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PROMOTING HOME OWNERSHIP BY

ENSURING LIQUIDITY IN THE

SUBPRIME MORTGAGE MARKET

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON 

FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

AND THE

SUBCOMMITTEE ON 

HOUSING AND COMMUNITY OPPORTUNITY

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

JUNE 23, 2004

Printed for the use of the Committee on Financial Services

Serial No. 108–97

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

DOUG BEREUTER, Nebraska 

RICHARD H. BAKER, Louisiana 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

DOUG OSE, California 

JUDY BIGGERT, Illinois 

MARK GREEN, Wisconsin 

PATRICK J. TOOMEY, Pennsylvania 

CHRISTOPHER SHAYS, Connecticut 

JOHN B. SHADEGG, Arizona 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

MELISSA A. HART, Pennsylvania 

SHELLEY MOORE CAPITO, West Virginia 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

TIM MURPHY, Pennsylvania 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

JAY INSLEE, Washington 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

KEN LUCAS, Kentucky 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

MIKE ROSS, Arkansas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

RAHM EMANUEL, Illinois 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

CHRIS BELL, Texas 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SPENCER BACHUS, Alabama, Chairman

STEVEN C. LATOURETTE, Ohio, Vice 

Chairman 

DOUG BEREUTER, Nebraska 

RICHARD H. BAKER, Louisiana 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SUE W. KELLY, New York 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

WALTER B. JONES, JR, North Carolina 

JUDY BIGGERT, Illinois 

PATRICK J. TOOMEY, Pennsylvania 

VITO FOSSELLA, New York 

MELISSA A. HART, Pennsylvania 

SHELLEY MOORE CAPITO, West Virginia 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

TIM MURPHY, Pennsylvania 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

RICK RENZI, Arizona 

BERNARD SANDERS, Vermont 

CAROLYN B. MALONEY, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

LUIS V. GUTIERREZ, Illinois 

DENNIS MOORE, Kansas 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

KEN LUCAS, Kentucky 

JOSEPH CROWLEY, New York 

STEVE ISRAEL, New York 

MIKE ROSS, Arkansas 

CAROLYN MCCARTHY, New York 

ARTUR DAVIS, Alabama 

JOE BACA, California 

CHRIS BELL, Texas 

(V)

SUBCOMMITTEE ON HOUSING AND COMMUNITY OPPORTUNITY

ROBERT W. NEY, Ohio, Chairman

MARK GREEN, Wisconsin, Vice Chairman 

DOUG BEREUTER, Nebraska 

RICHARD H. BAKER, Louisiana 

PETER T. KING, New York 

WALTER B. JONES, JR., North Carolina 

DOUG OSE, California 

PATRICK J. TOOMEY, Pennsylvania 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

MELISSA A. HART, Pennsylvania 

PATRICK J. TIBERI, Ohio 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

MAXINE WATERS, California 

NYDIA M. VELA ́ ZQUEZ, New York 

JULIA CARSON, Indiana 

BARBARA LEE, California 

MICHAEL E. CAPUANO, Massachusetts 

BERNARD SANDERS, Vermont 

MELVIN L. WATT, North Carolina 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

(VII)

C O N T E N T S 

Page 

Hearing held on: 

June 23, 2004 .................................................................................................... 1

Appendix: 

June 23, 2004 .................................................................................................... 51

WITNESSES 

WEDNESDAY, JUNE 23, 2004

Calhoun, Michael D., General Counsel, Center for Responsible Lending ........... 18

DeMong, Richard F., Virginia Bankers Professor of Bank Management, 

McIntire School of Commerce, University of Virginia ...................................... 22

Green, Micah S., President, The Bond Market Association ................................. 14

Kogut, Pamela, Assistant Attorney General, Office of the Attorney General, 

Commonwealth of Massachusetts ....................................................................... 19

Raiter, Frank, Managing Director, Standard & Poor’s Credit Market Services 16

APPENDIX 

Prepared statements: 

Ney, Hon. Robert W. ........................................................................................ 52

Bachus, Hon. Spencer ...................................................................................... 54

Clay, Hon. Wm. Lacy ....................................................................................... 58

Gillmor, Hon. Paul E. ....................................................................................... 59

Hinojosa, Hon. Rube ́n ....................................................................................... 61

Miller, Hon. Gary G. ........................................................................................ 63

Vela ́zquez, Hon. Nydia M. ............................................................................... 64

Waters, Hon. Maxine ........................................................................................ 65

Calhoun, Michael D. ......................................................................................... 67

DeMong, Richard F. ......................................................................................... 90

Green, Micah S. ................................................................................................ 98

Kogut, Pamela .................................................................................................. 104

Raiter, Frank .................................................................................................... 111

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Coalition for Fair and Affordable Lending, prepared statement ......................... 117

Freddie Mac, prepared statement .......................................................................... 127

Housing Policy Council of the Financial Services Roundtable, prepared statement ...................................................................................................................... 135

(1)

PROMOTING HOME OWNERSHIP BY 

ENSURING LIQUIDITY IN THE 

SUBPRIME MORTGAGE MARKET 

Wednesday, June 23, 2004

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND

CONSUMER CREDIT, AND

SUBCOMMITTEE ON HOUSING AND

COMMUNITY OPPORTUNITY

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittees met, pursuant to call, at 10:08 a.m., in Room 

2128, Rayburn House Office Building, Hon. Robert Ney and Hon. 

Spencer Bachus [chairmen of the subcommittees] presiding. 

Present: Representatives Bachus, Ney, Baker, Royce, Kelly, 

Biggert, Fossella, Gary G. Miller of California, Hart, Capito, Tiberi, 

Hensarling, Garrett, Kanjorski, Waters, Sanders, Maloney, Gutierrez, Velazquez, Watt, Ackerman, Sherman, Meeks, Lee, Lucas, 

Crowley, Israel, McCarthy, Miller of North Carolina, Scott, and 

Davis. 

Chairman NEY. [Presiding.] Today, the two subcommittees meet 

to continue our look at the subprime market and its importance to 

consumers. Last year, Chairman Bachus and I began holding 

roundtables to discuss abusive lending practices in subprime lending and how we can assure credit availability for those who need 

and want it. We are pleased to also have Chairman Baker with us 

today who has a wealth of knowledge on this issue and has spent 

a long time looking at this issue. 

Last fall, we held our first joint hearing to examine abusive lending practices. This spring, we followed that by holding a hearing 

looking at the subprime lending market. For the first time in the 

predatory lending discussion, we looked at the growing class of 

subprime borrowers and their role in the mortgage marketplace. 

Today, we will look at another vital piece of the subprime market. 

The United States mortgage market is the deepest and most affordable in the world. Due to the evolution of unique funding structures for mortgages, Americans pay less for mortgages than almost 

anywhere else in the world. As a result, this country has the 

world’s highest homeownership rate, although there is a lot more 

that can be done, especially in areas of minority homeownership. 

However, the unique funding structure that has been long established for the prime mortgage market is far less mature for the 

subprime mortgage market. Only recently has it become common 

2

for a majority of subprime loans to be packaged and sold to investors. I believe that this evolution has led to lower and more uniform rates for subprime loans, saving consumers money while making credit more widely available. However, states and cities have 

begun passing laws that dramatically affect the availability of 

funds for subprime lenders. 

In a well-intentioned attempt to end abuse of lending practices, 

some State and local governments passed laws extending liability 

for fraudulent origination practices to those in the secondary market that purchased the loan in a pool, but had no hand in actually 

writing the loan. These strict assignee liability laws threaten the 

availability of credit in the subprime market. I think we saw this 

most evident in Georgia at the time when it caused such a problem, people said, fine, we are just not going to do business. And of 

course, the legislature came back, there were some editorials, and 

they changed parts of that law. These strict assignee liability laws 

threaten the availability of credit, frankly, in the subprime market. 

Acting as a usury cap on mortgage lending, these laws effectively 

prevent people from receiving mortgages. 

The recent case study on the problems with assignee liability, 

and I mention, of course, recent case studies in Georgia, where the 

State legislature passed an incredibly onerous law with strict assignee liability. That law led many secondary market players to 

withdraw from the Georgia market, drying up the credit for the 

borrowers. Of course, I mentioned the rest about the editorials that 

followed, and then the Georgia legislature passed a partial fix to 

the problem that provided some lending opportunities, but we still 

do not know what will be the lasting effect of these predatory lending statutes on the availability of credit. 

In order to better understand the impact of laws like Georgia’s, 

this hearing will give our subcommittees a chance to hear from a 

distinguished group of witnesses on the availability of subprime 

mortgages. I think this hearing is timely and important to this 

committee’s duty of ensuring access to credit for Americans. I also 

want to thank Congressman Lucas and a wide variety of other 

members on both sides of the aisle, Congressman Sherman and 

others, who have expressed interest in this issue. We appreciate it. 

I know it can be a controversial and tough issue, but I think it has 

to be looked at and dealt with. So I again appreciate members who 

have been willing to look at this. 

With that, I will recognize Congressman Sherman. 

[The prepared statement of Hon. Robert W. Ney can be found on 

page 52 in the appendix.] 

Mr. SHERMAN. Thank you, Mr. Chairman. 

The recent actions by the OCC have created an absurd situation 

where a certain class of lenders has the lowest common denominator of virtually no restrictions, and that will eventually lead to 

some bad actors, if it has not already, that will tarnish the image 

of all lenders and result in a backlash that will be harmful even 

to that subset of lenders, the national banks that think they enjoy 

the OCC’s liberation from State regulation. 

The answer is that Congress needs to take action. The most immediate action we should take is to get rid of what the OCC has 

done, which is to substitute itself for this committee and this ConVerDate 0ct 09 2002 11:05 Oct 05, 2004 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 G:\DOCS\95652.TXT FIN1 PsN: MICAH
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gress. It may be necessary for us to do that as part of a package 

where we establish real solid consumer protections, not lowest common denominator, and at the same time preempt this glowing 

plethora of state and even local regulation. We need good regulation for all Americans, and not a patchwork city-by-city, county-bycounty, or even state-by-state. 

We need the competition that comes from efficiency, which comes 

from offering a product nationwide. I hope that both sides in this 

debate will not grab onto their own definition of nirvana; that consumer groups will not say, well at least in Berkeley, we have every 

regulation we want; God forbid we should lose that paradigm. And 

some national bank should not say, well, we have the OCC for now; 

we do not have to worry about anything. And instead unite behind 

solid consumer protections that represent a middle ground. 

I hope these hearings lead to that result, and I yield back. 

Chairman NEY. Thank you. 

Mr. Chairman, Mr. Bachus? 

Mr. BACHUS. Thank you, Mr. Ney. 

First of all, I want to commend you for having this hearing of 

our two subcommittees. By way of review, this is the third hearing 

we have had on this matter. Our first hearing, we addressed ways 

to combat abusive lending practices in the nonprime or subprime 

area, and to address them without jeopardizing the availability of 

nonprime or subprime loans to those with less than perfect credit. 

Our second hearing, we focused on looking at actually who the 

nonprime or subprime borrowers were, their profiles, and the advantages that nonprime and subprime mortgages, the benefits and 

advantages to those borrowers, and also some of the risks inherent 

in the nonprime or subprime market, and the risks posed by predatory lenders. 

Today’s hearing we are going to look at the secondary market, 

the role that it plays in adding liquidity to the subprime lending 

industry, and the benefits it provides of expanded homeowner opportunities. 

The nonprime market, I think the most surprising thing to me 

is the explosive growth in nonprime or subprime lending. In 1994, 

there were $34 billion in subprime mortgages. By 2002, that was 

$200 billion, so you are talking about a five-fold increase in 8 years 

in nonprime loans. A lot of this increase in the number of loans is 

because of development of the secondary market where the originators are selling loans into the secondary market, rather than retaining them in their own portfolios. When they do this, we found 

that they create mortgage pools and as a result of this there have 

been assignee liability problems, where people who purchase these 

mortgage pools are held liable as assignee’s. 

I think maybe that will be part of the focus at this hearing today, 

to determine the fairness of assignee liability provisions that require purchasers of mortgage pools to determine as part of their 

due diligence whether the lender or mortgage broker involved in 

originating the individual loans that make up the portfolio misrepresented loans terms or engaged in other deceptive practices in 

dealing with the borrower. 

There is a question about the fairness of imposing liability on 

secondary market participants for violations, and I know we have 

4

someone here from Standard & Poor’s that is going to be a witness. 

They have simply refused to rate mortgage-backed securities if 

they contained non-prime or subprime loans because of what sometimes is described as vague or open-ended assignee liability standards that some States have imposed. As a result of the assignee liability question, Congressman Ney and Congressman Ken Lucas 

introduced H.R. 833. What it does is it contains consumer protections in disclosures. It is intended to serve as a uniform national 

standard for combating abusive and predatory lending. 

At the same time, it addresses this assignee liability by amending the Homeownership Equity Protection Act. The approach that 

their legislation takes, I am sure the witnesses are familiar with 

that and will address whether they think that is the right approach. It at least has the possibility, if it is a fair approach, of establishing some legal certainty to the secondary market, which is 

lacking in a lot of State and local anti-predatory lending laws. 

With that, I will just close. Thank you for having this hearing. 

I am convinced that nonprime loans allow many people to participate in homeownership or to purchase a home that would otherwise be unavailable to them. I would like to allow us to find a way 

to preserve this market, preserve this opportunity that many middle-and low-income citizens need to have homeownership, and at 

the same time establish some legal certainty in a fair way concerning assignee liability, and to do it in a way that is fair to all 

parties. 

I yield back the balance of my time. 

[The prepared statement of Hon. Spencer Bachus can be found 

on page 54 in the appendix.] 

Chairman NEY. I want to thank the gentleman, and I thank the 

gentleman for chairing this hearing today with us. 

The gentlelady from California. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

I have a Statement that I am going to submit. I am here today 

to try and discover what the crisis is as indicated by this hearing. 

I think there is liquidity in the subprime market. I want to be 

clear. I am not opposed to subprime lending, and I know the difference between subprime lending and predatory lending. It does 

not have to be one and the same, but far too often it is. I am interested in making sure that in the subprime lending market, we do 

not have abusive practices, high interest rates and marketing techniques and practices that deceive and get people hooked into loans 

that they do not understand and cannot afford. 

So I am very careful about making sure that that is understood; 

that subprime lending can be lending that can be helpful, but it is 

not always helpful and I think we find a disproportionate amount 

of the predatory lending in the subprime market. I am opposed to 

preemption. I do not know if you are aware that Los Angeles is one 

of the cities that has passed some local predatory lending laws. I 

want to be careful to do nothing that would preempt the kind of 

work that they are doing and some of the other states. I understand there are about 29 states and at least 18 municipalities that 

have enacted laws to address the problem of predatory lending. 

So I am going to listen to the witnesses here today to see what 

they have to say. I do not know what the crisis is. Perhaps there 

5

will be some information here that can help me to understand exactly what is meant by the subject of this hearing. So with that, 

Mr. Chairman, I am just going to yield back the balance of my 

time. 

[The prepared statement of Hon. Maxine Waters can be found on 

page 65 in the appendix.] 

Chairman NEY. I thank the gentlelady. 

Chairman Baker. 

Mr. BAKER. Thank you, Mr. Chairman, for your leadership and 

interest in this matter, as well, of course, as Chairman Bachus. I 

know both of you have had longstanding concerns about this market issue. I understand the focus of the hearing today is the potential causes of liquidity impairment and abusive practices that may 

occur in the subprime mortgage market. I certainly agree with your 

interest in need for review, however I just want to make a very 

narrow observation about a concern I have today, which is that 

mentioned by Mr. Bachus as well, the potential imposition of liability on assignee’s of mortgage loans. 

This imposition would, I think, place a burden on the secondary 

market participants that would affect and have a disruptive affect 

on the flow of legitimate credit to many underserved communities. 

The advent of securitization certainly has assisted in the liquidity 

of mortgage markets, lowered cost of credit, significantly increased 

the availability of subprime mortgage credit, and has resulted in 

benefits, not necessarily associated with that described as predatory lending. But the consequences of assignee liability would cause 

potential buyers to forego purchasing subprime or high-cost mortgage loans. Certainly if this were the case, with fewer buyers and 

less money, legitimate lenders would ultimately impair the ability 

of low-and moderate-income customers to participate in homeownership. 

The public policy challenge, I believe, is to strike a balance between limiting abusive lending practices, while ensuring the flow 

of credit to borrowers who cannot obtain loans in the primary market. Consumers obviously need to be protected from unscrupulous 

lenders, particularly those who are financially unsophisticated. I do 

believe there are sufficiently strong standards currently in existence and they should continually be reviewed to determine their 

adequacy of protection of the unsophisticated borrower. 

Extension of these sanctions, however, to assignee’s risks the future of our current market structure. To assure that assignee’s are 

not made liable for abuses they cannot reasonably discover and correct, I have been at work for some time drafting my own approach 

to a remedy and I will be introducing later this week, that would 

recognize that commercially reasonable responsible actions called 

due diligence, which would not enable discovery, ought to be a sufficient defense. Sanctions such as class action civil liability, loan rescission, are matters which should be discussed. Assignees should 

be allowed to take some time to take corrective actions upon appropriate discovery of a compliance failure. 

