LEGISLATIVE SOLUTIONS TO ABUSIVE

MORTGAGE LENDING PRACTICES

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND 

COMMUNITY OPPORTUNITY

AND THE

SUBCOMMITTEE ON 

FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MAY 24, 2005

Printed for the use of the Committee on Financial Services

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LEGISLATIVE SOLUTIONS TO ABUSIVE MORTGAGE LENDING PRACTICES

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LEGISLATIVE SOLUTIONS TO ABUSIVE

MORTGAGE LENDING PRACTICES

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND 

COMMUNITY OPPORTUNITY

AND THE

SUBCOMMITTEE ON 

FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MAY 24, 2005

Printed for the use of the Committee on Financial Services

Serial No. 109–33

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(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

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 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

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 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON HOUSING AND COMMUNITY OPPORTUNITY

ROBERT W. NEY, Ohio, Chairman

GARY G. MILLER, California, Vice Chairman 

RICHARD H. BAKER, Louisiana 

WALTER B. JONES, JR., North Carolina 

CHRISTOPHER SHAYS, Connecticut 

PATRICK J. TIBERI, Ohio 

GINNY BROWN-WAITE, Florida 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

JOHN CAMPBELL, California 

MICHAEL G. OXLEY, Ohio 

MAXINE WATERS, California 

NYDIA M. VELA ́ ZQUEZ, New York 

JULIA CARSON, Indiana 

BARBARA LEE, California 

MICHAEL E. CAPUANO, Massachusetts 

BERNARD SANDERS, Vermont 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

EMANUEL CLEAVER, Missouri 

AL GREEN, Texas 

BARNEY FRANK, Massachusetts 

(IV)

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SPENCER BACHUS, Alabama, Chairman

WALTER B. JONES, JR., North Carolina, 

Vice Chairman 

RICHARD H. BAKER, Louisiana 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SUE W. KELLY, New York 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

JUDY BIGGERT, Illinois 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

RICK RENZI, Arizona 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

MICHAEL G. OXLEY, Ohio 

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 

JOSEPH CROWLEY, New York 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

AL GREEN, Texas 

GWEN MOORE, Wisconsin 

WM. LACY CLAY, Missouri 

JIM MATHESON, Utah 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

May 24, 2005 ..................................................................................................... 1

Appendix: 

May 24, 2005 ..................................................................................................... 111

WITNESSES 

TUESDAY, MAY 24, 2005 

Adams, Stella J., Board of Directors, National Community Reinvestment Coalition ...................................................................................................................... 23

Bouldin-Carter, Lisa, National Executive Director, BorrowSmart Public Education Foundation ................................................................................................ 81

Eakes, Martin D., Chief Executive Officer, Center for Community Self Help ... 25

Green, Micah S., President, The Bond Market Association ................................. 28

Guilfoil, Martina, Executive Director, Inglewood Neighborhood Housing Services ......................................................................................................................... 83

Hummel, Alan E., Chief Executive Officer, Iowa Residential Appraisal Company, on behalf of the Appraisal Institute ......................................................... 86

Lowrie, Regina, President-elect, Mortgage Bankers Association ......................... 30

Nabors, Jim, President-elect, National Association of Mortgage Brokers .......... 87

Nadon, Steve L., Chief Operating Officer, Option One Mortgage, on behalf 

of the Coalition for Fair and Affordable Lending .............................................. 31 

Smith, Joseph A., Jr., North Carolina Commissioner of Banks .......................... 21

APPENDIX 

Prepared statements: 

Ney, Hon. Robert .............................................................................................. 122

Bachus, Hon. Spencer ...................................................................................... 112

Clay, Hon. Wm. Lacy ....................................................................................... 115

Ford, Hon. Harold ............................................................................................. 117

Kanjorski, Hon. Paul E. ................................................................................... 118

Meeks, Hon. Gregory W. .................................................................................. 119

Adams, Stella J. ................................................................................................ 124

Bouldin-Carter, Lisa ......................................................................................... 138

Eakes, Martin D. .............................................................................................. 150

Green, Micah S. ................................................................................................ 186

Guilfoil, Martina ............................................................................................... 180

Hummel, Alan E. .............................................................................................. 196

Lowrie, Regina .................................................................................................. 206

Nabors, Jim ....................................................................................................... 218

Nadon, Steve L. ................................................................................................ 225

Smith, Joseph A. ............................................................................................... 355

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Oxley, Hon. Michael G.: 

Opposition letter regarding H.R. 1295 ............................................................ 480

Opposition letter regarding H.R. 1295 from NCRC ....................................... 483

2004 NCRC report ............................................................................................ 485

Letter of support ............................................................................................... 522

Ney, Hon. Robert: 

Letter from RESPRO in support of H.R. 1295 ............................................... 358

List of co-sponsors of H.R. 1295 ...................................................................... 360

Page

VI

Bachus, Hon. Spencer: 

Discussion transcript ........................................................................................ 361

Washington Post article ................................................................................... 362

Brown-Waite, Hon. Ginny: 

Inside Mortgage Finance’s newsletter ............................................................ 364

OCWEN Financial rate sheet .......................................................................... 368

Carson, Hon. Julia: 

Argent Mortgage Company rate sheet ............................................................ 369

Clay, Hon. Wm. Lacy: 

NCLR statement ............................................................................................... 372

Consumer Mortgage Coalition statement ....................................................... 376

McHenry, Hon. Patrick: 

Option One Mortgage paper ............................................................................ 474

Appraisal Institute: 

Written responses to questions from Hon. Paul Kanjorski ........................... 460

Martin Eakes: 

Center for Responsible Lending policy brief .................................................. 526

Center for Responsible Lending bill analysis of H.R. 1295 ........................... 527

Responses to questions from Hon. Patrick McHenry .................................... 463

Alan Hummel: 

Home Insecurity paper ..................................................................................... 530

(1)

LEGISLATIVE SOLUTIONS TO 

ABUSIVE MORTGAGE LENDING PRACTICES 

Tuesday, May 24, 2005

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON HOUSING AND

COMMUNITY OPPORTUNITY AND

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND

CONSUMER CREDIT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittees met, pursuant to notice, at 10:03 a.m., in 

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

[chairman of the Housing and Community Opportunity subcommittee] presiding. 

Present: Representatives Bachus, Lucas, Ney, Kelly, Gillmor, 

Biggert, Shays, Miller of California, Feeney, Hensarling, BrownWaite, Harris, Pearce, Neugebauer, Price, McHenry, Kanjorski, 

Waters, Sanders, Maloney, Velazquez, Watt, Carson, Sherman, 

Lee, Moore of Kansas, Ford, Crowley, Clay, Israel, McCarthy, Baca, 

Lynch, Miller of North Carolina, Scott, Davis of Alabama, Green, 

and Moore of Wisconsin. 

Chairman NEY. The hearing will come to order. 

Without objection, all members’ opening statements will be made 

part of the record. 

Today, we have two subcommittees which are meeting to continue to look into the important sub-prime mortgage market and 

its importance to consumers. 

In the past few years, Chairman Bachus—whom we welcome 

today and thank for all his efforts—and I have taken a great deal 

of time to investigate and find solutions to the problems of abusive 

and predatory lending practices, especially in the sub-prime market. 

We first began by holding roundtables to discuss these practices, 

sub-prime lending in general, and ways to ensure credit availability 

to those who need and want it. Those roundtables I think were 

very good, very successful. Many members on both sides of the 

aisle attended them. We also appreciated Mr. Kanjorski, among 

others, Ms. Waters and other members who are here today, both 

sides of the aisle that attended these roundtables. 

In addition, last Congress we had a number of joint hearings to 

continue to investigate this issue that affects all participants in the 

mortgage market. Today, we will move this process forward by examining potential legislative solutions to these lending practices. 

2

In March, I introduced, along with Congressman Paul Kanjorski 

of Pennsylvania—and I want to thank Mr. Kanjorski, who has just 

arrived on cue, for his support of this measure. I think he brings 

a tremendous amount of credibility to the bill and put in countless 

hours, he and his staff, Todd, who is here today, and our staff, in 

drafting this measure, which aims to stop abusive lending practices, while allowing the mortgage market to continue to offer affordable credit. 

Congressman Kanjorski and I worked long and hard to craft a 

legislative solution that drew from the many hearings this committee held last Congress, as well as the thoughts and suggestions 

of all those who will be affected by the bill. 

Congressman Kanjorski and I believe, I think it is safe in saying, 

that we have struck a lot of good compromises in this piece of legislation. I believe this bill provides the most comprehensive balance 

and effective set of legislative solutions that any Federal or State 

bill has ever offered for protecting mortgage borrowers from abusive, deceptive and unfair lending practices. 

We have also come to understand, like all legislation many people have ideas about how it can be changed or improved further, 

according to people’s points of view. As we stated from the beginning, we are willing to continue always to talk about the issues and 

always to look at the piece of legislation. That being said, I strongly 

believe the approach and the principles embodied in the Responsible Lending Act are the appropriate way to address the problem. 

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 

anyone else in the world. As a result, this country has the world’s 

highest homeownership rate. However, many consumers have had 

to pay more for credit than they should because of abusive and deceptive lending practices. Many State laws, as well as the mortgage 

lending industry itself, have done a lot to stop these practices. 

Unfortunately, the resulting patchwork of State and local laws 

threatens to undermine their intent, which is to provide affordable 

mortgage credit to consumers who need it the most. The time has 

come for a uniform national standard in this area. The Ney-Kanjorski Responsible Lending Act recognizes this fact and attempts to 

strike a balance between protecting consumers from unscrupulous 

practices and creating uniform regulations that will allow mortgage 

lenders to offer borrowers affordable credit options. 

I look forward to hearing from our witnesses, and again I want 

to thank Chairman Bachus for his support on this issue, and again 

Mr. Kanjorski. For the record, I am going to just enter the cosponsors, but we have tremendous members from both sides of the aisle 

who I think bring an amazing amount of credibility to the process 

and also credibility to the issue. 

With that, I want to recognize the gentleman from Pennsylvania. 

Thank you. 

Mr. KANJORSKI. Thank you, Mr. Chairman. 

Mr. Chairman, I want to say that it has been a pleasure in cooperating with you and coordinating with you on the Ney-Kanjorski 

bill. I think we have something here. I think we have a process in 

work and I look forward to that work today. 

3

I can say I am pleased that you have convened this meeting at 

this stage of the process. I commend you for convening and working 

on this over the last several years with me. 

In recent years, the sub-prime mortgage industry has grown dra- matically. In 1994, sub-prime lenders underwrote just $34 billion 

in mortgages. By 2004, this figure had ballooned to more than $600 

billion. As the sub-prime industry has matured, complaints about 

abusive lending practices and concerns about conflicting State laws 

have also grown. 

As my colleagues already know, I have spent several years studying these matters. As a result, I have come to the conclusion that 

there is a genuine need for a strong, uniform national sub-prime 

lending standard with appropriate enforcement mechanisms to protect consumers. 

Because the problem of abusive lending is complex, it also deserves a comprehensive solution. Beyond establishing uniform national standards, we need to improve housing counseling and better 

mortgage servicing. We also need to enhance appraiser independence and oversight, and strengthen mortgage broker licensing and 

supervision. 

H.R. 1295, the bill that I have introduced along with Congressman Ney, achieves these five important objectives. Several of my 

colleagues have also introduced their own bills to address these 

issues. As a result, I am hopeful that in the coming months we can 

build on the growing bipartisan consensus in Congress about the 

need to address these matters. 

Because the adoption of a uniform national standard is a key 

issue in these debates, I would like to focus briefly on why we need 

one. Establishing a uniform national standard will help us to ensure that consumers receive the same set of protections no matter 

where they live or from whom they borrow. A uniform national 

standard will also ease regulatory burdens, level the competitive 

playing field, and ensure the affordability of loans for all consumers. 

We are fortunate to have with us today a diverse group of witnesses. I already know that they will speak forcefully and candidly 

about their views in these matters. I also hope that they will share 

with us their ideas for how we can improve H.R. 1295, the Responsible Lending Act. 

In particular, there are a number of questions that I hope these 

experts will address. How should we refine the bill’s preemption 

language? Should we ban mandatory arbitration and single-premium credit insurance on all loans? Should we also improve upon 

the bill’s appraisal independence standard to incorporate a ban on 

collusion? 

In closing, Mr. Chairman, we need to ensure that all homebuyers 

and homeowners are appropriately protected in today’s complex 

mortgage marketplace. Today’s hearing will further our debates in 

these matters and hopefully build a consensus for enacting a subprime lending bill into law later in this session. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Kanjorski can be found on page 

118 of the appendix.] 

Chairman NEY. I thank the gentleman for his comments. 

4

Chairman Bachus? 

Mr. BACHUS. Thank you, Chairman Ney. I thank you for convening this fourth joint hearing of our two subcommittees to review 

issues relating to sub-prime mortgage lending. 

As Mr. Kanjorski and others have said, this market in 10 years has grown from $34 billion to $600 billion; from one out of every 

20 mortgages to one out of every four mortgages. So it has been 

a dramatic shift in the number of sub-prime mortgages. It is time 

we do take a look at it and see if uniform standards would be an 

appropriate response. 

In November 2003, we held a hearing which examined ways to 

eliminate abusive lending practices in the sub-prime lending market, while preserving and promoting affordable lending to millions 

of Americans. 

Our second hearing last March focused on the characteristics of 

sub-prime borrowers and the advantages and disadvantages the 

market poses to the financial security of these consumers. 

Our third hearing last June explored the role that the secondary 

market plays in providing liquidity to the sub-prime lending industry and creating homeownership opportunities for Americans with 

less than perfect credit records. 

That is what we are dealing with today. We are dealing with people who do not have perfect credit scores and their attempts to get 

mortgage financing. Today’s hearing will focus on legislative proposals to abate and eliminate abusive mortgage lending practices. 

Earlier this year, Chairman Ney and Congressman Kanjorski introduced H.R. 1295, the Responsible Lending Act, which contained 

a number of new and comprehensive solutions to mortgage lending 

problems and abuses. As I say today, it also generated T-shirts, so 

it is evidently maturing. 

The other major legislative proposal to address this issue is H.R. 

1182, the Prohibit Predatory Lending Act, which was introduced by 

Congressman Brad Miller and Congressman Melvin Watt. I am not 

sure that you generated any T-shirts or slogans yet, Congressman 

Watt, but I have not seen any. 

Congressman Ney, Congressman Kanjorski, Congressman Watt 

and Congressman Miller all deserve a lot of credit for their tireless 

efforts on this issue over the past year. I look forward to working 

with them and the entire committee to come up with some solution 

to the problem. 

Unfortunately, the increase in sub-prime lending has, in some instances, increased abusive lending practices that have been targeted at more vulnerable populations. We have heard past testimony in this committee about practices toward the elderly and minorities. 

An NPR story which ran last week talked about the fact that a 

sub-prime lending market has developed for offering illegal immigrants home loans. I do not know if any of you have seen those stories. At least according to NPR, these immigrants, some of them, 

do not have green cards. They do not have legal identification. 

They do not have a Social Security number or even a bank account. 

One disturbing problem about this is not only I think first of all 

it tells us the fact that a market has developed for illegal immigrants for mortgages, it shows that the immigration crisis is obviVerDate 0ct 09 2002 09:33 Sep 08, 2006 Jkt 029453 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 F:\DOCS\29453.TXT HFIN PsN: TERRIE
5

ously a large crisis, and an illegal immigrant homebuyers market 

has developed. The other thing that the story highlighted is that 

these illegal immigrants are being taken advantage of by predatory 

home lenders. 

The mortgage companies, again according to NPR, see no problem with giving a home loan to illegals, some with no credit history 

or bank account. The approach apparently is even if the immigrants default on their loans or are deported, the mortgage company still gets the house back. It apparently is a win-win situation 

for the lenders and a no-win situation for the illegal immigrants. 

