO. I would just comment on Mr. Baker and your comment about the need for legislation. I think I heard the regulators all say whether it is the Parity Act from 1982 or whether it is the 1996 law, they really haven't moved decisively in those areas. So I think, especially with the inconsistent laws, that it might be well for us to at least look at doing something this year to kind of coordinate this in terms of some measure that would be necessary.
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    It might be that they have the authority, but I think as indicated by the testimony from Mr. Apgar, that the practices have eclipsed existing regulations and policies, so I think it might be to our advantage to try and get out in front of this, at least at this point, with whatever coordination we could do in terms of law to bring this together. I do think it is a practice that is dealing with the underbanked earlier and dealing with the new classifications that are involved in terms of subprime and whether they are appropriately being applied to the individuals.

    The silver lining of this, I believe, is in terms of CRA. Putting aside the predatory lending for a moment, how does subprime lending impact low-income minority neighborhoods? In my opening statement, I note that the Treasury has concluded a review of CRA and pointed out nearly a half-billion dollars in mortgage loans to low- and moderate-income borrowers, so it is working.

    In doing the work, in terms of creating the subprime market, the fact is that it is helping, I believe, low-income and minority neighborhoods. Mr. Hawke, would you care to comment on that report and on the subprime lending?

    Mr. HAWKE. Mr. Vento, I think we would all agree that there has been a significant change in the marketplace, that what is called subprime lending has provided access to credit for many people who haven't had access to credit in the past. I think we all have expressed the view that we have to be extremely careful in any intervention in the market to make sure that fair access to credit is not inhibited or frustrated.

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    I don't think there is any question but that there are predatory practices, practices that anybody would define as predatory. I mentioned in my testimony the practice of institutions extending credit where there is no reasonable prospect that the borrower will be able to repay except through a foreclosure on a home. We think some unregulated lenders are actually targeting the equity in borrowers' homes for that purpose. They are targeting the equity to capture it in foreclosure and reap the fees and profits that come from these transactions.

    Mr. VENTO. Can CRA examination be a positive factor in terms of evaluation of this process as well?

    Mr. GRAMLICH. Let me comment on that. It certainly can and that is one of the things we are looking at. I think a number of the testimonies mentioned, at a minimum, denying CRA credit for predatory loans.

    Mr. VENTO. The Chairman mentioned this too in his precepts.

    Mr. GRAMLICH. The Chairman did. Denying CRA credit and maybe even penalizing banks if there is some evidence of predatory practices.

    One thing that you should understand is that these are somewhat different problems, because the CRA obligation is attached to deposit insurance, which means that it is done by banks and thrift institutions. A lot of the predatory lending is alleged to take place outside of that system, by loan companies and mortgage companies, and so forth, that don't have a CRA obligation.
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    Mr. VENTO. I think the solution there might be how broadly based the CRA might become in terms of affiliates and bringing under the umbrella some additional activities. This becomes very important as we look at modernization of affiliates and looking at the loans that are sold in the secondary market which is exactly where are federally-chartered secondary market entities are looking.

    We don't have time, Mr. Chairman, but I think I have made my point in terms of the importance of using and employing CRA and this idea of coordination, which I hope we could visit in a noncontroversial manner this year in terms of bringing this together. Rather than have them work on these individual 1982 laws and the 1996 law, try to bring this together so we can get some focus.

    Chairman LEACH. The gentleman makes a good point.

    We have four minutes to vote, so we are going to recess pending the vote. Let me say to Ms. Seidman, I understand you have an extraordinarily important event and you are excused for that event. I want to thank you for your testimony.

    Ms. SEIDMAN. I will try to come back.

    Thank you.

    Chairman LEACH. The hearing will be in recess pending the vote.

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    Chairman LEACH. Mr. Bentsen.

    Mr. BENTSEN. If I might, in looking at the testimony of all the regulators, everyone makes the obvious statement that it is very difficult to determine between legitimate subprime lending and predatory lending. I have a couple of questions related to that.

    It seems to me that if you can make that determination reasonably that one way to address this problem is to cut off the funding of this type of lending. If there is not funding either through the asset-backed market, secondary market or through the regulated depository institution system, you are going to eliminate very much of this.

    My questions are this. One, are the regulators able to develop underwriting standards? A number of you identify in your testimony issues that you see as indicative of what you would consider predatory lending. Can you establish a set of underwriting standards for regulated depository institutions for loans they might carry in their portfolio?

    Second, could you apply such underwriting standards to mortgage-backed securities which institutions might carry in their portfolio for purposes of meeting the mortgage test they may need to have?

    Mr. Hawke talked in his testimony about what Freddie and Fannie are doing with underwriting standards. Do you have the authority to mimic those types of standards if you think those are going to be worthwhile?
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    The other question is this. All the regulators—I didn't get a chance to go through the Fed's testimony—indicated upon at least cursory review, you do not see a preponderance of ''predatory loans'' in the portfolios of the institutions that you regulate. Obviously through mortgage-backs, there would probably be more.

    If this is a $370 billion market in total in the subprime market, how large would you classify the predatory market of that amount and where are those? Are those institutional investors, individual investors in the form of asset-backed securities? Where are those being held?

    Mr. GRAMLICH. I will try your second question. I cannot do it in terms of dollar amounts, but in terms of institutions, something like one-third of the institutions in the subprime market are remotely under some sort of compliance exam. That is where the regulators come in.

    The rest of the subprime business takes place really outside of the normal bank compliance exam cycle and it is the FTC that would then have the primary responsibility. It is about one-third of the institutions in and two-thirds out. I don't know what the number is in dollar amounts, maybe FTC does.

    Mr. BENTSEN. I want to get to the first question, but these obviously are not just loans held necessarily in somebody's portfolio; it is quite a bit of paper to be out there. Some of them, I guess, are Freddie and Fannie guaranteed and that is why they are apparently trying to impose some standards—or others, FHA guaranteed. In the home improvement market, where we have had problems in our area, are they unguaranteed, are they privately guaranteed? Where is that?
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    Mr. GENSLER. Why don't I try to take a crack at that. A great deal of the market of subprime is today securitized, and there are great benefits that come to that market through securitization. It may well be that over half of the subprime annual originations are now securitized. Very little of that is actually done by the GSEs. Most of it is done through other structures by various investment banks on the street and so forth.

    In terms of your question about how much of that would include some of the predatory lending and how much is not, the answer is mixed, because a great deal of predatory practices happen on the street level. It is fraudulent and deceptive practices on the street level that by the time that loan gets pooled in a securitization, and there are thousands of loans in a securitization, might be mixed in there, particularly those loans that have high fees. The high fees often will stay on the street level and then the loan will come up the financial chain, so to speak, and be securitized.

    Mr. BENTSEN. Let us get to my first question which the other regulators have not answered. Do you have the authority to establish underwriting standards, does it make sense to establish underwriting standards? If you had certain standards, wouldn't you be able to look at a portfolio—you obviously cannot look at every single loan—and say this is not a conforming loan for purposes of standards related to predatory lending and therefore has to be kicked out, because of high fees, whatever standards you might set?

    Mr. HAWKE. There are certain aspects of predatory lending that would lend themselves to that kind of treatment. As I said in my testimony, the practice of lenders extending credit without determinating that the borrower has the ability to repay absent recourse to a foreclosure on the collateral is the sort of thing bank examiners look at. That is something that can be determined on the basis of the documents that a bank would normally retain in its loan files. That is something we intend to bear down on. That is not a new concept or anything that is radical at all.
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    As Secretary Gensler said, much of what gets included under the heading of predatory lending is not reflected in loan files, and it would be very difficult to adopt underwriting standards that could be reviewable, say, in the process of doing due diligence on a securitization. There are limited aspects of predatory lending that can be made subject to either the scrutiny of bank examiners after the fact or underwriters doing due diligence.

    Mr. BENTSEN. My time is up, but you are saying when a bank puts together a portfolio and securitizes it, they do look at the credit quality of the loans that are going into it. At least they have some screen they put across it see that it meets some sort of standards. You don't believe in cases where you raise the loan where there is not sufficient non-mortgage assets that could be used to repay the loan, that would not be picked up anywhere?

    Mr. HAWKE. That should be picked up in the bank's basic loan underwriting from the very start. That is a conventional sort of thing for bank examiners to look at. If the borrower doesn't have the capacity to repay the loan except through recourse to foreclosure on the collateral, that is an unsafe or unsound loan. That is the kind of thing bank examiners look at all the time. That would be determinable when a bank was putting together a portfolio of loans for a securitization.

    Mr. BENTSEN. So if you did have certain standards, you would be able to find those and we could at least eliminate that portion of the predatory market perhaps?

    Mr. HAWKE. That is right. But as I said before, a number of aspects of predatory lending don't get reflected in the documentation for the loan, and it is exceedingly difficult to tell whether there were oral misrepresentations made to a borrower. That kind of practice is not reflected in loan files, although it may be a very common attribute of predatory lending.
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    Mr. GRAMLICH. This interagency task force that I referred to is considering now in connection with CRA the review of the purchase loans just for these kinds of issues. So we are looking at that.

    Ms. TANOUE. Again, I would reiterate that one of the things the FDIC is looking at is developing guidance for insured institutions to describe effective practices by which insured institutions might avoid indirect activity. In other words, practices to keep them from inadvertently acquiring loans or purchasing securities where those loans might have predatory terms or features.

    I think one of the issues you are raising is very important, and that is appropriate due diligence that should be done by an institution, and perhaps looking at prospectuses more carefully. That is an issue we do need to look at further.

    Chairman LEACH. Mr. Campbell.

    Mr. CAMPBELL. I was not able to hear the testimony, I was over in the International Relations Committee and I apologize for that. Given that, I am hesitant to impose on the patience of my colleagues. I will ask one question only, and if the two people to whom I address this have addressed this in their opening remarks, then I would be content with a reference to that.

    The question is to Mr. Celli and Mr. Curry as representatives of the State regulators. Do you feel Federal regulatory scheme preempts you in significant areas of jurisdiction where you ought to be able to have authority, or do you find that the predatory practices at issue in this hearing can be addressed under State law?
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    Mr. CURRY. In response to your question, that was addressed in our testimony, but I would like to elaborate on that.

    We do think that certain States, unlike my own, that did opt out of the AMTA, that in certain cases State laws that are more stringent in the case of punitive prepayment penalties, that consumers may be disadvantaged by not being able to avail themselves of a more protective State law.

    We are pleased, however, by the recent efforts of Director Seidman in terms of their ANPR to address some of those issues under the Parity Act.

    Mr. CELLI. The first thing I should say is I am a Civil Rights lawyer, not a bank regulator, so my knowledge of this area is somewhat limited. That having been said, we did not have any issue with preemption in our Delta case, which was the primary case that I spoke about in my testimony. We actually used a panoply of Federal and State laws, as well, in putting together our complaint. So that did not arise in the context of the Civil Rights litigation that arose out of predatory lending practices.

    Mr. CAMPBELL. Mr. Chairman, in yielding, I look forward to reading the testimony of the witnesses. A question that remains in my mind is the necessity for Federal regulation in the traditional sense, the protection of consumers being more delegated to the States, and it being appropriate that some States have different standards between them. That would be my first preference.

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    If, however, there are difficulties with the application of differing State laws and the necessity for uniformity, I would be hope to do that. At the moment though, that is the question that most concerns me.

    Chairman LEACH. Ms. Waters.

    Ms. WATERS. I thank you for this hearing. I guess we have done this before. It seems as if I have been working on predatory lending my entire political career, even in California before I came here, so I am surprised that many are just learning about predatory lending and understanding that it is destroying families and communities.

    In my community, I have witnessed predatory lending for many, many years and many of these cases end up in my district office where we try and seek out help in any way we can get it. We go to the city attorney's office, to consumer affairs, we go to whoever we think can be helpful to us.

    I must tell you, with all of the fire-power that is sitting at this table today, HUD, OTS, OCC, FDIC, Federal Trade Commission, Treasury, I tell you it is hard for me to believe that we haven't been able to do more than we have done. You all seem to understand what predatory lending is, but I don't hear any passion. Who is willing to close somebody down and shut somebody down? How much is too much? Is there anybody that you know about out there, whether it is one of the companies mentioned or not mentioned, that you believe needs to be closed down? Does anybody know of any mortgage company or bank that needs to be closed down? Who is willing to shut somebody down?

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    Mr. MEDINE. Congresswoman, we did. As I mentioned in my testimony, in one of the HOEPA cases that we brought last year, we obtained a ban, a lifelong permanent ban, against one of the lender's involvement in high-cost loans secured by consumers' homes. So we think a very strong remedy can be very appropriate in cases of abusive practices and we will continue to look for appropriate cases.

    Ms. WATERS. I appreciate that and I appreciate the work that Mr. Celli is doing up there in New York, because I think we need to do more, but it was just four years or so ago when we had Fleet at this table where they had flipped a loan four or five times and the mortgage ended up being four or five times more than the original. We called the gentleman from the table and took him in the back and made him get out of that. Do you remember that? Well, here we are again. I think you have a lot of authority to do something about it.

    Mr. Hawke, let me tell you, I have been in your office, I brought a case over there. I tried to work this case. One of the things you need to do is follow how they sell seconds and what the notice requirements are, because you know what? When you target a community and you know they have all this equity—a lot of these seniors have been there 20 years and the community is targeted—you know if they make a second to somebody who can't afford to pay it back that they don't want to be bound, because they want to foreclose. Who has done a study on foreclosures? Where are they most taking place?

    Well, I have a letter to you about something that is a bit different, Mr. Hawke, but it goes to what is wrong with not being aggressive. I wrote you about a new configuration between Union Bank and Nick's Check Cashing and a so-called CRA Group. They have come together to expand the check cashing outlets so they can get more into the payday loans.
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    Everyone sitting at that table knows that payday loans are disastrous and that people are paying 400 percent interest and more. But we are going to sit here, and five years later we are going to come back and talk about ''what can we do about payday loans?'' Who is going to advise us and recommend that at some point something is too much?

    I know that we don't control interest rates in this country, but it seems to me if you came in here and said to the Members of Congress that 400 percent interest is too much money on anything, I don't think anybody would think it would be unreasonable to say at some point we have to talk about capping it.

    On this that I raised questions about they want to get into the payday loan business—and they call it something else. They call it ''equal opportunity mortgage loans.'' You know what that is? You wrote me back and you said, ''Well, they told us they would be good, they told us they were going to be helpful.'' You didn't tell me what you asked them, nor did you tell me what you were willing to do to make sure there was some real oversight. You said, ''We don't really control payday loans, that is done by the State of California. This is what we do, this is what they do.'' Give me a break.

    I want to tell you, it is bad. Yes, communities are targeted and these seniors, why don't you come in here and suggest a longer cooling off period before they can execute one of these agreements? What do we have in most States, about 48 hours? We need a second opinion on some of this stuff, but I don't hear any creative thinking. I hear a little struggle about preemption, I hear a little struggle about don't put the good guys out of business with the bad guys. I am going to tell you, nobody is looking to put good guys out of business.
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    Don't tell me what you are going to do with CRA, because you know we can't open that can of worms and it only takes care of a few. The mortgage companies are not even included in that, and you are not willing to come to the table and say they should be included in that. This is bad.

    Treasury, HUD, Feds, OTS, OCC, everybody, I thank the ones who are working on behalf of the consumers. We can do better than that. You have enough authority now to deal with some of this. Have you seen some of the mailings that go out from these predatory lenders? They look as if they come from the Federal Government. Have you seen that stuff? Have you done anything about that?

    These mailings that on the outside say: ''Federal mortgage lenders, Washington, DC,'' where people think it is coming from the Federal Government. Have you moved to stop it?

    Mr. APGAR. We have active review of cases in New York where people are pretending to be FHA-approved lenders when they are not, and we are taking action.

    Ms. WATERS. Let me tell you, like I said, I was here four years ago on this. I was in the State of California on this working for years. Review is review is review. How long does it take you to shut down somebody who is obviously misleading people? What do you need to do?

    If I appear to be saying to you that I don't think you are strong enough, you are passionate enough, you are not doing a good job, that is exactly what I am saying. I don't think you are using what you have. I do think we could use some more legislation, and I think the Chairman has done a fabulous outline here, but as I look at what the Chairman has done, you have the power already to deal with some of the issues he has already raised.
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    Mr. Hawke, this letter is not good enough about Union Bank and Nick's Check Cashing and Operation Hope. It is not good enough for you to say ''they said they were going to be good and they were going to do good things.'' I want to know with this new configuration, why don't you see a need for some regulations? Because they are about to jump off into not only payday loans, but also a new kind of mortgage that you didn't even question. So I don't want to have to work on this year-in and year-out. You have the staff to do that.

