Remarks by

John D. Hawke, Jr.

Comptroller of the Currency

Before the

Neighborhood Housing Services of New York

May 5, 1999

New York, New York

It's truly a pleasure to join you this morning. Of course, I'd heard
about Fran Justa well before I became Comptroller of the Currency. But
only recently did I get to meet her. And only then did I come to fully
appreciate the outstanding work that she and New York NHS and all the
financial institutions represented here today \-- and many that are not
\-- have been doing together in partnerships formed over the past 17
years.

I could spend all of my time with you today discussing those
accomplishments, and still not do them justice. So, instead, I thought I
would offer some observations on a subject in which I know NHS has had a
long and abiding interest: the development of more equitable and
efficient housing and consumer credit markets.

I'm told that Fran's involvement in community development grew out of a
personal encounter with discrimination. Sad to say, her experience was
all too common. Not too long ago, redlining prevented credit from
flowing into many communities, and far too many would-be borrowers were
denied loans on the basis of race, gender, or ethnic origin. The result
was stagnation and decay in redlined neighborhoods, hardship and
hopelessness among many of our citizens, and lost business opportunities
and productivity in our economy.

Slowly, things changed for the better. The passage of laws such as the
Equal Credit Opportunity Act, Home Mortgage Disclosure Act, and the
Community Reinvestment Act brought the resources and authority of the
Federal government to bear in the fight against unequal access to
financial services. Regulators and public interest groups did their part
to ensure that the laws were properly implemented and enforced. And
organizations like NHS sprang up to provide leadership, bringing
borrowers and lenders together, educating homeowners and those who
aspired to join their ranks.

While CRA has known its share of controversy, its fundamental purpose is
to overcome market imperfections in the flow of information to \-- and
from \-- lenders. Empirical evidence suggests that information barriers
have impeded the efficient operation of financial markets. CRA created
incentives for banks to reduce the barriers that obstructed the flow of
market information. For example, when lenders shied away from some low-
and moderate-income borrowers, it was in part because they didn't know
enough about them \-- and because they thought that the cost of
obtaining additional information was not worth it.

For their part, aspiring borrowers found themselves caught in a vicious
\-- and pernicious \-- cycle. Without a verifiable credit history, they
were unable to obtain the loans they needed to establish a verifiable
credit history. Without good information, lenders relied on what they
had, including misperceptions and flawed generalizations. Someone \-- or
something \-- had to break the logjam.

That's what CRA was designed to do \-- to overcome the market
imperfection of inadequate information, and to help lenders and
creditworthy borrowers connect. And they have. As Chairman Greenspan
noted last year, "increased focus on \[community development\] lending
has helped financial institutions discover new markets that may have
been underserved before."

We can measure this progress in at least two ways. First, there is the
growing volume of CRA-qualifying loans and investments. Since 1993,
financial institutions have made CRA commitments and pledges totaling
more than one [trillion]{.underline} dollars.

The second measure of progress is the success of CRA asset-backed
securities in the capital markets. Since late 1997, more than \$2
billion worth of community reinvestment loans have been packaged and
marketed into securities. As a percentage of all lending that earns CRA
consideration, of course, that's a drop in the bucket. But it's an
important start. Every dollar taken off the originator's books through
securitization is a dollar available for new loans. And, more to the
point, securitization reflects a growing confidence among secondary
market investors \-- many of whom, after all, are under no CRA
obligation of their own \-- in the quality of these loans. I think that
it proves we're on the right track.

As we develop more complete information on low- and moderate-income
borrowers and the performance of their loans over time, competitive
markets are developing, just as we'd hoped. Lenders are discovering
opportunities in community development and the low- and moderate-income
housing market to build new and profitable business relationships. I
trust that NHS of New York is finding the going somewhat easier than it
was 17 years ago. Government encouragement is no longer the sole force
driving the process.