So this again just highlights the fact that in certain cases our illegal immigrant population is being abused and taken advantage of 

in so many ways. 

Predatory loan features include excessive high interest rates and 

fees, balloon payments, high loan-to-value ratios, excessive prepayment penalties, loan flippings, loan steerings and unnecessary 

credit life insurance. Predatory lending has destroyed the dream of 

homeownership for many families, while leaving behind devastated 

communities. Hopefully, today’s hearing will help us come up with 

solutions to address this issue. 

Let me close by saying this—predatory lending is not sub-prime 

lending. There is a difference and you should not use these terms 

interchangeably because there are, in fact today we are going to 

have testimony from some sub-prime lenders who do not practice 

these abuses and are not guilty of these abusive practices. What 

they do is they provide people with less than perfect credit the opportunity to own a home. 

The testimony before this committee in the last year is we have 

increased homeownership among minorities, from legal immigrant 

families, among the elderly, by the use of sub-prime lending. So 

sub-prime lending market is not a dirty word. Predatory lending is 

a dirty word, and there is a distinction between the two. It is one 

that we should bear in mind and not use those terms interchangeably. 

What we are attempting to do by this series of hearings is establish some uniformity in the sub-prime lending market and keep 

predatory lending practices out of that market. It is something that 

I think most of the large sub-prime lending companies very much 

want. It is something the consumers would welcome. It is a winwin situation for all of us. 

I will close by saying that I am committed to putting an end to 

predatory lending, this committee is, while at the same time preserving and promoting access for all homebuyers to affordable credit. I again commend Chairman Ney for his leadership, both in presiding over these important hearings and in advancing creative solutions to the predatory lending problem. I think with Congressmen Miller’s, Kanjorski’s and Watt’s help and that of others, we 

can fashion a good piece of legislation. 

I look forward to hearing from our witnesses, and I yield back 

the balance of my time. 

Chairman NEY. I thank the gentleman. 

The gentleman, Mr. Watt? 

Mr. WATT. Thank you, Mr. Chairman. 

6

I thank the Ranking Member for allowing me to go since I have 

to go to another appointment, and because I do kind of have a dog 

in this fight, as Mr. Bachus has indicated. 

There are some things that I think we should focus on first that 

both the Ney-Kanjorski cosponsors and the Miller-Watt cosponsors 

agree on. We agree that there is a problem. There certainly is a 

problem in the predatory lending area. I know we agree because we 

had a discussion when we were doing our preliminary views in 

some document earlier in this term of Congress, that all sub-prime 

loans are not predatory loans. I think we agree that we need to 

find a way to separate the legitimate sub-prime and non-sub-prime 

loans from the predatory ones. 

And then we start to ask ourselves some questions about which 

I am not sure whether we agree or disagree. I think I have detected in the opening statements perhaps a fairly substantial 

amount of disagreement. 

The first question I would raise is, do we need to preempt all 

State law or do we need to preempt any State law? Are we going 

to be the big brother in this area, or is there going to be some semblance of respect for States’ rights and federalism? Or is this yet 

another area where we are going to just take over the entire field? 

And then, if we do agree that we are going to preempt all or 

some State law, should you adopt a standard that is the lowest 

common denominator, or should you adopt a standard that most of 

the testimony I have heard in all of our hearings suggests, that 

North Carolina has the right balance? Should you adopt that as the 

correct balance? 

It should not go unnoticed that there are at least three people 

on this panel this morning who are from North Carolina and I 

think will have a perspective on that. Or should we be trying to 

adopt a standard, if we are preempting State law that is actually 

the highest common denominator that can be achieved? 

I honestly have not spent a lot of time yet trying to figure out 

what the difference between Ney-Kanjorski and Miller-Watt, what 

those differences are. But most of you know that when we go out 

on breaks, I have a tendency to start reading this stuff, and I suspect that by the time I get back I will know what the differences 

are pretty substantially. 

Some of the things I have read about Ney-Kanjorski, and these 

are not from my own independent verification, lead me to have a 

fairly substantial amount of heartburn. Despite that, if we have 

agreed that there is a problem and that there needs to be some fix 

of the problem, I hope that we are able to work our way to some 

common ground and try to reach a bill this term that will advance 

the rights of consumers. 

I appreciate the gentleman and I yield back. 

Chairman NEY. I thank the gentleman. 

The gentleman from Texas, Mr. Hensarling? 

Mr. HENSARLING. Thank you, Mr. Chairman. 

As we enter this hearing, I am once again reminded of the physician’s Hippocratic oath: First, do no harm. I fear that in our zeal 

to protect consumers from certain unfair lending practices, we may 

find that we have in fact protected them from any lending whatsoever. 

7

In the past, we have heard testimony that this may have been 

the case in North Carolina, Georgia, New Mexico and New Jersey, 

all of which passed very restrictive laws aimed at so-called ‘‘unfair’’ 

lending practices. The practical effect was that most legitimate 

lenders ceased to make high-cost loans. Thus, many borrowers who 

failed to qualify for conventional loans ended up with no loans. 

Mr. Chairman, those who fail to learn the lessons of history are 

certainly condemned to repeat them. I need not remind my colleagues on the committee that Americans currently enjoy the highest rate of homeownership in the history of America. The benefits 

of free enterprise and competition have been plentiful. With the advent of sub-prime lending, countless families have now had their 

first opportunity to buy a home or perhaps be given a second 

chance. The American dream should never be limited to the welloff or those consumers fortunate enough to have access to prime 

rate loans. 

In addressing the issue of predatory lending, it is important that 

we do not act to tie the hands of mortgage lenders with the red 

tape of excessive regulation. Disclosure and transparency of business practices are important for consumers, but lenders must not 

be denied the flexibility to protect themselves from risk and to effectively price the credit risk of the consumers seeking loans from 

their businesses. A Financial Services Roundtable study has shown 

that origination costs for sub-prime loans are 30 percent higher. 

Servicing costs are more than double, and delinquency rates six 

times higher. Again, lenders must be able to price the credit risk 

if these loans are to be made. 

If we truly want to be pro-consumer on this committee, I would 

suggest we find ways to 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 agree on what constitutes predatory 

lending and we isolate it from those reasonable players in the commercial market who are making homeownership opportunities 

available to low-income Americans. 

Mr. Chairman, after careful consideration, I have chosen to cosponsor H.R. 1295, the Responsible Lending Act, which I believe 

represents obviously a compromise and a balanced approach. I certainly applaud your leadership and that of Mr. Kanjorski. Although 

I have great concerns over some of the provisions in the legislation 

that I fear may be overly burdensome or tantamount to price controls, I do believe the legislation does a good job in addressing 

many true predatory lending practices that often involve fraud and 

coercion, such as loan flipping, steering, and home improvement 

scams. 

Importantly, the legislation would restrict assignee liability and 

create a uniform national standard that I believe will strengthen 

the ability of millions of Americans to access mortgage credit for 

the first time and achieve their American dream. 

I thank the Chairman for his leadership and yield back the balance of my time. 

Chairman NEY. Mr. Sanders? 

Mr. SANDERS. Thank you very much, Mr. Chairman. Let me 

thank you and Chairman Bachus for holding this important hearing. 

8

According to the Center for Responsible Lending, predatory lending is costing U.S. families $9.1 billion each and every year. Mr. 

Chairman, in the richest country on earth, the number of housing 

foreclosures in this country is a national disgrace. Between 1980 

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

United States have skyrocketed by almost 300 percent. According 

to a recent 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 sub-prime mortgage market that must be put 

to an end immediately. According to the Mortgage Bankers Association, while sub-prime lenders account for 10 percent of the mortgage lending market, they account for 60 percent of foreclosures. 

Mr. Chairman, according to figures compiled by National Mortgage News, new sub-prime loans totaled $290 billion in 2003, more 

than double the total loan volume for the year 2000. Homeownership is an American dream. It is the opportunity for all Americans 

to put down roots and start creating equity for themselves and 

their families. Homeownership has been the path to building 

wealth for generations of Americans. It has been the key to ensuring stable communities, good schools and safe streets. 

Predatory lenders play on these hopes and dreams to rip people 

off and rob them of their homes. These lenders target lower-income, 

elderly and often unsophisticated homeowners for their abusive 

practices. Let us not forget that predatory lending is being perpetrated 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, let me be clear. We need to do more than simply 

help homeowners who are ripped off by predatory lenders. We need 

to stop predatory lenders from stealing people’s homes in the first 

place. That is why Congress needs to pass anti-predatory lending 

legislation. We need strong standards that will not allow lenders 

to use loopholes to escape local and State laws. But we also must 

make sure that we do not prohibit State and local governments, the 

laboratories of democracy, from passing stronger consumer protection laws. 

That is why I am a proud cosponsor of H.R. 1182, the Prohibit 

Predatory Lending Act of 2005, introduced by Representatives Brad 

Miller, Mel Watt and Barney Frank. This legislation is based on 

the State of North Carolina’s predatory lending statute, which is 

widely considered the model State statute for preventing abusive 

lending, while preserving access to credit. 

Mr. Chairman, since the North Carolina law was enacted, the 

State has seen a dramatic reduction in abusive or predatory subprime lending and refinancing. A recent study conducted at the 

University of North Carolina at Chapel Hill found that after the 

passage of the North Carolina legislation ′′there was a reduction of 

9

loans with predatory terms without a restriction on access to or increase in the cost of loans to borrowers′′ with imperfect credit. 

Mr. Chairman, I know that this committee will also be considering H.R. 1295. 

Chairman NEY. The gentleman’s time has expired. Can the gentleman summarize? 

Mr. SANDERS. Okay. I look forward to hearing what our witnesses will say about this legislation, but in my view it does not 

go far enough. 

Thank you, Mr. Chairman. 

Chairman NEY. I thank the gentleman. 

Ms. Kelly of New York? 

Mrs. KELLY. I have no opening statement. I am anxious to hear 

from the witnesses, Mr. Chairman. 

Chairman NEY. Mr. Miller of North Carolina? 

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

I agree with those who today have said that Congress’s goal 

should be trying to provide a reasonable set of consumer protections, while at the same time assuring that credit remains available in the sub-prime market both for home purchases, purchase 

money mortgages, and for those consumers who need to borrow 

money against their home. 

I also extend the invitation to all who are interested to discuss 

the provisions of Ney-Kanjorski and the bill that Mr. Watt and I 

have introduced, or any other proposals. I certainly welcome that 

opportunity to sit down, not just with consumer advocates, but with 

mortgage lenders, with mortgage brokers, with the bond market, 

with all God’s children, to talk about this bill and these provisions. 

I understand that there perhaps were discussions in the last 

Congress in the last several months over the Ney-Kanjorski bill 

and the provisions of that, but I do not believe that consumer advocates, those who are advocating from the consumer point of view, 

were involved in those discussions. 

Although there may be some consensus or some compromise 

within the industry, to those who look at this from the consumer 

point of view, describing Ney-Kanjorski as a compromise bill is like 

the character in the Blues Brothers movie who said that he liked 

both kinds of music, country and western. Mr. Chairman, there are 

other points of view that need to be heard. 

Thank you. 

Chairman NEY. Ms. Harris of Florida? 

Ms. HARRIS. Thank you, Mr. Chairman. I wish to thank you for 

holding this important hearing today, and I also wish to thank the 

distinguished members of the panel for joining us. 

Consumer protection through disclosure is constituted as a staple 

of Chairman Oxley’s leadership on the Committee on Financial 

Services, and certainly Chairman Ney’s leadership in this subcommittee. Our discussions regarding this matter should remain 

consistent with this theme. 

I believe that homeownership provides families and individuals 

with an unparalleled opportunity to generate wealth. Studies have 

shown that when a family of low-income persons, their net wealth 

is about $900 when they rent and it skyrockets to over $70,000 

once they own their own home. So for most Americans, the ability 

10

to secure a mortgage is central to their ability to purchase that 

home. 

Damaged credit that has resulted from past mistakes or financial 

reversals can serve as a major obstacle, thus the willingness of certain lending institutions to underwrite the increased risks associated with damaged credit constitutes an important service that 

provides a second chance for millions of people. 

Regrettably, the abusive practices of bad actors which prey upon 

elderly and minority populations throughout my area have resulted 

in the demonization of an entire sub-prime industry. Nevertheless, 

we cannot ignore the effects of predatory lending when we truly 

seek to help the nonconventional borrowers overcome substandard 

credit. 

While I applaud the industry and State-level initiatives to address unscrupulous lending practices, I contend that we must formulate a national policy that supplements and enhances these efforts. I look forward to the suggestions of today’s panel which I 

hope will provide us with viable alternatives for reforming the subprime industry, without eliminating the critical borrowing opportunities that enable men, women and children to escape the grip of 

poverty. 

Thank you, Mr. Chairman. 

Chairman NEY. I thank the gentlelady. 

Mr. Moore of Kansas? 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. I appreciate 

you and Chairman Bachus and Congressman Kanjorski for holding 

this hearing today. 

Over the last few years, this country has experienced an exceptionally strong housing market that has created wealth for Americans of all income levels and sustained our generally healthy national economy. The new wealth created in our country by growth 

in home equity has accrued not just to wealthy homeowners, but 

also to brand new homeowners who have taken advantage of historically low interest rates and a competitive lending market to buy 

a home. 

In fact, much of the growth in our housing market has come from 

individuals and families who have never been able to own a home 

in the past. Many new homeowners have benefited from the rapid 

growth in the sub-prime market. According to the FDIC, in 2004 

approximately 20 percent of all new mortgages were sub-prime 

loans, an increase of over 11 percent from 2003, when sub-prime 

loans accounted for approximately 9 percent of all loans. 

However, the growth of the sub-prime market has been accompanied by an increase in abusive lending practices as some lenders 

have exploited consumers’ confusion with the complicated process 

of buying a home, to charge excessive rates and fees that far surpass comparable rates. Predatory lending is now a national problem, one that I believe requires a national solution. 

While approximately half of the States and nearly two dozen localities have passed separate anti-predatory lending statutes and 

regulations, the State of Kansas, for example, does not have a statute defining ‘‘high-cost’’ mortgages and providing remedies to consumers who have been the victims of predatory lending. 

11

Ney-Kanjorski would significantly strengthen the Homeownership and Equity Protection Act, which currently regulates abusive 

lending practices in Kansas. Ney-Kanjorski will strengthen the 

predatory lending laws that control in Kansas, and for that reason 

I am adding my name as a sponsor of H.R. 1295. At the same time, 

Ney-Kanjorski is not a perfect bill and has some room for improvement. While I recognize that not everyone will support this bill, I 

hope that members of the committee can work together as we did 

on the Fair Credit Reporting Act and came together with I think 

a great overall piece of legislation. 

Here, we can do something that protects borrowers, and also continues to make credit available to potential homeowners and preserves lenders’ access to the capital markets. While I support the 

uniform national standards in Ney-Kanjorski, I also believe that as 

currently drafted, Section 106 is overly broad and should be revised 

in such a way that Federal regulators, in this case the Federal Reserve Board, have the ability to identify, define and prohibit new 

abusive lending practices that may arise in the future. 

Additionally, some provisions of the Miller-Watt bill could be 

used to improve Ney-Kanjorski as currently drafted. The right-tocure provision in Miller-Watt, for example, is stronger than the 

similar provision in Ney-Kanjorski and could be an area in which 

H.R. 1295 might be improved. For that reason, I am also adding 

my name as a cosponsor of Miller-Watt and look forward to coming 

up with an overall bill that I think will accomplish what our objectives are in this area. 

Thank you again, Mr. Chairman. 

Chairman NEY. Thank you. 

The gentleman from Georgia, Mr. Price? 