    I am going to write the letter again, Mr. Hawke. I want you to tell me why it is you are allowing this to take place without any scrutiny, without using any power that you have to raise any questions about what it is?

    I yield the balance of my time.

    Chairman LEACH. Mr. Sanders.

    Mr. SANDERS. I have a statement I would like to submit to the record.

    Chairman LEACH. Without objection, sir.

    Mr. SANDERS. I agree with much of what Ms. Waters just said, but would like to raise a point. At the last markup that we had, some of us were raising the issue that, at a time when the banks wanted some $600 million in interest, that they are not getting right now, some of us—as you will recall—raised the issue that maybe there should be some responsibility on the part of the banks. I know the Chairman will remember that.
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    It seems to me, and maybe some of our panelists can comment, that the bottom line is, this is not a very complicated situation. You have some unethical people who are picking on low-income folks who are having a hard time securing credit from established institutions. It seems to me that everything we are hearing today touches on that very same issue. If the banks were doing what they should be doing, making sure that low-income Americans have access to reasonable credit at reasonable interest rates, you would not have crooks going out there able to manipulate people and rip them off and force them to foreclose on homes they have worked their entire lives for.

    I would ask our distinguished panelists, can they comment on this? Isn't, in a sense, what we are talking about today an indication of the failure of the banking system in reaching out to low-income Americans? Our banks are all over the world. They are investing in every bloody country all over the world, and yet, you have millions and millions of Americans who would like to be able to get credit in order to winterize their homes or do the things they need to maintain their homes, get that credit at reasonable interest rates, but somehow the banks are not there.

    I would ask any of our panelists to maybe comment on whether or not what we are really talking about today is a failure of the banking system responding to the needs of low-income Americans?

    Mr. GENSLER. I think at Treasury we have not seen it as many years and as many times as you have seen it, and it is hard to share the passion. But, as a boy from Baltimore, I share the passion when I hear the stories about what is happening in my community there.
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    I would say this: we are going to be very specific, not only about legislative solutions, but regulatory solutions in this report next month.

    In terms of the Congressman's question, banks have receded from these neighborhoods, not in just two or three years, but over many years, they have receded from many of these neighborhoods. So access to mainstream financial services is limited in many neighborhoods in America. That is one of the problems, but it is not the only problem.

    Even within those neighborhoods, there is a problem oftentimes of aggressive sales practices that one would consider the ''hustle'' that goes on in these neighborhoods.

    Mr. SANDERS. I agree with you. I think you are saying this is an indication of the fact that banks have left many communities they formerly served and the people are vulnerable to these kinds of unethical approaches. Is that true?

    Mr. GENSLER. I think that does make them more vulnerable. There are also other reasons in terms of consumer literacy and so forth. I think that makes them more vulnerable.

    Mr. SANDERS. I think we are talking about the need for regulatory action and legislative action.

    I would anyone else like to comment.
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    Mr. APGAR. I could comment as part of our oversight of the GSEs, we are preparing new affordable housing goals, we are proposing substantially to increase those goals in order to direct a larger share of the prime lending market into low- and moderate-income communities and to low-income people. We think this will help expand the access to credit in these neighborhoods.

    Ms. TANOUE. I would like to say that we need to distinguish between FDIC-insured institutions and these other types of lenders outside the insured arena that are engaging in these predatory lending practices.

    On the one hand, we have to say yes, we don't want to see these practices by the non-insured entities, but on the other hand, we do have to see these insured entities saying come to us. That is why I said earlier, it is a challenge. We need to challenge the mainstream lenders to make a greater effort to serve the areas targeted by these predatory lenders.

    Mr. SANDERS. You are right, but you can talk about challenging them, but we have been failing. The gentleman who spoke a moment ago said in the last number of years, banks have been receding from low-income neighborhoods. Do you agree with that?

    Ms. TANOUE. I don't know that they have been receding. They have been making a tremendous effort and I think the efforts under the CRA reflect that, but definitely we know from anecdotal evidence that there is a growing trend in predatory practices, and we are seeing more and more of these types of egregious cases.
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    Mr. SANDERS. But you are seeing more of these egregious cases because responsible, legitimate banking institutions are not there. Why would I want to pay substantially higher interest rates if I can go into a bank and be treated with courtesy and get a reasonable priced loan? Am I missing something?

    Ms. TANOUE. No.

    Mr. SANDERS. You say challenge, but we have been failing for many years. Does anyone disagree? I am suggesting the banks are withdrawing from the needs of low-income people. Anyone here disagree with that? Do you disagree, sir?

    Mr. HAWKE. No, I don't. I want to just give you an example. If you drive across 125th Street in New York—which I did recently going from LaGuardia Airport over to the West Side of New York—you go through an area of tremendously vibrant economic activity, but I counted only two financial institutions in the whole width of Manhattan Island. One was a branch of a Puerto Rican bank, and the other was a minority institution. There were no mainstream financial institutions in that area of tremendous economic activity. You are right, you see plenty of check cashers and fringe providers, and they moved in where neighborhoods are abandoned by mainstream financial institutions.

    Mr. SANDERS. That is my observation as well.

    Mr. Chairman, I think the bottom line is yes, we need better regulations to prevent absolute fraud and deception, but on the other hand, the truth of the matter is, we have failed. The idea that we are sitting here talking about helping the banks to another $600 million, we baled them out of IMF, they are making recordbreaking profits and then we hear the horror stories because they are not in low-income communities. That is not their failure, primarily. They need to do a much better job regulating. That is our failure for not demanding that the banks serve all the American people rather than their wealthy friends.
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    I yield back.

    Chairman LEACH. Mrs. Maloney, do you wish recognition at this point?

    Mrs. MALONEY. I would like to welcome Andrew Celli, the Chief of the Civil Rights Bureau for the Office of the New York Attorney General, Elliott Spitzer and really compliment you and your office for the extensive work and experience you have had in investigating predatory lending.

    In your testimony, you documented cases of high-cost loans, flipping and other problem practices. You also note that often predatory lending targets minorities and minority communities. I would like to follow up on the line of questioning of Mr. Sanders and Ms. Waters who indicated, and I also believe that one of the major reasons for this is the lack of traditional lenders available in some minority areas. Clearly there is a market there, because predatory lenders are able to go in and charge excessive fees.

    Is it your experience that there is a market in these areas in New York that are not being served by traditional lenders? Could you comment on your investigations in New York and the line of questioning they presented that the main banks are not serving communities in certain areas?

    Mr. CELLI. I am happy that two Members of the committee are my Congresspeople. Mrs. Maloney is my current Congresswoman and Mr. LaFalce, my former one.
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    Let me say when we looked at the Delta Funding Corporation and their lending patterns, we took their lending patterns and we overlaid a census map which broke down all of New York City into census tracts by race. We found a virtual perfect overlap between census tracts with 80 percent or more minority residents—African-American or Latino residents—and where Delta Funding was doing its lending. So clearly when I talk about targeting that is a word that I use advisedly and quite seriously.

    It is clear to the New York Attorney General's Office that the reason there is predatory lending is because larger, more traditional banks are not serving those communities. I would refer the committee to Senator Schumer's recent report, which is excellent, which looks at exactly this problem from that side of the coin. I think it is one of the better studies in the area.

    He looks at Brooklyn and Queens and it is very clear that major, traditional banks are not serving these communities. Why and what we can do about it is a matter I leave to the experts, but it is a phenomena we saw in our investigation.

    Mrs. MALONEY. New York has always been a leader in consumer protection and I know that New York has recently finalized by regulation new protections for consumers against predatory lending. I understand likewise North Carolina has moved in that direction.

    Given what we have done in New York State by regulation, do we still need the Federal legislation that Mr. LaFalce has put forth?
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    Mr. CELLI. Absolutely. Contrary to some of the remarks that were made here today, clearly HOEPA was a major advance, I agree with that, from where we were before HOEPA, but there is much more to be done on every level.

    One area I think maybe has not gotten the attention, but is a deeply problematic area, is at the level of brokers. These are the people actually having the interactions with consumers. Part of it is about deceptive practices and flat-out fraud, but part of it is sharp practices, not anything clearly illegal, but things that are sufficient to create a problem with a loan and a lender. I would like to see Federal legislation on the broker side as well. Clearly that is where we see a major issue.

    Mrs. MALONEY. So you are supportive of the LaFalce legislation?

    Mr. CELLI. Yes.

    Mrs. MALONEY. And you think that would make a big difference?

    Mr. CELLI. Absolutely.

    Mrs. MALONEY. I would like to ask Mr. Hawke, press reports have indicated that much of the growth of predatory lending is being funded by investment banks on Wall Street. Recently Franklin Raines of Fannie Mae was testifying and suggested that an industrywide campaign is needed to encourage Wall Street not to purchase loans that could be predatory. Do you think this will be effective or does it have the potential of limiting legitimate opportunities to credit?
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    Mr. HAWKE. I would defer to the distinguished Under Secretary of the Treasury, who comes from Wall Street, on that.

    Let me say that to the extent that our banks are engaged in the business of assembling and packaging loans that are then securitized, we certainly have a job to do in making sure that the right underwriting standards are applied by the banks. I think the investment banks also have an opportunity to do due diligence with respect to those transactions before they take them into the public securities arena.

    Mr. GENSLER. We are going to make some recommendations on market structure, but to try to answer your question today, I think the primary focus of predatory lending unfortunately has been at the street level and in these communities where there are some very poor practices.

    When you go back up the chain, it is important as well, beyond the lender who has to have the right underwriting standards, but even in the secondary market, that the right practices be motivated and encouraged. At the same time, I think you did put your finger on an issue of not trying to stop access for so many Americans that the secondary market has facilitated.

    So, for some very clear activities, you could possibly carve them out, but on many of the issues that happen right on the street in terms of the fraud and deceptive practices, I think the secondary market has a little harder time up the chain addressing that.

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    Mrs. MALONEY. Would you care to comment on Mr. Celli's comments that what is causing the problem is there is lack of access to credit in neighborhoods, in his particular area, New York City, my city and other areas of traditional lending from traditional sources and what we can do to address that?

    Mr. GENSLER. The economic success has been terrific and there is actually greater access today than there was five or ten years ago. But that access, it is accurate to say, is coming increasingly from non-mainstream financial participants. The study we recently did at Congress' behest does say that CRA is working and there is greater lending, but that greater lending tends to be in the prime market, not the subprime market.

    In terms of promoting access, it is one of the reasons why we are working with Congress to promote the First Accounts initiative. I know a number of the Members are strongly helping us with that initiative, and promoting education, so that there is more access to mainstream financial services in these communities.

    Even having a checking account is fundamentally important, because once someone has a checking account, they can establish a relationship and establish a record of credit that puts them on the road to a prime loan instead of a subprime loan.

    Mrs. MALONEY. I find three practices of predatory lending particularly troubling—negative amortization, where balances grow even as borrowers make payments; call provisions and prepayment penalties. Can you cite any examples of how these three activities in any way benefit borrowers? Maybe we should just ban those three practices that are so troubling.
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    Mr. GENSLER. I think you probably are not going to find much disagreement on this panel. Call provisions, meaning when a lender can actually call the loan, I can't see any benefit to any borrower. For single premium credit life, it has been well-documented that borrowers do not have much benefit. Negative amortization, in some limited circumstances may, but in most circumstances, does not provide a benefit. Those limited circumstances tend to be related to seasonality or sometimes adjustable rate mortgages. By and large, they can be very dangerous, particularly for more vulnerable borrowers.

    Mrs. MALONEY. Have you had an opportunity to review Mr. LaFalce's legislation? Do you think there is a need for Federal legislation?

    Mr. GENSLER. We are putting forth the report in the next month. We feel that the Congressman's legislation, and that of a number of the other Members as well, is a step forward and it addresses many of the important issues we are discussing here today. We are hopeful in the next month of giving very specific recommendations around HOEPA and some of the other laws as well, RESPA and TILA that we are discussing today.

    Mrs. MALONEY. Thank you.

    Chairman LEACH. Mr. Meeks.

    Mr. MEEKS. First, I want to associate myself with the statements of Ms. Waters and Mr. Sanders. I think they were very timely.

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    In my district, some of the things that are taking place currently, that I know of, there are over 325 homes that are now in foreclosure due to certain lenders. We know who those lenders are, so we can tell when we know who they are.

    We know that subprime refinancing represents one in four loans in more than half of all census tracts, and in black neighborhoods alone, carry almost 50 percent of all subprime lending in the City of New York.

    We know that in 1998, 11.2 percent of all refinancing loans made to white borrowers in New York were subprime loans compared to 45.8 percent made to black and 25.6 percent made to Latino borrowers. It seems clear, at least in New York with the Attorney General and the State of New York found there is a discrepancy when it comes to communities of color. Also from questions that I have heard, it has been clear that the primary lenders, or the banks and the mainstream lenders, are gone from many of these neighborhoods.

    I am trying to figure out how we resolve some of this and I would ask Mr. Apgar with reference to HUD, I know HUD has been talking about Freddie Mac and Fannie Mae needed to get more involved in minority lending, what about getting them involved in the subprime lending? Wouldn't that help since the neighborhoods have been abandoned? I know offices like mine, when people are in trouble, can direct them to at least a GSE that I could have confidence in as opposed to sending them to some of these subprime lenders who just want to rip off people.

    Mr. APGAR. I agree, it is very important to get mainstream lenders and the mainstream mortgage community more involved in these efforts and that would be helpful. The first thing I want to note is that many people who are in the subprime market don't belong there. They would qualify for a prime loan if given the opportunity. That is why first and foremost, we are encouraging the GSEs to reach out to lenders and make sure the prime lending market is scoured for all the possible loans that could be made.
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    There are also ways of bringing people through products that start off with maybe a bit of a higher rate and people then graduate into better rates. That is another opportunity as well. This again goes to trying to get mainstream lenders more involved in these communities. That has to be a big part of the solution.

    Mr. MEEKS. I agree. I think that we have to do that, but where we are failing, and obviously we are failing because they are not doing it and I have more and more people in my district who are losing their life investments. So my problem is to be able to do something to resolve some of those problems now, because based upon the question put forth to this panel by Ms. Waters and Mr. Sanders, no one really had any answers.

    The only answer I can come up with—I know we need to have more legislation, I know there needs to be more regulation and that is taking some time—at least I know I have some control if I had GSEs involved, not only in the prime, but in the subprime lending also and that way I have some control. Don't you agree with that?

    Mr. GENSLER. We agree that if the GSEs expand—and our goals propose that they expand—substantial lending in underserved communities to low- and moderate-income borrowers, that will provide a big boost to access to credit in those communities.

    Mr. MEEKS. The biggest investment individuals make are their homes, and we are in a big homeowner boom, but we find there are situations where there is no criminality, apparently because people get away with it.

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    Mr. Celli, I know you talked about the brokers, and in New York they go to the courthouse, look at the less pendants list and see those that have the equity in their homes, but are maybe back two or three months in their mortgage payments. Then they go knock on their doors and give them this whole spiel about how they are going to save their houses for them and in six months they are out on the street. There is no criminality, nothing to regulate that. Can you recommend anything on your level, the Attorney General's office, on what we should be doing here in Congress to try to stop this kind of nonsense?

    Mr. CELLI. Let me say I am not sure of the right place to do it, whether it is regulatory or by legislation, but there are a couple of concrete proposals that we make that we ask you to consider. First of all, as a general principle, there has to be accountability between the lenders and the brokers. Too often, lenders sort of get all their business from the same brokers, but then when the hammer is about to come down, they claim they don't know these brokers and they are not really sure what activities they are involved in.

    So at some level, that principle of accountability, the lender being somewhat accountable or at least knowledgeable about what brokers are doing, I think, is very important.

    Second, we think the yield spread premiums, which are just really just kickbacks for higher interest rates, ought to be banned and we think there should be a cap on broker fees of 3 percent. We look at the prime market, we see what these brokers do for the money, which is very little. The scheme here is to give more credit and then take away the asset, so it is quite easy for folks to get credit and it is quite easy for brokers to help folks get credit, so why are they entitled to 6 or 7 percent, even 4 percent, brokers fees? We would limit it to 3 percent.
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    As I said, I am not sure where the right place to do that is, but clearly, regulating the fee structure in a serious way is an important step.

    Chairman LEACH. Ms. Schakowsky, who has been so thoughtful on these issues.

    Ms. SCHAKOWSKY. It seems clear that everyone is in agreement that this is a problem area and all kinds of things are going on. It is just a question then of defining where legislation or regulation might step in. I wanted to go back to a number of areas that we have mentioned and see if people think it is completely unnecessary to do anything further, that the current framework will suffice with perhaps stepped up enforcement.