These are I believe important issues deserving of the committee’s 

time, and I look forward to working with you, Mr. Chairman and 

Mr. Bachus, over the coming weeks as we move forward in trying 

to provide balance in a very important market that provides a servVerDate 0ct 09 2002 11:05 Oct 05, 2004 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 G:\DOCS\95652.TXT FIN1 PsN: MICAH
6

ice to many underserved consumers, and certainly a very important 

part of our overall economic recovery. 

I thank you, Mr. Chairman. 

Chairman NEY. I want to thank the gentleman. 

Mr. Sanders, the gentleman from Vermont. 

Mr. SANDERS. Thank you, Mr. Chairman. I thank you and Chairman Bachus for holding this important hearing. 

According to the Center for Responsible Lending, predatory lending is costing American families $9.1 billion every year. I am happy 

that Michael Calhoun from the Center is here with us today to talk 

about that study. 

Mr. Chairman, in the richest country on earth, there is something wrong when so many foreclosures are taking place. Between 

1980 and 1999, both the number and the rate of home foreclosures 

in the United States have skyrocketed by 277 percent. According 

to an article in the New York Times, over 130,000 homes were foreclosed in the spring of 2002, with another 400,000 in the pipeline. 

Many of these foreclosures are a direct result of predatory lending 

practices in the subprime mortgage market that must be put an 

end to immediately. According to the Mortgage Bankers Association, while subprime lenders account for 10 percent of the mortgage 

lending market, they account for 60 percent of the foreclosures. 

Mr. Chairman, the title of this hearing is Promoting Homeownership by Ensuring Liquidity in the Subprime Mortgage Market. 

That is a very interesting title. The title seems to assume that 

there is a lack of liquidity in the subprime market that is somehow 

depressing homeownership in this country. But Mr. Chairman, according to figures compiled by the National Mortgage News, new 

subprime loans totaled $290 billion in 2003, more than double the 

total loan volume for 2000. 

Mr. Chairman, we have a subprime industry which has more 

than doubled their loan volume over the past 3 years, but accounts 

for 60 percent of all foreclosures in this country. I have to ask, by 

providing even more liquidity in the subprime market, would we be 

promoting homeownership or would be promoting foreclosures? Everyone wants to promote homeownership. Homeownership is the 

American Dream. But having your home taken away from you because you cannot pay the bills charged by predatory lenders can 

quickly turn the American Dream in to the American Nightmare. 

Also in this discussion, importantly, let us not forget that predatory lending is being perpetrated by the likes of just not small-time 

operators, but by the likes of Citigroup and Household International. As a result of legal actions filed by the FTC, Citigroup 

agreed in September to reimburse consumers $215 million for predatory lending abuses which represents the largest consumer settlement in FTC history. Household International has agreed to pay 

$484 million to reimburse victims of predatory lending, representing the largest direct payment ever in a State or federal consumer case. 

Mr. Chairman, when we are talking about predatory lending, we 

are not just talking about mortgage lending. Let us take finally a 

hard look at the abuse in credit cards, where many working people 

are paying 25, 28 percent a year in interest rates on credit cards, 

7

and as a result are going even further into debt. In my view, that 

is predatory lending as well. 

Lastly, Mr. Chairman, I know there is an effort to preempt states 

and localities from passing strong anti-predatory lending laws. Mr. 

Chairman, the Republican Party has got to get its act right. Either 

they hate the big bad federal government or they love the big bad 

federal government. You cannot have it both ways. You cannot tell 

us how we love local government and State government. The word, 

Mr. Chairman, is laboratories of democracy. That is what it usually 

is, something like that, and then we preempt them every single 

day. Let’s get our act together. Either the Republican Party wants 

to be the spokesman for the big strong federal government taking 

away power from local government or not, but let’s be a little bit 

consistent in that area. 

I yield. 

Chairman NEY. I want to thank the gentleman for his kind comments. 

[Laughter.] 

Mr. Miller? 

Mr. GARY G. MILLER OF CALIFORNIA.Thank you, Mr. Chairman. 

I want to commend you, Chairmen Ney and Bachus, for having 

this hearing. This is an extremely important issue in the subprime 

market out there. This is a very important issue particularly in the 

passage of State and local predatory lending laws which have assigned liability to the secondary market. 

There is basically a housing crisis in this country, particularly in 

my State of California. The California homeownership rate is 56.9 

percent in 2000. That lags the rest of the nation by over 10 percent. We also have the highest home prices in the nation. Housing 

finance is so vital to Americans and the overall health of our economy that the best public policy is for Congress to ensure that we 

have a fair workable uniform national lending standard. We must 

eliminate abusive lending practices, while preserving and promoting access to affordable housing credit. 

There is no question that in some nonprime borrowers, they basically have been abused and we need to deal with abusive practices, 

but we should do everything we can at the same time to prevent 

them. There is also no question of the vast number of borrowers 

who are not victims of such practices can become victims by poorly 

crafted protective legislation that restricts nonprime credit availability and basically creates an unnecessary situation. 

State and local anti-predatory lending laws are inconsistent and 

sometimes ineffective and nonexistent, and often arbitrary and unduly burdensome. This has been an effect of limiting nonprime 

credit availability. These laws have forced the mortgage industry 

to restrict access to credit or exit markets entirely. You cannot 

have a system whereby if you go one city, you have one requirement, and another city, you have another requirement. There is 

litigation on many of these ordinances that have passed locally that 

have not been implemented. 

From what I am hearing, if they are implemented, that the impact is going to be disastrous to local economies. That is unfair. 

You should not be discriminated against because you want to buy 

a home in a certain area. If you are looking at the subprime marVerDate 0ct 09 2002 11:05 Oct 05, 2004 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 G:\DOCS\95652.TXT FIN1 PsN: MICAH
8

ket, if you eliminate that, people are really in serious trouble when 

it comes to financing homes in those areas. So you have to be very 

cautious. You have to understand that there is a need for subprime 

and the predators in that marketplace need to be eliminated. 

We need to do everything we can in this nation to give people 

an opportunity to own a home. It is becoming more and more difficult to provide housing for people in this nation as time goes on. 

We have to be proactive in this area. Sometimes you have to look 

at what happens at the local level. We do that in housing all the 

time. HUD is looking at eliminating local red tape that exists out 

there that precludes people from being able to build homes in certain areas. We have to be proactive in doing that. You cannot sit 

there and ignore local policies that are just absolutely abusive towards people wanting to buy homes. 

You look at some of these areas, and the assessment against 

builders who want to build homes is so outrageous and generally 

passed on to homebuyers, that the federal government has to say 

this is wrong; that you are abusing people and perhaps federal policy has to establish certain guidelines that preclude some of these 

abusive policies. In subprime lending, we need to look at predatory. 

And when it is being abused, we need to move proactively 

So Chairmen Ney and Bachus, I applaud both of you for your efforts on this and I look forward to hearing the testimony from our 

panel. I yield back. 

[The prepared statement of Hon. Gary G. Miller can be found on 

page 63 in the appendix.] 

Chairman NEY. I thank the gentleman. 

The gentleman, Mr. Miller from North Carolina. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

I agree with those members who have said that it is vital that 

we make credit available for homeownership to those borrowers, 

those consumers who have less than perfect credit. It is also vital 

that they use the equity in their home, their life savings to provide 

against the contingencies of life. That is how they have saved for 

a rainy day. 

But I strongly agree with those members who say that there are 

sufficient consumer protections now for what is happening to some 

of the most vulnerable consumers when they try to borrow money 

against the equity in their home to provide for life’s rainy days. 

There is outrageous conduct going on. In the words of Woody Guthrie, they are being robbed with a fountain pen. There are lenders 

who steal their life savings, the equity in their homes, from the 

most vulnerable of consumers in the most difficult of circumstances. I certainly think that we can strike a balance between 

making credit available to those in that subprime market, including a liquid secondary market, and providing reasonable protections to those consumers. 

It is true that Standard & Poor’s have said that the subprime 

loans coming out of some States require additional credit enhancements. North Carolina was the first State, and it is not our nature 

to be first in anything; we were the 12th of the 13 states to ratify 

the Constitution; I think we were among the last of the States to 

join the Confederacy. We did ratify the constitutional amendment 

guaranteeing women the right to vote. I think we did that in the 

9

1980s. But we were the first with this, and our statute has held 

up pretty well. 

There is readily available credit for the subprime market. Standard & Poor’s has said that there is no enhancement required for 

North Carolina’s subprime loans. I think it is perfectly possible to 

craft legislation here that will protect consumers against those outrageous practices that are occurring, and assure the continuous 

availability of credit. 

I join Mr. Miller, the other Mr. Miller, in his opposition to poorly 

crafted legislation. I strongly oppose poorly crafted legislation. I 

may put that on my campaign literature this year. I am strongly 

opposed to poorly crafted legislation. But it is simply the case that 

we have legislation arising from the States that show us what can 

work. 

Thank you, Mr. Chairman. 

Chairman NEY. Mr. Royce. 

Mr. ROYCE. Thank you, Chairman Ney. I would like to thank 

you, Mr. Chairman and Chairman Bachus for holding this very 

timely hearing on issues in the secondary mortgage market. I 

would like to also thank our distinguished witnesses for appearing 

today. 

I think it goes without saying that the housing economy has been 

quite resilient for a number of years. I think this strength has occurred because of a number of factors, but one is asset allocation 

away from equities. Certainly, friendly government policies have 

helped, and low interest rates. 

What concerns me is that problems in a sector can often be hidden or overcome in a boom cycle. All of that being said, I think that 

we need to start thinking about what happens when that housing 

market cools, because today we have Fed funds rate at 1 percent, 

but if we believe Wall Street economists, they say that the Fed 

fund rate will reach 4 percent by the end of 2005. If these predictions prove true, unless we have a very flat or inverted yield 

curve, mortgage rates are going to be much higher in the not too 

distant future. Higher interest rates are going to have a very adverse impact on the housing market. 

I do not know how much we can do about that possibility, but 

we can address structural issues that unnecessarily add costs to 

consumer mortgages. In my view, assignee liability is one issue 

that we should address. Congress should encourage more investment in the secondary mortgage market. Assignee liability provisions do just the opposite. Fixed income investors are not excited 

to become the next target for trial lawyers, and that is a big problem here in the United States. Until we act, billions of dollars of 

capital investment will likely stay away from the subprime market. 

That is going to harm the very people assignee liability laws are 

intended to help. 

So once again, I thank Chairman Ney and I thank Chairman 

Bachus for having this hearing today, and I look forward to working with my colleagues on this very important issue. I yield back, 

Mr. Chairman. 

Chairman NEY. I want to thank the gentleman. 

The gentleman, Mr. Scott. 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

10

I, too, am very much looking forward to this hearing. As the Congressman from Georgia who was very much involved in the predatory lending legislation in the State, going all the way back to the 

beginning with the Fleet Finance fiasco, our State has been a 

major player in this debacle. 

I have heard from some representatives from the mortgage industry that subprime lending provides homeowner opportunities for 

many individuals who normally would not qualify for prime loans. 

I have also heard from consumer advocates that subprime mortgage lending provides ample opportunity for predatory lending 

practices and gives incentives to liberally approve loans to individuals who cannot afford a loan. Advocates from consumer advocates 

and subprime lenders both would like to see the creation of a national predatory lending law, and I certainly commend the leadership of our financial services committee for moving in that direction. 

As a former member of the Georgia General Assembly as a State 

Senator, I can speak of the impact that an overly strong regulatory 

measure can have on a housing market. For a little bit of history, 

the Georgia Fair Lending Act had several provisions, including assigning liability to secondary markets, which caused financial companies to pull out of our State and withdraw some lending products. The Georgia legislature had to revisit the law last year to prevent additional companies from leaving the State. 

In an effort to stop unscrupulous lending practices, the Fair 

Lending Act caused hardship to legitimate lenders. It triggered an 

immediate reaction from both mortgage lenders and secondary 

market entities. Once that Act extended assignee liability to potentially thousands of covered loans, with interest rates approximately 

4 percentage points below the HOEPA interest trigger. Major mortgage lenders announced their plans to stop making both the highcost loans and cover loans in Georgia. Standard & Poor’s announced it would not rate mortgages covered by the law, and both 

Fannie Mae and Freddie Mac indicated they would not purchase 

mortgages that qualify as high-cost loans under the Act. 

Assignee liability, then, presents us with quite a challenge. The 

central question, of course, is what is the effect of making assignee 

liability for the predatory lending practice of originators? Should 

assignee’s be required to bear the responsibility for the predatory 

practices of those from whom they purchase loans? 

One side of the argument is that it is clear that if the liability 

is broad and does not provide solid safe harbors and limits on liabilities, lenders will refrain from purchasing a broad category of 

loans. This is because the risk of acquiring the loan has become too 

great, not because of each of the loans in that category may be 

predatory. This means that many lenders will not originate highcost loans and purchasers will not purchase them. They will not be 

securitized and the secondary market will not produce the liquidity 

that fuels additional lending in the high-cost loan market. 

Yet, assignee liability is critical to successful efforts to address 

predatory lending. It helps to protect responsible investors from 

misperceived risk and provides incentives for the market to police 

itself, curbing market inefficiencies. The argument is, without assignee liability an unscrupulous lender can increase the value of 

11

the loans it sells by engaging in predatory practices, and packing 

the loan with unnecessary fees, excessive interest rates and large 

prepayment penalties. The lack of assignee liability provides little 

incentives to purchasers of such loans to determine if the loans 

were originated illegally or are so out of line with market norms 

that they present a substantial likelihood of abuse. 

What a dilemma; what an issue. How do we resolve it? How do 

we get an end to predatory lending? That is on our plate today and 

I look forward to an excellent meal. 

Thank you. 

Chairman NEY. I want to thank the gentleman. 

Mr. Hensarling from Texas. 

Mr. HENSARLING. Thank you, Mr. Chairman, and thank you and 

Chairman Bachus for holding this hearing. 

Since coming to Congress, I have heard a lot of bad ideas, but 

assigning strict liability to assignee’s of mortgages in the secondary 

market—strict liability—strikes me as one of the worse. I mean, 

where those who purchase the mortgage do not even have any 

knowledge of a potential underlying violation strikes me as a truly, 

truly bad idea. 

One thing we have consensus on in this committee is that we all 

believe that predatory lending is a problem. Unfortunately, we cannot seem to come to any consensus on what predatory lending is 

or is not. I hope that we as a committee do not conclude that predatory lending is tantamount to a commercial transaction between 

consenting adults with full disclosure, but because we do not like 

the terms, we decide in our infinite wisdom that we should outlaw 

these transactions. 

Now, as we debated the Fair Credit Reporting Act, we heard testimony after testimony that we in America enjoy the most accessible, lowest-cost credit in the world. I think it is undisputed we 

have the highest rate of homeownership in the entire history of our 

nation, and that includes homeownership opportunities for low-income individuals and those who have either poor credit records or 

no credit records. 

If we do not legislate properly, we risk all of this. I certainly 

found the comments from my colleague Mr. Scott of Georgia very 

instructional, very enlightening. To some extent, it seems to me we 

have a case study of what happened in Georgia and I look forward 

to hearing some testimony from the witnesses on this. But what I 

saw happen in Georgia was that Ameriquest, Chase, City Financial, Fannie Mae, GMAC, National City, Option One, Freddie Mac, 

Wachovia, the list goes on and on and on, all pulled out of the market because of uncertainties with respect to the liability. 

If we want to be pro-consumer on this committee, I would suggest that we work hard to make sure that we increase market competitiveness and not sow the seeds of the market’s destruction. It 

is critical that we figure out what predatory lending is, that we 

agree on the definition and we isolate it from those reasonable 

players in the commercial market who are making homeownership 

opportunities available to low-income Americans. 

I yield back the balance of my time. 

Chairman NEY. The gentlelady from New York, Ms. Velazquez. 

12

Ms. VELAZQUEZ. I ask that my statement be included in the 

record. 

Chairman NEY. The gentlelady asks for unanimous consent. I 

would note for all members, unanimous consent if there is no objection for their statements to be entered into the record. 

Mr. Lucas. 

[The prepared statement of Hon. Nydia M. Vela ́zquez can be 

found on page 64 in the appendix.] 

Mr. LUCAS. Mr. Chairman, in the interest of time, I would like 

to associate myself with the remarks of my colleagues across the 

aisle, Mr. Miller of California and Mr. Royce, and also with Mr. 

Scott of Georgia. Thank you. 

Chairman NEY. I thank the gentleman. 

The gentleman, Mr. Garrett. 

Mr. GARRETT. Thank you, Mr. Chairman. 

Just very briefly, first of all, I thank you for holding the hearing 

today. I think for both sides of the aisle, we are concerned about 

the same thing, and that is the victims, whether they be defined 

as some us are concerned, the victims of abusive practices, or also 

those people who are the victims of good intentions. 