Mr. PRICE. Thank you, Mr. Chairman. 

I, too, want to add my thanks to the Chairman and Chairman 

Bachus for holding this hearing on this remarkably important 

issue. In a former life, I was a member of the Georgia State Senate, 

and we struggled and stumbled and struggled with this issue, and 

ultimately arrived, I believe, at a compromise that was really a 

delicate balance, but it is good for the citizens of our State. 

So I look forward to the testimony and I would ask each panelist 

to specifically comment, if you would, on the appropriateness of a 

Federal role in this issue. I look forward to your comments. 

Thank you so much. 

Chairman NEY. Thank you. 

The gentleman from Georgia, Mr. Scott. 

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

I, too, want to commend you for having this hearing. I do not 

think we can grapple with a more important issue facing the American people than protecting their homes, which is the best first 

foundation of building wealth. 

As my colleague from Georgia mentioned, Mr. Price, I, too, am 

from Georgia and for 10 years served as the Chairman of the Senate Rules Committee through which came much of our final legislation dealing with this issue. Before that, I was the author of the 

bill to respond to the Fleet financing debacle that happened in 

Georgia. So for many years, I have been grappling with this issue. 

12

I concur with both the Ney-Kanjorski bill and the Watt-Miller 

bill, and I am a cosponsor on both of those pieces of legislation. But 

what I would like to do is to appeal to this committee, to all interested parties, that we have got to ratchet up the issue of financial 

education. For no matter what we do, no matter what laws we put 

on the books, if we do not provide those vulnerable people, those 

who are targeted, predatory lending a targeted, a targeted phenomena. Very few people in this room are going to be targeted for 

predatory lending. Predators know where to go. That is why they 

are called predators. 

They go to the African-American community. They go to minority 

communities. They go to low-income communities. They go to seniors. They go to those communities that do not have the information and do not have access to that information. So while we grapple with balloon payments, while we grapple with preemption, 

while we grapple with excessive insurance costs, while we grapple 

with packing and all of these detestable things that we do not like, 

I ask this committee to deal with financial education as a part of 

whatever we come out with. 

A part of what I have talked about, I introduced in a bill earlier 

in my career here, 2 years ago, called the Financial Literacy Act. 

Much of those components have been embraced by the Ney-Kanjorski bill. But I want us to ratchet it up so we understand that 

we are not just talking about a program or a piece of paper or a 

booklet. We have to engage. We have to send out a direct pipeline 

to these targeted communities, a toll-free number that is answerable by human beings at the other end, not get a recording, not tell 

them to go to a computer someplace, but somebody there to answer 

and respond to them. These are vulnerable people, not sophisticated, but even myself or you, when you pick up that phone and 

you call for help, you want a human being at the other end. 

Also in this measure that we have, we will get grants down to 

the grassroots to groups like ACORN, NAACP; give these groups, 

AARP, with the credibility that is targeting and communicating 

with their constituency, grants to help market the toll-free number, 

to give these people help, so that in essence we are sending a message to America’s most vulnerable about predatory lending, to say 

before you sign on the bottom line, call this number. This toll-free 

number will also help us to be able to catalog the experience, to 

be able to measure it. 

This phenomenon is not going to end with a bill. It is an ongoing 

process. And very, very critical to the success of dealing with predatory lending is to make sure we arm our folks who are going to 

be the most vulnerable, with a help line, with that toll-free number. 

Chairman NEY. The time has expired. 

Mr. SCOTT. And finally, Mr. Chairman, I just want to say one 

thing. I know in the bill, I am mighty afraid that the infrastructure 

for the toll-free number and where we want to put this program, 

I think it has been designated to HUD. I have some strong reservations about that, as a result of seeing HUD being basically dismantled before our eyes. So I want us to look at this information and 

this financial literacy and the education, a toll-free number, lifted 

13

up and make sure that we put this in the right place in the Federal 

Government where it can do the most good. 

Thank you, Mr. Chairman. 

Chairman NEY. I thank the gentleman. 

Mr. Miller of California? 

Mr. MILLER OF CALIFORNIA. Thank you, Chairman Ney. 

California is experiencing a very strong housing market, but nationally there is an affordability crisis we are having to deal with. 

It is significant. In California, our homeownership rates lag the 

rest of the nation by about 10 percent. We are about 56.9 percent. 

That is rather scary. 

I praise Chairman Ney and Mr. Kanjorski for the bill they are 

putting out because we need a workable uniform national lending 

standard. We do not have that currently. There is no question that 

some non-prime borrowers are subject to abusive practices. We 

really have to effectively deal with that. There is no question that 

the number of asset borrowers out there are victims of practices 

that become victimized by poorly crafted protective languages by 

States or local municipalities. 

When cities start drafting their own predatory language, you oftentimes force sub-prime lenders out of the marketplace because it 

is difficult to keep up with the requirements from city to city. So 

we do need a national standard. We need to understand clearly 

there is a huge difference between predatory and sub-prime, and 

too many people want to sweep both of them under the same carpet, saying if you are not prime, you are predatory. 

We need to be very, very cautious because if we eliminate the 

sub-prime marketplace, we are going to hurt a lot of people whose 

credit is not necessarily stellar, but they should qualify for a subprime loan. If we become too dictatorial and we put too many requirements on that, you are going to wipe out a marketplace. 

That is scary because there are people out there who are qualifying for sub-prime. If that market was not available to them, they 

would be paying outrageous rates today, or it just would not be 

available to them at all, and they would be stuck renting an apartment somewhere. That is not what we are trying to emphasize in 

this country and this committee. We are trying to emphasize homeownership. The legislation we are crafting, the bills we are putting 

out emphasize the need for homeownership in this country. 

So yes, predatory lending is atrocious. It needs to be absolutely 

dealt with, but you just cannot necessarily couple that with the 

sub-prime market. There are bad people in every sector of society 

and there are some bad people in sub-prime. We are going to have 

to make sure they are eliminated. We need to do everything we 

can. I believe the Ney-Kanjorski bill goes a long way toward doing 

that. 

I praise you for this hearing today, Mr. Chairman, and I look forward to the testimony. Thank you. 

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

Ms. VELAZQUEZ. I have no opening statement, Mr. Chairman. 

Chairman NEY. Ms. Lee of California? 

Ms. LEE. Thank you, Mr. Chairman. 

14

I want to thank you and Chairman Bachus, our Ranking Members, Ms. Waters and Mr. Sanders, for holding this very important 

hearing today. 

Unfortunately, too many of our constituents, mine included, 

know first-hand the devastating impact of predatory lending practices by what I call loan sharks. It is downright criminal in terms 

of the type of penalties and practices that are targeting hardworking homeowners and stripping them of their wealth. These 

practices, as you know, are particularly a threat to the AfricanAmerican and Latino communities. That is why we must have 

strong anti-predatory lending laws. 

So as we consider the two major bills that address the issue of 

predatory lending, I want to go on record early in opposition to the 

Ney-Kanjorski bill as it is currently written. At this point, Mr. 

Chairman, I would ask unanimous consent to include into the 

record two letters in opposition to H.R. 1295. They are from 

ACORN, AFSCME, the AFL–CIO, AARP, Center for Community 

Change, National Consumer Law Center, the NAACP, and the National Council of La Raza, among many, many others. So Mr. 

Chairman, I would like to ask for unanimous consent to insert 

these letters into the record. 

Chairman NEY. Without objection. 

Ms. LEE. And also The Washington Post article from March 25 

entitled, ‘‘Civil Rights Leaders to Fight Lending Bill.’’ So I think 

that the advocates have united in opposition to this bill and I 

would ask that my colleagues read these letters and consider the 

issues that they raise. 

H.R. 1295 does not simply fail to protect borrowers from predatory lending. It does not simply wipe out strong State laws. It actually makes matters worse. So I would encourage my colleagues to 

look at H.R. 1182, the Prohibit Predatory Lending Act by Congressmen Miller and Watt, for a bill that would actually help to protect 

homeowners from abusive mortgage lending practices. 

We owe it to our communities to empower them to build wealth, 

not to push them into foreclosure and bankruptcy. We owe them 

strong protections. We owe them a bill that will truly address abusive practices and not make matters worse. 

Thank you, Mr. Chairman. I look forward to the hearing. 

Chairman NEY. I thank the gentlelady. 

Ms. Brown-Waite of Florida? 

Ms. BROWN-WAITE. Thank you very much, Mr. Chairman. 

I do not have an opening statement, but rather I look forward 

to hearing from the witnesses and commend you for putting together the hearing on legislative solutions to abusive mortgage 

lending practices. 

Thank you. 

Chairman NEY. The gentlelady, Ms. Biggert of Illinois? 

Mr. BACHUS. Mr. Chairman, I would like to point out that Ms. 

Biggert, as Mr. Scott, talked about financial literacy, and she has 

been a leader in this field. I would just point out to the committee 

that I think she could be a great help in what you mentioned. 

Chairman NEY. Mr. Green of Texas? 

Mr. GREEN OF TEXAS. Thank you, Mr. Chairman. 

15

I would like to thank our Ranking Member and also thank the 

members of the panels that will appear today for appearing with 

us. 

Mr. Chairman, I understand that not all sub-prime lenders are 

predatory lenders, but I also understand that most predatory lending practices occur in the sub-prime lending market. I do believe 

that this does merit some of our considerable attention. We are 

talking about now the means by which most people start their 

wealth-building process, by acquiring a home. If they are stripped 

of the equity in the home, if they have an onerous balloon payment, 

if they have excessive interest rates, it makes it very difficult for 

that wealth-building process to become a reality for them. 

I look forward to hearing from the persons who will testify. I do 

want to make it clear, however, that I am honored to support H.R. 

1182, and trust that we will have an opportunity to strengthen the 

legislation that will protect wealth-building in this country. 

Thank you. 

Chairman NEY. The gentleman from Connecticut, Mr. Shays? 

Mr. SHAYS. Thank you, Mr. Chairman. Thank you for holding 

this hearing. I look forward to hearing from the witnesses. 

Chairman NEY. Ms. McCarthy? 

Mrs. MCCARTHY. Thank you, Mr. Chairman, for holding this 

hearing. I am looking forward to hearing from the panel. Thank 

you. 

Chairman NEY. Mr. Neugebauer of Texas? 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. I thank you also 

for holding this hearing. 

I have been in the housing business for over 30 years, and actually did some mortgage lending. When we first, in the 1970s and 

1980s, there was really no sub-prime market. In other words, a 

person either qualified under Fannie Mae or Freddie Mac guidelines, and if they fell within those guidelines, they got to buy a 

home. If they did not, they were given no other alternative. One 

of the reasons for that was there was no secondary market for 

‘‘non-qualifying’’ loans. 

So I think we are very fortunate in this country today that we 

have homeownership at the highest rate ever in the history of our 

country. Homeownership among minorities is up also. So I think 

ways that we can continue to encourage lenders to participate in 

this lending to hopefully open up homeownership for more Americans is a very positive thing. 

I look forward to looking through and going through the process 

of this legislation and seeing if there are some areas where improvement is needed. But certainly, the goal would be not to discourage sub-prime lending, but to encourage it and to help facilitate that. I look forward to continued discussion. 

Chairman NEY. Mr. Israel from New York? 

Mr. ISRAEL. Thank you, Mr. Chairman. I will be very brief. 

This has been a very good process, I believe, about 3 years of consideration on this issue. I think that we have all arrived at a general consensus that while we want to do everything we can to expand access to credit, we clearly cannot abide abusive practices, 

fraud, discrimination, steering, loan packing, unreasonably escaVerDate 0ct 09 2002 09:33 Sep 08, 2006 Jkt 029453 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 F:\DOCS\29453.TXT HFIN PsN: TERRIE
16

lating payments, loan flipping, harsh balloon payments, and unreasonably harsh prepayment penalties. 

I believe that Ney-Kanjorski is an imperfect bill, but it is a very 

good start at arriving at a common sense resolution that helps protect against these deceptive, misleading, coercive practices, while 

ensuring that access to credit to those who would not otherwise 

qualify is provided. I will continue to work closely with both sides 

of the aisle in the hopes that we can arrive at a common sense resolution to this issue. 

I thank the Chairman for this hearing and yield back the balance 

of my time. 

Chairman NEY. The gentleman from Massachusetts, Mr. Lynch? 

Mr. LYNCH. Thank you, Mr. Chairman, and Chairman Bachus. I 

would like to thank you both, as well as Ranking Member Waters 

and Ranking Member Sanders for holding today’s hearing. 

Mr. Chairman, I think that this committee is taking an important step with today’s hearing to open up the lines of communication on this issue surrounding predatory lending. I think this aspect of the debate was missing from our recent debate around 

bankruptcy reform, where we took away certain protections from 

folks who got into financial trouble and yet we did not address the 

issue of those who led them there to positions of financial infirmity. 

I hope that at the end of this legislative process, a true bipartisan solution can be reached that will give consumers the protections they need, as well as to facilitate the ability of our local lenders to operate effectively in the sub-prime market. 

I am sure we all agree that predatory lending is harmful to consumers and creates problems in the marketplace. I have received 

calls, as I am sure many of my colleagues have as well from constituents who have ended up with bad loans and who are now at 

the risk of losing their homes. I want to welcome a constituent of 

mine here today, Monica Saddler from Hyde Park in Massachusetts, who is here to help bring a personal face to the real consequences of predatory lending. 

However, despite the mutual concern that we have about the 

issue, there are philosophical differences about how best to curb 

predatory lending practices without shutting down the sub-prime 

mortgage market. It is the job of this committee to navigate the differences between the legislative proposals to develop consensus on 

this legislation. 

In my home State of Massachusetts, legislators worked together 

to come up with a comprehensive predatory lending statute that 

was passed last year. I am curious to learn from today’s witnesses 

their opinion on how the legislative proposals reflect a departure 

from strong consumer State laws such as the one in my home 

State. 

I understand that it can create a difficult marketplace if businesses have to play by 50 different sets of rules. That is why it is 

so important that we strike the balance that is proper within any 

Federal legislation. At the end of the day, I would like to walk 

away from this hearing with a better understanding of any rights 

that my constituents would gain or any current protections they 

would be forced to give up if we move forward with Federal legislation action on predatory lending as proposed. 

17

I do want to thank the members of this panel and the next panel 

for their willingness to come before the committee and help us with 

our work. 

Thank you. I yield back, Mr. Chairman. 

Chairman NEY. Thank you. 

We have one 15-minute vote. We have three members left. When 

we come back, we will begin, and I appreciate your patience with 

the panel. 

Next is Ms. Carson. 

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

And thank you very much for the panelists who have assembled 

here today. For the sake of my district, Indianapolis, Indiana, it is 

probably one of the most important hearings that this subcommittee could have for my district. 

Indiana has the highest foreclosure rate in the nation, which I 

am sure all of you know. There are many factors, of course, that 

perpetuate the foreclosures and the predatory lending. I created a 

1–800 number for consumers to call before they sign their name on 

the dotted line. It has worked extremely well. I have taken the lead 

in my district to get to the bottom of all this. We have had indictments. We have had it all in the district. 

So I appreciate very much the time that you have taken to come 

and provide us with your thoughts on this very critical issue that 

affects my district in a very personal way. 

I yield back, Mr. Chairman. 

Chairman NEY. I thank the gentlelady. 

Mr. Sherman? 

Mr. SHERMAN. Thank you, Mr. Chairman. 

Sub-prime lending is critical to not only our economy, but to individual families. You know, there are a lot of developed countries in 

the world where you cannot buy a home unless you can put onethird or 40 percent of the money down. I do not know many working families in America that could even dream of doing that. 

Whereas here in the United States, many times if you have less 

than 10 percent down, and even if you have a flawed credit history, 

you can get a mortgage loan and achieve the dream of homeownership. We have to make sure that this access to credit, credit of 90 

percent or more of the purchase price of a home, credit for those 

with less than perfect credit ratings, is not thrown away. 