    We have talked a lot about the triggers and whether they need to be adjusted. I know in my legislation and Mr. LaFalce's legislation, we do make a change in the triggers. I address the mortgage brokers themselves and have some level of responsibility and liability for them. Call provisions are not addressed in current legislation. Arbitration clauses are not addressed. Deferral fees are not addressed. Counseling is not addressed in legislation. The financing of credit insurance is not addressed in the legislation. Flipping is really not addressed explicitly in legislation. Influencing the appraisers in legislation that I have, it puts some responsibility on the creditor in influencing the appraisers and getting false appraisals.

    I am wondering if there are any areas which are clearly not in the realm, in your view, of legislation for this committee? I would pose that to any of you.
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    Mr. GENSLER. I think you have just given a very good list of some of the reasons why there is a need for further legislation. HOEPA was important and thoughtfully introduced. There are regulatory authorities under HOEPA that could be used today, but it still only covers a very small portion of the subprime market. The interest rate trigger in the current law only covers a little less than 1 percent of the entire subprime market and the fee cap may trigger some more. That means you are really only down to maybe the ''D'' level of the subprime market today. I know the legislation you have introduced and Congressman LaFalce has introduced would take a bigger group.

    One of the fundamental questions is, are there some abusive practices that really should be outside of even the concept of a trigger? You have named some of them. So we would share your view that there is a need to address this in a mixed approach, more work by some of the agencies here at the table in regulation and enforcement, but also a fresh look at the legislation.

    Ms. SEIDMAN. I would agree with what Secretary Gensler has said and in particular, the issues of flipping, the trigger and credit life which are things I think are very much on the front burner for everyone.

    I would also like to build on something the Comptroller said earlier, which is this whole issue of examination. I know a number of the States do a good job and are in there doing exams of the mortgage bankers and mortgage brokers who are subject to their jurisdiction. All of us need to make sure we use that tool to the maximum extent possible.

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    Mr. MEDINE. On the issue of HOEPA triggers, I think it is well worth the committee's consideration. We have investigated lenders over the past year or two and found they have very carefully kept their loans just under the HOEPA trigger so as to avoid the important protections that HOEPA provides consumers. Obviously, lowering the HOEPA trigger would bring more loans under those important protections.

    One of our specific recommendations is that the extras that are charged consumers—credit life, disability, auto insurance, auto clubs—all be included in the HOEPA cost so that is not another method of avoiding those important protections.

    Mr. CELLI. On the State level, I think there is a record already of trying to deal with many of the issues you raised. Nine States either have enacted legislation, use existing regulatory authority, or are pursuing State level regulations. I think that list is very comprehensive and one that other State level regulatory bodies and legislatures are also examining.

    Ms. SCHAKOWSKY. Thank you and I yield back.

    Chairman LEACH. Mr. LaFalce.

    Mr. LAFALCE. My name is not Bill Safire, but I do have some questions on the use of the English language, so I need your help.

    When I think of a prime loan, I think of one thing. If I think that I want to pay something more than a prime—or above prime—that is one thing; if I want to pay something less than the prime, that is something else too. Usually I would like prime or something less than the prime and I would call something less than the prime subprime. So everybody is talking about subprime loans, but those are high-cost loans. Isn't that an incorrect use of the English language? Shouldn't we be talking perhaps about subprime borrowers? Shouldn't we eradicate the use of the phrase ''subprime loans'' when we are referring to above prime loans? Help me out, please.
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    Mr. GENSLER. In this case I would defer to Comptroller Hawke, who was an English major.


    Mr. HAWKE. Mr. LaFalce, in this context, the term ''prime'' doesn't refer to the prime rate as such, but to the quality of the credit.

    Mr. LAFALCE. But they are talking about loans. They use the word prime and loans within the same context, do they not, the one before the other, the word prime before the word loan and then they use the word subprime before the word loan. That is what gives me difficulty. I think we are turning the English language on its head and it bothers me.

    I just want to share that thought with you and ask for your assistance.

    Ms. SEIDMAN. Let me point out, as Under Secretary Gensler pointed out, not all subprime loan holders are subprime borrowers. We have recently looked at the Mortgage Information Corporation data, which is a very comprehensive database of subprime loans. About a third of the borrowers had scores over 620, which is basically the Fannie/Freddie cutoff for an A quality loan.

    Chairman LEACH. Before dismissing the panel, I want to thank everyone. I would like to thank Ms. Seidman for her return which I would like to note.

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    Let me just say that a number of the panel members are banking regulators, but a lot of the practices that we are concerned with are outside the banking system. That poses a particularly interesting dilemma for the committee in general.

    Second, as a Member of this committee I am particularly concerned that in some cases we have subsidiaries of banks that are participating as if the bank itself is not as accountable as it might be for a regular bank loan. That is something worthy of concern.

    Also of concern to me is that if we don't move in the direction of more precise not just concern, but regulation, because of the concern, I think some reputable lenders may get out of more in between markets that we would like to welcome them into because of a fear that without precise rules they may be subject to legal challenges of a variety of natures.

    So I think it is very important that we move to rulemaking or legislation with more precision than has been on the table. I think it is also important that as we look at jurisdictions, that the Federal Reserve be considered a critical part of this because the Fed's jurisdiction goes beyond banks, savings and loans and certain other very defined institutions that are subject to Federal deposit insurance.

    I only raise this as a general concern because American finance is so widespread. I know the Fed had things under consideration much more actively in recent months and has issued some rules in some areas in recent weeks and this is appreciated.

    I think we all will have to work together, recognizing that we are going to have to think outside of boxes that I think the committee has traditionally thought in terms of and beyond responsibilities that might apply to simply one or the other institution, State or Federal that may apply.
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    In any regard, let me say I thank you all very much for your testimony. We are always particularly appreciative of outside of Washington witnesses in the governmental arena and the experience of States is very important.

    Thank you all very much.

    Our third panel will be composed of Professor Cathy Lesser Mansfield, Associate Professor of Law, Drake University Law School in Des Moines, Iowa; Mr. John Taylor, President and CEO, National Community Reinvestment Coalition; Ms. Margot Saunders, Managing Attorney, National Consumer Law Center; Ms. Gale Cincotta, National Chairperson, National People's Action; Mr. William Brennan, Jr., Director, Home Defense Program, Atlanta Legal Aid Society; and Ms. Gloria Waldron, ACORN of Brooklyn, New York.

    We will proceed in the order of the introductions and our first witness will be Professor Cathy Lesser Mansfield of Drake University. Professor Mansfield.


    Ms. MANSFIELD. I am Cathy Mansfield, a professor at Drake University. I teach consumer law and contracts. I believe I was asked to testify today because I have conducted two studies this year on the subprime mortgage industry. In my five minutes, I will just tell you some of the findings of those studies.

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    Chairman LEACH. First, all the panelists should be aware that without objection, their full statements will be placed in the record. We are hopeful to hold testimony to five minutes or so.

    Professor Mansfield.

    Ms. MANSFIELD. The few things I am going to talk about are rates and points, and data, how we got the data for the studies that I conducted and foreclosures, which is the other study that I did. I don't mean to suggest by limiting my comments to these issues that these are the only predatory practices, but these are the ones I was able to get information and data on.

    I want to start out by stating that in the conversations I have had with members of the Federal agencies and with other parties, I am always struck by how everyone seems to think we are talking about purchase money loans and that there is this credit need that is being filled by subprime lenders. It sort of assumes that the product being made is a purchase money loan or a second mortgage loan, which is something low-income neighborhoods need.

    The HMDA data suggests that the product that is being sold by subprime lenders is primarily the refinance loan, sometimes with a very minimal benefit to the borrower which that minimal benefit may have been the reason why that borrower was attracted to the subprime loan, like some cash or consolidating debt or a home improvement. I would like the committee to keep that in mind as I make my comments about rates and points and foreclosure rates.

    I think I will save data collection for last. The research that I did will be published in an article in the South Carolina Law Review. I will be supplementing the record and I will send a copy to each of the Members of the committee that traces the history of the subprime industry from DIDMA and AMPTA through the current industry. It has 661 footnotes, way too long for me to go through today, but I hope you will take the time to look at it for a historical perspective on how we got to where we are now.
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    The interest rate data that we looked at came from the 14 top subprime home equity lenders. A bunch of law students and I looked at securities prospectuses filed by six of the 14 top subprime lenders. That is because there were only six that were securitizing.

    We looked at over 1 million loans just to get a sense of what the interest rates were in the market. The prospectuses has to describe the loan pool that they are selling securities in, so that is where we got the interest rate information.

    For those of you who have my statement in front of you, if you look at Appendices 1 and 2 of my statement, that is the consolidated data for the years we looked at which is 1995-1999. The following appendices break it down by year, by lender and I have taken these graphs and marked in here what the conventional rate was. Then you can see on the graph where the interest rates were in these million loans that we looked at.

    Obviously the rates are significantly higher than they are for conventional rates. We are not talking generally 1 or 2 percentage points; we are talking a significant increase in the percentage points. My written testimony gives the median rates which is between 10 and 12 percent, but you can see the rates go as high as 20 percent.

    I then participated in a second study for purposes of the HUD Predatory Lending Task Force on foreclosures. In order to do that, a colleague of mine and I looked at SEC fillings and 16 of the top servicers. We looked at a little less than half of the outstanding subprime debt. We looked at over $163 billion in loans.

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    The appendices starting with Appendix 14 have the results from those studies. We were looking for 90-days-plus delinquencies and worse. So we were looking at foreclosures, bankruptcies, REOs which is real estate owned that hasn't been sold yet by the party that foreclosed, and we found the overall rate for the pool of loans we looked at, which is these 16 lenders, was approximately 4.65 percent.

    That compares with an overall rate including subprime mortgages of 1.54 percent. So the foreclosure rate overall is much higher. It is also much higher compared to VA and FHA loans, with VA loans averaging out at 2.27 percent and FHA loans averaging out at 2.57 percent. That is reflected in the graphs in Appendix 15.

    Then we also looked at single lender statistics. We looked at one company, Equicredit, and found that between 1995 and 1998 their delinquencies went from 5.58 percent to 8.27 percent, their serious delinquencies. So within a single company, foreclosure rates and serious delinquencies, which are headed for foreclosure, was also increased.

    Probably the scariest data for me personally that we looked at was a single pool foreclosure rate. What that means is we took one securitized pool which was made in 1998 and looked at how that pool has performed over the life of the pool. At about a year and a half into the pool, the delinquency rate for this pool, which was a WMC pool, was they had 27.93 percent of the loans in the pool in some sort of delinquency or foreclosure. Of those, 24.75 percent were either in foreclosure, 90 plus delinquency REO or bankruptcy. That means in that single pool, if that is symbolic for the industry, that means there might be a 1 in 4 chance of a borrower losing their home to a lender.

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    Then I looked at the 1996 HMDA data. This was another figure that really troubled me. It was that 90 percent of the loans made by these particular lenders in 1996 were nonpurchase money loans. That means that 90 percent of the borrowers, if you put those figures together, were probably in their home before they took out the loan that is ending in foreclosure and then losing their home.

    The last point I want to make was how difficult it was to get the data to make these studies. I sort of view my role as an academic to provide data so that Congress and other public policy institutions can make decisions, but mining the data from the SEC filings was the only way to get it. So I encourage Congress to amend HMDA so that we can really tell what is going on in this industry.

    I want to know things like what was the rate on a loan that was refinanced. One of the serious problems that a lot of practitioners are seeing is people coming in with loans that are refinanced at a higher rate that has no benefit to the borrower because their other loan was at a lower rate.

    What are the points and fees? I would like to tell you about points and fees. There is no source for information on points and fees right now.

    Thank you.

    Chairman LEACH. Thank you.

    Before turning to John Taylor, let me just say I am particularly appreciative of your bringing statistics to bear on this very difficult subject matter.
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    Mr. TAYLOR. Thank you for inviting the National Community Reinvestment Coalition to attend this hearing. It is good to see Representative LaFalce, Representative Waters, Representative Schakowsky and Representative Watt and the other distinguished Members of this panel.

    NCRC would argue that while subprime lending does play a role in expanding access to credit and capital for those with blemished credit records, I would like to state what strikes me as kind of curious in listening to some of the regulators and earlier folks who testified. We have experienced the biggest jump in lending to low-income and moderate-income Americans in home ownership and to minorities in the period of time from 1992 to 1993. Actually there was a 50 percent increase in lending to African-Americans and Hispanics two years in a row.

    Interestingly, the subprime market at that time was negligible, nearly nonexistent. In those days, we used to have things called ''affordable housing lending.'' We didn't have to have this subprime kind of lending scenario where a prime lender or bank simply says, ''You don't exactly fit the profile, what we are going to do is refer you or recommend you visit our finance company.''

    We do have to ask ourselves what have the CRA regulated institutions done in the refinance loan market? Have they abandoned these areas? Are affordable lending products, branches, marketing efforts outreach and the kinds of things that heretofore, just five years ago, reached these populations, are there products still available as prime, not subprime products?
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    Does the industry havewo sets of financial systems for different populations?

    I kind of compare the need for this hearing and legislation to the fight we had in trying to have minorities move from the back of the bus to the front of the bus. It took us eight years to pass the Public Accommodations legislation and frankly, this Congress should not take a year to respond to predatory lending practices. I am not willing to accept the notion that this Congress cannot take this on its agenda and really try to pass some legislation that prohibits these kinds of usury and horrible practices that are essentially dispossessing people from their homes.

    I am happy to hear today the discussion from a number of Members of Congress questioning what the bank regulators have done in this process. The truth is, I would agree with your question about the regulators being AWOL on this matter. The truth of the matter is there are laws on the books now. The Fair Housing Act, for example, has been largely ignored by the bank regulatory agencies, in our opinion. Occasionally, even though the law requires them to do so, they will refer a case to the Justice Department, but their examiners should be here telling us about the depth and level of the predatory and subprime practices, because they have examiners and regulators in the banks looking at the files, data and information that we don't have any access to. They should be the ones informing us, bringing forward this horrible problem instead of ''Nightline,'' ''48 Hours'' and the anecdotal stories that we hear from Bill Brennan and a number of others. Instead, we have them being somewhat defensive, somewhat not forthcoming in what they could do.

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    The GAO did a recent fair lending study on the Federal Reserve Bank and suggested one of the things they needed to do was to look at the subsidiaries that offer the sort of consumer financing the subsidiaries of holding companies, to look at their performance. It was a very simple request, but done under the auspices of the GAO saying it would give us all a better picture of what the larger institution is doing in the fair lending arena.

    The response from the Federal Reserve Bank, in a written letter from the Chairman a few months ago, was ''We don't currently have that as a practice.'' And he saw no reason to change the practice.

    I did ask Governor Gramlich today if they would reconsider that and he tells me that is one of the many things, and I think this hearing has helped. They are reconsidering.

    I would like to show you a map of some of the subprime lending that is occurring in Manhattan. Here we have Manhattan and the boroughs and what you see in the dark areas are the higher concentrations of minority population. If you look closely, you will see the minority areas are totally inundated with subprime lending. There are dots all throughout the minority areas.

    Here is a white area, of comparable income, almost exactly comparable, and there are hardly any dots at all. What we have here is a clear instance of a fair housing violation in which they are steering and targeting neighborhoods and offering inferior quality products, disproportionately to people of color versus the white neighborhoods.

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    Let me show this more graphically in the actual number of subprime loans that are made in New York City by the top twenty lenders, including many CRA-regulated institutions. These are existing homeowners who have already been through the gauntlet looking to refinance their home loans. Eight percent of the whites in majority white census tracts in New York City got subprime refinancing loans. Seventy-nine percent of all minorities in New York got a subprime loan when refinancing their homes.

    There is a law against this and those guys—bank regulators—sitting here have a responsibility. They have a lot more access to data than we and have a responsibility to identify these kinds of problems and refer those problems to HUD and to Justice and they simply are not doing it.

    There is another law called the Community Reinvestment Act. That Act is very clear that the obligation of CRA-regulated financial institutions is to meet the credit needs of low- and moderate-income communities. Meeting the credit needs is often not offering a subprime loan. And predatory lending is the exact opposite of meeting the credit need. Dispossessing people of wealth, equity stripping, taking away their homes, making them poorer than when they entered the process, is not meeting credit needs.

    You are right Mr. Chairman Leach to bring up the notion, and I was very glad to hear what sounded like bipartisan support for the abhorrence of predatory lending. I think you are right to bring up the notion that these regulatory institutions have the ability and the power to do a lot of things, but have not been doing that. I commend your efforts to encourage them to do so.