Some emerging financial sub-markets are experiencing growing pains,
however. For example, I know of no financial product with greater
potential for good \-- or for abuse \-- than subprime loans.
Potentially, they offer first-time borrowers a chance to build a credit
history, and repeat borrowers a chance to rehabilitate a blemished
history. Under the right conditions, subprime loans can provide entry
\-- or reentry \-- into the financial mainstream \-- but only if they're
marketed and used responsibly. An increasing number of subprime lenders
are taking the lead in developing programs that reward good payment
performance with gradually lowered rates. That's the way efficient
markets should work.

But sharp and shady practices unfortunately abound. Subprime borrowers
often lack professional advisers to help them in shopping for a
mortgage, which can make them easy targets for unscrupulous lenders.
When the paycheck's gone and there are still bills left to pay at the
end of the month, the offer of credit \-- on any terms \-- can be hard
to resist, and lenders know it. Yet evidence suggests that at least 30
percent of subprime mortgage borrowers would actually qualify for prime
rates if they only knew to ask or to shop around. And we continue to
hear heartbreaking stories of people \-- especially the elderly \-- who
have little cash flow, but lots of home equity, being signed up for
loans they cannot possibly repay, and losing their homes as a result.
Through no fault of their own, subprime borrowers can easily become
trapped in a financial straitjacket from which Houdini himself would
have trouble escaping.

I would like to believe that these predatory practices are less common
among commercial banks with subprime departments than among other
subprime providers. And I wonder whether the CEOs and directors of any
offending banks are actually aware that these practices are taking
place.

Just as with community development lending in the recent past, I believe
that sunshine is the best antidote to predatory and discriminatory
lending practices in the subprime field today. That means full,
complete, and conspicuous disclosure of terms to potential borrowers, to
let them see the actual cost of their loan, how rapidly it will
amortize, and what the consequences of non-payment will be \-- a matter
of particular importance when loans are secured by the borrower's
primary residence.

Consumers need full and accurate information if they are to make
intelligent choices. The lack of information plays directly into the
hands of the financial predators.

Another essential piece of the disclosure picture concerns credit bureau
reporting. Subprime loans can't become a vehicle for upward mobility if
creditors in the broader credit market lack access to consumer credit
history. Yet, a growing number of subprime lenders have adopted a policy
of refusing to report credit line and loan payment information to the
credit bureaus \-- without letting borrowers know about it. Some make no
bones about their motives: good customers that pay subprime rates are
too valuable to lose to their competitors. So they try to keep the
identity and history of these customers a closely guarded secret.

When they do, it's the borrower who loses. A credit history can't be
built or repaired if lenders refuse to let anyone else know about it.
The failure to report is unfair to customers, unfair to competition, and
ultimately inconsistent with the values of our national economy.

I'm also concerned that a decline in credit bureau reporting could have
broader safety and soundness implications for the whole banking system.
Lenders that continue to rely on credit bureau information \-- as most
still do \-- on the assumption that it is fair and complete, and lenders
who construct their scoring systems using such data, will have less
complete information. This must inevitably skew lending decisions and
eventually compromise the integrity of those lenders' risk management
processes.

That's why we recently brought this issue to the attention of the other
banking agencies, and why our staff has raised questions about these
practices with staff at the Federal Trade Commission. In the coming
weeks, we will be formulating a joint supervisory response to the
non-reporting of favorable consumer credit histories

. In the meantime, I would urge any banks and other financial
institutions with subprime interests that might be reconsidering their
policy on credit bureau reporting to think about the potential
consequences \-- for themselves and for their customers \-- before they
jump aboard this bandwagon.

Thanks to the NHS of New York and its many corporate and community
partners, thousands of New Yorkers are better housed than they've ever
been. You should be very proud of that achievement. One of the things
I've tried to do in my remarks this morning is to remind you that the
impact of your good work goes beyond the individual neighborhoods of
this great city. You've made a significant contribution to a national
economy that's more open, more rational, and more humane. That's no
small feat. I congratulate you \-- and thank you.