We have an absurd patchwork of legal restrictions on lending, 

both geographical and as far as legal category. What is allowed in 

one State is not allowed in another. Now we have different counties 

getting involved, cities getting involved. And yet we want a situation where lenders compete so consumers win. Lenders cannot compete for business and give people the benefit of a market economy 

if we split this country up not only into 50 different markets, but 

into as many markets as we have cities. 

We also have an absurd patchwork in that we have one set of 

rules for most lenders, and then national banks have, well, no rules 

at all. We need, of course, to prevent predatory lending. We need 

good national standards that will achieve that. For those of my 

friends who want to see the toughest conceivable restrictions, 

Berkeley, California for example, and somehow feel that the Federal Government will take that away through congressional action, 

18

I can only say it has already been taken away by the bank regulators who have exempted a huge class of lenders not just from 

what Berkeley does, not just from what California does, but from 

virtually all rules. 

So we can do a lot more to protect consumers by having national 

standards that apply to everyone, than by bragging about how we 

have achieved some incredibly tight straitjacket on some lenders in 

some municipal jurisdictions. 

I yield back. 

Chairman NEY. Thank you. 

The gentlelady? 

Ms. WATERS. Mr. Chairman, I would like to thank you for your 

interest in this subject matter, both predatory lending and subprime lending. I would like to thank you for giving all of our members the opportunity to get involved in this issue with your legislation and, of course, the legislation by Mr. Watt and Mr. Miller. 

We have been wrestling with the subject of predatory lending for 

so long. I have been involved in this issue since my days in the 

California State legislature, where we were basically dealing with 

redlining at the time. I am opposed, as you know, to preemption. 

I would not mind if we could get strong legislation that would take 

care of all of the jurisdictions in this country and not preempt 

those jurisdictions which have good laws on the books. 

Whenever you get national legislation, it is very minimal. I do 

not mind having some minimum legislation that would deal with 

some of these issues. However, I do not want to preempt those entities that have stronger legislation to protect the citizens of their region. 

This business of sub-prime lending is understood by many of us, 

and we are not opposed categorically to sub-prime lending. As a 

matter of fact, there are some lenders who have products that I 

like very much. For those people who have had some problems, 

who have demonstrated that not only have they taken care of those 

problems, but they have worked very hard to do it, I do not mind 

them getting into products that would cost a little bit more, but 

they have to be able to roll out of those products at some point in 

time. 

If you demonstrate that you can make your mortgage payment, 

that you can make them on time, then I think if you enter with 

a sub-prime loan then you should be able to exit at some reasonable point in time and revert to the kind of interest rates that 

would have been given to you had you not had that problem. 

It is absolutely unacceptable what many of our lending institutions are doing. I just really understood for the first time that you 

can have one of these banks who have offices that are for people 

who are not going to have to worry about being given sub-prime 

loans, and they have branches in mostly minority communities 

where that is all you can get. One bank, different treatment for 

people depending on where you live and what your ethnicity is, I 

suppose. That is absolutely unacceptable. 

I think that the housing market has been good to lenders. Everybody is making a lot of money. It would seem to me that our lenders would be a little bit more charitable. They should be coming to 

us talking about getting rid of prepayment penalties. And they 

19

should absolutely wipe out this discriminatory practice of charging 

people who live in a certain area more for their mortgages, higher 

interest rates, even though the amount of money that those people 

earn, the way that they have paid their bills, match those who 

come from other communities. They are still being ushered into 

these sub-prime loans. 

It is wrong. It must stop. I have not really weighed in 100 percent on all of this legislation, but I am not going to be charitable. 

I am not going to worry as much as some of my colleagues about 

the institutions and the ability for the institutions to have their 

way. I have discovered in this business that these banks can take 

care of themselves. Not only can they take care of themselves, they 

go way beyond what any reasonable person would expect in taking 

advantage of those who cannot negotiate these environments and 

fend off these practices because they just do not have the tools to 

work with to do it. 

So I think if this committee wants to do something admirable, 

would like to do something to really help the people of this country, 

we will work very, very hard to see that our citizens are not taken 

advantage of. We continue to talk about the American dream, to 

talk about how wonderful it is in America to be able to own a 

home. Well, let’s do something about it and help people to own a 

home, not help people to get into these loans that will cause them 

to have to pay a disproportionate amount of their income; loans 

that are really pretty risky and will cause them to default. 

I think we can do better than we have done in the past, and I 

think the legislation that we are proposing now can take care of 

all of these issues now. Let’s not delay it any longer. 

Thank you very much. I yield back. 

Chairman NEY. I thank the gentlelady. 

Ms. WATERS. Excuse me one moment. I am sorry. If you do not 

mind, Mr. Chairman, I was asked to enter this opening statement 

of Congressman Meeks who could not be here today through no 

fault of his own. 

Chairman NEY. Without objection. 

Ms. WATERS. He cares an awful lot about this subject and I 

would like to ask unanimous consent to enter it into the record. 

Chairman NEY. Without objection, it will be entered into the 

record. 

Mr. BACHUS. I would just like to associate myself with the remarks of Mr. Sherman, who I think pretty much distilled my reasons for wanting some legislation. I am sorry that I cannot agree 

with my colleague. 

Ms. WATERS. I am sorry, too. 

Mr. BACHUS. I was very persuaded by his argument. 

Chairman NEY. If you do not mind, we are going to miss a vote, 

and we will come back to the panel. 

Thank you. 

The committee will be in recess. 

[Recess.] 

Chairman NEY. The committee will come to order. 

We have one brief, I am told, opening statement by Mr. Davis, 

and we will start with the panelists. 

Mr. Davis? 

20

Mr. DAVIS OF ALABAMA. Thank you, Mr. Chairman. Let me let 

everybody get assembled, if you do not mind. 

Mr. Chairman, first of all, thank you for being gracious enough 

to give me an opening statement. Let me try to be brief because 

I know that we want to move to the testimony. 

I simply want to make three points. Number one, this is an enormously important hearing because I think the context around this 

issue has frankly changed since I have been in the House of Representatives. I think there was a perception several years ago that 

there was a disparity in sub-prime lending in the country. We are 

seeing more and more evidence of that. 

The concern that some of us have is that we may be entering a 

phase where the disparity in sub-prime lending does have a racial 

characteristic to it, at least descriptively it has a racial characteristic. I certainly compliment my friends from North Carolina, 

Mr. Miller and Mr. Watt, for their efforts in this area. I do compliment Mr. Ney and Mr. Kanjorski for their efforts as well. But 

the one determination that I have coming out of this process is that 

if we are going to have a new bill, if we are going to have a national standard, that, A, it be a strong one; and, B, that it be a 

standard that speaks to this emerging disparity. 

Homeowners in this country ought to have an expectation of a 

market that is not racially tinged. They ought to have an expectation of a market that reflects the realities of the marketplace, and 

not one that reflects any other hidden biases in our society. So I 

would just simply say that I thank again both the Chairs of this 

committee for calling this hearing and I am hopeful that we will 

adopt an effective standard and one that does address this emerging problem in our economy. 

Mr. Chairman, thank you for being indulgent with me today. 

Chairman NEY. I thank the gentleman. 

The gentleman from North Carolina is going to introduce the 

first witness. 

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

There are actually three witnesses from North Carolina on this 

panel, which is impressive. Two are fairly familiar, I think, to 

members of this committee, or at least to those who do follow the 

committee’s work. Stella Adams and Martin Eakes are well known 

nationally as consumer advocates. The witness that the Chair graciously allowed me to invite was Joseph Smith, the Commissioner 

of Banks of North Carolina. Mr. Smith is a graduate of Davidson 

and the University of Virginia law school. 

He practiced law at a variety of corporate law firms. He was the 

General Counsel of RBC Centura, a large North Carolina-based 

bank, before becoming Commissioner of Banks approximately 3 

years ago, where he has both regulatory and rulemaking authority 

over the mortgage industry. He has licensed 1,500 mortgage firms 

and 15,000 individual mortgage brokers. 

Ms. Adams and Mr. Eakes bring to this panel the perspective of 

a consumer advocate, which as I said before, is an important perspective to have added to this debate. But Mr. Smith’s perspective 

is that of a corporate lawyer, and a banking lawyer, and his experience in applying and construing North Carolina’s law from that 

perspective. 

21

Thank you, Mr. Chairman. 

Chairman NEY. I thank the gentleman. 

Welcome to Mr. Smith. 

Stella Adams is the executive director of the North Carolina Fair 

Housing Center, a nonprofit organization seeking to create equal 

housing opportunity and equal access to all citizens. Ms. Adams is 

testifying today on behalf of the National Community Reinvestment Coalition. The coalition seeks to increase the flow of private 

capital into traditionally underserved communities. Its members 

include community development corporations, civil rights groups, 

community reinvestment advocates, local and State government 

agencies and churches. 

Martin Eakes is the chief executive officer of the nonprofit Center for Community Self Help in Durham, North Carolina. The center, with its two financing affiliate Self Help Credit Union and Self 

Help Ventures Fund, seeks to create ownership and economic opportunities for minorities, women, rural residents and low-wealth 

families. 

Micah Green is president of the Bond Market Association. The 

association represents the largest securities markets in the world, 

the estimated $44 trillion debt markets. Its membership accounts 

for about 95 percent of the nation’s municipal securities underwriting and trading activity, and includes all primary dealers in 

the United States Government securities, all major dealings in 

United States agency securities and mortgage-and asset-backed securities and corporate bonds. 

Regina Lowrie is from Mr. Fitzpatrick’s district, he wanted me 

to note, and is president of the Gateway Funding Diversified Mortgage Services in Horsham, Pennsylvania. She is also testifying on 

behalf of the Mortgage Bankers Association, a national association 

representing the real estate finance industry. Its members comprise more than 70 percent of the single-family mortgage market 

and more than 50 percent of the commercial multi-family market. 

Steve Nadon is the chief operating officer of Option One Mortgage Corporation, a subsidiary of H&R Block Incorporated, located 

in Irvine, California. He oversees the company’s Option One and 

H&R Block mortgage origination business, as well as the internal 

lending operations. Mr. Nadon is testifying on behalf of the Coalition for Fair and Affordable Lending, the coalition which represents 

over one-third of the non-prime mortgage lending industry, advocates for national and fair legislative standards for non-prime 

mortgage lending. 

I want to welcome all the panelists. 

We will begin with Mr. Smith. Thank you. 

STATEMENT OF MR. JOSEPH A. SMITH, JR., NORTH CAROLINA 

COMMISSIONER OF BANKS 

Mr. SMITH. Thank you, sir. 

Representative Ney, Representative Bachus, Representative Kanjorski, my friend Representative Miller and Representative 

McHenry, all Tarheels, and I will say, Mr. Chairman, your counsel 

is also a Tarheel, so I feel very at home with this committee. 

Thank you very much for inviting me to participate in this hearing. 

22

Chairman NEY. Maybe he has been in Washington too long and 

he forgot that. Thank you for reminding me. 

[Laughter.] 

Mr. SMITH. He admitted it to me. 

Thank you very much for inviting me to testify. I filed written 

testimony and in the interest of time I will try to pull out a few 

salient points that I hope you will find of interest. 

First, I cannot resist beginning with a glaring generality, which 

is that home mortgage lending in the United States today is a local 

transaction that is funded globally. That is the issue that confronts 

policymakers at the State level and here at the national level. 

There has been a revolution in mortgage finance, as I am sure 

you all aware, over the last 25 years. I can remember my first 

mortgage, barely, with a thrift institution in Connecticut, of all 

places, years ago and it is not the same world at all now. The mortgage business has been deconstructed. Funding, origination and 

servicing are done by different firms, many of whom never have 

contact with the consumer or the community in which the consumer resides. 

The results have been what I call the good, the bad and the ugly. 

The good is increased access, as you have discussed, to mortgage 

capital. The bad has been increased foreclosures. And the ugly has 

been predatory lending and its ugly twin, fraud, and I think they 

are related. 

The States have taken action. North Carolina was the first to 

adopt an anti-predatory lending law because, let it be remembered, 

Federal standards at the time were insufficient to stop predatory 

conduct. That is why this whole business got started. 

So what has been the result? I am not a statistician, and I know 

there are various studies about the impact of North Carolina’s law, 

but I understand you are interested in that. I will say I sit regularly at an office in Raleigh, North Carolina and travel around 

North Carolina and hear from people who have problems in North 

Carolina. My office gets about 1,500 formal consumer complaints a 

year. We get about five times that many informal ones. Two-thirds 

of those are about mortgages. 

I have been in this office 3 years. I have never heard a single 

example of a single person who has ever come to me, to anyone I 

know in government, to anyone I know or have heard from in our 

General Assembly, claiming they were denied mortgage credit because of our laws, ever. I understand there are other studies that 

say different things, but I must tell you, so far I have yet to meet 

the flesh-and-blood example for this issue. 

Further, it appears to me fundamentally that the law has not 

driven people from the market. Among our top 15 sub-prime lenders in 2003, 7 of the top 15 were among the top 15 nationally. Option One, by the way, was our leading lender in North Carolina in 

sub-prime during that year. And they have roughly the same market share in North Carolina that they have elsewhere. 

So I think the case has yet to be made, to be frank, that North 

Carolina’s law has driven people out of the mortgage market, driven lenders away who really wanted to be there, or driven people 

away, or had the effect—direct or indirect—of denying people mortgage credit. 

23

What do I think are the lessons that may be drawn from our experience and the experience of other States around the country? By 

the way, if we are crazy, if this is some sort of insanity on our part, 

it is shared by a number of other States who seem to have the 

same problems in the real flesh and blood world. Let me suggest 

to you five or so items that I would appreciate it, and I think you 

might well consider in looking at Federal legislation. 

This first one I am doing with trepidation because I know I am 

going to get stoned over it by some, but the first question is whether there is a Federal standard required at all. I understand the 

issue about separate State laws, but to be frank, the bond market 

and the secondary market in mortgage securities does not seem to 

be suffering greatly. They have made a boatload of money and it 

is hard for me to see that they are sort of at death’s door, but I 

am sure they can defend themselves on that. They may be. They 

may just look better than they feel. 

Secondly, if you must have Federal standards, look to the standards that worked in the States. I would say that North Carolina’s 

standard is a standard that you ought to look at. 

Thirdly, and this is very important, if you adopt Federal legislation, please give the States coordinated enforcement authority of 

Federal standards in your law. It is wrong to think that a law, 

however good it may be, adopted by you can be enforced centrally. 

Finally, we should also be included in mortgage oversight. I will 

say I am pleased to see and I hope you will continue to incorporate 

the efforts that are going on with the Conference of State Bank Supervisors pulling together a unified national application system 

and database in the mortgage industry. 

I appreciate very much the time allotted to me and would be 

happy to answer any questions. Thank you very much for inviting 

me, sir. 

[The prepared statement of Mr. Smith can be found on page 355 

of the appendix.] 

Chairman NEY. Thank you for coming here. 

Ms. Adams? 

MS. STELLA J. ADAMS, BOARD OF DIRECTORS, NATIONAL 

COMMUNITY REINVESTMENT COALITION 

Ms. ADAMS. Thank you, Chairmen Ney and Bachus, and Ranking 

Members, Representative Miller, Representative McHenry. It is an 

honor to be here today as the voice of over 600 community organizations from across the country that comprise the National Community Reinvestment Coalition. 

NCRC is the Nation’s economic justice trade association dedicated to increasing access to capital and credit for minority and 

working-class families. Our member organizations represent communities from your congressional districts, organizations such as 

the Coalition of Neighborhoods in Ohio; the Community Action 

Partnership of Northern Alabama; the Community Action Committee of Lehigh Valley in Pennsylvania; and finally, the North 

Carolina Fair Housing Center where I am the Executive Director. 