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    It is music to the ears of National Community Reinvestment Coalition to hear Members of Congress saying this once again, because we have been saying this for many years. If they are not going to do it, maybe we really do need some very clear legislation that is going to force these regulatory bodies to enforce the Fair Housing Act, to enforce the Equal Credit Opportunity Act, to enforce CRA and then to have legislation which covers those things which Representative Schakowsky, yourself and others have pointed out are outside the parameters of these existing laws.

    The truth is, we don't need a Balkanization of credit for different segments of the American population. We need folks to not be placed on the back of the economic bus, but to be able to move forward on that bus and to be able to experience the full experience of being a citizen of this country and being able to enjoy the benefits of working hard, paying taxes and playing by the rules. We all ought to get behind this.

    I have written statistics and testimony which I think you have accepted into the record and I appreciate the time you have given me.

    Chairman LEACH. Ms. Margot Saunders.


    Ms. SAUNDERS. Thank you for inviting us to testify today. I testify on behalf of the National Consumer Law Center's low-income clients as well as the Consumer Federation of America and USPIRG.
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    It is very nice to be sitting at such a table with so many colleagues, to have such a long and comprehensive and full hearing devoted to this question. We have been saying for a long time this is a problem, and in fact, predatory lending has been a problem for a long time. It is definitely getting worse.

    If there is any doubt as to whether it is getting worse, we can look at not just anecdotal evidence, but at the United States Census data. Foreclosure rates, according to the Census, have climbed almost four times in the last 20 years, four times as many people are being foreclosed upon.

    The question seems to be what is a predatory loan. Another seems to be what should we do about it? The first thing I think we need to recognize is that not all credit is good. Credit is not food. Just because we are opening up the laws to allow more people to get more loans doesn't necessarily mean that is the right thing to do.

    At some point this Congress is going to have to take the hard step of closing down some of the loopholes that were created in the 1980's. What may result there is that some loans will not be made. I think that will be good.

    In 1980, this Congress passed the Depository Deregulation and Monetary Control Act, which deregulated interest rates. Essentially it said to the States, you cannot regulate interest rates on first mortgage loans unless you opt out from this law within three years. Only twelve States did that.

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    Then two years later, Congress passed AMTPA—the Alternative Mortgage Transactions Parity Act—which is the law you have been referring to Mr. Chairman. This law said, ''States, you cannot prohibit prepayment penalties, balloon notes, negative amortization or other variable rate terms on loans secured by home mortgages.'' Only five States opted out of that law, one of which was New York, which is why New York regulators did not have problems pursuing the Delta Funding Corporation.

    There have been direct problems as a result of these deregulatory laws and there has also been indirect problems. Congress was sending a message to the States that deregulation and competition is appropriate. In other words, we will let competition control the market. I think we know now that competition does not work in the subprime market.

    Fraud and unfair trade practices have always existed and they will always exist. The question is in what arena. Twenty years ago when I started practicing law, we were arguing about vacuum cleaners being sold at unfair prices and other unfair and inappropriate practices that were going on. We were generally not worried so much about the loss of homes as a result of these unfair trade practices.

    We have laws on the books that prohibit unfair trade practices. What we don't have are laws, or even the ability for the States to pass their own laws, that will prohibit what are now legal but predatory loans.

    The Home Ownership Equity Protection Act was a good start in 1994. But all the folks at this table know this Act dod not go far enough. We said this at the time, and we are now saying ''we told you so.'' HOEPA doesn't cover most of the predatory loans. As HUD pointed out, it only covers 1 percent of the subprime loans. Even if HOEPA covered all predatory loans, HOEPA doesn't adequately address the problems by prohibiting the real problem terms. It doesn't stop the equity stripping; it doesn't even address that issue.
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    Mr. LaFalce and Ms. Schakowsky's bills quite appropriately put a cap on the fees and points that can be charged up-front. That is the only way that we are going to stop the equity stripping, which is what encourages mortgage brokers and predatory mortgage lenders to make bad loans.

    We need to keep in mind that 24 percent of the American population, according to the Department of Education, is illiterate. You can have two points of view on this. One, we can say ''if you are not smart enough, you can take your lumps.'' Or you can pass laws, which I hope you do, which protect all people against inappropriate behavior.

    The entire regulatory structure of this United States on mortgage loans is based on the assumption that a consumer can understand and manipulate the loans that are made available to him. I would contend, after having advised many very smart people—friends of mine—about what kind of loans to get, that even the most sophisticated consumer has a difficult time. The 24 percent of the population that is illiterate has an almost impossible time.

    We need to pass new laws such as Mr. LaFalce proposes and Ms. Schakowsky proposes that will actually make these loans illegal.

    Thank you.

    Chairman LEACH. Mr. Brennan.

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    Mr. BRENNAN. Thank you for the opportunity to come before your committee to tell you about the nightmarish existence that my clients that are streaming into my office and into other legal services offices around the country are experiencing.

    I have been a legal services lawyer for almost 32 years and for the last 12 years I have run a unit called the Home Defense Program which specializes in mortgage fraud issues, but primarily in predatory mortgage lending cases. I can tell you that it is disastrous what we are seeing with minority, elderly and lower income homeowners being subjected to these practices, many of them losing their homes and becoming homeless.

    When you have been around a long time, you sort of have a long institutional memory. As Margot stated, I can remember those vacuum cleaner cases too and we thought that was pretty serious. Back in the days when I started at Atlanta Legal Aid, working in a really poor neighborhood, we saw a few mortgage cases, usually wealthy white people coming down into black neighborhoods to lend money at pretty outrageous rates, but we had a good consumer protection law in place. That was repealed.

    Today, it is just overwhelming what we are seeing in terms of the loss of homes, the loss of wealth and the direct destabilization of communities.

    I would submit to you that the financial services industry has created a system of financial apartheid and have done it on purpose. What they have done is separate Americans into two groups—those with A credit and those with less than perfect credit, B, C and D and especially C and D. People with A credit buy and large are treated very well by our financial institutions and banks. People with C and D credit are purposely abused for the sake of exploitation and profits. The sad thing is that there are even some A customers treated as C and D customers are treated.
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    This seems to be a very formalized system today. I agree with Representative Waters when she said it is not just the predatory lending area, it is the whole system of the shadow banking system, people being denied access to low-cost credit by banks and other large conforming financial institutions so that they can be ripped off by these other companies such as check cashing services, rent-to-own stores, auto title pawn, pawn shops and the most serious that we see are these predatory mortgage loans.

    As one of my associates, a Philadelphia Legal Services lawyer said, ''It is as though society has dealt with the problem of inadequate access to productive credit by drowning low-income households in destructive debt,'' and that what I see every day.

    I am only too willing to define what predatory lending is because I have been looking at it for twelve years steadily and I will give you an accurate definition. Here is what these companies do, the predators. They overcharge on interest and points, they charge egregiously high annual interest and prepaid finance charges, points, which are not justified by the risk involved, because these loans are collateralized by valuable real estate.

    Since they usually only lend at 70 to 80 percent loan-to-value ratios, they have a 20 to 30 percent cushion to protect them if they have to foreclose. They usually always buy at the foreclosure sale and pay off the debt and sell the house for a profit.

    I would submit to you that you don't have to believe me, but this assertion, the excuse they use for this is high risk. So here is the question. If the risk is so high, then losses must be great, but let us look at the profits the companies make. If the losses are great, the profits would be down in line with the conventional lender, 7 or 8 percent. That is not what we are seeing. The profits are tremendous.
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    Just anecdotal information, I hear that Bank of America was going to get rid of Equicredit, Nations Credit. Well the National Mortgage News just points out in an article that they are going to get rid of Nations Credit, but not for the reason I would have hoped, but, because they only earned $5 million a month. They are going to keep Equicredit because they earn $30 million a month. I submit to you again that the profits are great.

    The second factor, these companies perpetrate abusive practices. We call them the substantive abuses and I have set them out in my written testimony and in an appendix. There is a list of about 20 something practices such as loan flipping, packing the loan with single premium finance credit life, and other types of credit life, balloon payments, high prepayment penalties. You have heard the litany of the abuses.

    I submit to you that we have to understand a very important thing. These abusive practices, the substantive abuse, is different from interest and cost and are inextricably intertwined with profitability. These companies don't do these things because they are mean, and believe me they are mean. They do these things because they enhance profits.

    When you pack credit insurance in and you own the insurance subsidiary, you are enhancing profits. So when you are asking these companies to give up the abuses and you are trying to legislate and regulate the abuses away, they are not going to want to do that.

    When Fannie and Freddie are going to be buying these loans, Fannie and Freddie aren't going to want to buy loans that don't have these abuses in my opinion, because they are so profitable.
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    These companies target groups based on age, race and sex. I see that all the time. I have a map too I could show you. John's map is fine and there are so many good maps. The NTIC people did a good map, the Woodstock Institute has shown that prime loans are in white neighborhoods and the subprimes are in minority neighborhoods. I think it is unquestioned now.

    I see it every day. My typical client is an elderly, African-American widow. I have file drawers filled with these cases. I believe they do it for reasons that make sense to them. They target the elderly because they have paid down their mortgages by living in their homes a long time and they have retired, so they are cash-poor and equity-rich. They are prime targets for the subprime lenders.

    They target minority groups because they have historically been cut out of access to credit and these lenders know that. Even if that has improved, the lenders know many of these homeowners don't understand they might have access to good credit.

    I believe they target vulnerable women as well. I am not sure exactly why. I don't want to make any sexist comments, but maybe particularly some older women who have relied heavily on their husbands to help them with financial situations and they are now widows, for example. I don't know why exactly, but so many of my clients are women.

    Let me say a word about two abuses of these companies. They use home improvement companies and mortgage brokers to originate loans. I tell you, these home improvement companies and brokers are bird dog brokers for the lenders. They use these signs. I tear down these signs. They are only in black neighborhoods in Atlanta. I don't know if these particular companies are engaged in abusive practices, but I do know these companies are brokers and don't have any money to lend, but they will hook people up with Ameriquest and Nations Credit and all the rest of the subprime lenders.
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    This is really sad, because HUD runs what is a well-intentioned, very good program called ''The Title I Home Improvement Program.'' Believe me, it is being ripped off by the home improvement companies that work with subprime lenders. They tell the homeowners HUD will guarantee the work I am doing on your house and they have these signs all through the neighborhoods. People are being ripped off and funneled into the subprime loans through the home improvement companies.

    As Ms. Waters said, they do use checks that look like government checks. I have a whole handful of them. You send a check like $35,000 to an 86-year-old African-American homeowner who didn't graduate from high school and she needs her roof fixed and she can't get a loan from a bank, she will answer this call. They send urgent telegrams and they come from all the subprime companies.

    I submit to you would a legitimate company do something like this? Is this a legitimate way to do business?

    I would make two quick points. I have been around a long time. I have been representing poor people for 32 years and I have been and still am, and always will be shocked that major American banks are among the worse predatory lenders in America. Mr. Chairman, you are right when you say these banks have subsidiaries and they try to distance themselves from the subsidiaries. I won't let them do that.

    Some of the worst cases I see day-in and day-out are from bank-owned subprime mortgage companies. The list of abuses I have here, they engage in many or all of them.
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    Mr. LAFALCE. Would you please tick off some of them, please, some of the abusers?

    Mr. BRENNAN. There are many banks involved in this. Bank of America owns Nations Credit and Equicredit; First Union owns the Money Store, one of the worse companies. All of these companies are abusers. City Group, when it merged with Travelers Insurance Company, Commercial Credit came with Travelers and now it is called City Finance. I just picked up a horrendous case with City Finance a month ago.

    There is an article in the National Mortgage News, ''Banks Take Over Subprime. Banks now control five of the Nation's top ten subprime lenders.'' Among the top 25 subprime lenders in the third quarter of 1999, ten are owned by either a bank or a thrift. A year ago, just three of the top 25 were owned by depository institutions. Banks aren't distancing themselves from these predatory practices, they are plunging in with both feet.

    They own them, but banks make capital loans to support the operations of subprime mortgage companies. Another article in the National Mortgage News, ''Twenty Banks led by First Union National Bank, made an unsecured $850 million line of credit loan to now defunct subprime lender United Companies which is now in Chapter 11 bankruptcy.'' I can't tell you how many cases we have had with United Companies. Here is First Union leading 22 banks to make an unsecured loan to United when they won't make a good secured loan for my client, so that she can borrow $7,000 to fix her roof. The banks are directly and indirectly involved therefore with these subprime lenders.

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    Other banks support subprime mortgage lenders by purchasing mortgage loans originated by subprime mortgage companies or by acting as trustees in the securitization process. It is so dismaying to us that Bankers Trust played a major role with Delta Funding in acting as the trustee for securitization. These banks have arrangements with the subprimes that they don't just act as the trustee, but they do servicing, including foreclosures.

    I get a call from a lawyer yesterday before I came up here from a rural area in Georgia and he says, ''I have a client here who read about the HUD hearing in Atlanta,'' and said ''it is an 85-year-old black man and he lives out in the boondocks. He has a house that is a wreck and a home improvement company hit him not once, but twice. He has a $350-a-month payment and a $100-a-month payment, and both loans went to the Money Store. But guess who is foreclosing on him? Bank of New York.'' He said, ''Why is Bank of New York foreclosing on this man in a rural area?'' I said because I assume Bank of New York did the securitization and has the servicing agreement.

    Here is the Bank of New York coming to rural Georgia to foreclose on and evict an elderly 85-year-old black man. This lawyer had another lawyer friend put the guy into Chapter 13. He couldn't pay to begin with, and he can't pay under Chapter 13. Now the law firm has said, ''If he will give us the deed in lieu of foreclosure, we won't require him to catch up the arrears, but we'll let him stay there the rest of his life as long as he pays the monthly payments on the two loans.''

    I am shocked the banks are involved the way they are. Let me conclude by saying when I hear that Fannie and Freddie are responding to HUD's requirement that they increase their involvement in affordable lending in inner city neighborhoods and they say, ''Here is our answer, we will start buying subprime loans.'' I am thinking to myself is that any different from the banks?
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    I went to a public hearing that Nations Bank, now Bank of America, held in 1993 when they bought Chrysler First, which became Nations Credit, and there were questions asked. There is a great article in the Charlotte Observer. Here is an article from 1993 about this whole subject. The question was asked, ''You are buying this ripoff subprime mortgage company owned by the Chrysler Corporation, what are you going to do about all these abuses?'' Their answer is, ''We are a bank, we will clean up the abuses.''

    When I went to that public hearing in Georgia in 1993, I believed them. I figured sure, the banks aren't going to let these abusive practices continue. Let me tell you, Nations Credit, Equicredit are the worst I have ever seen. They have gotten far worse and there are far more homeowners with these types of loans.

    When First Union bought the Money Store, they made assurances they would clean up the bad practices. They haven't done it. Now Fannie and Freddie purport to say that they are going to apply their processes, which have uniform underwriting standards and ways to unify what is happening out there. Let me tell you, I am a bit cynical, I don't see why Fannie and Freddie would act any differently from the banks. First of all, I don't think they have the capacity to review what is in these loans. They have already agreed on some things. They won't buy loans that have three abuses or two abuses. What about all the other abuses? They don't cover loan flipping, don't cover the home improvement scam.

    I submit to you when you are talking about Fannie or Freddie or any legislation you might enact on this subject, if you don't prohibit all these abuses, if you just prohibited three, as Fannie and Freddie are offering to do, these companies will just shift into the other abuses which are so profitable and beef up those.
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    So unless you are addressing all the abuses, and we provided you a list of them which I think is accurate, I am afraid we are all wasting our time and we will be back in five years having the same type of hearing.

    Chairman LEACH. Thank you, Mr. Brennan.

    I skipped improperly over Ms. Cincotta and I apologize. Are you prepared to go now?


    Ms. CINCOTTA. I behaved well and was quiet. I enjoyed listening.

    Thank you very much and I am glad you got to hear Bill Brennan and the frustration that comes across with Bill when we have testified before to let you know how bad things are. It is almost like an insanity of working in these neighborhoods where we were hit with so many high FHA foreclosures and now we have a lot of reforms and we are making a difference of stopping the FHA foreclosures.

    We weren't getting any loans in the community. We won CRA and the Chicago City ordinance. Also in my material, we have worked with four banks, our NTIC in Chicago. The neighborhood groups deal with the others and gotten $ 1 billion in CRA loans to underserved communities.
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    Some of these banks have changed hands so you clean up FHA, you continue to work with these lenders. Some of them are doing predatory lending now and what we have seen while we are doing that is a map that goes like this in five years where the increase of foreclosures of 93 to 99 from about 131 to almost 5,000. These are the high interest rate loans, subprime lenders.

    We clean up FHA, get our CRA, do this work and over the phone and everywhere else is that kind of an increase in subprime loans.