I come from the State of New Jersey where the victims in that 

case are the victims of good intentions of the State legislature who, 

as in Georgia as well, had the best of intentions, I am sure, to look 

after those folks who may be victims of abusive lending practices. 

But at the end of it, they become victims themselves, whether they 

are those who no longer are able to enter into the subprime market, the families involved who are no longer able to get those loans; 

and finally those legitimate lenders who are now precluded from 

being in that marketplace because of the actions that the State legislature took. 

I am also mindful of the Ranking Member’s comment at the outset of these discussions with regard to a Statement saying we have 

to get our act together here. Would that be true, that we get there, 

and make a decision from either side of the aisle as to where the 

appropriate responsibility lies, whether it is on these areas of State 

concern or federal concern. 

I think at the end of the day, the hearings that we hold here at 

the very least should shine the light of day both on the abusive 

practices, but also on the very debilitating effect that the State legislative actions in several States have already taken, and fortunately they have begun to take remedial actions on these various 

facets. 

Mr. Chairman, again I appreciate your holding these hearings 

and I yield back the balance of my time. 

Chairman NEY. Thank you. 

The gentleman from New York, Mr. Israel. 

Mr. ISRAEL. Thank you, Mr. Chairman. 

I will take less than a minute. There is an old saying here in 

Washington that we cannot define pornography, but we know it 

when we see it. The same rule cannot be applied to predatory lending and below-prime lending. It clearly means different things to 

different people. I have a community in my congressional district 

that has been tragically undermined by predatory lenders. The fact 

13

of the matter is that bad actors in predatory lending are negatively 

defining reputable below-prime lenders. 

I have a very simple bottom line, Mr. Chairman, and that is that 

I believe that we need to work on a bipartisan basis to create an 

appropriately regulated federal marketplace that allows the 

subprime industry to give more people access to homeownership, 

while completely shutting down the bad actors. I look forward to 

working with my colleagues towards that end. 

Thank you, Mr. Chairman. I yield back. 

Chairman NEY. Thank you. 

Mr. Davis of Alabama. 

Mr. DAVIS. Thank you, Mr. Chairman. Let me also thank the 

Ranking Member for her comments at the beginning. 

I will not take anywhere near the full 5 minutes, but I want to 

define the problem from my perspective. On both sides of the aisle, 

we have a very strong commitment to a free market in this country. That is a bipartisan commitment that we have. The challenge 

of predatory lending and excessive subprime lending is that it distorts the market. I have to consider a market to be distorted when 

upper-income African Americans and upper-income Hispanic Americans with good credit are finding themselves pushed into the 

subprime market. That is a distortion of the way the market 

should be working in this country. It is a distortion that limits 

homeownership opportunities. It is a distortion that locks people 

into a vise from which they often cannot escape. 

We are struggling for a solution. I think a number of us would 

like to see a national standard, but it has to be a national standard 

that has some teeth to it. It is a reality that the efforts of the Department of Treasury, the efforts of the Office of Comptroller of the 

Currency have frankly not made any real headway. One of the reasons why some of us on this side of the aisle are troubled by the 

OCC’s efforts at preemption several months ago is because the efforts of HUD, the efforts of OCC in the last several years have not 

made any significant dent, as Chairman Bachus said at the outset, 

in the incidence of subprime lending. I think illegitimate subprime 

lending is only continuing to rise in this country. 

The short of it is that we have to find a strategy to address this 

serious market distortion and we have to rise above anecdote. 

What we often hear is that, well, we have made progress in Baltimore; we have made progress in L.A.; we have made progress in 

New York. Nobody ever wants to quantify this problem. Nobody 

wants to find a way to really, number one, identify what practices 

are illegitimate lending and what we can do about it. 

So I hope the focus of this hearing will lead us toward some consensus on what an across-the-board approach ought to look like, 

but I hope that we do not leave here without a genuine recognition 

that this is a market distortion and it is something that ought to 

concern both sides of the aisle. 

I yield back the balance of my time. 

Chairman NEY. I thank the gentleman. 

With that, I want to thank also the witnesses and the members 

for their opening statements. We will move on to the panel. Our 

first witness is Micah Green, who is president of the Bond Market 

Association, an association representing approximately 220 securiVerDate 0ct 09 2002 11:05 Oct 05, 2004 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 G:\DOCS\95652.TXT FIN1 PsN: MICAH
14

ties firms and banks that underwrite, trade and sell debt securities. Mr. Green joined the association in 1987, having previously 

served as the staff director and general counsel with the House 

Subcommittee on Human Resources of the Committee on Post Office and Civil Service. 

Frank Raiter is a managing director of Standard & Poor’s Credit 

Market Services, a division of the McGraw-Hill Companies. The 

company assigns credit ratings to financial institutions such as 

loan guarantees, bank loans and mortgage-and asset-backed securities. 

I will defer at this point to Mr. Miller of North Carolina to introduce the next witness. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. I 

am very pleased to introduce Mike Calhoun to this committee. Mr. 

Calhoun is the general counsel and vice president of the Center for 

Responsible Lending. They are headquartered in Durham, which 

adjoins my district, and I believe Mr. Calhoun lives in Durham as 

well. The Center for Responsible Lending is an affiliate of SelfHelp, and Mr. Calhoun is also a general counsel of Self-Help. 

I am very proud of the work that Self-Help has done in making 

credit available, providing financial services generally to low-income consumers, and has done it on reasonable terms. Their approach is, how to provide a product at a reasonable price, taking 

risk into account, and make a fair, reasonable profit off of the 

transaction, as opposed to when a consumer walks in their offices, 

taking the approach of just how much money can we they make off 

that consumer. Self-Help has grown dramatically and has done 

great things for folks in North Carolina. 

Mr. Calhoun has practiced consumer law for more than 25 years. 

He is a graduate of the law school at the University of North Carolina at Chapel Hill, an outstanding academic institution. I understand that Mr. Calhoun also has a college degree. 

Chairman NEY. Thank you. 

The next witness is Pamela Kogut, who is the Assistant Attorney 

General in the Office of Massachusetts Attorney General Thomas 

F. Reilly; and Richard DeMong is the Virginia Bankers professor 

of bank management at the McIntire School of Commerce at the 

University of Virginia, where he taught since 1977. Dr. DeMong is 

a registered investment adviser and has lectured extensively on 

issues relating to equity evaluation of subprime loans and financial 

analysis. 

I want to welcome all the witnesses today. We will start with Mr. 

Green. 

STATEMENT OF MICAH S. GREEN, PRESIDENT, THE BOND 

MARKET ASSOCIATION 

Mr. GREEN. Thank you very much, Chairman Ney. I really appreciate your kind introduction. I congratulate you and Chairman 

Bachus and Ranking Members Waters and Sanders for your leadership and continuing your review of this important issue. I also 

would thank Chairman Baker for his constructive work on this 

issue. 

Let me just say, too, to the entire subcommittees, I know typically a hearing is when those of us who are witnesses impale ourVerDate 0ct 09 2002 11:05 Oct 05, 2004 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 G:\DOCS\95652.TXT FIN1 PsN: MICAH
15

selves to you about what we think needs to be done. I will tell you, 

I just sat through 20 opening statements of people who have 

thought about this issue, people who understand this issue, people 

who have strong feelings on this issue. We have heard from you. 

I think I can speak for my other panelists. We know what we have 

to do now. We know that we have to be responsible on this issue. 

We cannot understate the problem of predatory lending, nor should 

we overstate the market issues. 

We also need to be very careful to be very clear about what the 

problem is with assignee liability, and we need to make sure that 

we fully understand and together define clearly what a good 

subprime marketplace is all about and what bad predatory lending 

is all about, and agree that we have to stop predatory lending, but 

not at the cost of people who need access to capital just merely because they have had a tough lot in recent years and their credit 

rating may not be stellar. 

So I will tell you as a witness at this hearing, I have heard your 

Statements and I will take them back to our community to make 

sure that we take the charge very seriously, to come together constructively on something that can hopefully advance the ball here. 

But there is a problem. There is a problem, and to pick up on 

Congressman Sanders’s point about the States being a laboratory 

the States have, in fact, been a laboratory. The States have been 

an excellent laboratory. States have tried to deal with this issue in 

ways they sincerely knew and felt that they could best deal with 

this issue. And they learned that there was a problem. There was 

a problem that if you go too far, it can have a cost to people who 

need legitimate capital at the most affordable cost. 

Keep in mind, all these statistics about the growth of the 

subprime market have been at a time when interest rates have 

been very low. The subprime market has grown just as the other 

mortgage market has grown tremendously, both the refinancing 

market and the original issue market for home purchases. We are 

about to enter a period of rising interest rates. We are also about 

to enter a period where people who may have been out of work during a recession may be coming back to work. What happens when 

people are out of work? Their credit rating, their own personal 

credit quality could go down during that period of stress in their 

life. 

So they may now be back at work and need to access capital for 

the purchase of a home or for whatever reason, and because of a 

blemish on their record may need to access the subprime market 

at the most affordable level. If a viable secondary market is not 

working well to help reduce the cost of that subprime marketplace, 

real people will be hurt, not by a loss of liquidity, which is a favorite term of art in the marketplace, but by higher costs. The way 

liquidity translates itself to the average person is a higher cost of 

that borrowing, a higher cost of that mortgage. So we are at a time 

where this issue has grown in importance because of a potential 

rising interest rate environment, as Congressman Royce indicated. 

But I will say that the real problem with the laboratory experiment in the States has been not only any one particular state experience, like what happened in Georgia or New Jersey or any one 

of numerous states, but the fact that we have a patchwork quilt of 

16

various types of state regulations and state requirements. Some of 

them are clear and objective. Some of them are vague and uncertain. 

The marketplace is a national marketplace. In order to quantify 

the risks, you need clarity and objectivity. Imprecision and 

unclearness results in the inability to value those risks and quantify those risks. That is why when a very objective observer like 

S&P looks at this issue, they say it is difficult for them to quantify 

the credit-worthiness, as you will hear from S&P. 

So we come here today wanting to be a partner. We want to work 

with these committees to try to arrive at a solution. In a perfect 

world, no assignee liability would probably be the ideal, but we recognize, as Congressman Scott said, that you need some way to enforce these rules in a way that will get at the predatory lender. So 

we would support clear objective assignee liability, because at the 

end of the day if it is clear and objective, it can be implemented 

in a precise and less costly way. 

So we would look forward to working with this committee to try 

to figure out where that line is, but clearly the status quo, particularly at this stage of the market cycle, is not a good place to be. 

So I thank you, Mr. Chairman and members of the committee, 

and I look forward to answering your questions. 

[The prepared statement of Micah S. Green can be found on page 

98 in the appendix.] 

Chairman NEY. I thank the gentleman. 

Mr. Raiter. 

STATEMENT OF FRANK RAITER, MANAGING DIRECTOR, 

STANDARD & POOR’S CREDIT MARKET SERVICES 

Mr. RAITER. Good morning, Chairman Ney, Chairman Bachus 

and members of the subcommittees. 

As an independent and objective commentator on credit risks, 

Standard & Poor’s generally does not take a position on questions 

of public policy. Thus, while Standard & Poor’s strongly supports 

efforts to combat predatory lending and other abusive practices by 

lenders, it does not take a position on what legislative or regulatory 

actions would best accomplish that goal. 

Nevertheless, Standard & Poor’s has been closely following legislative and regulatory initiatives designed to combat predatory lending in order to determine how those laws might affect its ability to 

rate securities backed by residential mortgage loans. Standard & 

Poor’s appreciates the opportunity to discuss the factors that it considers when evaluating the impact of anti-predatory lending laws 

on rated transactions and in particular the issue of assignee liability. 

Increased access to mortgage loans has led to increased homeownership across the United States. While this growth in homeownership is positive, it has become evident that some of this increase has unfortunately occurred simultaneously with the rise in 

predatory lending practices. Among others, these predatory practices include the following: charging excessive interest or fees; making a loan to a borrower that is beyond the borrower’s financial 

ability to repay; charging excessive prepayment penalties; encourVerDate 0ct 09 2002 11:05 Oct 05, 2004 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 G:\DOCS\95652.TXT FIN1 PsN: MICAH
17

aging a borrower to refinance a loan notwithstanding the lack of 

benefit to the borrower; and increasing rates upon default. 

Anti-predatory lending laws are designed to protect borrowers 

from these unfair, abusive and deceptive lending practices, and 

Standard & Poor’s strongly supports efforts to eliminate predatory 

lending. However, in its role as a provider of opinions on credit 

risk, Standard and Poor’s must evaluate the impact of these laws 

on the return to investors in mortgage-backed securities. 

Indeed, given the expansion of individual investment in securities through various retirement and pension plans, these investors 

might actually be the same borrowers the laws are intended to protect. Standard & Poor’s has determined that some of these laws 

may have the negative affect of reducing the availability of funds 

to pay these investors. This reduction could occur if an anti-predatory lending law imposes liabilities on purchasers or assignee’s of 

mortgage loans simply because they hold the loans that violate a 

law, even if they did not themselves engage in predatory lending 

practices. 

In performing its evaluation of anti-predatory lending laws, the 

two most important factors that Standard & Poor’s considers are 

whether an anti-predatory lending law provides for this assignee liability, and if so what penalties the law imposes on assignee’s for 

holding predatory loans. If Standard & Poor’s determines that 

there is no assignee liability, Standard & Poor’s will generally permit loans covered by the law to be included in rated transactions 

without any further considerations or restrictions. 

If on the other hand, a law does permit assignee liability, Standard & Poor’s will evaluate the penalties under the law. If damages 

imposed on purchasers are not limited to a determinable dollar 

amount, that is the damages are not capped, Standard & Poor’s 

will not be able to size the potential liability into its credit analysis. Therefore, these loans cannot be included in rated transactions. 

If on the other hand, monetary damages are capped, Standard & 

Poor’s will be able to size in its credit analysis the potential monetary impact of violations of the law. Standard & Poor’s looks at all 

types of potential monetary damages, including statutory, actual, 

and punitive damages. It should be noted, however, that even if 

capped damages can be sized, it may not be economical for a lender 

to make such loans if the credit support that Standard & Poor’s 

would require equals or exceeds the monetary value of the loan. 

For example, if a law provides for punitive damages, even if these 

damages are capped, the amount of the damages may well exceed 

the loan value. 

In making these determinations, above all Standard & Poor’s 

looks for clarity in the law. Specifically, Standard & Poor’s looks for 

statutory language that clearly sets forth what constitutes a violation, which parties may be liable under the law, and as noted, 

whether any monetary liability is limited to a determinable dollar 

amount. Absent clarity on these issues, in order to best protect investors in rated securities, Standard & Poor’s may adopt a conservative interpretation of an anti-predatory lending law and may, in 

instances where liability is not clearly limited, exclude mortgage 

loans from transactions it rates. 

18

In offering these comments today, Standard & Poor’s reiterates 

to the honorable members of the subcommittee that as a public policy matter, Standard & Poor’s supports legislation that attempts to 

curb predatory and abusive lending practices. Standard & Poor’s 

also notes, however, that its role is to evaluate the credit risk to 

investors associated with anti-predatory lending legislation, and 

not to recommend public policy. 

This concludes my testimony. I will be happy to answer any 

questions. Thank you. 

[The prepared statement of Frank Raiter can be found on page 

111 in the appendix.] 

Mr. BACHUS. [Presiding.] Mr. Calhoun. 

STATEMENT OF MICHAEL D. CALHOUN, GENERAL COUNSEL, 

CENTER FOR RESPONSIBLE LENDING 

Mr. CALHOUN. Chairmen and members of the committee, I appreciate the opportunity to testify today, and I thank Congressman 

Miller for his kind introduction and his respect for his college rival, 

Duke University. 

Self-Help has provided over $3 billion of financing for first-time 

homebuyers across this country. We regularly purchase, securitize 

and hold loans in the secondary market. Our mission is to help 

families create financial net worth. In the late 1990s, we found that 

many of our borrowers that we had helped put into homes were 

being solicited to refinance into predatory loans. We also found that 

many loan applicants had already been trapped in predatory loans 

and were unable to qualify for a loan to help them. 

We and other lenders and many other groups worked together in 

1999 when North Carolina enacted the country’s first predatory 

lending law. It has worked very well both protecting consumers 

and maintaining access to credit. I was one of the principal drafters 

of the law and I also serve as general counsel for Self-Help in its 

lending programs, and have previously directed Self-Help’s secondary market program. 

I will address three points this morning. First, assignee liability 

is presently a part of our national mortgage market and a necessary part. It is not something new. Second, the North Carolina 

law which has substantial assignee liability has worked very well. 

And finally, I will address the impact of the subprime market on 

homeownership. 

Today, it is a fact that most home loans are sold. You end up 

making your payments to somebody totally different from whomever you took the loan out with. Assignee liability simply means if 

the loan is illegal, can those violations of law be enforced against 

the party collecting or even foreclosing on your loan? 