We appreciate your convening today’s hearing on an issue that 

all of our members have been addressing for the last 10 years. In 

North Carolina, my organization worked tirelessly in coalition with 

24

the Community Reinvestment Association of North Carolina, Self 

Help, and other grassroots community organizations and industry 

to craft, promote and help secure the passage of North Carolina’s 

anti-predatory lending bill. 

Although North Carolinians enjoy some protection from predatory lending, there are still many States where consumers have little or no protection at all, and we believe that should change. Congress must ensure that any national bill related to predatory lending has at its core the need to provide consumers relief from abusive lending practices that steal homeowner equity, which is the 

primary and often the only form of wealth-building for most Americans. 

I am reminded today of the words of the prophet Jeremiah: 

‘‘Thus said the Lord, do justice and righteousness and deliver from 

the hand of the oppressor him who has been robbed.’’ 

Not all sub-prime loans are predatory, but predatory lending is 

a subset of sub-prime loans that takes advantage of borrowers not 

familiar with the lending process. The new 2004 HMDA data allows us to identify which communities receive the most sub-prime 

loans and are therefore most prone to predatory lending. For the 

first time, it includes pricing data for sub-prime lending. We found 

that minorities and women receive a disproportionate amount of 

sub-prime loans. 

Last month, NCRC released a report that was one of the first 

studies to examine the new HMDA data. The written testimony 

talks about this study and other NCRC studies. These studies reveal that pricing disparities remain consistent over the years. One 

of the studies controls for credit-worthiness and still finds large 

disparities. 

In the written testimony, we discuss the NCRC fair lending test 

report. This nationwide testing project examined large sub-prime 

lenders and revealed substantial differences in pricing and treatment based on race and gender. The testing project looked at preapplication stage. In addition, NCRC’s consumer rescue fund reveals alarming and distressing real-life stories of what happens to 

people throughout the application process and the long-term effects 

of unsafe and unaffordable loans. 

Mr. Ney, in the State of Ohio, NCRC is working with over 100 

consumers, most of them elderly minority people, who are being 

uprooted from the homes they have lived in for over 40 years. 

These unsuspecting consumers fell victim to a home improvement 

scam and are now facing foreclosure. In Staten Island and Long Island, NCRC is assisting over 100 New York City policemen and 

firefighters who purchased homes from an unscrupulous housing 

developer and mortgage broker. For these 9–11 heroes, the American dream of owning a home has now become their nightmare. 

In my home State, we have seen numerous victims of predatory 

practice, none worse than what happened to the folks in Vance 

County. The center investigated over 165 complaints against Donald Gupton and his many businesses. We filed complaints with the 

North Carolina Attorney General. He sold mobile homes to consumers whom the company knew could not keep up with the payments. He lied to customers about the price of homes, about their 

ability to refinance at a lower rate; falsified loan applications; misVerDate 0ct 09 2002 09:33 Sep 08, 2006 Jkt 029453 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 F:\DOCS\29453.TXT HFIN PsN: TERRIE
25

represented the value of the property by encouraging inflated appraisals of the homes and land sold to consumers. 

A consent decree was entered, but it has had little impact on the 

over 200 victimized families. Because there is no assignee liability, 

most of these victims of appraisal fraud and predatory lending 

abuses face foreclosure or are stuck making payments on homes 

that are not worth one-third of what they owe. 

In High Point, North Carolina, 11 mortgage brokers were indicted for faking downpayments and submitting inflated appraisals 

for loans they brokered, practices that allowed them to pocket the 

difference when the inflated loan came in. Again, there was no recourse available for the victims of homeowners who are stuck in 

these loans. Property flipping and inflated appraisals resulted in 

$23 million worth of fraudulent laws and 50-plus home foreclosures 

in rural Johnson County. 

We believe there is a need for a strong comprehensive national 

bill. We believe that State anti-predatory lending laws have not 

choked off access to credit. While we believe that lenders can operate in the current regime of Federal and State legislation, we 

would favor a national law if it is comprehensive and builds on the 

best State laws such as North Carolina’s, New Mexico’s, New Jersey’s and New York’s. It is remarkable that about half the States 

in this country have passed anti-predatory laws, but that still 

leaves citizens in half the other States unprotected from predators. 

Thus, a strong comprehensive national law is needed that expands upon the best State laws and existing Federal law and 

builds upon the best practices established by industry. 

I would like to highlight a couple of key provisions that must be 

included in any national bill. H.R. 1295 contains a provision that 

strives to outlaw steering or making a high-cost loan to a borrower 

who can qualify for a prime loan. 

Chairman NEY. I am sorry to interrupt you, Ms. Adams. The 

time has run over, but if you would like to summarize and submit 

for the record? 

Ms. ADAMS. Yes, sir, I would. 

Chairman NEY. I am sorry. 

Ms. ADAMS. If you would allow, I would like to also introduce 

into the record a letter from the membership of NCRC. 

Chairman NEY. Without objection. 

Ms. ADAMS. And also our studies that I talked about in my written text. 

Chairman NEY. Without objection. 

Ms. ADAMS. Thank you so much. 

[The prepared statement of Ms. Adams can be found on page 124 

of the appendix:] 

Chairman NEY. Thank you. 

Mr. Eakes? 

STATEMENT OF MR. MARTIN D. EAKES, CHIEF EXECUTIVE 

OFFICER, CENTER FOR COMMUNITY SELF HELP 

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

Ranking Member Sanders, Ranking Member Waters, my fearless 

leaders from North Carolina, Representatives Miller, Watt and 

26

McHenry, thank you for holding this hearing today and thank you 

for letting me come to testify. 

I am the CEO of Self Help and the Center for Responsible Lending. Representative Miller introduced me as a consumer advocate, 

but that is not the way I think of myself. I think of myself as a 

lender first. Self Help is a community development lender, the largest nonprofit community development lender in the country. In the 

last 21 years, we have provided financing of almost $4 billion to 

40,000 families who were underserved and unable to get homeownership financing. 

I will also tell you that Self Help is one of the oldest sub-prime 

lenders. We were doing sub-prime before anyone called it that. We 

were doing loans to people who were credit-impaired, but really 

good people who deserved to be able to own a home. For 21 years 

I have been making these loans and I have had virtually no defaults. So any sub-prime lender that has a large number of foreclosures, it means they are doing something wrong. It does not 

have to be done that way. 

Five years ago, 6 years ago, in response to borrowers who came 

to us and said, we are about to lose our homes; could you look at 

our financing papers? I started looking at individual borrowers and 

found that the first one that came to me a borrower who had a 

$29,000 loan that he had refinanced and was charged $15,000 in 

up-front fees. When he walked out of that office, he was doomed 

to lose that home one way or another. When I called the lender to 

contest, the person said to me, well, you are just a competitor trying to steal my loan and I will not even tell you what the payoff 

balance is for this borrower. 

That really infuriated me. And we set up an affiliate called the 

Center for Responsible Lending, a nonprofit, nonpartisan research 

and policy organization dedicated to protecting homeownership and 

family wealth by working to eliminate abusive financial practices. 

I want to tell you a little bit about how the North Carolina bill 

came about. I was the person who helped put together the leadership group that ultimately passed the North Carolina bill. Here is 

what we did that was quite unique. We brought together a group 

that included all of the mid-size banks in North Carolina, all the 

large banks, all the credit unions, the mortgage brokers, the mortgage bankers, the realtors, the civil rights groups, the housing 

groups, the community groups, the elder groups, AARP, everyone 

at one table to negotiate a bill. 

We ended up with a bill that no one particularly loved because 

it was a compromise. No one got exactly what they wanted, but 

those of you who have been in Congress for any time at all know 

that when you have the credit unions and the banks together saying pass a law that will regulate each of us, so that we can get rid 

of the bad lenders in our marketplace, you know something unique 

has happened and a problem that is very pervasive is being addressed. 

What North Carolina did, and it was very bipartisan, passed legislation that out of 170 legislators had only three dissenters. It was 

totally bipartisan in every regard. North Carolina started with two 

principles. The first was that we would not impose any more disclosures on borrowers or lenders. With 30 forms at a homeownership 

27

closing now, there is so much paperwork that adding one more 

would do more harm than good. 

The second piece that we did that was quite controversial is we 

said, but it was what brought all of us together in the industry and 

the wealth-advocate community, is we said we are not going to put 

a cap on the interest rate that can be charged to homeowners. Instead, what we are going to do is gradually get rid of the hidden 

fees that borrowers do not know they are getting and allow that 

to be translated into the interest rate on the mortgages. 

The truth is, it did not happen. That was the theory, but when 

we passed the four restrictions in the North Carolina bill, all of 

which went away, interest rates did not go up at all. So what this 

tells us is that in a competitive marketplace, these fees were really 

unnecessary. 

Here is what the North Carolina bill did in four ways. It did four 

things. The first thing is it prohibited the practice of flipping. ‘‘Flipping’’ is something that is done as an alternative to a high-cost 

loan. Someone finds the measure, whether it is 5 percent fees or 

8 percent fees, and offers a loan that is just below that, but does 

it repeatedly so that they eventually strip the wealth out of a person’s home. 

The problem with the Ney-Kanjorski bill is in its details. It prohibits flipping only for high-cost loans, so either it does not understand that flipping is an alternative to high-cost loans, but it 

means that it will have absolutely no effect in this bill. That was 

one of the most significant pieces in the North Carolina law. 

The second thing the North Carolina law did is it prohibited prepayment penalties. What it was basically saying, a large consensus 

of all the legislators in North Carolina, is that we do not want people who get into a bad loan to be trapped in it forever. Let’s let 

people get out so that they do not have $5,000 or $10,000 fees preventing them from being able to get from a bad loan to a good loan. 

The third thing we did was prohibit single-premium credit insurance altogether. Now, I think this is an unintended defect in the 

language of the Ney-Kanjorski bill now, but it actually would reauthorize single-premium credit insurance in this bill. It defines the 

prohibition against single-premium credit insurance only for highcost loans, but it does not include single-premium in the definition 

of points and fees to trigger the high cost. 

Chairman NEY. Sorry to interrupt you, but if you could wrap it 

up because the time has expired. 

Mr. EAKES. Okay. The final thing that the North Carolina bill 

did was to put a limit on loans that had greater than 5 percent 

fees. In this regard, many of the bills are similar. 

But those are the only four things that the North Carolina bill 

did. Unfortunately, in the Ney-Kanjorski bill currently before us, 

three of the four things are applied only to high-cost loans and the 

exceptions in the definition of a high-cost loan means that they will 

never apply. 

So thank you for letting me come today. I am a real technician. 

I hope you will ask me questions and let me be the geek that I am. 

[The prepared statement of Mr. Eakes can be found on page 150 

of the appendix:] 

Chairman NEY. Thank you. 

28

Mr. Green? 

STATEMENT OF MR. MICAH S. GREEN, PRESIDENT, THE BOND 

MARKET ASSOCIATION 

Mr. GREEN. Thank you, Mr. Chairman. I thank you for the opportunity to testify today at this important hearing on predatory 

lending. 

I am Micah Green, as the Chairman said, president of the Bond 

Market Association. I am also representing the views of the American Securitization Forum, which is an adjunct forum of the Bond 

Market Association. It is a broadly based professional forum of participants in the U.S. securitization markets. 

At the outset, I would like to acknowledge the tremendous efforts 

of you, Chairman Ney, and your coauthor Congressman Kanjorski, 

for introducing the Responsible Lending Act and the many cosponsors who are both on this committee and in the House generally. 

This is a clear-headed piece of legislation that to your credit reflects years of discussion and consultation with many and varied 

stakeholder groups with an interest in the very difficult public policy question of how to best curb predatory lending and ensure subprime borrowers have access to mortgage credit. Members of the 

BMA and the American Securitization Forum commend you for 

your efforts. We support the Responsible Lending Act and the clarity it would bring to the secondary market for sub-prime mortgages. 

The secondary market, more broadly securitization, plays an important role in our lives, not just for sub-prime mortgage borrowers, but all consumers. Besides mortgages, car loans, student 

loans, credit card loans and others, are repackaged by the secondary market as marketable securities. The process links the 

needs of borrowers to the broader capital markets, not just a single 

bank or credit card company. Credit for home mortgages and other 

credit needs as a result has become more broadly available and less 

costly. 

Why do financial market participants engage in securitization? 

Because issuers of these securities have a need for more capital to 

make new loans, which ultimately benefits consumers. Investors in 

the United States and the world have come to realize that assetand mortgage-backed securities provide attractive and reliable returns. Investors are buying the rights to loan payments. The secondary market knows that in order to please its customers, investors, the pool of loans backing these securities needs to be reliable. 

Loans with predatory characteristics add uncertainty and risk to 

securitizations for which investors must be compensated. 

These loans are more likely to default or repay early, which 

strikes at the heart of predictability and reliability sought by investors. They are also more likely to carry the risk of liability under 

one of dozens of anti-predatory lending laws at the State and local 

levels. Loans with predatory characteristics are obviously not in 

the best interest of borrowers, but they are also not in the best interest of the members of the Bond Market Association and the 

American Securitization Forum, who structure mortgage-and assetbacked securities because they are not in the best interest of the 

investors who buy those securities. 

29

For these reasons, secondary market participants employ rigorous due diligence, policies and procedures to screen for predatory 

loans. Mr. Chairman, let me state the obvious. No one testifying 

today favors predatory lending. It is a blight on an otherwise thriving home mortgage industry. It benefits no one except for the rare 

bad actors who typically take advantage of the most vulnerable 

borrowers. 

We believe that the Responsible Lending Act is the best chance 

yet to combat in a comprehensive manner predatory lending. It 

achieves the twin goals of borrower protection and the preservation 

of the benefits of securitization for those same borrowers. In several critical areas, the bill brings clarity to what are currently 

areas of uncertainty for participants in the secondary market for 

sub-prime loans. The bill clarifies what is a broad assignee liability 

standard in the Home Equity Protection Act to specify where secondary market participants would face liability for bad loans and 

when they would not. 

Under this legislation, borrowers facing foreclosure could bring 

claims against assignees under the appropriate circumstances. And 

regardless of their credit standing, borrowers could also bring affirmative claims against assignees that act with reckless indifference toward the terms of the Responsible Lending Act. Borrowers 

are protected and have avenues for relief. The secondary market is 

preserved. 

The Responsible Lending Act limits the damages of an assignee 

it could face under the liability provision to the actual economic 

loss experienced by the borrower. This is fair compensation for borrowers and a fair cost to assignees. Providing borrowers with an 

opportunity to recover an amount in excess of what an abusive 

lending term has cost them would not be equitable for the assignee 

that did not participate in the lending process. As with assignee liability in general, the exception to this rule is the instance when 

assignees exhibit reckless indifference, and there they have affirmative claims of action. 

The bill would also introduce the concept of a right to cure and 

preemption directly into the Federal mortgage lending regulation. 

The right to cure grants an assignee up to 60 days after the discovery to correct a lending violation and fully compensate the borrower for losses incurred. By establishing a uniform national standard for sub-prime lending, the Responsible Lending Act eliminates 

the confusion and inefficiency created by 47 varied and sometimes 

conflicting State statutes. 

In conclusion, Mr. Chairman and members of the committee, any 

public policy solution to the problem of predatory lending is unlikely to leave all borrowers and all lenders satisfied that enough 

has been done or enough has been averted. I think we would all 

agree that there is a need to fight the scourge of predatory lending 

in a balanced way that protects borrowers before the loan is made, 

provides the same borrowers an avenue for fair relief, and does so 

in a way that preserves the secondary market as a legitimate 

source of capital for sub-prime mortgages. 

We believe the Ney-Kanjorski bill does that. 

And I thank you for the opportunity to testify. 