    We also worked with Congress to get the cities and States money through their CDBG and CRA. How fast can we shut them off so that we do not have to deal with these criminals year after year after year. Can we shut them down faster and go back to dealing with the problems we do have.

    In Chicago, they are gouging borrowers with high fees and refinance loans. They are flipped to borrowers with multiple finance loans. They base the loans on peoples' equity without making sure they can repay the loans.

    What we are trying to do in Chicago is we put in a city ordinance—the Mayor is very upset with this also—which defines predatory lending and prohibits city depositories, contractors and their affiliates from doing predatory lending or the City of Chicago won't do business with them. It also tracks high-cost loans.

    At this moment, the banking industry and the trade associations are lobbying against the ordinance until even last week, where we thought we were going to have finance committee hearings and go to full city council meeting, there was so much pressure, nothing happened again. Even though the city is trying to do something, you have the forces nitpicking over the bills, ''Why don't you let this or that stay in?'' We are hoping the city holds up and we can get a city ordinance through.
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    We tried State reforms in the State of Illinois with the city support also. The lobbying effort by the institutions killed the ability to get State reforms last year. So we are trying city, trying State. What you really need is something national that would stop the practice, stop it dead in its tracks before it goes on as long as the FHA abuses, as long as the other banking abuses.

    One of the things pending here is something called the Ney bill. If I am reading it right, you ought to make sure you kill that bill, because it would take away the rights of the States and Congress to pass legislation.

    Again, introduce real reforms in Congress to stop the gouging with high fees, flipping also or making loans without borrower's ability to repay.

    Third, modernize HMDA to disclose points and fees, interest rates, annual percentage rates and credit score. I sit on the HUD oversight of Fannie and Freddie and Freddie out of the blue doesn't usually volunteer anything, because they said they were going to buy subprime whether anybody liked it or not and came up with a study that 35 percent of the loans they bought as subprime qualified for conventional, straight or not subprime loans. Getting that kind of data from Freddie is very interesting.

    Make sure financial institutions like First Union don't get CRA credit for subprime loans. First Union owns the Money Store. The bank does not have loans anywhere, Money Store is all over. Is there a way to even help the regulators move those things faster? We have had that complaint filed with the OCC and it has been stuck there for months. They are crooks, cut them off—period. Do it in a hurry.
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    Money can be available the straight way, as we can see through our CRA agreements. But it is not just carpetbaggers. These are supposedly good people doing bad things all over. It is all going for the bucks. The faster we can get something through, some real reforms of the gouging, the high fees, the flipping, the better. So if you can, act in a hurry.

    While we are sitting here, I don't know how many more people have lost their homes. I keep hearing that we need subprime. I don't know if we really do. If we have CRA agreements, if we have HMDA, if we have the money coming from State financing, why does all of a sudden everyone needs subprime? We did well without it, let it stay away from us.

    Thank you.

    Chairman LEACH. The last witness is Gloria Waldron from ACORN. Welcome, Gloria. Please proceed.


    Ms. WALDRON. Thank you for the opportunity to testify today.

    I am testifying on behalf of ACORN's 120,000 plus low- and moderate-income family members. I live in New York and in my neighborhood which is low- and middle-income, terrible things are done.

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    The thing is that we do not only lose our homes. Ms. Fores came to us at ACORN and she was there for a little while and she couldn't work, just the husband was working so she asked the lender to reduce the payment until she is better and can afford it. They only see the gain, they don't see the pain and what happened, she had a heart attack, she had to have bypass surgery. Eventually she said she didn't want to lose her house, because it is different with a minority. When you are working for $5,000 and are putting 10 percent aside for my building, you have $4,500 to go with. When you are working for $200, minimum wage or a little above, and you put aside the same 10 percent, you just have $180 to go on.

    The cost of utilities does not lower for the low-income person. It is the same across the board. These people have to take a longer time to accumulate the amount of money to pay down on their homes. So it is not just their homes they are losing.

    The woman had two bypass surgeries as a result of losing her home. When she came to us, she said after the first one she got a bus, a minibus and said, I will take children to school so that I can keep paying the mortgage. As a result of that, she had another bypass surgery, so we are losing not just the homes, but health and a lot more with it.

    We are saying predatory lending is doing a lot of damage and it has to be stopped. Brenda Johnson inherited a house from her mother and contacted the mortgage broker for a loan for needed repairs. Before Ms. Johnson had agreed to any loan, the broker had his contractor into the house unauthorized and started the work. Then someone from the broker called pretending to work for a lender and offered a loan to pay for it. Brenda ended up with a $91,000 loan from Delta, over $6,000 of which went in fees to the broker and related parties. She never saw the money for the construction, the work was never done.
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    People like Ms. Davis, an elderly woman living in a home inherited from her family who went to City Financial looking for a loan to do some needed repairs. A mortgage loan for more than she needed was made based on income from two rental units with no reserves required. The repairs were never done with no reserves and the nonpaying tenant has left Ms. Davis who lived on a fixed income on the brink of foreclosure. The lender has refused to discuss a workout.

    Everil and Sonya Plummer refinanced a loan through Delta simply to change who the signatories were. The loan started out at $188,000 and ended up at $217,000, a difference of $30,000 and the Plummers received no cash out and not even a settlement statement to explain where the $30,000 had gone.

    ACORN members from around the country unfortunately report similar stories. Last spring, Cesar Ramos from Oakland, California missed a mortgage payment when his son became ill and his wife suffered an injury at work. Almost immediately he received a call from Golden Gate Mortgage offering to refinance and other debts at 7.25 percent. When the representative came to Ramos' house, he pressured Mr. Ramos into signing the papers without reading them and told him not to worry, because he had three days to cancel.

    After the representative left, Mr. Ramos saw the loan rate was 11.25 percent, $8,000 in finance fees and monthly payments of $1,800, more than $400 above his previous payments. Mr. Ramos called repeatedly to rescind the loan, but no one from Golden Gate would assist him before the three days expired. Eight months later, the Ramos family lost their house.

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    Unfortunately, the statistics confirm what is obvious to us. These lenders target our neighborhoods and they are fast becoming the main lenders there. The subprime industry claims their loans open up home ownership to new families, but the vast majority of their business is refinancing and home improvement loans. Too frequently, subprime lenders tear down dreams of home ownership. As the subprime industry has taken off, so have foreclosures, despite the growing economy.

    In Philadelphia from 1995 to 1999, for example, as subprime lending grew, foreclosures more than doubled. Some of these damaging loans violate laws like HOEPA and many others are legal under current law, but clearly predatory. Pricing on these loans seems driven not by the credit risk of the borrowers, but how much the lender or broker can get away with. Subprime lenders also charge fees many times those of the banks for providing the same service.

    When entering a mortgage, every borrower places a certain amount of faith in the lender/broker. We need more consumer protections on high-cost loans, because while borrowers from middle- and upper-income areas can generally trust their bank not to rip them off, the fees, credit insurance or hidden prepayment penalties, people targeted by subprime lenders don't fare so well.

    This is a market where lenders deliberately deceive applicants regarding both the cost of credit and whether the applicants qualify for a more reasonably priced loan. A home loan is the most complex transaction most families will ever make. The home is the largest purchase. For many families it represents their entire life savings. We don't ask people to make decisions about buying medications based on reading 50 pages of disclosures. We make rules about what standard drugs need to meet in order to be sold.
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    Home loans are something like that. Borrowers are never going to know as much as lenders. Experience shows that too many subprime lenders are taking outrageous advantage of this fact. ACORN members believe consumers need additional protections, and those protections should apply to many more loans than are currently covered by HOEPA.

    We think current law and any new law needs to be better enforced. In addition, victims of illegal practices need better legal remedies both to recover losses and to discourage lawbreaking. Our written testimony describes in more detail the practices we are concerned need to be regulated. At the same time, we focus on predatory practices.

    We must not forget a large part of the problem is lack of lending by prime lenders as discussed before. Banks especially lag in refinances in underserved neighborhoods. These trends are more evidence of the need to maintain and strengthen CRA obligations.

    ACORN would like to suggest that there should be loan counseling before a loan is given. Because lots of times, like the Latinos, they do not translate the contracts into Spanish so that they can read it. They just give them the regular contract, ''sign on the dotted line.'' A lot of times in desperation they do, ''My roof is leaking.'' So they know the fine talk to give to them. We recommend that loan counseling be a must for these people so they know what they are getting into to.

    Another thing they do is inflate your salary or tell you, ''You can rent the two floors and live in the basement so you can make the payments.'' She did that, the two people reported her that it was illegal to live in the basement. They wouldn't pay the rent, she lost the house. These are the horror stories.
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    The predatory lenders get the gain, we feel the pain, because it is our people and they come in weeping. I was very encouraged at the hearing in New York with Mr. Schumer and the HUD representative, Mr. Cuomo. They spoke very strongly in favor of doing something about the predatory lenders.

    One of the women testified how much she has lost, Mr. Cuomo looked at her and said, ''I used to be an attorney before I got this job and I will take your case for a plate of food.'' The horror stories are something else, and these people who have worked long and hard to do this and realize this dream, but we pass the boarded-up houses and wonder where are these people.

    I am so glad there are so many allies here, particularly Maxine Waters. Whenever I see inequities or unfairness, I see you there fighting for us. A lot of time people tell me ''I am having a problem with my rent.'' I say, ''Do like Congresswoman Waters and fight for the underprivileged.'' We do appreciate all that you do for us.

    We strongly recommend that you pass the LaFalce bill, that you pass the Schakowsky bill, you pass the Schumer bill and you say nay to the Ney bill because it is not good and has too many loopholes.

    We have had action recently with Ameriquest, action on the predatory lenders, action on the Wall Street companies that buy the mortgages. We went to the White House. We are going to be relentless in our efforts to wipe this out, because it is wiping out our communities.
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    Thank you.

    Chairman LEACH. Thank you.

    Mr. LaFalce.

    Mr. LAFALCE. First let me say that I have so much enjoyed the presentation of this panel. I can't think of a panel that has done a better job since pre-1994 days. We need more of this. One of the reasons I was so cooperative was so we could get it behind us, and concentrate on the problems and plight of consumers in the future. And that is what we should be doing, and if I have anything to say about it, will be doing.

    Second, I want to give special thanks to Ms. Margot Saunders, because I received advice from so many individuals in the drafting of my bill on predatory lending, but no one more so than Ms. Saunders with virtually every dotted ''i'' and crossed ''t'', so special thanks.

    Ms. Cincotta, I want to thank you too for the work you have done over the years. I remember when I was a freshman Member of Congress, a few years back, coming to Chicago with Congressman Frank Annunzio and having a hearing on some of the housing problems in Chicago at the time, where you testified and we had a young cub reporter whom no one had ever heard of by the name of Jane Pauley covering the story. You have done magnificent work since then over the years.

    Ms. CINCOTTA. Thank you.
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    Mr. LAFALCE. Mr. Brennan, as you were testifying, all I could think of was that the late Mr. Justice William Brennan was probably looking down on you with a smile and great favor saying, ''Well done, Bill Brennan, well done.''

    Let me ask you, Mr. Brennan, you had so many anecdotal stories that were not simply persuasive, but compelling. Is there some association of legal aid lawyers who work in a home defense program in their communities similar to the way you do in Atlanta? Do you ever get together? Could we get legal aid attorneys specializing in home defense such as you, to have a conference here in Washington, a seminar, maybe even a hearing, where we have your counterparts from Los Angeles and Des Moines, Florida and New Orleans, and so forth, give similar anecdotal stories and then comment on what you think is the need for both stronger regulatory enforcement and stronger legislation? Perhaps something akin to the bill that I have introduced with the co-sponsorship of many others?

    Mr. BRENNAN. Yes, we could certainly do that. Actually, we have done it to some extent. Margot's National Consumer Law Center, we get together every other month on the phone with legal services lawyers and even private consumer lawyers. We have a foreclosure prevention task force that is run by the National Consumer Law Center and it is a great chance for us to get together and to compare notes.

    The National Association of Consumer Advocates, run by Pat Sterdivant who is here, also has sponsored conferences along with NCLC to address predatory lending and many of these lawyers have come.

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    I can tell you, however, that there are lawyers in Chicago, New York, Baltimore, Jacksonville, Atlanta and LA and maybe a few other cities—Philadelphia—and we are very much gratified that they are working in this area. It just shows you how serious a problem it has become.

    I am afraid in so many other cities, these issues are not being covered by legal services lawyers, mainly because of resource problems I would think.

    Mr. LAFALCE. I won't pursue it right now, but I do want to pursue it with you later.

    Mr. BRENNAN. We would love to do it.

    Mr. LAFALCE. I also want to say to the next panel that I am not going to be able to stay here, and I regret that very much and I apologize, but we have a vote on China coming up and I have simply got to participate in that momentous debate and vote, so I am going to have to depart.

    Chairman LEACH. Ms. Waters.

    Ms. WATERS. I would like to follow my colleague in thanking the members of this panel for all of the work they do. It takes a lot of courage, a lot of commitment to do the work you do, individual research, the kind of support that I received during the conference committee on the financial services modernization legislature from many of you, the work that you do trying to take these cases and assist families when they find they can't pay the mortgages and they need some intervention, someone to intervene to try and talk with the banks or the mortgage companies. Many of them finally need a place to live, because they are going to lose their home. So I really do thank you and I thank you for being here today.
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    It is very painful to sit here. Mr. Taylor, when you showed that very, very graphic information on where the predatory lenders are located, once again, I sit here as an African-American woman thinking all of the struggles that we have to be involved with on a day-to-day basis, whether it is the disproportionate health care, the criminal justice system that is incarcerating at disproportionate numbers, the banking, the housing, that was a little bit more than I could almost bear to see that large concentration of predatory lenders.

    I know in my city many of the faces in areas such as that one of people who have lost their homes and it is very difficult for a legislator's office to even track what has happened in these cases. Some of it gets very complicated, and I have to tell you, it got so bad in Los Angeles at one point that one of the representatives of a predatory lender was tracked down at his home and shot and killed by an irate homeowner who had lost her property because of the legal manipulations of the predatory lender.

    I think the legislation that is being proposed can be helpful, but again, after listening to the regulators today, I am more than convinced that if they but did their job, we could get at a lot of this. Not only are they not using the power they have, I think many of them now have too close a relationship with the financial institutions and they come in wanting to protect the banks.

    Each one of them started out by saying ''You have to be clear that subprime lending is not all bad lending, and you don't want to have any laws that are going to hurt any of the bankers who don't fall within this category of predatory lending.'' I didn't hear that passion on the side of the hurt and pain of the homeowners and our constituents.
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    So I am going to work with you in every way I can. My door is open for advice that you can give above and beyond everything that we do. I would love to have more information on foreclosures. There is noplace to get the information. My staff and I just talked about that, and I asked the regulators and they couldn't tell me anything. We may have to add to the legislation or come up with legislation.

    We also may need to talk about how to put together an 800 number so that we can create a databank of foreclosures and other information, because clearly the regulators are not reaching out soliciting that kind of information by which to clear up some of these problems.

    I am very interested in something I think you said, Mr. Taylor, about the affiliates of the banks that are involved in predatory lending with support from the bank itself. It is kind of a hide-and-seek game, I suppose, where the bank pretends to have a sterling reputation, but like Union Bank that I just asked Mr. Hawke about, are creating these affiliates where they are involved in everything from payday loans to this predatory lending.

    Let me say that in the State of California, we worked very hard on trying to get rid of the improvement loan predatory lending schemes. I created legislation there. At one point in time we had banks that had a relationship with improvement companies that supposedly rehabilitate homes and the improvement companies actually carried the papers of the banks, the applications, and they would knock on doors in targeted communities and have senior citizens and unsuspecting vulnerable people who needed a new roof, an extension on their homes or a new staircase, actually fill out the loan papers from the bank. The improvement company would take the papers back to the bank and they would lend money based on the equity in the house, because the improvement company would also take from the senior citizen a copy of the deed. They secured these loans with the deeds, so the banks didn't care. They took the paper back and had the deeds that secured the loan.
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    The companies would put scaffolding up, never start the job, go on down the street and keep knocking on the doors and signing up more people, getting more money. The payment book would come from the bank to the homeowner who had made this loan through this improvement person intermediary, work had not started, now payment is due. I got so many of those in my office until I stopped calling the regulators. I would go straight to the banks and threaten them.

    I was able to work some of the homeowners out of those relationships and make them give me back their deeds. But we can only do so much of that, and I know much of that is still going on in many cities and States around the country.

    If you are willing to continue to do this work, I am certainly willing. I am pleased the Chair of our committee and so many Members of the committee will stand strong as we try to deal with this issue.