Assignee liability is commonplace in mortgage transactions presently under a number of State and federal laws. It is the general 

rule in many consumer transactions, such as car purchases, furniture purchases that are regularly securitized, that paper is 

securitized. At the most critical point, with a family facing the 

threat of foreclosure, the absence of assignee liability means that 

the purchaser of the illegal loan can foreclose and evict the family 

and force them to try and find the original lender and seek redress 

against a party that may be gone or bankrupt. We will hear examVerDate 0ct 09 2002 11:05 Oct 05, 2004 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 G:\DOCS\95652.TXT FIN1 PsN: MICAH
19

ples of that today from other witnesses. In short, significant assignee liability is central to protect families and protect the integrity of our mortgage market. 

The North Carolina law did not contain a separate assignee liability provision because assignee liability for certain mortgage violations was already part of existing North Carolina law. North 

Carolina’s subprime market has remained strong, growing more 

than 50 percent under the law. A UNC Business School study of 

the law’s impact found no reduction in subprime home purchase 

loans in North Carolina under the law. It found the effect on refinancing loans was overwhelming on those loans with predatory features. It concluded the law was having its precise purpose and was 

working well. New Jersey and several other States have even more 

limited assignee liability than North Carolina and we expect that 

there will be positive experiences there as well. 

As noted by the Chairman and several other members, the 

subprime market has been exploding in volume. It is important to 

remember, though, the subprime market when we look at its impact on homeownership is overwhelmingly a refinance market. 

Over three-fourths of these loans are refinancings of existing mortgages where somebody is already in a home, not loans to purchase 

a home. Foreclosure in the subprime market, as noted, is exploding 

at a rate 10 times that of the prime market. As we sit here today, 

fully 5 percent of all subprime loans are in foreclosure right now. 

Moreover, these loans tend to refinance repeatedly and have an 

average life of only 3 to 4 years. If a lender charges five up-front 

points or more and/or a 5 percent prepayment penalty, with each 

loan and each refinancing, quickly a family’s long-earned home equity is gone. This has a very disparate impact on minority families. 

While the reasons can be debated, it is a fact that minority families 

are much more likely to have and be affected by subprime loans 

than other families. 

Moreover, the loss of home equity is even more devastating. 

There is a tremendous equity gap in the United States today, with 

African American families having only one-tenth the net median 

wealth of majority families. That is currently about $10,000. 

The continuation of unchecked predatory loan practices gravely 

threatens homeownership and equity of families. I urge this committee to enact effective federal protections like those in North 

Carolina. These federal protections should be a floor, not a ceiling 

so that the States and Congress can work together to protect American families. 

Thank you. 

[The prepared statement of Michael D. Calhoun can be found on 

page 67 in the appendix.] 

Mr. BACHUS. I appreciate that. 

Assistant Attorney General Kogut. 

STATEMENT OF PAMELA KOGUT, ASSISTANT ATTORNEY GENERAL, OFFICE OF THE ATTORNEY GENERAL, COMMONWEALTH OF MASSACHUSETTS 

Ms. KOGUT. Thank you, Mr. Chairman and members of this committee. I am so pleased to be here today to present the views of 

Massachusetts Attorney General Tom Reilly and our office’s work 

20

concerning subprime mortgage lending cases. I bring to this hearing the perspective of a law enforcement office which has a long 

history of bringing cases against mortgage lenders that have engaged in unlawful practices, including cases against subprime 

mortgage lenders. 

I am going to highlight a recent case which our office brought 

against, First Alliance Mortgage Company. This case illustrates 

that even when we have reasonably strong consumer protection 

laws on the books, in straightforward egregious violations of the 

law, consumers may not be made whole by a lawsuit at the end of 

the day unless the laws are made stronger and the secondary market entities are held accountable. If the secondary market entities 

are not held accountable, at the end of the day the consumers are 

going to be left holding the bag, and the bag will be empty. That 

is what our experience has shown us. 

So to focus on the First Alliance Mortgage Company case, this 

Irvine, California-based lender obtained a license from our Division 

of Banks to do business in Massachusetts in 1997. After a routine 

examination a year into their license, our Division of Banks found 

that this lender was routinely charging borrowers 20 points and 

more for mortgage loans. Our Division of Banks was concerned and 

referred the matter to our office for enforcement. We filed a lawsuit 

fairly soon after the case was referred to us. We filed a lawsuit in 

October of 1998. We focused on a State regulation that prohibits 

mortgage lenders from making mortgage loans with terms which 

significantly deviate from industry-wide standards or which are 

otherwise unconscionable. 

The focus of the lawsuit was intended to focus really cleanly and 

swiftly on the points overcharges which were clearly unconscionable by Massachusetts standards. We expected that this was a lawsuit that would be wrapped up quickly. This turned out not to be 

the case at all. A little more than a year-and-a-half after the case 

was brought, First Alliance Mortgage Company filed for bankruptcy protection in California, which extended the litigation in our 

case by years. The case did not end up getting resolved until 2002. 

At the end of the bankruptcy case, the Massachusetts consumer 

saw only cents on the dollar. 

Here is what we learned about First Alliance Mortgage Company’s practices. During the year when they made loans in Massachusetts, and after we filed our lawsuit and obtained a preliminary 

injunction against first alliance which limited them to charging no 

more than five points per loan, they closed up shop in Massachusetts and left. So they only did business in Massachusetts for one 

year, making 299 loans. Of these, more than 35 percent of the 

loans contained points charges in excess of 20; two of our borrowers 

paid more than 30 points. 

Although First Alliance characterized itself as a subprime lender, 

of the 299 loans made, 20 percent were made to borrowers whose 

credit ratings were A or A-minus according to FAMCO’s own standards. What does this mean in practice? This means that for example one of our borrowers, a woman aged 61, borrowed the sum of 

$47,000, a little more than that. She had an adjustable rate note 

that had an initial rate of interest of 9.49 percent, and she paid 

more than 25 points, or more than $11,000 in points for her loan, 

21

but she was rated as an A borrower, that is, a consumer whose 

credit history and debt-to-income ratio should have qualified her 

for a conventional conforming mortgage loan with competitive rates 

and costs. She was a middle-class borrower who lived in a good 

community outside of Boston, and she paid more than 25 points for 

a mortgage loan. 

Twenty-eight of our borrowers had their loans flipped which 

means that within about a year after they obtained their original 

refinanced loan from FAMCO, they got another FAMCO loan and 

paid the same level of points the second time around. For example, 

one couple in their 60s paid more than $15,000 in points, or as it 

turned out, more than 20 points for the first loan they got with 

First Alliance Mortgage Company, and just 14 months later got a 

second loan from First Alliance Mortgage Company and were required to pay more than $15,000 in points the second time around. 

There is no reason for that level of points payment, obviously. 

We learned that FAMCO telemarketers were taught to urge consumers to get new FAMCO loans at every opportunity. So if a consumer called this mortgage lender to get a loan payoff figure, the 

telemarketers tried to sell them a new loan. If they were late making one payment, telemarketers tried to get them to get a new 

FAMCO loan. Our Massachusetts consumers did not seek out this 

lender. They were solicited. They ended up with this loan not having needed it or looked for it in the first place. 

We also learned that this lender got its loan originators to memorize and follow a deceptive sales pitch called the loan officer track. 

Without going into the details, this was basically a handbook on 

deception and specifically taught the loan originators to deflect 

questions about points charges. We learned that this lender did not 

hire experienced mortgage loan originators. They drew from car 

sales people who had proven track records in car sales. It is significantly that they were not taught about mortgage lending laws 

when they were trained. They were only taught to memorize this 

deceptive program. 

Ultimately, after First Alliance filed for bankruptcy protection, 

the Massachusetts AG’s office was joined by a number of other AG 

offices, Minnesota, Illinois, Florida, California and Arizona, and the 

New York State Banking Department, as well as the FTC and private class actions, and we worked in a coordinated fashion to get 

a result in bankruptcy court. The result was very good: 18,000 borrowers got consumer redress. The consumer redress fund was ultimately approximately $85 million, but still this was not enough 

money to go around at the end of the day. Massachusetts at the 

time that this lawsuit was filed did not have assignee liability and 

the First Alliance Mortgage Company entity did not have enough 

money at the end of the day to make our consumers whole. 

One last point is that the coordinated plaintiffs in this case did 

make an important decision to sue Lehman Brothers, the investment firm that had securitized FAMCO’s loans and a jury did fine 

Lehman Brothers was liable for aiding and abetting FAMCO in its 

fraudulent scheme, and was ordered to pay the sum of $5.1 million. 

The point that we come here to make is that this is a lender that 

engaged in egregious violations of law. We had a clear law in Massachusetts, but we did not have assignee liability. The secondary 

22

market entities did not contribute sufficiently and consumers were 

not made whole. Our consumers at the end of the day were seriously harmed and there was nothing we could do to protect them. 

Thank you. 

[The prepared statement of Pamela Kogut can be found on page 

104 in the appendix.] 

Mr. BACHUS. Thank you. 

Professor DeMong. 

STATEMENT OF RICHARD F. DEMONG, VIRGINIA BANKERS 

PROFESSOR OF BANK MANAGEMENT, MCINTIRE SCHOOL OF 

COMMERCE, UNIVERSITY OF VIRGINIA 

Mr. DEMONG. Thank you, Mr. Chairman and members. 

The nonprime mortgage lending has increased dramatically in 

recent years, providing billions of relatively low-cost loans to millions of borrowers whose risk profiles prevent them from qualifying 

for so-called ‘‘conventional’’ or ‘‘prime’’ loans that offer somewhat 

lower rates. Without the availability of nonprime loans, most of 

these borrowers would not be able to obtain credit to buy a home 

or to utilize some of their home equity for a variety of important 

financial needs. 

The continued availability of critically important consumer credit 

is highly dependent on retaining a healthy and efficient 

securitization market for nonprime mortgages. Liquidity can be 

lessened significantly, especially for higher-risk borrowers, by unclear, overly restrictive and conflicting laws, particularly when purchasers or assignee’s of nonprime loans are subjected to broad liability for errors that may have been made by loan originators 

While it is now generally recognized that additional legislative 

safeguards are needed to protect nonprime borrowers from certain 

potentially abusive lending practices, it is critical that such legislation does not have the effect of reducing credit availability. 

This is an extremely important issue for millions of Americans, 

and I therefore commend Chairman Ney and Chairman Bachus for 

their continued leadership in scheduling this hearing to help address it. I also commend Representative Baker, who has voiced special concerns over preserving nonprime lenders’s access to the capital markets, and Representatives Lucas, Watt, Miller, Kanjorski 

and others for seeking to develop workable legislative proposals. 

The origination of nonprime mortgages in 2003 was estimated to 

be $325 billion, representing about 10.5 percent of all mortgage 

originations. Just as is true with the prime mortgage market, the 

nonprime mortgage market has become national as the large national institutional lenders have replaced banks and small finance 

companies as the primary source of funds. 

Loan originators no longer need to hold a mortgage loan until 

maturity or sell whole loans to other financial institutions. With 

the development of the mortgage securities and an active secondary 

markets, lenders can sell entire pools of loans to a diverse set of 

investors such as pension funds, mutual funds, life insurance companies or individuals. By bringing new investors to the market, 

securitization has dramatically increased funding for housing finance, reduced margins, lowered costs and interest rates, and inVerDate 0ct 09 2002 11:05 Oct 05, 2004 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 G:\DOCS\95652.TXT FIN1 PsN: MICAH
23

creased access to credit across the country. Two-thirds of nonprime 

mortgage loans are now securitized in the secondary market. 

To be most efficient, investors that are the source of funding for 

mortgage debt desire reliable risk analysis of the potential borrower, good reputations of all those involved in the mortgage lending process, transparency of the process, standardization of the 

process, and clarity in the laws. 

Just as prime mortgage interest rate spreads dropped in the 

1980s after the development of securitization, as well as the continued active secondary market, so have nonprime interest rate 

spreads dropped over the last 6 years, especially during the last 2 

years. I have two exhibits. Exhibit one shows the subprime interest 

rate spread between nonprime loans and the 10-year constant maturity treasury rate, and you see the dramatic drop in the last 2 

years. The second chart shows the difference between B credit and 

the 30-year FHA-insured FRM, the fixed-rate mortgage. Both of 

them show the shrinking spreads. 

As economic theory suggests, nonprime interest rate margins for 

the lenders have decreased with growing efficiency, which partially 

came from the standardization, and competitiveness in the market. 

Borrowing rates have therefore decreased for consumers. 

The investors evaluate all investments on a risk-adjusted basis. 

If an investment becomes uncertain or risky, investors will find 

other more certain and less risky investments. They demand a 

higher return for increased risks. All the financial markets crave 

certainty and similarity. A law that is not clear or certain may 

cause nonprime market liquidity to drop dramatically. An example 

of that is a study that I did in New Jersey after it implemented 

the New Jersey Home Ownership and Security Act of 2002, for the 

2 months after the implementation of the law, as compared to the 

2 months prior to it. Lending to subprimes dropped by over 60 percent. Any vagueness in the law will disrupt funding sources. 

So as Congress evaluates a uniform nonprime lending standard, 

there are lessons from the development of the prime mortgage 

securitizaton market. The success of the conforming securitization 

market depends on standardization of the legal framework, including preemption of state usury laws; and predictable and limited 

risks for the ultimate investors in the securities, in other words, no 

broad assignee liability. 

In closing, I urge Congress to pass a well-crafted federal law that 

prevents undesirable lending practices, while at the same time preventing disruptions to nonprime lending. That is, a law with clear, 

reasonable, and objective uniform national standards to prevent 

improper lending practices, and one that does not impose broad liability on assignee’s. Such a federal law will not only protect borrowers, but will help promote continued liquidity in the nonprime 

mortgage lending market 

Thank you for this opportunity to testify. I would be pleased to 

respond to any questions members may have. 

[The prepared statement of Richard F. DeMong can be found on 

page 90 in the appendix.] 

Mr. BACHUS. I thank the witnesses. For the record, without objection your entire written, statement, prepared statement will be 

made a part of the record. 

24

The committee has established a procedure where members are 

called on to question the witnesses in the order that they arrived 

at the hearing. Therefore, Mr. Garrett is the first member to be 

recognized. 

Mr. GARRETT. Thank you, Mr. Chairman. 

Just a couple of questions, first, in line with the most recent testimony from the professor, can you delve into a little bit more with 

my home state, New Jersey, your findings after the two-month period, and were you able to do anytime after that? Because as you 

have heard testimony here and elsewhere, there is no impact, and 

the impact has only been a negligible one or positive as far as the 

legislative actions in New Jersey, but the findings that you have 

just indicated seem to go counter to that. 

Mr. DEMONG. Thank you, Mr. Congressman. I have not done a 

follow-up study. I am collecting data to do that right as we speak. 

You are exactly right. The greatest impact is going to be immediately after the law is passed until the market sorts it out and figures out whether additional costs are necessary or additional fees 

are necessary or interest rates or anything else. It will be interesting to see the results. 

However, I should point out that the legislature in New Jersey 

is presently amending the law, which may very well change the 

whole study dramatically. I guess I was trying to use the study just 

to illustrate that a State law could, and did in this case, have dramatic effect immediately, and that is why I would argue for a very 

thoughtful national standard which would prevent disruptions in 

the market as investors search for more certain and less risky investments. 

Mr. CALHOUN. If I may, briefly, there was a special circumstance 

in New Jersey immediately following the passage of the act, and 

that was that the rating agencies had not yet had time to evaluate 

the act. So while they were undertaking that evaluation, they announced that they would not rate mortgages from New Jersey. 

They subsequently completed that evaluation and decided that for 

the overwhelming majority of loans, there was not a problem and 

that they would rate those loans. As you noted, as to the final category of loans, New Jersey created this intermediate threshold of 

covered loans. As to that final category, the legislature is debating 

now whether it should remove that category, as they did in Congressman Scott’s State of Georgia. They tried that category. It 

turned out to be a major problem and they quickly removed it. 

Mr. GARRETT. Yes, but that is exactly the point. The rating agency said that for everything outside of what the intention of the Act 

was going to cover, in essence they are still okay. It is for exactly 

what the legislature was aiming at that they still had the question 

as to what should we be doing with that area. 

Mr. CALHOUN. Under the Homeowners Equity Protection Act, 

HOEPA, there is full assignee liability on high-cost loans and the 

rating agencies for the last 10 years have taken the position generally that they do not rate those loans. So that is not different 

from what we have had previously, the New Jersey approach. 

Mr. GARRETT. Okay. Professor? 

Mr. DEMONG. The study that I did was actually after Standard 

& Poor’s had decided how to rate the New Jersey paper. So the 2 

25

months I did were December 2003 and January 2004, as compared 

to September and October of 2003. So it was after Standard & 

Poor’s had decided that it would rate paper from New Jersey. The 

markets were reacting to the implementation of the law. A rating 

agency action is just one more disruption, and that is the type of 

thing that I would urge Congress to look for and come up with a 

national standard so you would not have a State-by-state disruption. 