30

[The prepared statement of Mr. Green can be found on page 186 

of the appendix:] 

Chairman NEY. Thank you. 

Ms. Lowrie? 

STATEMENT OF MS. REGINA LOWRIE, PRESIDENT-ELECT, 

MORTGAGE BANKERS ASSOCIATION 

Ms. LOWRIE. Good afternoon, Mr. Chairman and members of the 

committee. My name is Regina Lowrie, and I am president of Gateway Funding Diversified Mortgage Services in Horsham, Pennsylvania. I am also chairman-elect of the Mortgage Bankers Association and appear before you today on behalf of MBA. Thank you for 

giving us the opportunity to express and share our views with you 

today. 

Mr. Chairman, let me begin by stating that MBA detests predatory and abusive lending. Such practices, however rare, are a stain 

on our industry and undermine the trust that consumers put in us. 

I believe that everyone in this room today shares the same ultimate goal, to end abusive practices in the mortgage market. It is 

imperative that in doing so we exercise wisdom and foresight. 

Over the last decade, the creation of a national non-prime mortgage market has made mortgage credit available to thousands of 

families for whom homeownership was previously out of reach. 

Non-prime borrowers commonly have low-to-moderate income, less 

cash for a downpayment, and credit histories that range from less 

than perfect to none at all, borrowers whose credit has been damaged by divorce or illness, single moms and dads, teachers and firefighters who have gone through difficult times, but still aspire to 

the dream of homeownership. 

A number of States and localities have passed a wide range of 

intention laws to combat abusive lending. Unfortunately, these 

laws often include subjective standards and create an immense 

compliance burden and higher costs for consumers. In the worst 

case, these laws have chased legitimate lenders out of certain jurisdictions altogether, reducing credit options for consumers. These 

consequences are inconsistent with the goal of maintaining access 

to affordable credit, while ending abusive lending practices. 

While H.R. 1295 creates a tough standard for the industry to operate under, MBA believes it is a big step toward creating a uniform national standard. In general, it strikes the proper balance by 

providing strong consumer protections and clear, objective compliance standards that will help facilitate market competition. Regulators, think about this, regulators would have one standard to enforce. Consumers would have one standard to understand and lenders would have one standard to obey. 

MBA supports a number of specific provisions included in H.R. 

1295. Under H.R. 1295, more loans would be subject to the Homeownership Equity Protection Act, bringing greater protection to 

high-cost borrowers. The bill would extend HOEPA coverage to 

home equity lines of credit, purchase loans, and also lower the 

points and fees triggers from 8 percent down to 5 percent. 

The bill also includes an opportunity for industry to promptly 

cure errors for consumers, as well as reasonable assignee liability 

standards. It is also important to preserve borrowers’ options by exVerDate 0ct 09 2002 09:33 Sep 08, 2006 Jkt 029453 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 F:\DOCS\29453.TXT HFIN PsN: TERRIE
31

cluding yields per premiums and prepayment penalties from the 

points and fees calculation. 

In summary, Mr. Chairman and members of the committee, 

MBA, like all of you, detests abusive lending and is committed to 

eliminating it. We believe strongly that the appropriate response to 

the problem of abusive lending is a clear, consistent, reasonable national standard for a national mortgage market. 

Once again, Mr. Chairman, I thank you for allowing me the opportunity to appear before you today. I look forward to answering 

the committee’s questions. Thank you. 

[The prepared statement of Ms. Lowrie can be found on page 206 

of the appendix:] 

Chairman NEY. Thank you. 

Mr. Nadon? 

STATEMENT OF MR. STEVE L. NADON, CHIEF OPERATING OFFICER, OPTION ONE MORTGAGE, ON BEHALF OF THE COALITION FOR FAIR AND AFFORDABLE LENDING 

Mr. NADON. The Coalition for Fair and Affordable Lending appreciates the opportunity for me to testify on its behalf today. I am 

Steve Nadon, CFAL’s chairman and chief operating officer of Option One Mortgage, which is a subsidiary of H&R Block and which 

is one of the Nation’s largest non-prime mortgage lenders. 

CFAL commends the lead sponsors of H.R. 1295 and H.R. 1182 

and their staffs for the thought and hard work that they have put 

into these bills. Both bills are well-intended and have a number of 

good concepts, but both have some problematic provisions. Having 

reviewed both bills, CFAL favors H.R. 1295, but believes that the 

committee should further refine it, including, where appropriate, 

incorporating certain of the Miller-Watt bill’s concepts. 

The Ney-Kanjorski bill significantly enhances current Federal 

law, covering more loans, improving the existing provisions and 

adding effective and workable new safeguards on other specific 

lending practices. Most of these provisions equal or exceed those of 

most State laws. Quite importantly, its provisions are designed to 

prevent abusive lending practices without limiting borrowers’ access to affordable mortgage credit and their ability to choose flexible mortgage financing options. 

Ney-Kanjorski provides for uniform national mortgage lending 

standards which CFAL strongly supports. Current State regulations provide very unequal levels of protection for borrowers. Uniform national standards can ensure that all borrowers in this country wherever they live and whatever lender they choose, enjoy a 

high level of protection, and that all communities have mortgage 

capital available on fair and affordable terms. CFAL believes that 

both Federal and State regulators should actively enforce these nationwide standards. 

H.R. 1295 also has very important additional provisions to greatly enhance financial counseling and education programs that are 

based on legislation developed earlier under Representative David 

Scott’s leadership. We share Representative Scott’s confidence that 

provisions in the bill that mandate establishing and widely publicizing the existence of both a toll-free telephone number and an 

Internet site that the public can use for information about repVerDate 0ct 09 2002 09:33 Sep 08, 2006 Jkt 029453 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 F:\DOCS\29453.TXT HFIN PsN: TERRIE
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utable credit counselors to assist them in making mortgage decisions will be practical important tools for helping consumers navigate the mortgage process intelligently. 

We think the committee also should consider having lenders pay a modest fee, perhaps $2, when loans are recorded after closing to 

help support State-and community-based education and counseling 

programs. A portion of this fee also could be used as a funding 

mechanism for enhanced State enforcement efforts. 

H.R. 1295, however, is not perfect and it needs a number of further technical and substantive refinements. For example, while we 

strongly support preemption, the provisions in Ney-Kanjorski need 

to be scaled back so that they do not sweep in almost all mortgagerelated activities, for example, closure laws, and are instead targeted primarily at State and local laws aimed at regulating mortgage lending practices, whether based on a loan trigger rate or 

some other mechanism. 

We believe that the Ney-Kanjorski bill for the most part strikes 

a good balance between adding protections against abuse of these 

financing options and allowing lenders to continue offering these 

choices to borrowers so they can make their loans more affordable. 

However, the Miller-Watt bill takes a fundamentally different approach on each of these issues, which have substantially negative 

impacts on loan affordability for all non-prime borrowers, not just 

high-cost borrowers. Let me explain this problem. 

Both Ney-Kanjorski and Miller-Watt lower the 8 percent trigger 

to 5 percent, but they take very different approaches in dealing 

with prepayment penalties, yield-spread premiums, and discount 

points. As noted above, Miller-Watt includes both yield spread and 

the potential maximum prepayment penalty in the calculation of 

points and fees, and the exclusion of discount points essentially 

does not apply with most non-prime loans. 

The result of this is that in real terms the 5 percent trigger is 

more like 2 percent or less. This forces the lender to put more costs 

into the rate, significantly raising the rate and therefore raising 

the borrower’s monthly payment. Under Miller-Watt, the borrower 

also is generally no longer able to use discount points to buy down 

his or her rate, or to accept a prepayment penalty to lower the rate, 

and the de facto prohibition on the use of prepayment penalties 

would further cause all non-prime loans to go up by 1 percent. 

The bottom line here is unmistakable and inescapable. Most nonprime borrowers would have no flexible loan financing options that 

are so essential to meeting their needs and circumstances, and 

would find that loans would be much less affordable. Moreover, 

many borrowers who want to purchase homes would find that with 

the much higher rates and monthly payments, they could no longer 

qualify for a large enough loan so they would have to shift to a less 

expensive home and a smaller loan. 

Please look at the chart on page five of my oral statement or 

page 10 of my written statement which we handed out this morning. As you will readily see in the example provided, the MillerWatt bill would result in monthly payments being increased by 25 

percent or more because it effectively prohibits non-prime borrowers from using flexible financing options. Mr. Chairman, I suspect this is a classic case of unintended consequences and I do not 

33

believe that the Miller-Watt bill sponsors ever intended such adverse consequences for borrowers. 

In any case, I sincerely hope that the committee will not adopt 

the overly restrictive approach on these flexible loan-financing options that are proposed in the Miller-Watt bill. CFAL believes that 

the Ney-Kanjorski provisions here generally provide reasonable 

protections that preserve borrowers’ choices and their options for 

making their loans much more affordable than under the MillerWatt bill. As I noted earlier, some of these Ney-Kanjorski provisions can be tweaked or tightened somewhat, but they are basically 

sound and should be retained. 

CFAL is confident that the Financial Services Committee can 

work together on a bipartisan basis to fairly resolve the various 

issues addressed in these legislative proposals and can report out 

a balanced bill that provides effective national standards for fair 

lending and that protects all non-prime borrowers in every State 

without unduly limiting their financing options and access to affordable mortgage credit. 

We appreciate your allowing us the time. 

[The prepared statement of Mr. Nadon can be found on page 225 

of the appendix:] 

Chairman NEY. Thank you. 

I am going to yield at this time to Chairman Bachus. 

Mr. BACHUS. I thank the Chairman. 

Ms. Adams, I think your testimony is you think we need a national standard. Is that correct? 

Ms. ADAMS. Yes, sir. We need a strong national standard. 

Mr. BACHUS. Okay. And I would say, I am from a State that has 

no law, no regulation and that is also the case with Kansas, Mr. 

Moore’s State and others. 

Let me ask all the panelists, and I would say, Mr. Smith, one 

thing that you said I sort of question. You said all lending is local. 

Is that right? 

Mr. SMITH. I said that the mortgage itself is a local transaction, 

but it is funded globally. That has changed from the old days. 

Mr. BACHUS. But securitization, there is the secondary market. 

It is a national market. 

Mr. SMITH. Okay. But I mean ultimately, what I meant by 

‘‘globalization’’ frankly was national and international markets. 

Mr. BACHUS. But you understand now securitization is actually 

a national market. To finance loans locally, you go nationally. 

Mr. SMITH. I understand. 

Mr. BACHUS. Okay. I think we are all seeking the same thing, 

and that is a national law that will work, will allow people to get 

good loans, will basically weed out and prevent bad loans or punish 

those if they are made. We have talked about different States. One 

State that has not been mentioned, and I am curious to know why 

because the law has been on the books for some time, and I have 

not seen any criticism of it, and I am not seeing any. I know loans 

are still available and it does not seem to have driven up the cost 

of loans in California. Ms. Adams, the California law, is that a good 

law? You did not mention it in your list. 

Ms. ADAMS. No, sir, I did not mention it in my list. To be quite 

honest, I personally am not familiar enough with the California 

34

law and how it works to be able to respond to that. But being from 

North Carolina, I know we have a really good law. 

Mr. BACHUS. In some States like North Carolina, a lot of the 

loans, you cannot finance them on the national market, in the secondary market. 

Ms. ADAMS. I have not found that to be true, sir. Almost all of 

the loans that we work with, there is national service involved with 

that. 

Mr. BACHUS. What about, and I would just ask any of the panelists, what about the testimony about the studies that say it drives 

up the cost of loans and it affects loan availability? Anybody want 

to respond to that? 

Mr. GREEN. I would. 

Mr. BACHUS. Let’s let Ms. Lowrie and then Mr. Green. 

Ms. LOWRIE. Mr. Chairman, I would like to speak to that. I think 

sometimes true stories really speak volumes to it. We can run a lot 

of reports and gather a lot of statistics, and we do operate in a national mortgage market. Before I tell you my little story, I want us 

to just step back for a second and think about where the mortgage 

industry was in the early 1980’s, when consumers went to banks 

and through deposits banks lent out money. There was no diversity 

on a national level, and if there was a credit crisis like when there 

was the oil patch crisis in Texas, liquidity in that market raced 

right up. 

The sheer fact that we have been operating in a national mortgage market is evidenced by the fact that we have two governmentsponsored enterprises that have standardized underwriting guidelines, borrowers’ profiles, credit profiles, and all of you I applaud 

for having validated that by passing the Fair Credit Reporting Act, 

which creates a uniform credit standard. 

Mr. BACHUS. My time is kind of low, but have you seen any lack 

of loan affordability or credit availability? 

Ms. LOWRIE. Actually, there is a situation in the State of New 

Jersey that happened right after the New Jersey predatory lending 

law was passed. We had a customer who had come to Gateway 

Funding to apply for a cash-out refinance, debt consolidation, less 

than perfect credit. Most of it was due to medical bills and medical 

expenses that he had incurred. The gentleman was on disability 

and was blind. He wanted to do a debt consolidation to avoid losing 

his home. He came to us. We processed the loan, verified all of his 

information, and approved the loan with a commitment to sell it 

to an investor. 

There were conditions to satisfy on that loan that unfortunately 

did not get satisfied prior to the effective date of the New Jersey 

predatory lending law. 

Mr. BACHUS. So he was denied a loan? 

Ms. LOWRIE. And subsequent to that law passing, his loan could 

not be closed. 

Mr. BACHUS. Okay. I will come back. 

Chairman NEY. I thank the gentleman. 

The gentlelady from California? 

Ms. WATERS. I have a few questions I want to try and get in. And 

even though this is a little bit off of the subject for today, for H&R 

Block, I believe you are the one that is involved in doing tax reVerDate 0ct 09 2002 09:33 Sep 08, 2006 Jkt 029453 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 F:\DOCS\29453.TXT HFIN PsN: TERRIE
35

turns that help people get their earned income tax credit. You do 

a lot of that work. Is that right? 

Mr. NADON. Option One Mortgage is not involved in that, but our 

parent company, H&R Block, does that. 

Ms. WATERS. And H&R Block basically lends money to these people whose tax returns they prepare in advance of the money that 

they would be getting back from the government, and they charge 

an amount of money, interest, to do that. Is that correct? 

Mr. NADON. I am not an expert on it. I think the way that the 

actual laws are written is H&R Block cannot be the lender on 

those, but I could certainly get you in touch with someone at H&R 

Block. 

Ms. WATERS. So H&R Block does it and they have a partner who 

does the loans? 

Mr. NADON. I do not work at H&R Block, ma’am, so I cannot 

really tell you. That is our parent company. I could get you a contact point within H&R Block to answer a question like that. 

Ms. WATERS. I think I will find out about it. I guess the reason 

it is on my mind is poor people are disadvantaged in so many ways, 

and the earned income tax credit is one that I am looking at because I think what I am seeing is the tax preparers are helping 

them to get their money early and they are charging exorbitant 

rates on it. 

So we are fighting not just on predatory lending. Payday loans, 

tax returns, tax preparation with advance amounts being given to 

people for exorbitant rates, it is just a mess in these poor communities, with all of these people descending on the poorest of the 

poor to exact from them every penny that they can get. 

Having said that, I would like Mr. Eakes to explain to me what 

you referenced in your testimony about the bill and the definition 

of ‘‘high-cost loans’’ and why some of what is supposedly advocated 

in this bill would not apply because they will never meet that definition. What were you talking about? 

Mr. EAKES. Thank you, Congresswoman Waters. 

In the definition of ‘‘points and fees’’ under the current Ney-Kanjorski bill, there is an exclusion for any fees paid to an affiliate. 

Okay? So if you simply structure your origination, and this is something that has been raised by CountryWide a lot over the years. 

You structure it so you have an affiliate that does your settlement 

services or an affiliate that does mortgage insurance or an affiliate 

that does anything. And basically you split the fee off. 