    We have to put up with the likes of our colleagues, one of whom sat here today and said, ''Oh, they are just ignorant.'' What you are saying is they don't know how to read the agreements they are signing. Then, after saying that, he went on to say ''Well, these are complicated agreements and most people can't read them.'' Again, we have a lot of work to do in getting at all of that, and that is not going to be easy.

    I said something to the regulators today about extending the cooling off period or a second opinion. I mean that. Forty-eight hours is not enough and with all the education that you and others will do, because they are not going to do any, they will talk about it, but you are the ones that have to do this. If a little homeowner, senior citizen, uneducated person in one of these communities can take that paper maybe to the minister on Sunday or to something where we have a clearly identified place to go that is funded and paid for by Government, and we give them enough time to do it, then perhaps that will help, but we don't hear those kind of ideas coming from the regulators.
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    We need seven days or more to get people an opportunity to take that agreement someplace and then be able to wind out of it because somebody, a relative, a minister, or somebody can say ''This is bad, you don't want to do this.'' So let us keep coming up with the ideas. Whether we get them into legislation or not, let us keep going after them and let us keep doing some of the hard work that people like you, Ms. Cincotta, do in saying ''If you don't listen to me in Congress, I will come to your house and perhaps you will listen to me there.''

    Thank you.

    Chairman LEACH. Let me just conclude with one aspect of an observation on statistics. About fifteen years ago, junk bonds looked like a pretty credible investment for a lot of people and the default rate wasn't enormously awful. Then a study was put forth that said that the upsurge every year in junk bonds had been so large that people failed to look at junk bonds on a yearly basis and the default rates were rather extraordinary.

    When you get very high interest rate situations, over time they become increasingly difficult to meet that obligation. So you have noted that the default rates are going up and I suspect they are going to escalate dramatically based upon the number of new high interest rate circumstances out there.

    This is going to be a very difficult situation. I think it is self-apparent that lack of credit is preferable to predatory credit.

    Second, we are dealing in an area when it comes to housing that isn't simply finance. As is sometimes expressed, housing is the American dream, but there is nothing worse than a dashed dream. So if someone gets involved in a housing circumstance for which it is over their head and they have some of their real savings lost, and then they lose the house, you have a real issue of social cohesion.
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    You don't have an issue of a loss that is simply finance. You have social incohesion, and what is so critical in this country is that the pockets of America shouldn't be left out of the credit system, but pockets of America can't be left out of the honorable credit system. It is a dual situation and what Mike described as anecdotal, but anecdotal that is of a compelling variety is coming to the attention of the regulators and the Congress. We have an obligation to pay some attention to the issue and to try to figure out a new structure that puts greater restraints of accountability to bear.

    I thank you all. Your testimony is very much appreciated.

    Mr. Bentsen.

    Mr. BENTSEN. I apologize for not being here for all of your testimony. I had to take a meeting with some constituents just a second ago. I did have a couple of questions.

    The Chairman raises the sort of analogy of the high yield or junk bond market, and I would add to that, because I did notice in one of the testimonies the incredibly high default rates, several times the normal default for a single family mortgage portfolio in an otherwise rather good, if not exemplary, economic time. So I think you could argue that assuming we have not repealed the business cycle and there is a downturn at some point, a recession, and unemployment goes back up, you could experience even astronomical default rates in some instances. That would spill over into other sectors of the economy both in deflating the real estate market, as well as impact on safety and soundness of the banking system.
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    We did see over time that the high yield market, the better end of the high yield market, which did make credit available, did sustain and survive and exists today, but certainly not anywhere near where it was in the late 1980's when it probably got out of control.

    Mr. Taylor, and I would ask the others to comment on this, you talk about the regulatory response to this issue. I assume you heard the panel before you. I was taken aback by the regulators' inaction with this issue of predatory lending. They seem to say, and I do agree, it is somewhat difficult to differentiate between all forms of predatory lending and acceptable forms of subprime lending, but then they did a pretty good job of listing those categories in their testimony.

    Then they said that it did not appear that much of this was going on within regulated depository institutions, but went on and said it would be hard for us to find it if it were.

    In your testimony, you talked about the Federal Reserves' most recent study under the 1993 Act, and you contradict Governor Gramlich and the Fed that, in fact, it has a larger prevalence within their portfolios either at the bank level or at the holding company, subsidiary affiliate level. I would like you to elaborate a bit on that.

    Second, the regulators were saying even if there was some form of uniform underwriting standards in place to try and divide the wheat from the chaff, if you will, of acceptable subprime lending and predatory lending, they probably wouldn't have the documentation available, but if they did find it, it would be a safety and soundness concern.
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    Is there a way for the regulators to be doing this under existing laws that they are not doing?

    Mr. TAYLOR. Yes, sir.

    Chairman LEACH. If I could interrupt for a second.

    Let me apologize to the gentleman. We have another panel and we have a really critical vote and one the Chair wants to speak on, so if I could ask you to keep your responses to one minute each.

    Mr. TAYLOR. The fact of the matter is the large banks blend in their HMDA reporting the subprime lending, they bury it and it is very difficult to find. Also with the holding companies, they have subsidiaries which the Federal Reserve Bank has refused to report the kind of lending and subprime activity that they conduct.

    GAO has recommended as part of the fair lending analysis that the Fed should report it. They refuse to do that.

    Finally, we know that of the major subprime lenders in this country, several of the big ones, are owned by large banks or holding companies. So their hands are in the cookie jar in a big way. It is a matter of political will. I think this hearing is going to help very much.

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    I will say it one more time. These regulatory agencies have examiners and regulators in these financial institutions who have access to all the detail in all the files on all of this, something none of us have, something you don't even have. So they should be coming to us and shouldn't be acting surprised or reactionary to this problem. They should be coming to us telling us the extent of the problem, whose hands are dirty and what the solutions are.

    It is a matter of political will and I hope this hearing is going to help that political will move to the forefront within those agencies.

    Ms. SAUNDERS. We propose on page 15 of our testimony that the Community Reinvestment Act could be expanded to specifically require banks to measure bank compliance with CRA such that any loan they or a subsidiary had that fit certain criteria—and we name the five criteria as having high costs or excessive fees—would be counted against their CRA rating.

    These ideas are not novel. I didn't make them up, but they are certainly well within some of the regulators' power. However, the whole idea that the regulators go out on a limb and actually do something that might tamp down on some kind of credit has been until today totally off the books, totally unimaginable.

    As my friend, John Taylor said, maybe today will change that.

    Ms. MANSFIELD. I just wanted to say I have heard this comment. I caught that comment this morning about the inability of the regulators to look on a file by file basis and oddly enough I sat with a subprime securitizer on the plane coming here yesterday who told me the same thing about her company. They can't look at the pool of a million loans on a file by file basis to make sure there is nonpredatory practices and then there is the other problem of some of the files look clean and they have falsified income and that sort of thing. So even if the file looks clean, there is a problem behind it.
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    If the regulators can't do it on a file by file basis and Wall Street can't do it on a file by file basis, one, how are Fannie and Freddie going to do it on a file by file basis and also, doesn't that argue for content regulation by Congress? In other words, there are certain practices that are just not acceptable and we won't have to do a file by file analysis looking for these bad practices because they have been banned.

    Mr. BENTSEN. If I recall correctly, there are certain standards for conforming loans with Fannie and Freddie in order to be qualified to be in a portfolio that you have to meet. If they find the loan subsequently did not meet those standards, they can kick it back out and the liability inures to the originator of the loan which is significant liability.

    It seems to me that if there were some underwriting standards, sure it is possible through fraud and other ways that things could get in, but if you had the ability and the requirement to kick it out subsequently, that at least helps police some of this activity.

    Chairman LEACH. Let me thank the panel very much. We appreciate very much your testimony.

    Our fourth panel is composed of Mr. Steven Bartlett, President, The Financial Services Roundtable and former colleague; Mr. David Bochnowski, Chairman, President and CEO, Peoples Bank, Munster, Indiana and First Vice Chairman, America's Community Bankers; Mr. Ralph Rohner, Professor of Law, Catholic University, on behalf of the Consumer Bankers Association; Mr. George Wallace, Partner, Eckert Seamans Cherin & Mellott, LLC, on behalf of American Financial Services Association; Mr. Martin Eakes, President and CEO, Self-Help Credit Union; Ms. Laura Borrelli, President, Barrister Mortgage and Investment, on behalf of the National Home Equity Mortgage Association; and Mr Neill Fendly, President of Pathfinder Mortgage Company in Phoenix and the President-Elect, the National Association of Mortgage Brokers.
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    We will begin with the order of introduction. Steve, as a former colleague, we will begin with you first.


    Mr. BARTLETT. My name is Steve Bartlett. I am President of The Financial Services Roundtable and represent the Roundtable and our member companies. It is my goal to explain how members benefit from subprime lending and to propose an approach that will reduce predatory lending.

    When I was on your side of the table I never heard any Member of the committee recite that he liked the testimony, but it was just not long enough, so like the other witnesses, I have cut and cut and cut. My written testimony is for the record.

    Illegal predatory lending does exist as does deceptive trade practices and deceptive sales practices. Sadly, there are those who use illegal and unethical techniques to prey on homeowners and borrowers and the general public.

    The Roundtable and our member companies do object to these predatory practices and we support appropriate policy changes i regulatory efforts to protect homeowners. However, as you have heard again and again today, predatory lending and subprime lending are not one in the same.

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    Subprime lending is a flexible approach for lending to borrowers with little or poor credit experience. The fact is that subprime lending has played an important role in the growth and quality of home ownership among other benefits.

    Today, close to 70 percent of Americans own their own homes, an all time record and I would caution the committee to do nothing that would deny those home ownership opportunities for all segments of American society.

    Subprime lending itself has contributed to both the rate and in many cases, the quality of home ownership. Borrowers who rely on subprime loans to pay for repairs for a leaky roof or to replace aging plumbing or to install a new water heater would be harmed by legislation drafted in hast.

    So who benefits from subprime loans? For the most part, they are working men and women of moderate incomes. They may be looking to establish a credit history or they may have had past credit problems and are seeking to reestablish good credit. Many subprime borrowers, after establishing a payment record, go on to be offered loans at the best rates offered to consumers.

    I repeat that predatory lending does exist. The Roundtable strongly supports efforts to identify, investigate and prosecute abusive lenders. However, some of the legislative proposals that have been floated may have the unintended negative consequences of limiting or prohibiting many legitimate borrowers access to credit.

    During the course of today and in the last few months, you have heard dozens of proposals floated. I want to cite several. One proposal would limit or eliminate financing of points and fees. I can tell you when I was Mayor I learned the biggest obstacle to home ownership, at least during the 1990's, was often closing costs. Often a borrower cannot afford to pay up-front closing costs. If we were to prohibit in some way lenders from financing those costs, that would deny access to credit to many otherwise qualified borrowers.
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    It has also been suggested that borrowers should be required to obtain credit counseling prior to entering into a subprime loan. This sounds good on the surface, but there are practical negative implications. Apart from the reasonable resistance that many borrowers would have to this mandate, the number of qualified, HUD-approved credit counselors is extremely small and the ultimate result again in many cases would be the denial of access to credit.

    Therefore, what should Congress do? First, under existing laws, the Federal Trade Commission and many States have the authority to address unfair and deceptive trade practices. The FTC's record suggests they have a great deal of authority, but they lack the resources. This committee should and encourage the FTC to be more proactive.

    Second, this committee could work with the regulators, including the FTC, to ensure that all Federal agencies have appropriate resources to enforce those existing laws.

    Third, the committee should and could encourage either through a committee report or through a sense of Congress resolution if it takes it that the Federal Reserve Board use its authority that has been granted under HOEPA to prevent abusive lending practices.

    Fourth, The Roundtable suggests the need for significant and extensive research on the scope and causes of predatory lending contrasted with the benefits of subprime lending to avoid the unintended consequences.

    I have additional specific suggestions in my written testimony. We do call upon both this committee and all interested parties to work together to promote responsible lending and to promote the American dream of home ownership.
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    Chairman LEACH. Thank you for that constructive testimony.

    Mr. Bochnowski.


    Mr. BOCHNOWSKI. As a former personal staff member of a House Member in the late 1960's, this hearing room gives me a different perspective from this side of the witness table.

    My name is David Bochnowski, President and CEO of Peoples Bank, a State-chartered bank located in Munster, Indiana. Our headquarters is near the industrial cities of Gary and East Chicago. We are part of the economic subregion of the City of Chicago.

    I appreciate this opportunity to testify today on behalf of America's Community Bankers. ACB and its members work hard to help average Americans become and remain homeowners. This is the opposite aim of the predatory lenders that are the subject of today's hearing.

    Community banks are responsible participants in the process of expanding our local economies. We deplore the actions of unscrupulous lenders who prey on uninformed borrowers to make a fast buck.
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    Predatory lending that causes homeowners to lose their homes and ruin their credit ratings undermines our communities and damages potential customers. ACB pledges to work with Congress and other policymakers to eliminate predatory lending and provide all creditworthy borrowers with access to sound loans. We don't underestimate the difficulty of this task.

    Unlike federally insured depository institutions, predatory lenders are often effectively beyond the reach of Federal laws. Policymakers must distinguish between subprime lending and predatory lending. Many mistakenly use these terms interchangeably. Subprime lending has given many borrowers a new chance at home ownership.

    Unfortunately, general descriptions of predatory lending cannot easily be translated into clear statutory language. Defining predatory lending presents a difficulty similar to the one faced by the Supreme Court in the pornography case years ago. As Justice Potter Stewart said, ''It is difficult to define pornography, but I know it when I see it.'' So it is with predatory lending.

    In 1994, the Home Ownership and Equity Protection Act attempted to address this issue. HOEPA does not encompass all loans that might be considered predatory and some loans that are not truly predatory might fall into the HOEPA ambit particularly if Congress tightens the HOEPA definition.

    There is a risk of discouraging insured depository institutions from making responsible subprime loans which would effectively open the door even wider to unregulated predators. Fortunately, there are effective alternatives.
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    ACB urges Congress to bear in mind the advice that the HUD/Treasury Task Force heard in Atlanta on May 2. Increase the resources available for consumer education and credit counseling. This will substitute for the social infrastructure that victims of predatory lenders often do not have.

    Our institutions already work to ensure that borrowers understand their responsibilities and will be able to fulfill them. For example, 12 institutions in my market have joined together to sponsor regular home ownership seminars. Peoples Bank hosted the most recent session and it was conducted in both English and Spanish.

    We also envision increased reluctance of financing to provide funding to predatory lenders. Certainly the point you made, Mr. Chairman, earlier today, we can look forward to tougher regulation and supervision to prevent abuses. Unlike legislation, these actions can be tailored and adjusted to deal with diverse and changing circumstances.

    In addition to bring more loans under the HOEPA definition, some legislation would also impose new restrictions on high-cost loans. Some of these raise problems, particularly if the HOEPA definition is tightened to the point that it covers loans that may not be predatory or could be considered legitimate subprime loans.

    Some of the legislation would also add unprecedented new restrictions on non-HOEPA mortgages. ACB vigorously opposes many of these provisions because they would prohibit terms that are often in the interest of borrowers and lenders.

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    I would like to leave the committee with a few thoughts First, federally insured depository institutions are not a major part of the predatory lending problem. They are a key component of the solution.

    Second, subprime lending has helped many, many homeowners and many first time homeowners become homeowners.

    Third, expanding HOEPA coverage by statute and banning certain terms from all loans could be both harmful and ineffective.

    Fourth, borrower education is the essential bulwark against predatory lenders.

    Fifth, ACB pledges to work with Congress, the agencies and most importantly, our customers to eliminate predatory lending.

    Chairman LEACH. Mr. Rohner.


    Mr. ROHNER. I am Ralph Rohner, Special Counsel to the Consumer Bankers Association for whom I appear today. CBA represents the major banks engaged in consumer lending across the full spectrum of credit products, including subprime.
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    We begin as an echo. We join with every witness today in condemning and deploring fraudulent and abusive mortgage lending practices and in seeking effective solutions to deal with them. As Congresswoman Waters noted, these kinds of practices are not altogether new, although the pejorative characterizations of them as predatory may be. The tough questions for all of us are identifying the practices, or combinations of practices, that cross the line and crafting effective responses that are not overkill.

    We would make only a few comments beyond our written testimony.

    Our members consider themselves the leaders in the financial institution community with enormous levels of accountability and reputational risk for the banks' practices. The banks must be responsive to their customers, lest competitors take them away, to their shareholders, to the investors and secondary market parties, to the banking agencies and their examiners who are constantly looking over their shoulders, and to Congress. There is little for CBA bank members to gain by risking our reputations in unsavory practices. We have therefore strong incentives to keep our industry clean and to collaborate with others to the same end.

