On November 5, 2003, a joint hearing of the House Financial Services' Housing and Financial Institutions Subcommittees, chaired by Representatives Bob Ney and Spencer Bachus held a hearing entitled "Protecting Homeowners: Preventing Abusive Lending While Preserving Access to Credit."

All of the prepared testimonies of the witnesses are available at the House Committee on Financial Services Web site.

MEMBERS IN ATTENDANCE Representatives William Clay (D-MO), Gregory Meeks (D-NY), Ed Royce (R-NY), Tom Feeney (R-FL), Brad Miller (D-NC), Harold Ford (D-TN), Brad Sherman (D-CA), Katherine Harris (R-FL), Maxine Waters (D-CA), Joe Baca (D-CA), Steve Israel (D-NY), Ruben Hinojosa (D-TX), Carolyn Maloney (D-NY), Jim Leach (R-IA), Gary Ackerman (D-NY), Paul Kanjorski (D-PA), Melvin Watt (D-NC), Bob Ney (R-OH), Frank Lucas (R-OK), David Scott (D-GA), Jeb Hensarling (R-TX), Joseph Crowley (D-NY), Richard Baker (R-LA), Sue Kelly (R-NY), Christopher Shays (R-CT), Spencer Bachus (R-AL), Bernard Sanders (I-VT), Patrick Tiberi (R-OH), Melissa Hart (R-PA), Dennis Moore (R-KS), Scott Garett (R-NJ), Carolyn McCarthy (D-NY) and Nydia Velazquez (D-NY).

PANEL 1

Robert M. Couch, President and CEO of New South Federal Savings Bank, on behalf of the Mortgage Bankers Association. Couch said "predatory" mortgage lending is not a new problem, rather it is only the current manifestation of what is traditionally referred to as "mortgage fraud". MBA believes that "predatory lending" has three fundamental root sources that need to be attacked: (1) the complexity of the laws and mandated disclosures, (2) the lack of consumer education, and (3) the lack of adequate enforcement of existing laws. Couch pointed out that current state-based laws do not set forth a uniform or workable definition of "predatory lending." In addition to encouraging education, enforcement and simplification, the MBA urges the Committee to support the establishment of a uniform national standard to combat abusive lending practices.

A W Pickel, National Association of Mortgage Brokers. NAMB would support a nationwide registry of mortgage originators and companies and a federal registry of all loan originators. NAMB would like better enforcement of existing laws by state and federal regulators. NAMB distinguished between the terms "subprime," which is usually linked to the credit status of a borrower, and "predatory," which is abusive lending. Abusive lending can vary from case to case and this is a question that turns on the context and circumstance of the individual. Consumer education is needed in order to combat abusive lending. NAMB is concerned about the proliferation of state and local initiatives, and would like a level playing field for all market participants through national preemption.

Allen Fishbein, Consumer Federation of America. Fishbein stated that predatory lending- exploitative lending to financially unsophisticated borrowers- occurs in all aspects of consumer credit, such as auto finance, credit cards and short-term installment debt. CFA defines "predatory lending" using the June 2000 Treasury/HUD report which includes: lending without regard to a borrower's ability to repay, loan flipping, prepayment penalties, balloon payments, credit insurance packing and mandatory arbitration provisions. Fishbein mentioned the income and racial disparities in the subprime market, and in his testimony he sites both the HUD/Treasury study as well as another study prepared by Calvin Bradford. Both studies conclude that racial disparities exist in all regions of the nation. CFA believes the high incidence of subprime foreclosures is the "smoking gun" of predatory lending. The CFA calls for new legislative action in the form of: (1) Strengthening HOEPA, (2) Establishing lender liability for illegal broker/contractor acts, (3) Encouraging the expansion of prime lending in underserved communities.

George Brown, Senior Vice-President for Self-Help, Coalition for Responsible Lending. The Coalition recognizes that predatory lending is a widespread problem, one they estimate costs U.S. families $9.1 billion each year. The Coalition believes that market-based solutions will work best, and would prefer that lenders limit fees as opposed to capping interest rates. The Coalition says research demonstrates that North Carolina's approach is working citing a study performed by the University of North Carolina which concluded that the law reduced the incidence of loans with predatory terms. The Coalition also advocates "cooperative federalism" and would not support the federal preemption of state laws as they would needlessly cut off states' pioneering efforts to address predatory lending.

Thomas Miller, Attorney General for the State of Iowa. Miller stressed the difference between constructive and destructive credit. He agrees with the law enacted in North Carolina and believes that harm is being done by the OCC having extensive preemption powers. According to his testimony, the question before the Committee revolves around depleting access for Americans to appropriate credit, as successful regulation will reduce access to predatory lending.