So the appearance of a 5 percent fee in the details of this bill, 

it is just an appearance. So really, you can do an unlimited amount 

of fees that you could not do even under existing HOEPA law at 

8 percent. 

Ms. WATERS. Thank you very much. 

You heard a description from Mr. Eakes. I know that you said 

you are very much against predatory lending. Would you be willing 

to fix that in this bill? Do you agree with him? Would you be able 

to eliminate that from the bill that would allow these unlimited 

fees to be charged based on this definition? 

Ms. LOWRIE. Congresswoman, MBA absolutely detests abusive 

lending and has been working— 

36

Ms. WATERS. No, no. I just want to go to the specifics of what 

Mr. Eakes has just described. I know you are against predatory 

lending. It is a terrible thing. You would never do it. But I want 

to know about the specific language. 

Ms. LOWRIE. The specific language in the bill takes the points 

from 8 percent to 5 percent. Sitting down and going through what 

is included in those points and fees triggers I think is part of the 

discussion over the next weeks and hopefully not months. 

Ms. WATERS. Do you agree with his definition of what high-costs 

loans are and what he just described? 

Ms. LOWRIE. No, I do not. 

Ms. WATERS. Okay. So based on what you understand and know 

about it now, you would keep it just the way it is. Is that right? 

Ms. LOWRIE. No. What I said was that MBA would like to sit 

down and work to modify those areas of the bill that may not provide strong protections to the consumer. At the end of the day, 

Congresswoman— 

Ms. WATERS. You said you came to tell us that you supported 

this bill. You support this legislation. I am asking you about a specific aspect of it because while we work every day with our friends 

and our colleagues, we see things differently sometimes. And while 

you are adamantly opposed to predatory lending, we just got a description of what we consider is predatory lending. Now, maybe it 

is a mistake, but you support the bill and do not know about it. 

I did not know about it. So did you not know about it, or are you 

opposed to that language? 

Ms. LOWRIE. We are not opposed to that language. 

Ms. WATERS. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman NEY. I thank the gentlelady. 

Mr. EAKES. Could I add, there were two other pieces of the definition of points and fees in New Jersey, New York, Georgia. They 

include prepayment penalties and yield spread premiums, which 

are basically an incentive to up-sell to higher rates. If you do not 

include those in the definition, you will not be able to address those 

two problems. They are generally viewed as fees that substitute for 

origination fees, so they should be included in that definition. 

Ms. WATERS. Thank you very much. I appreciate that. 

Chairman NEY. Mr. Miller? 

Mr. MILLER OF CALIFORNIA. Thank you, Chairman Ney. 

I have been in the real estate and building business for over 30 

years. I have worked with a lot of lenders and I understand that. 

I am looking at California, and there is a patchwork of local laws 

being passed, beginning with the non-prime mortgage market, and 

it is scary watching what is happening. 

I am really concerned because I have met with several reputable 

lenders who operate in all 50 States, and these are lenders with 

huge loan originations and securitizations. I am concerned that 

their ability to continue doing business under the trigger of the 

Miller-Watt bill would be greatly impacted. To be fair regarding 

both bills, would any of you on the panel care to comment on the 

impact of the points and fees triggers in both bills? 

Mr. NADON. The concern that we have with including financing 

options, these are just not non-prime financing options. These are 

37

used in the prime world every day. So the impact that it has on 

affordability is when you write legislation like they have in the 

Miller-Watt bill, part of the design I think is to try to drive more 

of the costs into an interest rate. The downside to that is that interest rate is what people’s monthly payment is based on. 

Mr. MILLER OF CALIFORNIA. They cannot make their payment if 

you drive it up. 

Mr. NADON. It drives up the monthly payment, so we have fortunately right now rates seem to be stabilizing a little bit, but certainly in a rising rate environment— 

Mr. MILLER OF CALIFORNIA. The 1 percentage point increase that 

you might experience, what percentage of the people does that put 

out of the marketplace by increasing interest rates by 1 percent? 

What would your guess be? 

Mr. NADON. I would hesitate to take a guess on that, but I can 

certainly run the math on it, but 1 percent has a fairly dramatic 

impact on the average consumer. It could be $300-and-some a 

month on our average loan just for an average consumer. When 

you talk about taking $3,000 or $4,000 out of their paychecks during the course of the year, that gets to be a fairly significant 

amount of money. 

Mr. MILLER OF CALIFORNIA. So in effect appearing to do what 

seems good in effect is going to have a major impact on people who 

do not have the earnings to basically pay the additional 1 percent. 

Mr. NADON. It just reduces their purchasing power and so they 

either cannot buy at all or they have to scale down what kind of 

a home they are going to buy. 

Ms. ADAMS. Mr. Miller, may I share with you what the downside 

of not including yield-spread premiums and prepayment penalties 

into the trigger is. I once saw a loan where there were 10 points 

on the loan that was the yield-spread premium. That would not be 

counted in the trigger. That is enormous. It was a loan where the 

principal balance on that loan was $10,000. With all the fees that 

were attached— 

Mr. MILLER OF CALIFORNIA. Is that on a home loan, a $10,000 

home loan? 

Ms. ADAMS. It was a cash-out refinance. It was a $10,000 loan. 

Mr. MILLER OF CALIFORNIA. With 10 points. 

Ms. ADAMS. And they had a total of $11,000 fees on it. And this 

was one that was filed with the Banking Commission. When the 

Banking Commissioner challenged the lender about where was the 

benefit to the borrower in this, and this was an associate’s loan, the 

lender said they got a 1 percent reduction in their interest rate. 

Under Ney-Kanjorski as it is currently written, that tangible benefit would be enough for that to be a legitimate loan. And I know 

that that is unconscionable to this Congress, that $11,000 worth of 

fees— 

Mr. MILLER OF CALIFORNIA. Ten points is outrageous. I would 

agree with that, but the question as it applies in a broad base to 

everybody, do you believe that most people are so unsophisticated 

that they should not have an opportunity to decide what they 

want? 

Ms. ADAMS. The yield spread does not even show up. POC, most 

borrowers do not know what POC means. They do not see it. They 

38

do not know it. They do not understand it. When I am sitting down 

and going over their loan to them when they come to me, they are 

going, what is a yield-spread premium? What is POC? They have 

no idea. 

Mr. MILLER OF CALIFORNIA. In fairness, would anybody else like 

to respond? 

Mr. NADON. If I can, I have within our written testimony for all 

of you. We have an example of what our disclosure is on a yieldspread premium. It makes it very, very clear to the borrower what 

is taking place. 

Mr. MILLER OF CALIFORNIA. That is what we are trying to deal 

with. Disclosure, that is the key. 

Yes, ma’am? 

Ms. LOWRIE. And I agree with that, disclosure is key and consumer education, which is part of the Ney-Kanjorski bill is key. But 

let’s think about for a second all of the studies that have shown 

that those who are underserved in the marketplace, one of the biggest challenges to achieving homeownership is the ability to make 

the downpayment and pay the closing costs. 

If it were not for yield-spread premiums to give the borrower the 

choice of paying closing costs through the interest rate, and not 

putting those in points and fees, both the Fed and MBA agree that 

it would be double counting. Yield-spread premiums, I believe, can 

be a benefit to the consumer. 

I think through all of this, we have to keep one thing in mind, 

not only that we have the best housing finance system in the 

world, the highest homeownership rate, but I would like to talk a 

little bit about the question on foreclosures. We talked about the 

fact that foreclosures are so high. And yet, from the third quarter 

of 2002 until the fourth quarter of 2004, we saw foreclosures decrease in sub-prime loans from 8.5 percent to 4 percent. That 

means 4 percent of the loans that may be going into foreclosure, 

out of 100, means 96 consumers received loans that may otherwise 

not have had the opportunity to do that. In a lot of cases, it is because of yield-spread premiums. 

Chairman NEY. The time has expired. 

Mr. MILLER OF CALIFORNIA. Thank you, Chairman Ney. 

Chairman NEY. Would you like to wrap up? 

Ms. LOWRIE. No, that is fine. 

Mr. MILLER OF CALIFORNIA. Thank you, Chairman Ney. 

Chairman NEY. Thank you. 

The gentleman from Pennsylvania, Mr. Kanjorski? 

Mr. KANJORSKI. Thank you, Mr. Chairman. 

In listening to the testimony of the present panel, is it reasonable for me to assume that you do recognize that there would be 

a strong reason to have a national standard? Or are there members 

of the panel that really do not want to move to the national standard at all? I guess I am directing this to really Mr. Green and Mr. 

Eakes. I think everyone else has conceded the fact that a national 

standard is worthwhile. 

Mr. SMITH. Do you want me to throw up the white flag? 

Mr. KANJORSKI. No, no, no. 

Mr. SMITH. I think what my testimony suggests, sir, is that 

whether there is an actual need for a national standard ought to 

39

be considered. But if there is to be a national standard, there needs 

to one, as Ms. Adams said, that is appropriate and that reflects the 

experience of the States. 

Mr. KANJORSKI. Right. 

Mr. Eakes? 

Mr. EAKES. I would say that it depends on what the national 

standard is. If the national standard does more harm than good, 

we are better off without it. In the last 5 years, we have basically 

eliminated the Associates, United Companies, FAMCO, Greentree, 

IMC Mortgage, the worst players we have now eliminated without 

having a Federal standard. If you put a Federal standard in place 

that actually reauthorizes some of the practices like arbitration 

that the industry has now done away with, then it will do more 

harm than good. 

Mr. KANJORSKI. All right. So it strikes me, then, that we almost 

have consensus on the panel that a national standard may be 

worthwhile, particularly considering 26 States in the Union have 

no standard, have no laws to protect consumers. Of course, the national legislature has to look at half the country being undressed. 

I would concede that North Carolina has made excellent strides, 

but we also have to be practical. The likelihood that the North 

Carolina law would become the national law is highly unlikely, or 

Mr. Ney and I would not have had to try and find consensus on 

something that would meet the ability to pass. We can have the 

ideal, and we are never going to have legislation. 

What I am hearing from both Mr. Green and Mr. Eakes, and I 

really welcome you, I am directing my attention to you, is the 

whole purpose for this hearing. I readily concede, and I think Mr. 

Ney would join me in this, that we do not have a perfect bill. Probably, we will never have a perfect bill. But you have brought up 

some suggestions that we can tweak things to make it more acceptable to you. I think, Mr. Eakes, I will talk to you, on this idea of 

the affiliate. It is a tough call. 

We did not want to encourage activity by lenders to try and extract more monies from people. That is not our intent. What our 

intent is is that we want to encourage those institutions that 

outsource certain services that they can continue to do that. That 

means a large number of the community banks, a large number of 

the smaller mortgage makers. If we structure everything has to be 

done in-house, what we are doing is taking a large part of this 

market away that they cannot provide these services in-house. 

They just do not have the capital. They do not have the capacity 

to do it, so they are out of the mortgage business. 

Now, on the other hand, we probably can find some language. 

What I am asking you do to is to work with us to avoid misuse and 

abuse of the affiliate charges, but yet still allow our ability to have 

the less than the largest in the mortgage business, so that we can 

keep this large segment of business activity, which I happen to 

think is much more competitive and will ultimately drive the rate 

down in sub-prime lending. 

Now, I could be wrong, but I think that is where it goes. The indications to me are that this is now becoming a relatively mature 

market, and probably there will be a narrowing of people that are 

involved in the market just by virtue of the fact that it would be 

40

so price-competitive. What we want to make sure is it is consumer 

protective in that happening, and you could be of great assistance. 

Maybe you ought to make an offer to the Chairman that formed 

this advisory committee and have all the parties of interest, as you 

did in North Carolina, come together. And it is not necessarily the 

Ney-Kanjorski bill that we want you to look at, but look at Mr. Miller’s bill and Mr. Watt’s bill, and any other additions that we may 

have mentioned, to make a better bill. 

Now, I will concede we cannot get a perfect bill. I think you agree 

with that, too. Regardless of what we do, we are probably going to 

lessen the protections of North Carolina, but we are certainly going 

to increase the protections of Kansas and Alabama and Pennsylvania. 

Ms. ADAMS. Mr. Kanjorski, I am so sorry. I did not mean to give 

any indication that the provisions in our State law, our State law 

is a strong sub-floor, but if we weaken it, we will fall right through. 

I did not mean to give the impression that I thought a national bill 

that would be less than what we have in North Carolina is a bill. 

I think it is a strong sub-floor. I am willing to put up with parquet, 

rather than hard oak floor, on the covering of it. But the North 

Carolina law in our State is working. Foreclosures in North Carolina are half of what they are in other States that have no laws. 

While I am willing to work to help cover the 26 States that do 

not have coverage, I think there is a place between what North 

Carolina has and what ideally Ney-Kanjorski can be. 

Mr. KANJORSKI. Right. And that is what I am inviting all of you 

to do; make sure that we are aware of what changes can be made, 

and that we have to argue them out because there will have to be 

compromise in how it applies. 

Let me end up, Mr. Chairman, I am taking a little more time 

than I really should. You know, when you really think of it in all 

these areas, I come to a conclusion, and I have always lived by sort 

of a principle, and I call it my ‘‘5 percent bastard’’ rule. 

When you really think of all the laws and all the rules and regulations we have on the books, 95 percent of the people that are in 

these businesses are in it to do standard business operations, get 

people in houses, provide consumer protections, and are not out 

there to steal money from them or be predatory. But regardless of 

what we write, there will be the ‘‘5 percent bastards’’ out there. We 

should try and tighten it up, but fully recognize that we are not 

going to remove them to zero. 

What we are trying to do is come a long way to take care of the 

Kansases, the Alabamas, the Pennsylvanias. Until last year, it is 

just now that Pennsylvania is coming forth with an effective piece 

of legislation toward predatory lending. I have had the personal experience in my district, in the Pocono Mountains. I have seen how 

disastrous it can be. I do not know what we could do. 

As a matter of fact when I talk with the Secretary of Banking 

in Pennsylvania, it sounds like I am self-serving because I happen 

to be a lawyer by profession, but I cannot understand people that 

go into transactions to buy real estate that do not get a lawyer. 

And 50 percent or 75 percent of the abuses in Pennsylvania, if they 

had had any kind of a lawyer at all, would not have happened. 

41

Ms. ADAMS. Well, Mr. Kanjorski, to address that, in North Carolina we had a law that said that all closings had to be done by attorneys so that there would be somebody there to help protect the 

consumer. The Federal Trade Commission said that that was a monopoly. 

Mr. KANJORSKI. Anticompetitive. 

Ms. ADAMS. Anticompetitive, and so now a person can go and 

close a loan with no safeguards. 

Mr. KANJORSKI. It is a real problem. I think Mr. Scott’s provisions were so compelling and that is why we took his provisions 

and put it in. I think it is going to go a long way for education, 

for counseling, but it is not going to solve all the problems. Sometimes these folks are so anxious to get a chance to get a home and 

want to believe everything that is attractive about the transaction, 

even though it is a fair transaction, but they may not be able to 

afford it; they may not in the long run be able to keep it. 

But if you are living in an apartment in New York and you get 

a chance to move to the Poconos and get your kids out of a school 

system and into another, where your income will go a lot further 

in the Poconos than it will in New York, it is an awful driving 

force. We are not going to cure all of those problems, but I am 

hopeful that at least out of those of you that feel that we have not 

quite come the proper distance yet, you will help us close those 

holes, or at least elucidate the problems. 

Chairman NEY. The time has expired. 

The gentleman from Texas, Mr. Hensarling? 

Mr. HENSARLING. Thank you, Mr. Chairman. 

I will beg the pardon of many of the panelists. I was out of the 

hearing room for much of the testimony, so some of this may be 

redundant. We have just heard several comments from Ms. Adams 

regarding the North Carolina experience. 