    Also, as an industry, we are proud of our accomplishments in extending credit to our communities, both through CRA supported or incentive programs and frankly, through programs incented by profit motives. It is clear that the advent of expansion of subprime or risk-based credit has been, in general, a good thing for our economy and for many of the members of our community.

    We are concerned that attempts to deal with the bottom feeders, the predators, not inhibit the ability of lenders like our members and others to continue to risk base and price their products accordingly and not be hampered by artificial constraints on the pricing strategies that are employed.
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    In that connection, I want to comment on two examples that were raised by Mr. Medine of the Federal Trade Commission this morning. I hope there is another side of the story. He suggested that two features of certain subprime loans were objectionable and apparently made them eligible for predatory characterization.

    One was the inclusion of mandatory arbitration clauses. As you probably know, there is a strong Federal policy in favor of arbitration of disputes. That policy suggests that at least in some context or many contexts an arbitration clause and arbitration tribunal is an appropriate technique. To say that would cure or help cure predatory lending is not a persuasive argument on our side.

    The other is the question of prepaid credit insurance policies or offerings. They are expensive in a sense, I am sure, but they have proved to be a product that some consumers choose to take and prefer to take. They do affect and influence the creditors' pricing options and have been a longstanding part of our credit marketplace.

    I am not sure, again, that abolishing or delimiting that kind of contract inclusion and revenue source is necessarily going to cure the predatory practices that we all abhor. In fact, our assessment of the cases and the anecdotal reports that we have seen on alleged predatory practices suggest to us that almost every one of them is fraught with deception, unconscionability or fraud that already violate existing State or Federal laws. So one of the questions we would bring to the committee is whether before imposing new statutory restraints, can we not do a better job of enforcing existing Federal and State law.

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    Another aspect of that is the question alluded to by some of the prior witnesses of the desirability of improving the whole regime surrounding the mortgage application, underwriting and settlement process. That is an exercise in which both HUD and the Federal Reserve have submitted reports to which there has been no particular regulatory or legislative follow-up. It seems to us that some of the opportunities for predatory practices or other kinds of deceptive practices, could be minimized if there were a more streamlined or transparent overall regime for mortgage applications and closings.

    There are a number of other points I would like to make, but let me conclude with one. Finally and perhaps most importantly, we do not see ourselves, CBA and its member banks, as adversaries to anyone who has testified today. We share the common objective of ridding the market of outlaws and outlaw practices, if we can define them. This can best be accomplished, we believe, by pursuing the many initiatives already underway in the agencies.

    Let the agencies draw on their expertise and access to information and consult with all interested parties to set groundrules that are fair, balanced and effective. Let Congress' role be to encourage, even demand real progress, but not to dictate its detail.

    Thank you, Mr. Chairman.

    Chairman LEACH. Mr. Wallace.

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    Mr. WALLACE. Good afternoon. It is a pleasure to be here. I taught at the University of Iowa for some fourteen years, lived in Iowa City, was a constituent of yours for a period of time, so it is a pleasure to see you.

    My name is George Wallace. I am a partner in the law firm of Eckert, Seamans, Cherin & Mellott located here in Washington, DC. I am here today representing the American Financial Services Association, a trade association for a wide variety of market-funded lenders. We look forward to working with the committee to examine the issues raised today.

    At the outset, we stress that predatory lending is not the same as subprime home equity lending. Predatory lending is the practice of using home equity loans as the vehicle to trick and defraud unfortunate borrowers, always with the goal of making fast and dirty money. In predatory lending, a consumer is intentionally induced into a series of transactions intended to result in the stripping away of the consumer's equity in the house. The end result is the loss of the consumer's principal residence, and we deplore that practice.

    In contrast, subprime lending is an important part of the home equity loan market serving consumers with less than perfect credit. Approximately 25 percent of the home equity borrowing today is subprime. Subprime borrowers are not usually old and poor, but simply may not meet traditional bank standards.

    For years, Congress and particularly this committee has sought to make credit as widely available to Americans as possible without artificial limits. Subprime lending has been an extremely important part of carrying out that policy. Subprime lenders make loans to get repaid, they do everything they can to avoid lending to borrowers who cannot repay. Foreclosure almost always results in a substantial loss to the subprime lender and they avoid it if they possibly can. Foreclosure rates among legitimate subprime lenders are very low.
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    Should Congress enact legislation which increases the Federal regulation of home equity lending in an effort to stamp out predatory lending? We suggest before Congress does so, it should cautiously consider three points.

    First, predatory lending is fundamentally a misleading and fraudulent practice already prohibited by a formidable array of Federal and State law, including the Federal Trade Commission Act, criminal fraud statutes and State deceptive practices statutes to mention but a few.

    We urge that existing regulation of fraudulent practices is already sufficient to control this problem if strongly enforced. We suggest that there is no better deterrent to this type of behavior than successful prosecution.

    Second, this market is already very heavily regulated. Additional regulation, no matter how well intentioned, can hurt American consumers by raising credit prices and reducing credit availability unintentionally. Clearly, there must be compelling reason before Congress enacts additional regulation.

    Finally, many of the lending terms and practices attacked as evidence of predatory lending by those who are advocating increased regulation are legitimate features of successful loan programs that provide American consumers with the loan products they want and need. Professor Rohner just mentioned a few of them. Prohibition or burdensome regulation of those lending tools ultimately hurts the American consumer.

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    In conclusion, we caution that existing law covers predatory lending thoroughly. To the extent underlying abuses are increasing, more resources for enforcement would clearly be constructive. Subprime lending and predatory lending are not at all the same thing. Subprime lending makes a significant contribution to the increased availability of credit, economic growth and an improved standard of living. Subprime lenders have no interest in taking a consumer's house.

    We urge Congress to move carefully in this area to avoid serious though unintended damage to legitimate lending and borrowing.

    Thank you very much, Mr. Chairman. I will be glad to take questions later on.

    Chairman LEACH. Thank you, Mr. Wallace.

    Mr. Eakes.


    Mr. EAKES. Good afternoon.

    My name is Martin Eakes. I come to you first as the CEO of Self-Help which is a community development lender in North Carolina. With $550 million in assets, we are the single largest nonprofit community development financial institution in the country which makes us about the size of one large bank branch. We have provided $700 million of financing to 11,000 low wealth homeowners across North Carolina and now across the country.
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    I will also tell you that we are one of the oldest subprime lenders. We started doing loans to credit-impaired, mostly minority borrowers in 1984. For 17 years, 11,000 borrowers, we have had virtually no defaults. So it can be done, it should be done and if you have a large number of defaults, it tells me that as a subprime lender you are doing something wrong.

    Second, I come as the spokesperson for a coalition in North Carolina that really was a remarkable event that came together last summer. This coalition started as a group of 120 CEOs of financial institutions in North Carolina. Basically, North Carolina is known as a banking State, not as a consumer protection State. We came together because we felt the predatory lending that was taking place in North Carolina was giving us lenders a bad name. We ended up with 88 organizations that were part of this coalition. Those 88 organizations had 3 million members. North Carolina only has 5 million adult voters. We had the credit unions, the banks, including the community banks and all of the large banks. Those of you in Congress know that if you ever get the credit unions and banks together on the same issue, asking that there be regulation imposed on them in order to stop the bad actors, that it has to be a very pervasive problem.

    Also endorsing this bill, we had the mortgage bankers, the mortgage brokers, the realtors, the NAACP, civil rights groups, community groups, housing groups, consumer groups, AARP and seniors' groups. Every single party who had something to say about mortgage lending in the State of North Carolina came to the table and ultimately endorsed what was not a perfect bill, but was a consensus bill, a compromise bill to basically stop predatory lending in the State of North Carolina.

    When the bill was finally presented, it passed both chambers in a bipartisan way with virtually no votes in either house against the bill. Why did that happen? How did it happen?
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    In North Carolina, we started with two limiting principles. The first one said we are not going to have any additional disclosures. With 30 forms, there is an overload already; we are not going to put any more disclosures that will cause more harm than good. The second key principle is one that may be controversial, but was one that brought people together. We said we would place no cap on the interest rate that can be charged on a mortgage loan, but in exchange for that, we are going to eliminate some of the other controversial issues of pricing a mortgage loan. By allowing the rate on a loan to go up as high as it needs to go, we ensured the credit would not be rationed and not ever be cutoff.

    What did we do? Everyone says they are against predatory lending, it is like beating your grandmother, but no one is really willing to acknowledge what the practices really are. In the North Carolina legislation, we did exactly what everyone says is so hard to do—we defined precisely what we considered to be predatory lending. We had four practices on which we focused.

    The first was we said it is wrong to flip a loan. Here the classic case for us was, we found dozens, if not hundreds of cases, of Habitat for Humanity borrowers who had 0 percent, $40,000 mortgages, who had been refinanced into 14 percent mortgages, which meant that these families will surely lose their houses, all so that they could get an additional $1,000 of cash to add a credit card loan into the mortgage. No one can tell me that is not predatory. It is not illegal, and I disagree with my fellow panelists who believe that predatory loans are fraudulent loans. We already have laws for that. Predatory loans are the abusive loans that take place legally under today's laws.

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    The second practice we focused on was the unconscionable practice of charging very large, up-front fees. Again, remember, we said you can charge a higher interest rate, but don't charge more than 3 to 5 percent fees on the front end, which essentially strips the wealth out of individual borrowers' homes.

    The third practice, which I think there is virtually no debate over in any of the circles that I know, is that financed credit insurance is simply intolerable. There is no excuse for it. You can purchase credit insurance and poor people are underinsured, that is true, and they can pay for credit insurance on a monthly basis, but not up-front where they are paying interest on that credit insurance for the rest of the loan.

    In North Carolina, we found that there are 10,000 families each year who get up-front credit insurance and lose $10,000 of equity in their home every single year, 10,000 people. At the end of four years, on a 30-year loan with $10,000 of up-front credit insurance, often on a $50,000 loan, that small, at the end of four to five years, you will have paid off exactly $100 of the principal on that $10,000 of credit insurance. So when the loan gets refinanced, you will lose $9,900 out of the equity in your home.

    The fourth and final issue is prepayment penalties. There is no justification ever for saying that a poor person or someone who is desperate should be penalized for doing what we preach to them all the time they should be doing, which is getting out of debt. Why should they have a penalty to simply do what we tell them they should do?

    Prepayment penalties are the glue that holds together what we call ''racial steering,'' where a broker brings someone to a lender and says, ''I have a person who is unsophisticated and they qualify for an 8 percent loan, but I have been able to sell them an 11 percent loan. I want to be paid a premium, because I was able to sell the higher rate.'' If you don't have a prepayment penalty, you can't hold someone in to a very high rate loan.
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    I am out of time. I have more I would love to say, but I will wait and say it later.

    Ms. WATERS. Unanimous consent for at least one more minute for this gentleman.

    Chairman LEACH. Let me say to the gentleman, you have presented some of the most interesting perspective to this committee and I would be happy if you would proceed.

    Mr. EAKES. What can Congress do? In drafting the North Carolina bill, by far and away the most difficult issue we had was to step between all the different preemption statutes that exist as Federal law.

    The first one we talked about was AMTPA, or the Parity Act. The Parity Act had some value when it was first passed in 1982. It was primarily put in place—with all deference to Mr. LaFalce, who said he was a co-signer—it was very valuable when it was passed. It was primarily aimed at trying to save the savings and loan insurance fund. In 1982, remember how high interest rates were.

    What it said was, we want there to be a preference for variable rate interest mortgages. That was not a common thing in 1982. Now we have secondary markets, we have adjustable rate ARMs that are very, very common everywhere you look. We simply don't need that statute.
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    The Parity Act says for Federal thrifts which are highly regulated, we want to say every other State-chartered mortgage lending institution should have parity with Federal thrifts, which are highly regulated. Virtually every State in the country already has a State parity act which says for their State thrifts, they can do whatever a Federal thrift can do and have parity with Federal thrifts.

    Now, seventeen years later, the effect of the Parity Act is to say only those unsupervised mortgage lenders in the State can have parity with a highly supervised lender, Federal thrifts, and it simply makes no sense. Virtually every predatory lender in the State of North Carolina, and I know it is true nationally, claims preemption under the Parity Act as the way they can justify charging prepayment penalties, even though in a State like North Carolina we have an outright State prohibition against charging prepayment penalties on home loans.

    What business does Congress have now—or Federal mandate have now—to say that a State unsupervised mortgage lender should have parity and not be required to abide by a State rule that was passed by every single legislator in the State of North Carolina?

    If the Federal policy mandates are not going to help us solve this problem, at least get out of the way and let us do it on the State level.

    Second, I would say the Federal Reserve has abdicated its responsibility in this arena. I will read to you the actual words in the discretionary authority of HOEPA: ''Discretionary regulatory authority of the Board: The Board, by regulation or order, shall prohibit acts or practices in connection with mortgage loans that the Board finds to be unfair, deceptive or designed to evade the provisions of this section.'' That is the authority they have.
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    It is very significant that the language there does not talk about high-cost loans. It says the Federal Reserve has the authority for all mortgage loans to be able to prohibit anything that is deceptive or unfair.

    I posit to you that every single practice that we dealt with in the North Carolina bill could be dealt with by the Federal Reserve under the authority granted in that section.

    We talked about the affiliates of banks. The OCC, the FDIC, OTS, none of them have authority to review the affiliate of a bank depository. The only entity that has the authority to look at the affiliates of a bank that is a subsidiary of the bank holding company is the Federal Reserve Board. As other testifiers have said, the Federal Reserve Board has opted not to examine those institutions and under request from the GAO, has specifically refused to do so.

    I would suggest to you that if the Federal Reserve is going to continue in the vein it has. Either you shift that authority to another agency or else you have to pass the bills we have seen introduced in Congress this session, because they have not acted and they should.

    With that, I will quit.

    Chairman LEACH. Our next witness is Ms. Borrelli.

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    Ms. BORRELLI. It is a pleasure to be here. My name is Laura Borrelli. I am President of Barrister Mortgage and Investment based in New Jersey. I have been a licensed mortgage banker, specializing in home equity loans for the last 22 years. I am immediate past president and a member of the executive committee of the National Home Equity Mortgage Association. I am speaking today on behalf of NHEMA, which is the principal trade association representing subprime home equity mortgage lenders.

    Most of all I would like to emphasize that what we have all read and heard about instances of abusive lending, that we at our association abhor those practices. Borrowers should never have to worry about being abused by lenders or brokers. We are working to make sure that these practices come to an end. I would like to use my time to make a few brief points.

    Predatory lending is not subprime lending as you have heard. There is an enormous difference. Many of the proposed provisions in the legislation would make it much more difficult and much more expensive for millions of Americans to obtain home equity loans and if we wand to address this issue quickly rather than waiting for a long, drawn out debate, we have three specific steps our association would like to see implemented right away that would drastically reduce predatory lending practices.

    Subprime lending is not predatory lending. Subprime loans are made to all Americans who for whatever reason may not qualify for a prime or A credit rating, may not fit into that specific box created by conventional lenders. They may have blemishes on their credit from life events such as job loss, medical bills or they may be behind on several mortgage payments.

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    They may not qualify for other reasons, they are new to the job market, are temporarily between jobs, or have no credit history, come from a culture wherein they had not obtained credit before.

    In years past, consumers like these were not able to get loans for mortgages or home equity loans, because lenders insisted on prime credit ratings and specific criteria. Today, because of the growth of the subprime industry, virtually every American has the opportunity to get a mortgage or a home equity loan for important credit needs, including education, medical bills or someone like myself who used the loan to start a business.

    We are proud that we have played a key role in the democratization of mortgage credit and the credit market helping millions of consumers obtain affordable mortgage loans.

    Some predatory lending inevitably takes place in the subprime mortgage market just as it does in every other area of financial services. Our data indicates that it does not take place anywhere near as commonly as some critics are suggesting.

    There are approximately 5 million outstanding subprime loans. Clearly the unfortunate instances that we have heard about are extremely small in the percentage of the overall total number of loans outstanding. The industry does not target the elderly. Over 50 percent of our borrowers are younger than 49 and 10 percent over the age of 65. It does not specifically target minorities. HMDA data from 1998 show that approximately 72 percent of subprime mortgage loans in 1998 went to white borrowers and approximately 18 percent to African-Americans and 8 percent to Hispanics. This is not dramatically different from the racial makeup of our country.
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    Subprime consumers pay their bills on time and do not all default. At any given time, over 90 percent are current on their monthly payment. Foreclosures in the industry average only about 2 percent which is less than the FHA/VA rate and about 1 percent rate higher than foreclosures on prime mortgages.