Mr. GARRETT. I know Mr. Green wants to answer that, then I 

have a question for the Deputy Attorney General. 

Mr. GREEN. I was just going to supplement that one of the elements in the New Jersey law is that the borrower enjoy a net tangible benefit from the transaction, but it is ill-defined. I think one 

of the things that the New Jersey legislature is looking at is that 

area, because again getting back to the need for clear and objective 

standards, an ill-defined or even undefined net tangible benefit 

analysis will be impossible to do. It simply increases the risk that 

the assignee’s liability will have a real-world effect on the ability 

to purchase that mortgage and make it part of the pool, which has 

the effect on the overall pool. 

Mr. RAITER. If I could just add, having been at Standard & Poor’s 

at the time, the reason that upon initial review of the New Jersey 

Act, there were some incredibly vague language that implied that 

any use of proceeds from a refinancing that went into home improvement would open up the investor to a liability that was undefined or capped. There was no way to in fact determine at the time 

that someone refinanced the house and took cash out that they 

may or may not engage in home improvements. Therefore, we could 

not rate any refinanced loan in New Jersey until we got clarity on 

exactly what the intent was. 

Mr. GARRETT. I thank you. I did have another question. I will not 

do the questions as my time is allotted. I just will say that I have 

met with used car salesmen over literally the last past week and 

they are looking for some prime lenders to come into the industry. 

I am just kidding. 

[Laughter.] 

Mr. BACHUS. I thank the gentleman from New Jersey. 

I have just been informed that Mr. Sanders will not be back. I 

am trying to cope with that loss. 

[Laughter.] 

I am going to recognize the gentleman from Illinois, Mr. Gutierrez. 

Mr. GUTIERREZ. Thank you. 

I guess my first question is to Mr. Raiter. The OCC keeps saying 

that national banks are not predatory lenders. You indicate in your 

testimony that you can easily rate subprime loans and make allowances, and that you can do this despite, although I just heard you 

say that you had a little difficulty in New Jersey, that you can easily rate these loans despite different state laws governing them. 

If you can in your agencies as you have testified, can rate these 

loans and therefore assess risk on these loans, do you see a need 

for the OCC to issue a predatory lending rule at all, with the claim 

that it was crucial to avoid a crisis in liquidity? In other words, the 

OCC came here and said, we are going to have a crisis in liquidity 

26

if we do not issue these preemptive laws on predatory lending. But 

I read your testimony and listened to you, and it sounds like you 

figured out a way to rate those loans, so if you can rate them, then 

investors can know the risk. So what is the issue of liquidity if 

there is one? 

Mr. RAITER. When we analyze a loan and include it in a rated 

security, as I think I indicated in the testimony, in some cases the 

risks to the investor exceeds the value of the loan. So if you lend 

somebody a dollar, but you have to put up $1.50 in order to get 

your dollar back, you are very likely not going to be lending a dollar. 

Mr. GUTIERREZ. I guess, Mr. Raiter, but you have been able to 

figure that out. 

Mr. RAITER. Correct. 

Mr. GUTIERREZ. My question is not whether there is a lot of risk 

to the loan. You are answering my question. You have been able 

to tell the market, hey, listen, this loan for a dollar could cost you 

$1.25 or $1.50 in the end. 

Mr. RAITER. Right. 

Mr. GUTIERREZ. I am just trying to see if I understood your testimony correctly, and that is you have been able to assess risk. If 

you are able to assess risk, could you tell me how that could affect 

liquidity then because I guess everybody knows what the risk is? 

Mr. RAITER. The way it has affected liquidity, if ‘‘liquidity’’ is the 

term that you all want to use, is those loans are not getting made. 

Those borrowers are not receiving the loans under those terms that 

would put them in a category of a high-cost or a covered loan. 

I might just add that we are getting reps and warranties from 

everyone that uses S&P’s mortgage ratings desk that provides that 

they are not making high-cost loans under any jurisdiction in 

which they are operating. So the loans that are covered by the law 

are at this point not being financed in the secondary market. If 

they are making the loans, they are putting them in a portfolio. 

As to your point on the OCC, and I am not a government regulatory expert, but I do believe their issue is with leveling the playing field for financial institutions that they regulate from one jurisdiction to another, not necessarily liquidity. 

Mr. GUTIERREZ. I am sorry. You were not here, as you state, for 

the hearing and you are not a government official and not a member of this committee, so you would not be knowledgeable on the 

point. We are, as they have come to testify before us. So I think 

the record is pretty clear that they said we have a crisis of liquidity. 

As a matter of fact, since you are an agency that wants to bring 

clarity, the OCC did not only do that, they did it in a rushed manner. They did it in the stealth of night. They did it under cover of 

congressional recess. We asked them, we said, OCC, do not issue 

the rule until Congress comes back to session, and 2 weeks before 

we got here, they issued the rule. So you can imagine how we 

might be suspect after we have written them letters. As a matter 

of fact, this committee, Republican and Democrat, passed an 

amendment on the budget that basically is saying that the OCC 

does not have jurisdiction to do this. 

27

So I understand and maybe I asked the wrong person, but it is 

just that when I read your testimony about being able to rate 

things, I figure, well, people will know what to buy and not to buy. 

From my perspective, that is a good thing. People know, a pension 

fund, do not buy these loans. Maybe they should not buy them because they are bad loans, because you at Standard & Poor’s have 

assessed such a risk to those loans that maybe you have assessed 

that risk to those loans because they should not have been made 

in the first place. 

I do not think we should get into the kind of argument of, well, 

they did not issue the loans. Well, maybe they should not have 

issued the loans. Maybe they were bad loans and we should not 

just have a system that says, we are going to have rules that allow 

all kinds of loans, and then in the end kind of see where those 

loans fit. Because as I have heard testimony here this morning that 

in the predatory lending, it is 10 times as high; the foreclosure 

rate. That is a lot of people that are going to suffer. I mean, it is 

not like a small mistake. Ten times higher than conventional mortgages? That is a lot. That is a lot of people that are going to suffer. 

So if it was a small calculation in the market, maybe we could 

take a look at it, but I think that we should really be careful when 

the rate is 10 times as high. I think you have answered my question. You can rate these loans. So the marketplace has a reliable 

place they can go to before they buy or sell loans, because you can 

rate them. That basically was my question. 

Mr. BACHUS. Mr. Gutierrez, you are over 1 minute, but if you 

would like another. 

Mr. GUTIERREZ. Thank you so much. In the absence of Mr. Sanders, I am trying to fill in a little bit for him. 

[Laughter.] 

Mr. BACHUS. Okay. I have learned some things. I did not realize 

the OCC issued that thing late at night under the cover of darkness. 

[Laughter.] 

Mr. GUTIERREZ. Maybe you have not read the letters from your 

side of the aisle asking them. And since the gentlelady from New 

York is here on your side of the aisle, and she and others wrote 

them the letter. 

Mr. BACHUS. Was it 2 or 3 at night? What time was it? I am just 

kidding with you. Please go ahead. 

Mr. GUTIERREZ. We can laugh and we can be silly about this experience all we want. The fact is that people, we have had testimony here today that people are losing their livelihoods, and that 

is a very serious issue. When we have an Assistant Attorney General from Massachusetts who says that she is a law enforcement 

officer of the State of Massachusetts, elected directly by the people 

of Massachusetts, and we have a philosophy being groomed here in 

Congress that at the local level they do it best, and that Washington, D.C. does not necessarily have all the answers. 

And we have had Mr. Green come and testify about how wonderful all these laboratories are at the different state levels, I just 

think that it is a serious thing, because if you lose your house and 

you are getting ripped off, it is a crime. What we are discussing 

here are not dollars and cents. We are discussing crimes against 

28

people, and I think that is a very serious thing. So I characterized 

it that way, and I do not know that we should impugn my interpretation in that way, but that is the way that I see it. That is what 

I will submit for the record. 

Mr. BACHUS. I appreciate your wrapping up. I will say that the 

institutions that the testimony has been about, none of them are 

federally insured under the regulations of OCC, at least according 

to OCC. 

Mr. GUTIERREZ. Mr. Chairman, if I could ask the Attorney General a question, maybe we can clear this up, because we have had 

testimony here that when the New York Attorney General, elected 

by the people of New York, attempted to engage a nationally chartered bank, that nationally chartered bank told the Attorney General, a law enforcement officer in New York, we do not have to deal 

with you; we are going to talk to the OCC. And Mr. Chairman, you 

know, the OCC is only open from 9 to 4, Monday through Thursday. 

Mr. BACHUS. Mr. Gutierrez, what I am saying is the institution 

that we have heard testimony about today was not regulated by 

the OCC. Thank you. 

Ms. Capito? 

Mrs. CAPITO. I do not have any questions. Thank you. 

Mr. GUTIERREZ. Thank you, Mr. Chairman. I can see this committee who it is being run by and for. 

Mr. BACHUS. Ms. Kelly? 

Mrs. KELLY. Thank you, Mr. Chairman. I have no questions. 

Mr. BACHUS. My first question is for Mr. Green. Mr. Green, you 

have heard testimony from the Assistant Attorney General and 

from Mr. Calhoun and others that there is a situation where there 

is a predatory or abusive practice or tactics employed that harms 

consumers, and the lender or the broker is, as in the case of Massachusetts, was bankrupt, so they are not really subject to legal recourse. You have a situation where you either have a, let’s say, innocent assignee or innocent victim. At least in the case of predatory 

lending, wouldn’t it be better to hold the assignee liable than the 

innocent victim, in that the assignee at least should have been in 

a position to know? 

Mr. GREEN. I think it is a great question because that is precisely why we have come to the conclusion, after looking at all of 

what is going on in the marketplace now, after looking at what the 

various States have done, to that a national standard—one that 

provides clear and objective assignee liability that can be identified. 

And picking up on the gentleman from S&P, focusing on the 

damages side, that if you had a national standard that accomplished that in an objective and clear way, in fact there ought to 

be assignee liability and that assignee liability ought to be enforceable. But when it is not clear, when it is a patchwork quilt around 

the country, it makes it very difficult to operate in an efficient, 

cost-effective, or even just-effective way. 

Mr. BACHUS. I guess what you are saying is as long as they are 

able to price the liability risk? 

Mr. GREEN. If liability is going to be accepted, you have to know 

what is going to impose it, and that clear and objective standard 

makes that doable. 

29

Mr. BACHUS. And as long as there are clear standards as to what 

the liability would be? 

Mr. GREEN. Yes, we would support and look forward to working 

with you. I know there are several pieces of legislation in the works 

just among this committee, Congressman Ney, Congressman Watt, 

and Congressman Baker today. We would look forward to working 

with all of you to try and find what that right definition is. 

Mr. BACHUS. Okay. The GAO found in a study they released earlier this year that by separating ownership of a loan from its originator, the secondary market for subprime loans may in some instances undermine efforts to combat predatory lending. I am going 

to quote from the GAO report, ‘‘The existence of a market that allows originating lenders to quickly re-sell subprime loans may reduce the incentive these lenders have to ensure that borrowers can 

repay.’’ How do you respond to the GAO suggestions that the secondary market may, at least in some instances, facilitate predatory 

lending? 

Mr. GREEN. The analogy that comes to mind, if that was a question for me, is a way of reducing car accidents is to prohibit driving. The fact is there is a big market for people who need credit, 

who need access to capital, and they may not have pristine, clean 

track records. The subprime markets provide them access to credit. 

It should not be surprising to anyone that the foreclosure rate is 

higher in the subprime market. They are riskier loans. That is why 

they are made in the way they are made. That is why they do pay 

a higher interest rate because they are a riskier credit, and riskier 

credits do have a higher risk of failure, so the fact is that there is 

a higher foreclosure in that category of loans. But if the foreclosure 

rate, which I heard earlier is 5 percent, that means 95 percent are 

people who needed credit are not facing foreclosure. Without that 

deep liquid secondary market, they may not have the same access 

to credit that they currently have to be able to reach their own 

life’s dream. 

So I would say that while the GAO may be technically correct, 

it is losing the forest for the trees. The important thing is you want 

to create access to capital for those who want it and deserve it and 

need it, and you have to deal with the problem of predatory lending 

more straight-on. 

Mr. BACHUS. What about the North Carolina law? Do you all find 

that to be a fair law? I would ask you, Mr. Green. 

Mr. GREEN. I guess we have found that the North Carolina law, 

specifically on predatory lending, has less vagueness in the assignee liability and frankly the body of their specific predatory 

lending stays away, as the previous witness said, from assignee liability specifically. So it has been a law that most of the marketplace has perceived to be a more workable standard than what we 

found in other states. 

Mr. BACHUS. So you found that the North Carolina model at 

least does not inhibit the mortgage capital? 

Mr. GREEN. I never say never. 

Mr. BACHUS. It does not appear to be. I mean, we have experience with it now. 

30

Mr. GREEN. Right. But I think it would be a good standard as 

this committee furthers its look at potential legislation. It would be 

a good standard to look at. 

Mr. BACHUS. Okay. 

Mr. CALHOUN. Mr. Chairman, may I clarify two things? First of 

all, Mr. Green was referring to the 5 percent foreclosure figure. I 

want to make it clear, that is 5 percent of subprime loans which 

are currently in foreclosure. That is this year. Next year, there are 

going to be more loans. It is not that 95 percent of these loans are 

going to stay out of foreclosure. It is this year, 5 percent are in 

foreclosure. Given the average span of a foreclosure process, which 

is in the range of a year, next year we are going to get another 5 

percent of them. We are talking about huge numbers of families 

losing their homes in this market. 

The other one point is, on the North Carolina model, I want to 

be clear. North Carolina was the State that developed the prohibition against flipping, that there has to be a net tangible benefit. 

That applies to all loans in North Carolina. We also have a couple 

of safeguards. You have to prove that it was an intentional violation by the lender, and some other safeguards. We went through 

a lot of time trying to come up with a very specific standard. Both 

lenders and consumer advocates found that all of those standards 

were over-or under-inclusive. 

Mr. BACHUS. Let me ask you this, my time has run out, I think 

what Mr. Green is saying is that the industry can live with the 

North Carolina law. 

Mr. GREEN. I am saying it is a good starting place to look because their approach——

Mr. BACHUS. Has it limited liquidity to any great extent? I am 

not trying to put you on the spot. 

Mr. GREEN. You are doing a good job. 

[Laughter.] 

I would say that the North Carolina law has examples in it that 

the industry does feel are more precise and objective than what we 

have experienced in other states. 

Mr. BACHUS. Okay. 

Mr. GREEN. The right place to be on a national standard is probably not going to be exactly where the North Carolina law is. 

Mr. BACHUS. I understand. I am just saying it is workable. I 

think Mr. Calhoun is saying, at least what I hear, is that it is protecting consumers. 

Mr. CALHOUN. That is correct, Mr. Chairman. 

Mr. BACHUS. Maybe I am oversimplifying this process, but that 

is sort of what I am hearing. 

Ms. Waters? 

Ms. WATERS. Thank you very much. 

I think it must be understood that those of us who fight so hard 

against preemption appreciate the fact that some States work very, 

very hard to get rid of predatory lending. When we move to socalled definitions at the national level, all of that is going to be 

weakened. The whole idea, I have discovered, of wanting to preempt state laws not only as it relates to predatory lending, but in 

some other things, is basically to weaken the laws of States that 

have strong laws to protect their consumers. 

31

I want to ask Mr. Calhoun because we keep hearing how much 

folks care about folks with bad credit being able to have access to 

credit and to get these mortgages. I am very grateful for that, that 

people care so much about people being able to have access to credit. As I said when I first started to speak, I do not mind subprime 

lending that is fair, but there are some other details that we have 

to look at with this subprime lending. I want you to discuss for me 

two or three other things that make subprime loans bad, that turn 

them into predatory lending. 

For example, you talked about loan flipping. I want to tell you, 

we see a lot of loan flipping. I want to hear something about late 

payments. I want to hear about some of the other things that turn 

subprime lending into bad loans. We are not opposed to somebody 

getting a percentage point more for a loan because someone has 

shaky credit. 

Now, if the credit is too bad, then I do not care who it is, they 

should not have a loan because they are not going to be able to pay 

it back. If you know that they do not have the income by which to 

make these payments and they are going to get in trouble because 

they simply cannot afford the loan, then it is sinful, it is shameful 

to advance that loan because you are simply going to cause people 

to lose a lot of money. 

Also, Mr. Calhoun, I have had so many complaints, people coming to my office. These loans are sold so many times they do not 

know who they are paying. This is one of the tricks. Folks do not 

know who the payment should go to because it has changed hands 

so many times, and that is how they get caught, getting late and 

getting behind trying to track down who this payment is to go to, 

because the loans has been sold three or four times. 

Help me to understand and this committee to understand some 

of the other factors that go into predatory lending, so that people 

do not get the idea that we are just railing against subprime lending. 