Steve Nadon, Chairman of the Coalition for Fair and Affordable Lending (CFAL) & Chief Operating Office of Option One Mortgage. CFAL believes that it is imperative that Congress promptly pass HR 833, and will work with Members to refine HR 833 as needed. CFAL advocates uniform national standards for nonprime lending. Nadon made a distinction between "nonprime" lending products verses "predatory" lending practices. In his testimony Mr. Nadon said that most borrowers are in their 40s and 50s, have incomes in the $50,000-$75,000 range, and are not minorities. In many cases these customers will again become prime after experiencing temporary problems. CFAL pointed out that HOEPA's protections are providing relatively little benefit, and it is likely to come at a higher cost due to the law's provisions.

Summary of Representatives' Questions (Partial List)

Chairman Bachus (R-AL) asked to whom the North Carolina law applies. Brown said that it applies to state chartered institutions. Miller said that North Carolina is a bipartisan solution. Bachus asked what Congress can do to enhance the enforcement of existing laws; questioned modifying terms to avoid flipping restrictions; and as HOEPA restricts unfair, abusive or deceptive acts, should loan flipping be defined as abusive. Miller said that enforcement has room to grow, and that perhaps a fund should be created. He said that funds to states would be helpful, though it is not strictly an enforcement problem and that the industry can clean itself up. He stated that we cannot have federal preemption and increased enforcement.

Congresswoman Waters (D-CA) asked about the number of characteristics of predatory lending that are identifiable. She gave the examples of loan flipping and called it egregious, and she asked the MBA if loan flipping should be outlawed, and should Congress put a limit on the number of times a loan can be refinanced. Couch stated that her question underscores the difficult part of the debate and that loan flipping must be defined. He gave a personal example of loan flipping- that he has refinanced his own home twice this year, but that it is to his benefit. He stated that dealing with hypothetical situations is difficult. Currently there are 22 federal statutes that govern loans, and if these are properly enforced, they would take care of a number of problems. The MBA, he said, believes the most effective tool is education. Congresswoman Waters then asked about balloon payments. Nadon said that for most people this is not a legitimate service. Miller said that balloon payments almost always are misleading in the subprime market and that rarely they are in the interest of the consumer, though they do make sense in the prime market.

Congresswoman Kelly (R-NY) asked if there is a middle ground, or does the Federal government need to adjust what is being done by the states. Miller said that the states are doing a good job and that the OCC proposal is the wrong step. States provide a good, effective service and states should continue to have this responsibility. Kelly then said that she has submitted a letter for the record, asking Chairman Oxley for a hearing on the OCC as she is not sure if it has followed its congressional mandate. Kelly asked if Congress should hold a hearing on the OCC. Miller said yes, and that he would like to be invited to testify. He said the OCC proposal is a radical change from our Republic and that the OCC is now saying they can preempt certain state laws dealing with national banks and that states cannot enforce state laws with national banks. This statement is a dagger in the heart of federalism. Kelly asked Couch if they should improve the financial literacy program at HUD. Couch said that the MBA currently has financial education programs in English and Spanish, and that soon they would release a program in Arabic. He stressed that the consumer needs to be educated.

Congressman Lucas (R-OK) asked for a definition of "net tangible benefit." Miller said that refinancing constructively would be an example and that the consumer must be better off after the refinancing. Brown said this term was used in North Carolina. Lucas asked Nadon if it is necessary to extend assignee liability that makes the investors liable. Nadon said that there is no problem stopping with us, and that smaller players do not have the power for securitization. The problem with assignee liability lay in the fact that no one has yet drafted it into state laws, except North Carolina, without scaring off the capital market. In Georgia, the bond market couldn't qualify risk and so it scared off loans, and one could not lend in Georgia whether we liked the law or not. Lucas asked as mortgage brokers originate a majority of the laws, if they are adequate to do so. Nadon said that no, the rules for becoming a broker vary and that it is hard to get consistency. There are bad players in the brokerage industry. One way as lenders to identify those people is to cut them off through the creation of a database to unite everyone and give them standards for behavior.

Congressman Miller (R-CA) asked Iowa Attorney General Miller to expand on how a patchwork of laws might impact overall laws. Miller said that the market has expanded and by and large this is a good thing. Also, the Georgia experience is not all bad, and while they went to far, they did pull back and this is a good use of democracy. North Carolina has found a good balance, and working through the states can be a good thing as they can be self-corrected easily. Congressman Miller asked about Fannie Mae and Freddie Mac and asked when developing new programs to put immediately into the marketplace, if there would be a dramatic impact on consistency for consumers that could impact the market overall. Attorney General Miller said that he didn't think so, and that he is not concerned that the people who want loans will not be able to get them. Nadon said that the challenge with Georgia will happen again as legislation in New Jersey will go into effect on November 27. His company is lending $1 million in that state and 70% of their lending will go away.