    It is true that our loans on average go to consumers with lower and moderate incomes and almost by definition, by serving that market niche that does not qualify for prime loans, we inevitably serve more people who are not high income. They may be young people in their first homes, in the early stages of their career, or those with difficult credit histories or may have no credit history at all, or collateral that is not absolutely applicable to conventional standards.

    Because serving consumers with lower credit ratings carries a higher risk than prime loans, we have to charge a slightly higher interest rate. Most recent data indicates that subprime note rates generally average about 2.5 percentage points higher than prime note rates. This rate is still one of the lowest rates in history for subprime loans. When I started 22 years ago, interest rates ran between 18 and 24 percent and points between 8 and 10. This data shows our current rates are not high for the increased level of risk and costs that these loans require.

    Our customer base is very similar to the profile of America in general and the vast majority of our borrowers are able to repay the loans on schedule. This is far from a predatory industry.

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    Many legislative provisions seek to block practices that seem predatory, but in fact are important to many consumers. We have heard about balloon payments. They can be extremely helpful for several types of borrowers. For young people purchasing their first homes, they allow a lower monthly payment as it is stretched over a longer period of time that will allow them to catch up with increasing salaries. Balloon payments are often applicable to people who know they will be leaving their homes in a given period of time and therefore are not concerned.

    Obviously balloon payments can be structured as abusive and if they are excessive, but blocking them across the board could penalize many consumers who would benefit from them.

    Similarly prepayment penalties may help most borrowers by lowering the cost of a loan. Whenever a lending company makes a loan, it incurs costs, often several thousand dollars that it does not recover in the mortgage payments in the first several years. If a borrower repays the principal on the loan immediately, the lender cannot recover these costs.

    Lenders could increase the interest rate on all loans to cover this contingency which occurs only in some cases, however, we believe it is fairer to more consumers to allow the lender to charge a prepayment penalty to those consumers who pay early to cover those up-front costs.

    Issues like these are extremely complicated. Prohibitions can have negative effects on borrowers that are not intended. We believe any blanket provision should be examined very carefully to be sure we don't do more harm to consumers than good. How can these problems be corrected.
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    Chairman LEACH. If you could summarize, please.

    Ms. BORRELLI. We would like to emphasize the increase in enforcement of existing laws as my fellow colleagues have discussed. The Federal Trade Commission has been bringing enforcement actions in this area.

    Second, we agree with so many who have spoken today about improving consumer education. We have taken many steps to do so including working with the Consumer Federation of America on brochures and PBS for educational programs.

    Third, we should recognize the impact can be made by voluntary standards. At NHEMA we have been moving fast with a new code of ethics, new fair lending and best practices guidelines, new home improvement lending guidelines and new credit reporting guidelines.

    We believe that government and other interested parties should pursue greater enforcement of current laws, enhanced consumer education and industry self policing and any remaining issues including streamlining and simplification of RESPA and TILA provisions can be addressed systematically in the next Congress.

    Thank you for the opportunity to appear here today. We look forward to working with you. We would be happy to respond to questions.

    Chairman LEACH. Mr. Fendly.

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    Mr. FENDLY. My name is Neill Fendly. I am the President of Pathfinder Mortgage Company in Phoenix, Arizona and President-Elect of the National Association of Mortgage Brokers.

    NAMB is the largest organization exclusively representing the mortgage broker industry and we appreciate the opportunity to speak today on the issue of abusive mortgage lending and to discuss the extent of these problems with you and their possible solutions.

    NAMB has always been engaged in efforts to reform laws regulating mortgage originations to help benefit consumers. We participated in the Mortgage Reform Working Group in 1997 and 1998 which sought to reach consensus on how to reform RESPA and TILA, and are currently active in HUD and the Treasury Department's Joint Task Force on Abusive Lending Practices.

    NAMB has also worked with Members of this committee and with HUD to pursue a comprehensive mortgage reform package to improve the mortgage loan process for consumers. Although there is no consensus to date, we will continue to work toward this important goal and we have high regard for the Members of this committee, HUD, consumer advocates and other interested groups that have participated. We would like to encourage you to pursue this worthwhile objective.

    We believe abusive lending is the work of a tiny minority in the mortgage origination industry. They routinely ignore State licensing and consumer protection laws, they routinely flout the Federal Home Ownership and Equity Protection Act. We therefore believe that the best solution is twofold: increased enforcement of existing laws and industry self regulation.
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    We urge State and Federal enforcement agencies to expand their efforts. Please do not misunderstand. The legitimate industry already feels thoroughly regulated, but increased enforcement should be directed at those who ignore the law. Because legitimate businesses work hard to comply, we resent those disreputable companies that do not. We consider them unfair competition and a blemish on the many benefits that we bring to our consumers.

    As an industry, we would like nothing more than to see them stopped, but the way to stop them is to enforce existing laws. New laws will mean only a greater compliance burden for those who believe in complying and more meaningless words for those who do not.

    Nevertheless, to the extent Congress finds legislation necessary, we stand ready to work with all interested parties toward passage of an appropriate measure. NAMB is proud to support the package of consumer protections contained in H.R. 4213, the Consumer Mortgage Protection Act of 2000 authored by Congressman Bob Ney of Ohio.

    Representative Ney's bill has not only earned the support of NAMB, but a strong bipartisan group of 21 of your colleagues in the House of Representatives. H.R. 4213 seeks to protect especially vulnerable consumers, particularly those with impaired or limited credit history from the abusive lending practices utilized by a small minority in the industry.

    We applaud the Congressman's efforts and feel his bill is both focused and balanced, thus minimizing the risk of such intended consequences as limiting consumer access to legitimate useful credit products. For this reason, we are proud to support Representative Ney's bill.
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    Unlike Government-imposed restrictions, self-regulation of the sort envisioned by NAMB's best business practices initiative, utilizes industry self interest to weed out bad actors. BBP has existed since 1997 and in Phase I, NAMB worked to enhance the interaction between mortgage professionals and consumers by enacting a series of 11 best business practices that define what a consumer should expect from their loan originator. Adherence to these principles is a mandatory condition of membership in NAMB.

    NAMB has also worked with the Mortgage Bankers Association of America to develop a model loan origination agreement. It explains to consumers how mortgage brokers work, how they are compensated and whose interest they represent. Our disclosure today is in widespread use and was commended by HUD in Policy Statement 1999-1.

    More importantly, NAMB is now pursuing Phase II of BBP. This effort envisions a universal registry of individual loan originators and companies, each uniquely identified. Each mortgage business will report information on individuals and companies that engage in improper practices. Employers will be able to consult the registry and avoid ever hiring such individuals. Wholesalers and secondary market investors will refuse to do business with individuals and companies with bad track records.

    NAMB is committed to making this registry a reality and is joined in this important effort by other significant industry players including MBA, Fannie Mae and Freddie Mac.

    Working toward the goal of a better mortgage process for America's homebuyers we believe will go a long way toward eliminating abusive lending practices.
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    In conclusion, NAMB remains committed to all serious efforts to address abusive lending specifically and mortgage reform generally. We urge others to stay equally committed to this goal and we look forward to working with Members of the committee to introduce fundamental mortgage reform legislation in the next session of Congress.

    Thank you again for the invitation to testify and your kind attention today. I would be happy to answer any questions.

    Chairman LEACH. Thank you, Mr. Fendly.

    The Chair would note as he did before we have a truly crucial piece of legislation on the floor, so I would like to wrap this up in as short a timeframe as I can. The Chair will refrain from questions at this time.

    Ms. Waters.

    Ms. WATERS. I would like to thank some of the panelists and I would like to say that to the degree that we can all face the fact that there is a problem and that we can come in with constructive suggestions, it would give a lot of creditability to the industry rather than the same canned testimony that says, let me remind you that subprime lending is not predatory lending, again, and again, and again. We are not stupid. We know that and if that is part of the canned testimony, you don't need to keep saying it.

    Two, to say that there is not really a problem and that you don't target old people and you don't target minorities when you don't have any factual information to support what you are saying and we have people who have come here with some factual information and we have a study, ''Unequal Burden, Income and Racial Disparities in Subprime Lending in America,'' just released in April by the U.S. Department of Housing and Urban Development.
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    If you have some facts to refute this, I would like to hear it now. If you don't have any facts to refute this, let me tell you what the findings were quickly. From 1993 to 1998, the number of subprime refinanced loans increased tenfold. Subprime loans are three times more likely in low-income neighborhoods than in high income neighborhoods. Subprime loans are five times more likely in black neighborhoods than in white neighborhoods. Homeowners in high income black neighborhoods are twice as likely as homeowners than low-income white neighborhoods to have subprime loans. Does anyone have any information to refute this?

    Ms. BORRELLI. Yes, ma'am. In the full testimony we submitted, there is data. We used data from the 1998 HMDA report which is where I got the figures discussing that 72 percent of the loans.

    Ms. WATERS. Subprime loans are five times more likely in black neighborhoods than in white neighborhoods. Where is your data, where is your information to refute this?

    Ms. BORRELLI. The HMDA data, the same HMDA.

    Ms. WATERS. Would you recite it to me, please? We are submitting a study done by a corporation, Research Corporation, SMR, that also uses the 1998 HMDA data to show this information.

    Chairman LEACH. If the gentlelady will yield, it is possible that both sets of information are correct. Neither of you is saying the opposite of the other. One is using a larger picture and one is using a microcosm. I think we will have to examine both sets of statistics.
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    Ms. WATERS. Mr. Chairman, I thank you. You are very kind, but I sat here all day long and I have listened very carefully and I have seen information and I have studies. To simply have them disregarded, no one able to actually refute them in any credible way has to be dealt with.

    I am not going any further with it, because we are not going to get anywhere. I can see that. I would like to thank Mr. Martin Eakes. You are like a breath of fresh air, sitting here with your colleagues in many ways and in many ways not, to offer some very constructive ways by which we need to address these problems and to describe what you have done and how it is working. I really do appreciate that. Again, you could have said nothing or you could have come here with some canned testimony, but you didn't. I think you have been very, very helpful and I want you to know I appreciate it.

    Thank you very much.

    Chairman LEACH. Mr. Watt.

    Mr. WATT. I appreciate the Chairman having this very, very important hearing and apologize to the witnesses for having been in and out, but I have tried to be here for the actual testimony, even though this is the first time I have been here to ask any questions.

    I want to say a special thanks to Martin Eakes who is from North Carolina, my home State, for the work he did in making sure this coalition of people working on this issue in North Carolina stayed together and got a piece of legislation through the State legislature. I know how difficult that is and I know it took the coalition being together and staying with it to come to satisfactory legislation.
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    I assume there are some things you would have wanted in the North Carolina statute that you did not get, because some compromises had to be made to keep the coalition together. Are there that you would consider would be critical. Would be doing ourselves a service at a national level to pass something that would be equivalent to the North Carolina legislation?

    Mr. EAKES. I would hope you would do something better than we did.

    Mr. WATT. That is what I thought you would say, but I had to lay the proper foundation by making sure we ought to at least be striving for what we did in North Carolina or what the State legislature did.

    Having said that, where would you go beyond that North Carolina statute at the Federal level assuming the existing regulators are not going to use the authority you testified they already have? What else would you put in a statute?

    Mr. EAKES. I would say the context has changed since last summer. There is a lot more attention, a lot more acknowledgment that there really is a problem. It is not isolated. It is 50 to 100,000 victims in North Carolina who have either already lost their homes or are in process of losing them. I think that there is a different level of debate than we had last year.

    The one issue we just punted on in this bill, we put off to a second bill that we are working on now and next year, was the treatment of yield spread premiums and how a broker relates to a lender. In our bill, we tracked what HOEPA did, and simply excluded the back end payments. I think those clearly should be included in a 5 percent fee level. That is a big one, because the problem of steering is something that offends everyone, white, black, rich, poor. To state that my credit, and what I spent 30 years building, qualifies me for an 8 percent loan, but, because I am not sophisticated, I get put into a 9 percent or 10 percent loan. The fact there is an incentive in place to do that is really offensive.
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    It would be as if I went to Wal-Mart and when I came to the checkout counter, they asked me what my literacy level was and if I were not sophisticated, they were able to double the price. It is just wrong. That is something that needs to be picked up on.

    The second thing was we compromised the level of prohibition of prepayment penalty. There was a ferocious fight during the middle stages of this bill that ultimately everyone endorsed saying we will prohibit prepayment penalties on all home loans, not just high-cost home loans, but only loans that are $150,000 or smaller. I really think that level should have been the same as all the other loan levels in the bill, which was the conforming loan level for Fannie Mae and Freddie Mac, which is $200,000 and some.

    The fact that a widow lives in a middle class area, $150,000 doesn't go that far in Charlotte, Raleigh or some of the other communities. A prepayment penalty is really very, very critical. It is the single factor that when a broker sells a loan, enables it to have the steering take place. If you don't have a prepayment penalty, the person can get out of the loan and the marketplace will discipline this steering problem, because a lender will not pay a 3 percent or 5 percent premium for putting someone into a higher rate than they qualify for, because the lender fears the broker would take that same loan and flip it to someone else a week later.

    So, the lenders will not pay this steering premium which consumer advocates sometimes call ''kickbacks,'' but they won't pay it unless you can have a prepayment penalty to glue that transaction in.

    I believe in the North Carolina bill, but we should have gone to the $240,000 that would be adjusting over time with inflation instead of the $150,000. Those are the two places I think it was a compromise.
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    Mr. WATT. Thank the Chairman for being so generous with the time. I will talk with Martin separately and try to pursue some of the other questions I had.

    Chairman LEACH. Ms. Schakowsky.

    Ms. SCHAKOWSKY. Mr. Bartlett, is Bank of America or First Union or City Group part of your association?

    Mr. BARTLETT. Yes, ma'am.

    Ms. SCHAKOWSKY. We had testimony earlier that Bank of America owns National Credit and Equicredit, that First Union owns Money Store, that City Group owns City Finance and those companies are engaged in predatory lending. I wanted your comment on that and what your organization is doing currently about it?

    Mr. BARTLETT. I don't know specifically what companies those companies own, but I wouldn't at all be surprised. I find it to be a positive and not a negative that large financial services companies, including those large banks, would own subprime lenders to be able to offer credit to people who otherwise would not qualify.

    Ms. SCHAKOWSKY. Charges were made that those specific companies were engaged in predatory lending practices.

    Mr. BARTLETT. I didn't hear the words that they were illegal predatory lending. I heard there was objections from a prior panel to some examples they had and I respect those objections. I would be happy to look into the specifics. I don't really buy it. I think those are reputable companies that are providing credit to people who would otherwise be denied access and that is the nature of subprime lending.
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    I think the country is better off for those companies to own subprime lenders and to be a part of the subprime lending market than if they were not.

    Ms. SCHAKOWSKY. The Assistant Secretary of the Treasury, spokespersons from HUD, the Fed, OTS, OCC, FDIC, FTIC and a colleague of yours from North Carolina and testimony from New York and Massachusetts all said we need some legislation. There was no disagreement about that. There was some discussion about what was appropriate.

    No one refuted the kind of data that showed there was in fact a targeting of the elderly. As Congresswoman Waters pointed out, HUD has well documented that.

    I would just say to the industry and many of you have acknowledged that there is a problem, it is really a bad idea to come before this committee I would posit, or any other body of this Congress, and say we really don't have a problem here, that there is no real issue, Ms. Borrelli, because I think all of us, both anecdotally and with the data that has been provided, know all too painfully from our own constituents and from what we are reading there is a serious problem.

    I would also say to you that HMDA, a bill I have would amend HMDA so that we could get rate information which would make it much easier for us to determine whether or not predatory lending is happening. When you say you have used HMDA data, I would be interested in how you did that to determine whether or not predatory lending exists, because I would say you really can't use the data that is currently available under that Act.

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    We have map after map and chart after chart and number after number. We have a problem that affects low-income people, senior citizens in particular, and as described, the older, African-American, low-income widow is sort of the profile of the person we are trying to protect in this committee.

    I think working with all of you is the way that we need to go as many of you have expressed and working with will not only include stricter enforcement, but it is going to include new legislation. I would welcome your participation in that effort.

    Thank you, Mr. Chairman.

    Chairman LEACH. Let me conclude by thanking the panel. I think we have identified a problem. I think the panel that represents the industry has indicated that care should be taken in ensuring that new approaches we might want to consider don't dampen availability of credit itself.

    Within those constraints, I would say at some level in some way, these abuses have to be dealt with. I think we cannot ignore that circumstance.

    I appreciate all your testimony and thank you very much for your perspective.

    The hearing is adjourned.

    [Whereupon, at 3:47 p.m., the hearing was adjourned.]
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