Mr. CALHOUN. I think one of the most important lessons that has 

come from the homeowner protection act that this Congress enacted 10 years ago, and the experience in North Carolina, is that 

unscrupulous lenders will simply change tactics unless you have 

comprehensive protections. 

The North Carolina law is actually pretty modest. It sets a 

threshold for high-cost loans at 5 percent lender fees. So we are 

talking a $100,000 loan, $5,000 of lender fees, excluding things like 

appraiser, attorneys fees, et cetera. We want to make it clear, that 

is not a benchmark for a good loan. I do not think many of us 

would be happy with a loan like that or happy if our parents or 

our family received a loan like that. 

It is meant to be a generous threshold so that it does not restrict 

access to credit. But the important thing is that it includes all of 

the fees. We leave the flexibility to the lender and the borrower 

how they want to structure the loan. Do they want to have small 

up-front fees but a big prepayment penalty? Do they want to have 

a large origination fee and then not many other fees? If you do not 

include all the fees, the lenders’ experience has been under the federal act simply change the name of the fees or restructure the loan 

to evade the law’s protections. 

32

We see that under your current federal law, HOEPA, in for example prepayment penalties which are perhaps the biggest looming 

problem in the subprime market. There are virtually no prepayment penalties in the prime market. They have now developed to 

be on the majority, almost 80 percent of subprime loans, and they 

are often as much as 5 to 10 percent of the loan amount. So when 

you go in to pay off $100,000 loan, they take another $5,000 or 

$10,000 out of the equity. 

Under the federal law, the size and presence of prepayment penalties are not considered at all in determining whether it is a highcost loan. Today, a loan with a 20 percent prepayment penalty is 

not a high-cost loan under the federal Act. If you leave a fee like 

that excluded from determining whether it is a high-cost loan, then 

the bill will just simply require people to change how they structure the loans, change the names of the fees, but will not end up 

at the end of the day protecting borrowers. That is one of the most 

important lessons. 

The other is that you need a flipping standard applying to all 

loans. As we heard from the Assistant Attorney General, virtually 

all of these lenders make money by refinances. They collect a new 

set of fees and their loan officers are trained and pushed to try and 

get a refinancing at every chance. Repeated refinancings are what 

see currently under HOEPA, where a lot of the lenders charge 7.99 

points to stay under the 8 point threshold for high-cost loans under 

your federal law. If you repeatedly refinance at 7.99 points, it does 

not take very long to take away all of the home equity. 

Again, that is totally legal under your current federal law, and 

we have seen examples where people have been refinanced three 

or four times in a year at 7.99 points. That is not a high-cost loan. 

It is not a violation of any of the federal protections at this time. 

Ms. WATERS. Are those the major kind of items that you have 

covered in your North Carolina laws dealing with predatory lending and that you would want to have covered in any federal preemption? If there is going to be one, and I hope not, are those the 

major concerns? 

Mr. CALHOUN. Yes, Congresswoman. To emphasize, the high-cost 

loan threshold does not bar high-cost loans. There are HOEPA 

loans made today by some lenders who specialize in that, and there 

are some high-cost loans being made in North Carolina. But again, 

under current standards for a high-cost loan, you are talking about 

a loan with more than five points up front, or interest rates in today’s market of more than 13 percent. We feel like, and the experience in North Carolina has been, that credit is readily available for 

almost all borrowers within those constraints. 

Ms. WATERS. What about late payments? 

Mr. CALHOUN. Most States have some provision to protect consumers in both mortgage transactions and other transactions, on 

late payments. There are some lenders who try abusive practices 

where they will extract one late payment and make all your subsequent payments declared therefore late. Or they use late payments 

as a wedge to try and force a refinancing and a flip. So that is an 

important area to have protections. 

Ms. WATERS. Mr. Chairman, I am going to yield back the balance 

of my time, but I would really like if at all possible for Mr. Green 

33

to give me his ideal. You know a lot about this subject. You have 

worked it quite some time. If you were going to advance a federal 

law, a change, an improvement to deal with predatory lending in 

the subprime market, what would you advise us to do? What is acceptable to you? You kind of nodded your head on Mr. Calhoun’s 

North Carolina law, but you did not quite say you support it. What 

do you support? 

Mr. GREEN. At the end of the day, the specific criteria for what 

is a predatory loan is something that the originators of the loans 

and this committee and others need to figure out, what are the best 

identifying criteria. From the secondary market perspective, what 

criteria are utilized is less important than the precision with which 

those criteria can be identified. 

Many of the criteria that are looked at in the North Carolina law 

carry with them objective standards. It is when the criteria becomes more vague and esoteric and theoretical and less precise 

that it becomes much more difficult to value and to identify a loan 

in a pool of hundreds, maybe thousands of loans as to whether or 

not it meets that standard. Even if you could identify it, you have 

no way to control whether or not you have met that standard. 

So to hold someone liable and assign them liability for something 

they cannot identify and cannot control is where the problem in the 

marketplace arises. If the criteria can be identified and is objective, 

you can begin to implement something. That is why we suggest a 

national standard. I do not want to use the ‘‘preemption’’ word. I 

guess there is no way around it if you are going to use ‘‘national 

standard.’’ I think everyone agrees that this is a national problem. 

The marketplace that you are focusing on is a national market, and 

we have had experiences in the laboratory of state legislatures 

where it has been difficult to establish that enforceable, quantifiable objective standard. 

Ms. WATERS. I respect that, but let me just tell you, bankers 

know how to count and they know junk when they see it. Prior to 

coming up with ways by which to make money in the subprime 

market and with predatory lending, they use the same eye to tell 

people no, you cannot have credit because you do not look like you 

can pay this back. You look like you are a bad risk. 

So they know it. They understand it. And when they are protected and they can roll the dice on it and they can make a lot of 

money with high interest rates and other kinds of fees et cetera, 

and they have no liability, they will take a chance. So I am not at 

all impressed with the fact that they just do not know bad paper 

when they see it. They know it quickly and surely. 

Chairman NEY. [Presiding.] The time has expired. I would note, 

Mr. Green, I believe, does have to leave, so if you have a question. 

Mr. Fossella of New York. 

Mr. FOSSELLA. Yes, to follow-up on that. Thank you, Mr. Chairman. 

Mr. Green, you talk about subjective triggers. ‘‘Unintended consequences’’ is perhaps a phrase that comes to mind in our efforts 

to curtail abusive practices, which I think we all agree with, should 

be curtailed and ultimately eliminated. 

But can you be more specific as to why a national standard is 

necessary by quantifying perhaps how some people are ultimately 

34

shut out of the market, if that is a conclusion from all these nebulous, esoteric standards, as you in your testimony call them, subjective triggers to assign liability? How are people actually shut out 

by limiting access to capital and the folks who are actually purchasing these loans? 

Mr. GREEN. At the end of the day, the secondary market succeeds because people pay their loans back. It is not in anyone’s interest to have loans in a portfolio that are not going to perform. 

Now, there is a risk of nonperformance in any loan, even the highest-rated credit has a risk of nonperformance. But in higher and 

riskier borrowers, that risk is higher. 

In order to make sure that they are in compliance with the law 

of a particular state, they will take certain actions. That will have 

an effect on their ability to accept loans that extend credit to that 

higher-risk category. If they do not accept those loans, those loans 

are never made. 

Now, where the line is between loans that should be made and 

should not be made is a difficult public policy question, because you 

do not want to draw the line so that nobody gets loans because 

there are lots of people that deserve them. But the viability of the 

secondary market ultimately defines the extension of credit. If we 

can come up with tangible, identifiable objective standards that can 

be enforced on a national level, you can make the marketplace 

work much better than the current situation allows us to have happen. 

Mr. FOSSELLA. So is it safe to say that ultimately if this were to 

be left unaddressed that there are going to be people who fit 

subprime criteria that would ultimately be shut out of the market? 

Mr. GREEN. I think as Mr. Raiter indicated that the risks that 

are in the marketplace when you can or cannot get a rating have 

an effect on whether or not credit is extended in the first place. So 

the answer is yes. I dare say I think that the risk of that is greater 

in a rising interest rate environment when credit itself, by virtue 

of its cost, is less accessible. 

Mr. FOSSELLA. So to Mr. Raiter, are there situations, and you 

may have said it in your testimony, forgive me because I was not 

here, are there situations in which at the State level laws were 

passed and ultimately you in your testimony indicate that you support these measures, but at the same time recognize again these 

unintended consequences that result? Did you notice a pushback in 

some States that are considering legislation that would be inconsistent or at odds with the federal standards right now? 

Mr. RAITER. At odds with the federal standard? 

Mr. FOSSELLA. Are there laws that have taken root in the States 

where as a result of this liability imposed on the purchasers, States 

have had to modify and change, and what, if any, has been the impact in other states that have been considering similar legislation? 

Mr. RAITER. I can comment on the changes that were made in 

Georgia. 

Mr. FOSSELLA. Yes, specifically yes. 

Mr. RAITER. And the changes that were contemplated in New 

Jersey, and after the original law was promulgated and enacted, 

there was an Attorney General opinion on how it would be interpreted that had an impact on how loans would be treated when 

35

they came in for ratings out of the New Jersey markets. What 

other jurisdictions may be doing when they see the impact of 

changes in those two jurisdictions, we have not tracked. We have 

looked at the individual laws as they become enacted. 

I think the other answer to the first part of the question is the 

high-cost loan categories in all the jurisdictions that have gone into 

effect are not showing up. If they are being made, they are not 

being financed in the secondary market with transactions that are 

rated by Standard & Poor’s, which may be exactly the intent of 

these various laws and statutes, that those loans are undesirable. 

Whether they are predatory or not would depend again on whether 

we could identify exactly what the requirements for falling into a 

violation were under the statutes. 

If it was clear and defined and we could size the risk, then we 

would put a number on it. If it was not clear and defined and we 

could not tell whether a loan was or was not really predatory, then 

they would have to be excluded. So if it is the intent to basically 

prevent these types of loans from being financed in the secondary, 

then it would behoove the legislators to be as specific as they can 

in identifying what is a violation and what the penalty is, and the 

loans will not make it to the secondary market because it will not 

be economically feasible, as they are not making it now. 

We do not have any issuers that are checking the blocks and telling us that they are including high-cost loans. They are giving us 

a warrant that if in fact they inadvertently acquired a high-cost 

loan, they will immediately buy it back. 

Mr. FOSSELLA. This will be my last question. Are you prepared 

to say whether it is a better public policy to ensure that as many 

loans are allowed to flow into the secondary market as possible, or 

are you neutral on that? 

Mr. RAITER. We are neutral on public policy, but you all should 

be quite aware that where you draw the line, it is likely that the 

loans that fall above that line probably will not be made. 

Mr. FOSSELLA. All right. Thank you, Mr. Chairman. 

Mr. DEMONG. Congressman, can I add to that? 

Mr. FOSSELLA. If you like. 

Mr. DEMONG. The study that I did in New Jersey showed an absolute drop in certain subprime loans, including cash-out refinancing, probably at least a 60 percent drop in the first 2 months 

after the Act. But to go directly to your question, can you quantify 

the folks that do not get the loan; you are not going to hear from 

them. It is tough to measure that folks that do not get a loan. So 

we can see a change in lending based on a law, and I would argue 

that we are better off with a national standard because it is a nationally funding market. 

But to address the second part of your question, yes it does matter if a law affects the secondary market, affects securitization, in 

that there are going to be less funds available for potential borrowers in that state or in that region. So there will be a direct impact if the secondary market securitization market is cut off. 

Mr. CALHOUN. If I may add one thing, I think there is a very important distinction here. This is a dynamic market. What the experience has been under the federal law and under the State laws, 

it is not that people stop making these loans. Rather, the loans are 

36

restructured so they do not have the predatory impact on the borrowers. 

The main predatory feature of loans has been fees that strip equity. So simply what a lender can do is structure the loan with a 

higher interest rate, because for example the North Carolina law 

follows the federal interest rate trigger, but takes less money out 

of the fees. It is these high up-front fees and high prepayment penalties that have encouraged all of the equity stripping, the repeated 

refinancing. 

It is important. In North Carolina, we advocated strongly, do not 

change the interest rate threshold from the federal standard. Allow 

plenty of room for these loans to be made. Remember, for most 

subprime borrowers, hopefully these are bridge loans so that they 

can improve their credit and move to a better or a prime or closer 

to prime loan. If the loan is loaded up with large up-front fees and 

prepayment penalties, the borrower is blocked from doing that, 

from doing what I would hope we would want to encourage these 

borrowers to do. If instead the loan has more in the interest rate, 

the lender can still make a fair profit, which they have to do, but 

the borrower is not trapped long term in a predatory loan. 

Mr. FOSSELLA. Thank you. 

Chairman NEY. Mr. Miller of North Carolina. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

Mr. Raiter, Mr. Green I think praised North Carolina’s law, but 

I think by faint damnation, and said it was not as imprecise; the 

prohibitions were not as vague; not as subjective as some other 

states. But in rating subprime loans coming out of various states, 

you did not rate North Carolina’s loans. I do not want to talk you 

into doing that, but could you tell me what was different about 

North Carolina? Did you do that based on the provisions of North 

Carolina’s law? Or did you do that based upon the experience 

under North Carolina’s law? If it was based upon the provisions, 

what were those provisions? And if it was based on the experience, 

what has been the experience? 

Mr. RAITER. Specifically, it was based on both. The provisions of 

the law incorporated that violations, the borrower had to prove 

that it was knowingly and intentionally committed, and that they 

had a pattern or practice of violating the law. At the same time, 

the North Carolina law had a provision that if a plaintiff did not 

settle a reasonable settlement to alleviate the issue, then I believe 

the plaintiff could be charged with the legal expenses. 

So the actual experience in North Carolina is there were no actions brought under this law that were going to assignee liability 

payment beyond where the loan was initially made. So it was 

structured in such a way that the problems that did arise were 

being solved and resolved locally, and that the risk to the investors 

in the pool that held those mortgages had been successfully mitigated. But there were still the high-cost loans. There are still loans 

that we have not seen. People are giving us the rep saying they are 

not doing loans that exceed the thresholds that were incorporated 

in the North Carolina law. 

Mr. MILLER OF NORTH CAROLINA. Okay. Mr. Green, I think you 

have spoken of the burden of knowing what loans in a package 

may be illegal under some State’s laws. Does any State require a 

37

duty of inquiry absent actual knowledge? Does any State require 

a duty of inquiry that goes beyond the loan documents? 

Mr. GREEN. I am not sure. I do not know the answer to that 

question as it relates to states, but I do know there are clear due 

diligence requirements that have to be done before packaging the 

loans into a security. That due diligence is really what we are talking about here, and whether or not the due diligence can be accomplished in a way that is honestly achievable. 

When there is vagueness fulfilling that due diligence by looking 

at the bond documents themselves, will not get you there, because 

you have to look at what the intent of the loan was, what the desire was, what the conversation that took place between the loan 

originator and the person, as opposed to something that will come 

through on the face of the bond documents. 

With a clear or objective standard, you will have something that 

will come through on the face of the loan documents that will allow 

for a much easier identification. As you said, I think the goal here 

is to keep out of the pools the loans you do not want in the pools, 

but to make sure that that which you want to move forward and 

finance, can. 

Mr. MILLER OF NORTH CAROLINA. Which State or which locality 

requires a purchaser of a loan to know about oral dealings between 

a lender and a borrower? Isn’t it all based upon the written documents? The duty of inquiry under HOEPA is to be what can be determined based on the documentation required by this chapter. 

Isn’t it all based on the documents? 

Mr. GREEN. You look at the imposition of a vague, net tangible 

benefit rule to determine whether or not there is a net benefit. You 

have to get to what motivates someone to refinance a mortgage. 

You have to get beyond the bond documents because what we are 

talking about here are things that cannot be reduced to words on 

paper. They get to subjective judgments. It is those subjective judgments that are precisely the things that we have a concern in certain States that are creating the problem. A set of objective standards would be the solution to that, because you would have something to look for, something to identify and something to act upon. 

I will tell you further that if you had such standards, and in 

those states that do have such standards, if a packager of mortgages in the secondary market has done their due diligence and 

still has those loans in their pool, they should be held responsible. 

We would support that. But the fact is, when it is a vague standard, how possibly can you ultimately hold them responsible for that 

which they cannot easily identify? 

Mr. MILLER OF NORTH CAROLINA. May I continue just a bit? 

Chairman NEY. If we can wrap it up quickly. 

Mr. MILLER OF NORTH CAROLINA. I did notice that the light was 

a fairly bright shade of yellow. 

Chairman NEY. A whiter shade of pale. Go ahead. 

Mr. MILLER OF NORTH CAROLINA. One last question, and I suppose also for Mr. Green, although perhaps Professor DeMong as 

well. Mr. Israel quoted Potter Stewart’s opinion earlier, saying he 

did not know how to define pornography, but he knew it when he 

saw it. John Hawke testified before this committee earlier. OCC 

has preempted state predatory lending laws with respect to OCCVerDate 0ct 09 2002 11:05 Oct 05, 2004 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 G:\DOCS\95652.TXT FIN1 PsN: MICAH
38

chartered institutions and their affiliates. In a speech to the Federal Society last year, he said his definition of predatory lending 

was making a loan that the consumer could not repay. It did not 

go beyond that definition. It was making a loan the consumer could 

not repay. 