Congressman Sanders (I-VT) asked if states and cities have the right to legislate, and if the U.S. Congress takes draconian actions and tells 20 states and cities that they are wrong, who benefits and who gets hurt. Miller said that consumers don't benefit as it is a self-correcting process. Brown said that he echoes Miller, and that if North Carolina had not happened we would continue to see predatory practices and consumers would be substantially harmed. Fishbein said that he agrees with Miller and Brown.

Congressman Scott (D-GA) asked about financial literacy, the assignee liability issue and set national standards verses the state preemption issue. Nadon said that the long term answers are in consumer education and that they sponsor JumpStart as well as working with the Fannie Mae foundation and Option One education. Pickel said that he takes education very seriously.

Chairman Ney (R-OH) asked what the benefit of a national registry is over a state registry. Pickel said that a national registry would take out the bad actors in the marketplace. Ney expanded to say that a person could go from state to state without anyone catching him. He asked about North Carolina and said that there is an argument that the amount of credit offered is now being scaled back. Miller said that the UNC study is good, and demonstrates that first time buyers are up 43% which is consistent with the rest of the south. He said somewhat less financing is occurring, although this would happen if the destructive financing is no longer happening. He said this is different from Georgia in terms of assignee liability and if we are going to have a national law, we should use North Carolina.

PANEL II

Micah Green, President of the Bond Market Association. Green said that the Bond Market would like to promote financial education. The Bond Market Association opposes the concept of extending liability to the purchaser or assignee of a loan for violations of which they had no knowledge. The Bond Market asserts in their testimony that as the purchaser of a loan cannot know what a lender told a borrower, or the features of a loan that would be suitable for the borrower, that blanket assignee liability under these circumstances is unreasonable. The Bond Market believes that the preservation of credit for borrowers in all markets is one of the strongest arguments available in favor of federal preemption. The Bond Market concludes that placing the burden of enforcement of anti-predatory lending rules on the secondary market is bad public policy with consequences that are both undesirable and unnecessary.

Cameron Cowan, on behalf of the American Securitization Forum. Cowan discussed the benefits of securitization and the challenge of curbing predatory lending without curbing subprime loans. Securitization lowers the borrowing costs for individuals and corporations and aids in the geographic dispersion of capital to areas that otherwise might be deprived of credit options. Securitization allows for more options for investors and flexibility for the originator. The ASF urges the Committee to consider legislation to pre-empt the authority of states and local governments in the area of predatory lending and to construct a safe harbor from assignee liability for secondary market participants.

Margot Saunders, National Consumer Law Center. Saunders stated that in the year 2003 we are not dealing with the same access to credit laws as we were in the 1980s. Since that time there has been a continued deregulation and democratization of credit. She said there is too much credit, and that there is a push market where people are being pushed into refinancing for reasons that do not benefit them. These loans are not beneficial for consumers. Saunders submitted a chart with her testimony that demonstrates a huge increase in the number of foreclosures between 1980 and 2001. While foreclosures are flat in the prime market, 1 out of 12 consumers in the subprime market foreclose. Saunders compared this figure to that of the regulation of toaster ovens. Saunders is pushing for some assignee liability and would like to cap damages and have clear rules for assignee liability.

Kurt Eggert, Associate Professor of Law at Chapman University School of Law. Eggert said in order to define predatory lending one must look at the practices and results. Eggert said the definition is the use of manipulative, coercive, or deceptive tactics to get consumers to take loans or lead borrowers to be worse off. Eggert said the causation of predatory lending is linked to the spike in the 1990's, and gave a discussion of securitization. Eggert said that the cure cannot depend on regulators, but that the securitizers need to step in and refuse to deal with scam lenders. These securitizers can look at default rates and assignee liability should be used in order to regulate the industry.

Frank Raiter, Managing Director for Standard & Poor's. Raiter said that from Standard & Poor's perspective, an anti-predatory lending statute's imposition of liability on purchasers or assignees of mortgage loans (assignee liability) might reduce the availability of funds to pay investors in securities backed by mortgage loans governed by the statute. S&P evaluates the impact an anti-predatory lending statute might have on the availability of funds to pay investors in the rated securities. In performing its evaluation of a statute, S&P considers (1) assignee liability, (2) clearly delineated loan categories, (3) penalties (4) clarity of statutory violations and safe harbors.

Summary of Representatives' Questions

Congressman Kanjorski (D-PA) was the only representative to question the second panel. He asked if there was anyone who felt that there was not a need for subprime lending. The panel agreed that there is a need for national legislation and that the Committee should put the framework together. Kanjorski asked if the panel favored national preemption. Saunders replied that she did, but not legislation that preempts the states. Kanjorski asked if there can be national standards. Jarman said that yes, there is the capacity for the industry to root out the bad lenders.