I use an example that Self-Help has given here, and I cannot recall all its details, but an elderly school employee, probably not a 

teacher, probably a cafeteria worker in Durham, borrowed $99,000 

for home repairs that were desperately needed to maintain the 

value of her home. To make that loan, she was charged $23,000, 

I think it was, in up front points and fees. She left the loan knowing how much money she was getting at closing and knowing what 

her monthly payments would be. She could make the monthly payments, but sometime later when she went to Self-Help to refinance 

the loan, she learned that she had lost $23,000 of the equity in her 

home, her life savings, at the moment she signed those loan documents. Is that predatory lending? 

Mr. GREEN. I am not a Justice on the Supreme Court. There are 

lots of scary anecdotal examples of what certainly sounds like predatory practices. Frankly, I would hope that the originating community would honestly try to define with policymakers what a predatory loan is. In the secondary market, whatever you decide it is, so 

long as those standards are objective, we will be able to deal with 

that. But as those who are involved in the secondary market, it is 

hard for us to determine specifically what predatory lending is. 

That certainly sounds like a predatory practice. Up-front fees and 

all the criteria that were mentioned, late fees, loan flipping, balloon 

payments, the repayment ability, and you did not mention negative 

amortization, all those things appear predatory. They can be predatory. They do not necessarily in and of themselves have to be predatory. That is the difficulty, but I think we need to come up with 

that so that we can have that objective criteria. 

Mr. MILLER OF NORTH CAROLINA. So in the eyes of Mr. Hawke, 

he saw that loan as not predatory. Do you disagree with Mr. 

Hawke? 

Mr. GREEN. I have not read his entire statement, so it is hard 

for me to know exactly what he said. Having said that, predatory 

practices certainly sound like big up-front fees. I think you need to 

look more deeply to see whether or not that made that loan a predatory loan. There are lots of factors that take place. So I would not 

agree or disagree. 

Chairman NEY. The time has expired. 

Mr. MILLER OF NORTH CAROLINA. Mr. Chairman, Professor 

DeMong had his finger right on the button. He was just itching. 

Chairman NEY. I am going to take this time off Mr. Scott. If you 

would like to proceed, you can ask him. Mr. Scott, do you want to 

yield some time? 

Mr. SCOTT. Right now, I have my own fish to fry on this issue. 

Chairman NEY. There you go. 

[Laughter.] 

Mr. SCOTT. If I have a little time, I certainly will. Let me get my 

points out. 

This has been a real fascinating hearing and very informative. I 

am concerned about preemption. I am also concerned about making 

39

sure that we move forthrightly with the strongest efforts to stop 

predatory lending. Nowhere is it more impactful than within minorities, the elderly, African Americans, and we are all very much 

concerned about that. 

I also happen to believe that assignee liability is critical in my 

estimation to preventing predatory lending practices. I think that 

Mr. Green has given us a shot into the darkness as a way to kind 

of begin to move out of this. But I believe that we are going to have 

to come to some illumination between Mr. Raiter and Mr. Calhoun. 

Here is my point. 

In my State of Georgia, we put forward predatory lending, and 

Mr. Raiter came in and kind of negated that with the Standard & 

Poor’s rejection of rating these mortgages. Fannie Mae, Freddie 

Mac would not purchase mortgages because we had assignee liability. Yet in North Carolina, as Mr. Calhoun said, he had assignee 

liability. These things did not happen. Standard & Poor’s did not 

come in and say they would not rate these. Fannie Mae, Freddie 

Mac, they did not say anything at all. 

I think it would be interesting for you to just point out very 

clearly, what is it within your application of assignee liability did 

you do, and in your opinion, did Georgia go too far in its application of assignee liability, and if so, where did it go? First you, Mr. 

Calhoun. 

Mr. CALHOUN. Thank you. I think everyone here should know 

what a critical role you played in making sure that the Georgia law 

worked for both consumers and ultimately for the market. For the 

record, the subprime market in Georgia is thriving even with the 

remaining very strong protections in that law which you helped 

very much shepherd through. 

Shortly after passage of the Georgia law, since we have been involved in assisting in that process, we were contacted by secondary 

market players. They said, we have some concerns about the assignee liability provisions. I think the real message out of that and 

today is that these issues are largely solvable. We reached agreement with those secondary market parties. 

And then initially, several of the rating agencies said, we do not 

have a problem with the Georgia law; we are going to allow what 

in the industry are known as reps and warranties. I think it is important for everybody to understand that these purchasers are not 

out there holding the bag. Whenever they purchase the loans, they 

make the seller pledge that if this loan is illegal and has liability, 

you have to indemnify me, the purchaser. 

So this assignee liability really comes up with the problem of 

what happens when the originator disappears or becomes insolvent. But you should know that usually the purchaser is protected 

by these so-called reps and warranties that they insist that the 

sellers of loans provide to them. 

So initially, other rating agencies said, we are going to rely on 

reps and warranties; we are fine with Georgia. S&P had concerns 

in particular about the possibilities of unlimited punitive damages, 

I think that was their major concern. To their credit, we worked 

with S&P as well as Senator Cheek, who you know well from Georgia, and S&P quickly reached agreement on what were acceptable 

assignee liability issues, and those were resolved. 

40

The delay in passing those provisions was that it got caught up 

in a bill where there were debates about what were substantive 

triggers, what were the other provisions of the law to look like. 

That is what slowed it down. The assignee provisions that were acceptable to S&P are not the ones that finally came in there. Those 

got changed some. But the assignee liability issue was resolved relatively easily. The important thing is that there be comprehensive 

standards. I would urge you that it is not an either/or on the preemption. If you have strong federal standards, you will find the 

States backing off. 

There have been questions about municipal ordinances. I think 

one of the lessons from North Carolina is, we had no proposed municipal ordinances ever in North Carolina. The reason is there was 

not a need for it. There was no void for municipalities to mess 

with. They have plenty of other things to do. We had a good state 

standard. I think you can have the same effect at the federal level 

if you pass a good federal standard. The states will have no need 

to move in here. 

The Truth-in-Lending Act is that way. It does not have preemption, but you passed a comprehensive, strong standard, and the 

States, I think there is one state out of the 50 that has some mild 

supplemental provisions, but there is no move and there has not 

been in 30-something years for states to move into that area, even 

though they have the authority to do that. Truth-in-Lending is a 

floor, not a ceiling, but it provides comprehensive protections and 

there is no need for the States to move in. 

Mr. SCOTT. Now, Mr. Raiter, that was your major concern, unlimited liability. That was the only difference between Georgia’s assignee liability and North Carolina’s was the unlimited liability. 

That is the reason why you would not rate the mortgages. 

Mr. RAITER. That was the most significant issue, the punitive 

multiple damages that were unlimited. There is some mitigating 

language, as I mentioned earlier, in the North Carolina law that 

makes it much more friendly to resolving the issues so that the ultimate assignee does not get involved in the transaction, but it 

again goes back and relies on the reps and warranties that Mr. 

Calhoun was just describing. 

Chairman NEY. The time has expired. 

Mr. SCOTT. Just one final little point, thank you, Mr. Chairman, 

just to get a summation. Is it the consensus of everybody on this 

committee that our Financial Services Committee should come up 

with a uniform federal standard for assignee liability? 

Mr. GREEN. Yes. 

Mr. SCOTT. Everybody? 

Mr. DEMONG. I would support that. Just as it was pointed out 

that it is important to define predatory lending for the secondary 

market, it is also important for the originators. Having a clear law 

serves both purposes well, and will enable the credit to flow to 

those that should have it and deserve to have it. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Mr. CALHOUN. For the record, States have traditionally through 

the Uniform Commercial Code, which is close to uniform in the 

various states, made the decision about assignee liability, including 

in mortgages. There currently is liability for assignee’s in certain 

41

circumstances under the law of almost all of the States. We would 

suggest if you have the uniform standard, that that is going to take 

care of this issue. 

I think the States have learned their lesson. No one will be more 

responsive to an interruption of the credit market than State and 

local officials because they are the first people who get called, as 

you know well, if there is any disruption in the market. Local officials have learned from these state laboratories. They are not going 

to disrupt their markets. 

Chairman NEY. I have let things slip a little bit. We are going 

to stay on time so everybody gets their questions in. 

The gentlelady from New York, Ms. Velazquez. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Mr. Raiter, Standard & Poor’s recently announced that it would 

require credit enhancement for loans governed by anti-predatory 

laws in 14 states, including high-cost loans in New York State. Can 

you comment on how the New York anti-predatory lending law is 

affecting the ratings, and consequently the purchase of loans in the 

State? 

Mr. RAITER. In a nutshell, we are not seeing high-cost loans from 

New York State. 

Ms. VELAZQUEZ. You are not seeing them. 

Mr. RAITER. No, we are not. 

Ms. VELAZQUEZ. What about the New York City ordinance? 

Mr. RAITER. I believe that was overturned. I do not believe that 

is in effect any longer. 

Ms. VELAZQUEZ. So is it true that your new credit enhancement 

criteria will affect a very small portion of the subprime loans originated in New York and across the nation? 

Mr. RAITER. We have no way of going back in time and determining how many loans that would have failed the test before the 

law went into effect. All we know is that the lenders that are operating in New York, as has been pointed out here, they are either 

changing the fees or they are changing the rates, or they are not 

granting the loans, but they are giving us the rep that they are not 

engaged in high-cost lending in New York State. 

Ms. VELAZQUEZ. Thank you. 

Skyrocketing defaults and foreclosures are devastating many 

low-income communities around the nation. In some areas like in 

my district, many of the foreclosures are on subprime loans, and 

we have been hearing about that all morning. Wouldn’t you agree 

that requiring that recipients of subprime loans are simply made 

aware of the availability of counseling could go a long way in decreasing the number of defaults and foreclosures? Please note I am 

not talking here about mandated counseling, but the availability of 

counseling. Mr. Calhoun, would you like to start? 

Mr. CALHOUN. I favor the approach that is in the North Carolina 

law that has worked well. That is that the North Carolina law requires counseling for high-cost loans only. That is the whole philosophy of the law. The high-cost loan is a loan that is not always a 

bad thing, but it is very susceptible to abuse. So you should have 

special protections when somebody wants to charge more than five 

points or more than 13 percent interest on a loan secured by a person’s home. The truth is in most of the foreclosures, these are goldVerDate 0ct 09 2002 11:05 Oct 05, 2004 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 G:\DOCS\95652.TXT FIN1 PsN: MICAH
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standard loans. They are backed by people’s homes, and we know 

from 20 years of lending experience that most people will do about 

anything to keep their home. 

Ms. VELAZQUEZ. Would you support legislation that required 

lenders to make subprime borrowers aware of the availability of 

counseling? 

Mr. CALHOUN. Yes, but we do think it also needs to require counseling on high-cost loans. That is done presently under the law in 

a number of States for reverse mortgages, because again they are 

very susceptible to abuse. In those rare circumstances, the counseling should be required. 

Ms. VELAZQUEZ. Dr. DeMong, would you like to comment? 

Mr. DEMONG. As a professor, I am always in favor of education. 

I have done some work with 401(k) plans, and having people know 

what they are investing in is always better than not. So to the extent that you could have education that will help people better understand the provisions of the loan, what it obligates them to, is 

always better than not. 

Ms. VELAZQUEZ. Would any of the other witnesses like to comment? 

Ms. KOGUT. Yes, I would just add that in the First Alliance Mortgage Company case, we would have loved to have had our victims 

undergo counseling. Sometimes we were the first people to tell consumers that they paid points in the amount that they had paid. It 

was painful and horrible to let them know that the equity in their 

house had been lowered as dramatically as it had been. We were 

frankly shocked that we were the people breaking that news to 

them. If they had only taken their loan papers and had them reviewed by a third party, a lot of the abuses we think could have 

been avoided. So we it would be very useful. 

In Massachusetts right now we have a bill that is working its 

way through our legislature that would incorporate some of North 

Carolina’s provisions into it. We would have mandated a credit 

counseling provision for high-cost loans, which we think would be 

a good idea. 

Ms. VELAZQUEZ. Thank you. Any other comments? 

Mr. GREEN. I would only say the Bond Market Association is a 

strong advocate of investor education. In fact, on our own Web site, 

investinginbonds.com, we get over three million hits a month about 

what people should know about bonds. The questions you are asking are really in the loan origination side. What kind of education 

is undergoing between the borrower and the lender? So I would 

hope that that level of education would increase. 

On the question of whether or not it should be a criteria, not to 

sound overly bureaucratic, but I would come back to how objective 

and clear that criteria can be in determining whether or not that 

criteria was met. 

Chairman NEY. The time has expired. 

Ms. VELAZAQUEZ. Thank you, Mr. Chairman. 

The gentlelady from New York, Ms. Maloney. 

Mrs. MALONEY. I would like to thank you all for your very 

thoughtful testimony on this important issue. I would like to ask 

Mr. Green, we have a number of laws across the country that are 

different in States. Given the fact that the reports that have come 

43

back show that the subprime lending is growing, it is strong, it is 

out there helping people, why do we need a national standard? We 

just passed, as you know, the Fair Credit Reporting Act, and there 

was a very clear need for access for credit that was really critical. 

It was a staunch need. 

I do not see a staunch need for a strong federal standard. Why 

is there such a need for a federal standard here? It seems like the 

market is strong and there are many loans being given, and it does 

not seem like it is a big, big problem to the bond market or to the 

industry in a sense. Could you elaborate? 

Mr. GREEN. I can try. The market has certainly grown over the 

last several years, as has the mortgage market, as has the municipal markets. That is in large part because of low interest rates, 

rising home values, the ability for people to tap equity. So a rising 

size of a marketplace does not necessarily translate itself into all 

those who need and want access to capital and deserve access to 

capital can get that capital. 

Particularly now that we are on the cusp of a rising interest rate 

environment, when the sheer cost of capital is likely to go up, those 

access questions become even more relevant. I think what we are 

talking about here a national standard would ensure that you get 

it as close to right as possible, so that where you draw the line of 

the loans that you want to stop versus the loans that you want to 

encourage, which is really what we are talking about here, is as 

close to right as possible. 

What we have experienced in both the numerous state laws and 

some local laws is that the effects of that being more right or 

wrong is not manifesting itself in nationwide volume of subprime 

lending, but it is manifesting itself in whether or not you are getting any high-cost loans in these pools. If you are not getting any 

high-cost loans, you might say, well, that is good. Except, what is 

a high-cost loan? If the standard is wrong by how you are identifying what these loans are, you in fact may be cutting off capital 

to those to whom you do not want to cut off capital. That is why 

we believe a national standard will set a more consistent national 

policy, particularly since the secondary market is a national market. That is where we see the consistency in the argument. 

Mr. DEMONG. Congresswoman, can I add to that and support 

Mr. Green’s point? 

Mrs. MALONEY. Yes. 

Mr. DEMONG. I also want to point out that, as Mr. Green stated, 

the market has grown, but has it grown to the point that it is satisfying all those who need and deserve credit? That is the question. 

The other reason for a national standard, besides making sure that 

the credit is available to those who need and deserve it, is that you 

end up with a more efficient market, and when you have more efficiency you can have lower costs, therefore lower interest rates for 

the borrowers that do qualify for loans. 

Mrs. MALONEY. But if state standards are unworkable, then a 

State legislature would act to change it. We have seen that happen. 

How would a national standard increase access to capital? Would 

a national standard increase the number of people who could get 

subprime loans? I do not see the correlation there. Explain it more 

clearly. I am for access to capital. I believe in homeownership. I 

44

want more Americans to own their own homes and apartments and 

so forth, but how does a national standard increase that? Maybe 

Mr. Calhoun would like to comment, or maybe others. 

Mr. DEMONG. Thank you, Congresswoman. 

Mrs. MALONEY. How does it increase it, a national standard? 

Mr. DEMONG. It increases it in that investors have a choice of 

investing in all kinds of different investments in the United States, 

stocks, bonds, real estate, you name it. So if you have an efficient 

market for mortgages, then more of those funds will flow from one 

asset to mortgage lending. The more efficient the market is, the 

clearer the risks are, the more willingness that investors will have 

of taking money that they could have invested in the stock market 

or the bond market or the international stock and bond market, 

and put it into mortgage markets. 

Mr. GREEN. Congresswoman, that gets to the contribution of the 

whole mortgage-backed securities market and the securitization 

market generally. By pooling mortgages and by selling the mortgages from the originator, you create more capital, because they get 

money for that mortgage and that loan and they turn around and 

loan it out again. The more supply of capital, ultimately the lower 

the cost, but the only way you can do that is you have to have 

someplace to sell that mortgage. 

Chairman NEY. The time has expired. 

Mr. Davis of Alabama. 

Mrs. MALONEY. Would anyone else like to comment, if we could, 

just for 2 seconds? 

Mr. CALHOUN. If I may, very quickly. I think the evidence shows 

that the liquidity is very high in the market and that states are 

very sensitive to cutting off any liquidity. So I agree with your 

premise that a federal standard would not change the liquidity. 

The states will make sure there is liquidity. We support strong federal standards that are a floor, not a ceiling, to increase protection 

for consumers under the Homeownership and Equity Protection Act 

because right now lenders have learned how to largely evade that 

act and commit predatory lending that does not get caught or protected by that act. 

Chairman NEY. Mr. Davis of Alabama. 

Mr. DAVIS. Thank you, Mr. Chairman. I will try to be brief so 

Mr. Ackerman gets an ample amount of time. 

Let me try to focus with the panel on something that we have 

not talked about at all today. There is a lot of agreement, and the 

statistics are pretty undisputable, that there are racial disparities 

in the incidence of subprime lending between blacks and whites 

and Hispanics. Some of that is presumably attributable to a class 

difference, the fact that obviously you may have higher rates of 

poverty; you may have those kinds of issues around the minority 

community. But I want to focus for a moment on the disparity that 

exists with respect to high-income blacks and Hispanics and lowincome whites. 

As I understand it, the incidence of subprime lending right now 

is twice as high in the affluent African American community or the 

level is double in the affluent African American community than 

what it is in the low-income white community. There is no good 

statistical evidence I have seen that suggests that affluent blacks 

45

have worse credit than poor whites, or that affluent Hispanics have 

worse credit than poor whites. So again, there is no market basis 

for that distinction. 

Now, in the field of Title VII law, as Ms. Kogut of Massachusetts 

is aware, in the field of Title VII law there is a presumption that 

if you have a lot of disparate impact lurking behind the door, it is 

some evidence of disparate treatment. So can some of you speak for 

a moment about what it is that lenders are doing that is targeting 

or disproportionately affecting high-income blacks or Hispanics? 

Mr. CALHOUN. Let me respond. First, there have been, and we 

cite in our written testimony, a study, specifically one by a Harvard 

professor, looking at broker fees paid by borrowers after you settleout credit score, et cetera. It showed that African American borrowers tended to pay $500 more in broker fees than similarly situated white borrowers; the same for Hispanic borrowers, actually I 

think it had $600 more per fee. The same types of results have 

come up in recent studies and litigation concerning car financing, 

where it has been shown that, sorting out for credit characteristics, 

that minority car purchasers are paying more for the financing. 

A lot of it is there has been a change in this market. You used 

to go in for a home loan and the expectation would be that you 

would get the best loan that you could qualify for. That is no longer 

the case in this market because the originator, and this is one of 

the features that has been alluded to about the secondary market, 

is compensated more if they up-sell you to a higher interest rate. 

If you qualify today for a 6 percent loan and the loan originator, 

and this applies unfortunately to most banks as well as——

Mr. DAVIS. Let me jump in for 1 second, Mr. Calhoun, because 

I agree with everything you are saying, but I want to try to drive 

to a conclusion a little bit. We agree that there is a disparity and 

that it is one that does not have an economic basis or a credit 

basis. What I am trying to get at is what we can do about it. 

Maybe I should direct this question to Ms. Kogut, since she is the 

attorney on the panel. If we have a problem with primary lenders 

going out there and steering these products or steering excessive 

lending rates to black or Hispanic Americans, first of all, doesn’t 

it seem that we already have something called section 1981 that 

may provide a remedy for that? Is it possible that we need to be 

making more aggressive use of our existing civil rights laws, particularly section 1981, to address this problem? 

Ms. KOGUT. You raise very good questions. In fact, even in our 

own office when we have looked at these cases, our Civil Rights Division which is in charge of enforcing our fair lending laws, and we 

look at federal fair lending laws also, which do exist to protect in 

communities in this area, we have tried to figure out what is the 

best approach in terms of bringing cases and getting remedies. 

The one thing that I will say, which is just a fact, these loans, 

you said this in your opening statement, there is no competition 

going on. The consumers who end up with these high-cost loans are 

not comparing prices with other loans. For whatever reason, there 

is something, there is a problem with a fair market in terms of how 

these loans are given to consumers. 

In Massachusetts, our Mayor in the City of Boston has used lots 

of educational opportunities to try to make members of our commuVerDate 0ct 09 2002 11:05 Oct 05, 2004 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 G:\DOCS\95652.TXT FIN1 PsN: MICAH
46

nities aware that they do not need to be taking loans like this and 

that they should be seeking legal advice when they go to get mortgage loans. 

Mr. DAVIS. Let me stop you for one second because my time is 

running out. Mr. Green, let me specifically point this toward you 

since you are to some extent representing the industry here today. 

What does your industry need to do to deal with what in some instances seems to be clear-cut intentional discrimination? I am not 

just talking about disparate impact. Doesn’t it seem that the industry has a significant responsibility, number one, to figure out what 

your agents and what your lenders are doing to obviously target a 

lot of these subprime rates toward high-income blacks or Hispanics? Isn’t that just a clear-cut instance of plain old discrimination and prejudice a lot of the time? 

Mr. GREEN. Congressman Davis, I will answer your question, but 

I will just clarify that I am here representing the secondary market 

of these mortgage securities, not the originators. 

Mr. DAVIS. I understand that. 

Mr. GREEN. I think you raise an excellent point. One of the 

things the Bond Market Association has done is we created and are 

very supportive of the Bond Market Foundation, which operates a 

family of Web sites geared toward basic financial literacy targeted 

to women, young people, and the Hispanic community. We are 

working with State Treasurers around the country to reach into 

states. We are also working now with the NAACP to set up a program that will reach into other communities to educate people 

about basic finances and where to get money, where to borrow 

money, and what are the proper practices that ought to be followed. 

We represent the secondary market side of it. So I cannot agree 

with you more. We are trying to do what we can, and our foundation Web site and the work that we are doing is really a way of 

increasing the education base of various communities. 

Mr. DEMONG. Congressman, I spent some time last year studying this issue and studying some of the studies that have been 

done. They are not as clear-cut as many would expect to find. I 

think it is ripe for another study that really goes into some of the 

issues that you have raised. I would support trying to find out if 

there is discrimination and if so, what is causing it so that it can 

be resolved. But the studies that have been done so far have been 

somewhat contradictory on the issue of income, on the issue of net 

worth, and the issue of race. 

Chairman NEY. I thank the gentleman. 

Mr. Ackerman, the gentleman from New York. 

Mr. ACKERMAN. Thank you very much, Mr. Chairman. I will be 

brief, as I notice that we are about to be outnumbered by the witnesses. 

[Laughter.] 

I was listening intently, and Mr. Green made the important 

point that if 5 percent of the mortgages that were written, it meant 

that 95 percent of the people were enabled to become homeowners 

because of the subprime market, which is something that is very 

good. 

47

Mr. Calhoun then pointed out, without contradiction, that that is 

5 percent a year. So I went back to thinking, 5 percent of what? 

I did, being a broken down old math teacher, use the old math and 

said if we start with a model of 100 loans made, 5 percent would 

mean 95 people were in houses that were supported by lenders in 

the subprime market, and five homes or five families were foreclosed upon. That would leave 95 people. 

If you took 5 percent of the 95 the following year, that would be 

4.75, leaving 90.25 from the first group of numbers. And if you took 

5 percent of that the next year, 4.56 percent would be foreclosed 

upon, and the next year, 4.28 percent and the next 4.07 percent. 

In the sixth year, it would be 3.38 percent. So after the end of 6 

years, if you add those foreclosures, you have 26.53 families or 

homes, more than one in four at the end of 6 years from the original group foreclosed upon. 

Is there something wrong with my math? Or was there something wrong with the 5 percent, depending on whose 5 percent it 

was? 

Mr. GREEN. Congressman Ackerman, I think your example would 

be correct if only those 100 loans were made and that in each succeeding year more loans were not made. 

Mr. ACKERMAN. That is correct. I would assume out of the next 

100, the same percentage would apply, more or less, unless the statistics changed. Of the next 100, at the end of 6 years——

Mr. DEMONG. Congressman, I do not have those statistics so I 

cannot speak to them directly. However, I will point out that I 

know the life of the subprime loans tends to be relatively short, I 

do not know whether it is 3 years or 4 years, but if the life of the 

loan goes out only 3 or 4 years, the average loan is paid back within that time period and thus the percent foreclosed is down. 

Mr. ACKERMAN. Do you know what percentage of the loans are 

that short? Are there any 15-year loans? 

Mr. DEMONG. Again, I do not have that statistic, and I would be 

glad to try to get that for you, but if the average subprime loan is 

refinanced in 3 or 4 years, then that would, even at the numbers 

you are talking about, would not equate to the large number that 

you had calculated by going out 6 years. 

Mr. ACKERMAN. If I go out 3 years, 14.31 percent. 

Mr. DEMONG. Again, I do not have the statistics, but I would like 

to find it for you. 

Mr. ACKERMAN. If they were all 3-or 4-year loans, at the end of 

3 years, that 5 percent a year would be 15 percent. The 5 percent 

diminishes because you are starting with a smaller base than 100. 

Mr. DEMONG. I do not have that number. I would like to get it 

for you. 

Mr. ACKERMAN. So even based on 3 years, 14 percent at the end 

of 3 years of people losing their homes is really a staggering number if that number is correct. 

Mr. DEMONG. And that is an important point, if that number is. 

Right. 

Mr. ACKERMAN. It is a big number, whatever it is. So it is not 

really the 5 percent. It is 5 percent a year. 

Mr. CALHOUN. To clarify the numbers, first I want to say your 

analysis is essentially appropriate in that even those loans that are 

48

again pre-paid, they are refinancing. They are jumping back in the 

pool and are at risk again to this 5 percent foreclosure. But the 

numbers, to clarify for the record, come from the Mortgage Bankers 

Association’s regular tracking of foreclosure. The current statistics 

were that 5 percent are currently in foreclosure and they track it 

by quarter. For this quarter, the first quarter, an additional 1.8-

plus percent again went into foreclosure during the first quarter. 

At the end of the quarter, you had 5 percent in foreclosure process. 

Whatever the precise number is, I think it shows, and we cite 

several other foreclosure studies in our testimony, there is an explosion in foreclosures going on across this country fueled mainly 

by subprime loans. 

Mr. ACKERMAN. At the end of the term, what percentage of the 

people who have loans in the subprime market refinance within the 

same market? Is that a big number? You are shaking your head. 

Mr. CALHOUN. Yes. I think the data show that most of the loans 

are refinanced back into the subprime market. 

Mr. ACKERMAN. Are most of them in the subprime until their 

house is paid off? Do we know how many actually get out of the 

subprime market? 

Mr. DEMONG. I think that is an excellent question. One of the 

things that I want to do at some point is study that exact issue. 

I understand from some of the lenders that folks do move from the 

subprime to prime, but I do not have a good statistic for you. 

Mr. ACKERMAN. Okay. If you would, professor, I think that would 

be very helpful for us to understand the industry and what is going 

on, which leads me to my second question, similar to the question 

or following up on the question that Mr. Davis had raised. People 

in the subprime market are people with poor credit, people in the 

minority communities and less-educated communities tend to have 

poorer credit. They also have less of an education, of which at least 

several people spoke previously. 

I know that I have a fairly good interest rate. I have a fairly good 

credit rating. It is because of that, I presume, that I get solicitations because people want my business and they keep offering me 

lower and lower and sometimes free mortgage money for a period 

of time. I take advantage of that. Less-educated people do not go 

out and actively seek and test the market for different rates. 

Is there an active program such as the one for people who are 

more economically advantaged, presumably better educated and 

better financial risks, a similar program for people who are in the 

subprime market? Does anybody send them a solicitation and say, 

hey, we reviewed your credit, the way they did mine, and you are 

pre-approved to get such-and-such an interest rate, and please fill 

out the application or call and we will do it over the phone in 22 

minutes? Does such a program exist for those people? Or is it just 

those of us who are fortunate? 

Mr. CALHOUN. I think the industry information is clear that if 

anything there is more solicitation of loans in the subprime market. It is hard to believe given the volume in the prime market. 

Mr. ACKERMAN. Is that solicitation for another loan or solicitation for a lower interest rate? 

49

Mr. CALHOUN. It is solicitation typically for another loan, because 

again in the subprime market, most of these loans are originated 

by brokers. 

Mr. ACKERMAN. I can appreciate that, because if it is only 3 

years, everybody is looking for that business, because if it is being 

written at 9 percent or whatever, people are going to want to write 

12 percent or whatever it is, 15 percent, write that business. 

But my credit report gets reviewed by people with green eyeshades somewhere, and I get all these promotions. I know a lot of 

other people that do as well. It floods our mailboxes, and they are 

offering us a better deal. I am not asking you if they are getting 

another deal, because everybody wants to give them another deal 

if they are paying that rate. Statistically, it pays to make the bet. 

But does anybody go to these people and say, hey, based on your 

credit report recently, you are a better risk and therefore we are 

going to offer you four points lower or three points lower? 

Mr. CALHOUN. The challenge has been that the market has shifted and gotten turned on its head so that in these situations most 

of the money for the originator is being made in up-front fees. So 

the incentive, particularly since they know somebody else is going 

to come and try and sell another loan a year or 2 later is to try 

and get as much up-front fees and capture profit there, instead of 

having free market forces work that would compete to lower the interest rate. That is one of the reasons that we want the market to 

work better by having people compete on interest rates, and let 

lenders offer a rate that reflects the risk. 

Mr. ACKERMAN. And the current system does not permit that? 

Mr. CALHOUN. The current system turns it on its head and says 

the most successful lender is the one who can extract the most 

points at each lending. 

Mr. ACKERMAN. That system basically locks these people, who 

tend to be more minority and poorly educated, into expending a 

greater portion of their income than anybody else in our society on 

their housing needs, although their housing needs might be much 

more modest. Is that accurate? 

Mr. CALHOUN. Yes, Congressman. 

Mr. ACKERMAN. Should there be something, and I am finishing 

up now, Mr. Chairman, should there be something in the counseling process which tells these people that if your credit position 

improves and if you make all your payments on time, that there 

is a reasonable possibility that when your loan comes to the end 

of its term that you will be able to get a better rate, and here is 

what you should do about it, or do we just tell them other things? 

Mr. DEMONG. Congressman, I have actually seen some ads that 

Fannie Mae has done arguing that people can improve their credit 

if they take the certain steps. 

Mr. ACKERMAN. Does this go out to those people specifically or 

is it advertising in the papers? 

Mr. DEMONG. I have only seen it on television. 

Mr. ACKERMAN. And that is Fannie Mae. 

Mr. DEMONG. I think the point is that that education is always 

more valuable, and helping people better understand their own 

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while. I know some of the industry has done that, with such programs as ‘‘BorrowSmart’’. 

Mr. ACKERMAN. Last question, should we be looking at a requirement or encouraging the industry to when they make re-solicitations or initial solicitations of the people who are in the subprime 

market, that if their credit is good from that point on, if they are 

paying their bills, including their mortgage, and are not late, specifically to these people during the counseling process, and perhaps 

a written notice be required to them towards the end of their term 

that they should investigate that? Would that be helpful? 

Mr. DEMONG. Again, as a professional educator, educating folks 

is always important. If it became a written notice, the point I 

would make is make sure it is easy to read and understand that 

it is there to help them. 

Mr. ACKERMAN. Mr. Calhoun or Mr. Green or anybody? 

Mr. CALHOUN. The mortgage process is inherently complex and 

can be easily manipulated. The time you need counseling is at or 

near the time of closing. That is why the North Carolina law, one 

of its most effective provisions has been to say, if you are going to 

get a very high-fee mortgage, that you should go to counseling at 

that point, get a certificate, and then go through with the mortgage 

if you want to. But almost invariably, what happens is they are advised they can get a better mortgage and they in fact do get a better mortgage rather than one of these very high-fee mortgages. 

Mr. ACKERMAN. Mr. Green, any comment? 

Mr. GREEN. No. The experience that we have had with investor 

education on the bond market side has been a very positive thing. 

So education is a good thing. 

Mr. ACKERMAN. Indeed it is. With that, I thank the Chair. 

Chairman NEY. I thank the gentleman, and thank the panel for 

your patience and participation, also our members for coming 

today, and Mr. Ackerman. 

I have for the record some hearing enclosures. I have a Statement of the Coalition for Fair and Affordable Lending; a Statement 

of the Housing Policy Council; and a Statement of Freddie Mac 

which I would like to enter for the record, if there is no objection. 

Hearing no objection, I enter it for the record. 

[The following information can be found on pages 117, 135 and 

127 in the appendix.] 

I would also like to note that some members may have additional 

questions for this panel which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and 

place their responses in the record. 

Again, I want to thank Chairman Bachus and most of all, all of 

you who came here today. Thank you. 

[Whereupon, at 1:05 p.m., the subcommittees adjourned.] 

(51)

A P P E N D I X

June 23, 2004

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