Dealing with assignee liability, Mr. Green, I guess I would like 

to get your opinion on it since I think you may have a slightly different opinion, but what do you see happening in States like North 

Carolina and Georgia that have passed strict assignee liability provisions that ostensibly are very pro-consumer? What is your observation of what happens in the marketplace? 

Mr. GREEN. Well, it is fundamentally an arithmetic equation. Either they continue doing high-cost or other similarly situated subprime loans at a higher cost, or, because of the vagueness of the 

liability that they may have to take, they just do not participate 

in those loans. I do not want to say the sky is falling. I cannot sit 

here and say that because of the North Carolina law in the last 3 

years X number of loans have exited the market. 

Keep in mind, we have been in an incredibly attractive interest 

rate environment right now. What happens when credit as a matter of market gets tougher to come by for every participant in the 

marketplace, and the issues of vagueness in liability come front 

and center? So we believe as a matter of principle you need more 

clarity and frankly from the assignees’ perspective, you need to 

make sure that it is very clear what the assignee’s role is and what 

the assignee’s liability is. We believe the Ney-Kanjorski bill provides a clearer standard and a more appropriate standard. 

Mr. HENSARLING. So in your opinion, the bill gets it right. 

42

Mr. GREEN. In our opinion, the Ney-Kanjorski bill does get it 

right. 

Mr. SMITH. If I may respond to that also. I do think that the evidence in North Carolina is, and again in 2003, and this is the mortgage bankers’ statistics, out of our top 15 sub-prime lenders, 7 were 

in the top 15 nationally. They accounted for 33 percent of the dollar 

volume of sub-prime loans originated in North Carolina. 

So I will defer to my friend Mr. Eakes. He knows more about assignee liability than I, but, A, I think we do not have a very strong 

assignee liability provision in our law, and B, whatever provision 

we do have has not kept national lenders who are national market 

players from participating profitably in our market. 

Mr. NADON. If I can just add a comment, because I am a national 

lender, that much of the lending that we have done in North Carolina, it has been in just the last few years. We did not have a presence there 10 years ago. So we have opened up a branch there, as 

I know some of our competitors have. We now have a lot more sales 

people working there than we did. There is a growth that is there, 

just the natural organic growth that comes from growing a business. 

We were not living in a static environment in North Carolina. 

We had a very mature business in that State at Option One before 

the law passed, and then subsequent to that law you can look at 

it and say, well, we did not seem to get affected. We charge people 

a higher rate for the exact same loan in adjoining States and other 

States in the market than in North Carolina because of the law 

that they passed. So there is a higher cost. 

I do believe that the Banking Commissioner has even commented, I am not sure how recently it was, but on the fact that 

credit is more expensive; non-prime credit is more expensive in 

that State. 

Mr. HENSARLING. Mr. Nadon, since you spoke up, let me ask you 

another question. We need to go on please. 

I believe, and I actually did catch part of your testimony. I think 

I heard you say that costs of a loan can increase 1 percent if you 

have a de facto prohibition on prepayment penalties. Did I hear 

you correctly there? 

Mr. NADON. Yes, that was the outcome of a study done by an outside group, the Pentalpha Group consulting firm did that study. 

That was a conclusion they came to. It is fairly consistent. Right 

now, if you opt for one of our loans with a prepayment penalty, we 

take 100 basis points off your rate. 

Mr. HENSARLING. Ms. Adams, unfortunately I missed some of 

your testimony, but I caught a little bit of it in the question and 

answer session. Assuming that there is actual full disclosure, is 

your organization against consumers having that option to actually 

sign up for a prepayment penalty and perhaps enjoy the benefits 

of a 1 percent reduction in their interest rates? 

Ms. ADAMS. On sub-prime loans, yes, sir, and I will tell you why. 

The purpose of the sub-prime market is to give people a second 

chance to rehabilitate their credit so that they can go back into the 

prime market. So it is quite possible that without a prepayment 

penalty, that person would make on-time payments of that loan for 

43

3 years, prove their credit-worthiness, improve their credit score, 

and then qualify for a prime loan— 

Mr. HENSARLING. But if there is full disclosure, aren’t you supplanting your decision with their decision? 

Ms. ADAMS. —that benefits them. I am saying that if we are 

going to look at what is in the long-term best interest of the consumer, locking them into the sub-prime market is not helping them 

to build wealth. Whereas if they had the opportunity to move into 

the prime market with full knowledge that if they make their payments on time, full disclosure means telling them if you do not take 

it and you pay your payments on time for 3 years, you may be entitled to a 3-point reduction when you refinance into the prime market. 

So with full disclosure, sure, if a consumer makes that choice, 

that would be their choice, but that is not what kind of disclosure 

consumers are getting. 

Mr. HENSARLING. My time has expired, but I would offer the 

opinion that the consumer is probably the best judge of what is in 

the consumer’s best interest. 

I yield back, Mr. Chairman. 

Chairman NEY. Mr. Miller? 

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

Mr. Nadon, I look forward to working with you as we continue 

to discuss the various bills. I did have a couple of questions from 

your testimony. 

In the appendix, you have your best lending practices, or what 

is it called, fair lending practices set out. However, on your Web 

site, I printed it out this morning, it appears to be a different 

version or was perhaps an earlier version. It is on the PDF format 

as it appears on your Web site. Apparently, the HTML format does 

have it the way it appears in the appendix. But there are some 

changes, and I am curious. 

On page 35 of your current best practices, on the appendix pages 

35 and 36, it no longer says, to make certain there is no personal 

financial benefit for someone to charge you a higher rate, we do not 

pay yield-spread premiums to brokers, which means the broker 

does not receive a financial incentive to charge a higher interest 

rate than our published rate. 

Mr. Nadon, when did you change, when did Option One change 

your position on yield-spread premium from the view that it created a conflict of interest between the broker and the borrower, and 

now view it as a wholesome practice that should be protected under 

law? 

Mr. NADON. Our challenge on the yield spread all along was the 

clarity of the disclosure that was done within the industry, as I 

think someone on the panel commented. What was most frequently 

found was lenders were, particularly going back several years ago, 

would have a reference on a closing statement of POC or something 

like that. We did not think that was sufficient. We did not think 

that told a borrower what they really needed to know. 

So we found a way to put a very, very clear disclosure out there 

that I would be happy to provide all the members a copy of. 

Mr. MILLER OF NORTH CAROLINA. It is in your testimony. 

Mr. NADON. It is on page 39 of the testimony. 

44

Mr. MILLER OF NORTH CAROLINA. Okay. And that has changed 

your view that a yield-spread premium creates a personal financial 

benefit for someone to charge you a higher interest rate. 

Mr. NADON. Yes, because what we are doing is we are actually 

lowering their rate for some things, and we are using these as a 

tool now to say that one of the challenges for a lot of non-prime 

borrowers, one of the reasons they actually wind up being in the 

non-prime category is a lack of financial reserves; their ability to 

have the cash needed to close on a transaction. 

This actually, if done right, can allow people when they do not 

have cash or when they want to reserve some of their cash in savings for after the time the loan is closed, it still allows them to buy 

the home. So there is a clear benefit in there. 

Mr. MILLER OF NORTH CAROLINA. Mr. Nadon, you heard Mr. 

Eakes earlier testify on why he thought additional, and the view 

in North Carolina was that additional disclosures were futile given 

how much was already being disclosed. It was just more paper. You 

disagree with that. You think the additional disclosure, one-page 

disclosure on this is not just one more form a consumer signs? 

Mr. NADON. I think this one is a good disclosure. 

Mr. MILLER OF NORTH CAROLINA. This one they read closely, 

word for word. 

Mr. NADON. Yes. 

Mr. MILLER OF NORTH CAROLINA. Okay. There are a couple of 

other points that are no longer in your fair lending practices, negative amortization loans and single-premium credit life or disability 

insurance, or any other types of credit or disability insurance when 

your loan is made. You no longer view those as unwholesome practices. 

Mr. NADON. We have never offered any product like that. 

Mr. MILLER OF NORTH CAROLINA. Okay. That is no longer in 

your fair lending practices. 

Mr. NADON. That might just be an oversight when they did a revision of the document, because we have never offered, as Mr. 

Eakes knows, we have never offered any credit life insurance products. 

Mr. MILLER OF NORTH CAROLINA. Okay. What was fairly striking 

in your testimony, and you have come back to it in the questions 

and answers as well, the assertion that you give a 1 percent discount when someone does not have, or you charge 1 percent more 

when someone does have a prepayment penalty. 

Mr. NADON. We charge less when there is a prepayment option. 

Mr. MILLER OF NORTH CAROLINA. I was struck by the lack of authority, the lack of citation of a study or an industry publication 

or anything, or even your own rates from State to State. An industry publication, Inside B&C Lending in 2001 said that the industry 

was setting out to study to try to document that North Carolina 

rates were in fact higher as a result of North Carolina’s law. You 

have heard Mr. Eakes say that they were no higher. 

Four years later, there still does not appear to be a study that 

documents that. In fact, B&C Lending said that they examined the 

rate cards for various sub-prime lenders for North Carolina versus 

other States and said they could not see any difference in the products that were available or in the rates. 

45

Can you at least provide various rate cards? Can we see that for 

the different States? 

Mr. NADON. Yes, our rate sheets are available on our Web site, 

and I certainly can have someone in our secondary marketing put 

it together for you in such a way to show the clear distinction on 

like loans. The importance is taking a like loan, the same loan 

amount, same LTV, same debt ratio, the same characteristics of a 

loan in that market versus another market, and just taking those 

two rate sheets in those two different markets, what do we charge. 

We can show that for you. 

Mr. MILLER OF NORTH CAROLINA. Ms. Lowrie? 

Actually, I am out of time and I had one more question for the 

folks, if I could, Mr. Chairman. 

A couple of the members have noted that there now seems to be 

no disagreement about the need for a national standard. Mr. 

Eakes, Ms. Adams, do you think there should be a preemptive national standard? Do you think the standard should be both a floor 

and a ceiling? Or do you think it is sufficient? When you say that 

you want a national standard, do you mean that there should be 

a floor only? 

Mr. EAKES. If I could take one step back on the pricing. If you 

look at page 22 of my testimony, I have the raw data looking at 

all the sub-prime loans in North Carolina and adjacent States, on 

page 22. It basically shows that the pricing across the industry in 

North Carolina for every year is no different than adjacent States, 

the interest rate. So regardless of what people theoretically think 

might happen, it has not happened, even though prepayment penalties have largely been eliminated in North Carolina. It is just a 

fact. 

A preemptive standard I think will not work. Uniformity is 

overrated. When you have an entity that is a local finance company 

that has no national regulator, you have to have some sort of State 

standards that can enforce. You have to have the ability to adapt. 

My belief is what we need is a strong Federal floor standard. If it 

is a floor, you will not have any new State legislation being passed 

because it is too much work. 

But if you put it as the maximum and say this is preempting any 

and all changes, then what you find is you cannot deal with the 

problems as they evolve. If North Carolina had been adopted by 

Congress in 2000, and said this is the end of the game, there is no 

more discussion, the elimination of single-premium credit insurance immediately morphed into something called debt cancellation 

contracts which were not insurance. 

Chairman NEY. The time has expired. 

Mr. EAKES. Okay. So the simple answer is you need a Federal 

floor. If it is high enough, there will not be any proliferation of 

State laws, but you should not preempt. 

Mr. MILLER OF NORTH CAROLINA. Mr. Chairman, I would just 

ask to make part of the record today the fair lending practices that 

I printed off Option One’s Web site this morning. 

Chairman NEY. Without objection. 

Mr. MILLER OF NORTH CAROLINA. As well as the March 5, 2001, 

copy of Inside B&C Lending. 

Chairman NEY. Without objection. Thank you. 

46

We now go to Mr. Feeney. 

Mr. FEENEY. Thank you, Mr. Chairman. 

Thank you to the gentleman from North Carolina as well. 

Mr. Green, I was interested perhaps in your opinion of the tangible net benefit analysis under loan flipping. I was not able to be 

here for much of the hearing, but that looks like an awful subjective standard to me. 

I am a cosponsor of the bill, but what regulatory guidelines do 

we have in place now to lenders and borrowers? And which ones 

would need to be developed so that what looks like a subjective 

standard can be turned into more of an objective and ascertainable 

standard before we enter loan criteria as opposed to afterwards? 

Mr. GREEN. I think you raise an excellent point. The fact is that 

the goal here is to provide clear, objective standards by which lenders can be guided and that secondary market participants can flag 

readily and easily. Frankly, it goes to the issue of the need for a 

national standard. We believe very strongly that while there are 

many local elements to the mortgage market, it is now a national—

and dare I say international—capital marketplace, and that a floor 

that does not provide preemptive strength will not provide a standard whatsoever. 

There will be a cost to that uncertainty. The flipping and other 

standards that will be a part of the discussion that will ensue during the coming weeks and hopefully short months with this subcommittee and other market participants will hopefully provide 

better clarity for that and can provide that national standard that 

all can feel comfortable—be they borrower, lender, or secondary 

market participant. More importantly, you the Congress can have 

faith that predatory lending can be stopped with the implementation of these standards and that sub-prime lending can continue. 

But the point you raise is one of those exact points that we need 

to clarify. 

Mr. FEENEY. Mr. Smith, I appreciate your defense of federalism. 

I came from the State legislature and appreciate the State prerogatives. But it does seem taken to its extreme that we have 5,000 to 

10,000 jurisdictions if you include townships and cities and counties and the 50 States. Just the compliance costs for people who 

want to engage in not just national lending, but also the ultimate, 

I do not know of anything more liquid than capital other than perhaps water. Capital will chase places where there is certainty, 

where the risk is minimal and where the return is greatest. 

One of the burdens is compliance costs. If I have a lot of capital, 

which I do not, but if I want to put it in the mortgage market as 

opposed to a myriad number of other investments, the last thing 

I want to do is to have 5,000, or for that matter 50 sets of regulations to worry about. 

Mr. SMITH. Well, let me answer a bit of that, respond to it anyway. First, the fluidity of capital is the reason I said that mortgages are financed globally, because global capital markets allocate 

capital around the world and our national market is a piece of that. 

That was an attempt at sophistication. I will never try it again. 

In the United States, there are multiple jurisdictions that have 

adopted these regulations. I will say I think the State level is an 

appropriate level to do it, not for the least of the reasons that State 

47

real estate law is still one of the last, I think, remaining I should 

say redoubts of State jurisdiction. Who knows? That may get preempted, too, but if you do loans in North Carolina, the deed of trust 

loans and the means of conveying are different. 

So there are compliance or documentation issues in the real estate finance business that are inherent, setting aside for a moment 

predatory lending laws. It seems to me that a State jurisdiction is 

an appropriate jurisdiction in our Federal system to regulate loan 

content and lender conduct. 

As to the issue of cost, it seems to me that by and large, and I 

know that some provisions of our laws deal with all loans, but by 

and large the protections we are talking about are for a subcategory of a subcategory. The sub-prime market is, I believe, its 

high point is— 

Mr. FEENEY. I understand that, and I am about to run out of 

time. I will let you finish on that. 

Mr. SMITH. I apologize. 

Mr. FEENEY. That is okay. I will let you finish on that, Mr. 

Smith. 

Mr. Nadon, whether your stats are right or his are right, we live 

in a very easy credit market. I was General Counsel to a real estate developer with a third-grade education, but boy he made millions in real estate. What he taught me was, not that he was a fool, 

any fool can make money in an up-market in real estate. At a time 

when we have 25 percent increases in values in residential homes 

in Florida, nobody who is lending is losing. But that is not always 

true, because we see the downsides also. 

We have easy credit out there. Nobody is losing money by lending money in real estate today, but there will come a time when 

lenders will not be so easy. My view is you will be punishing borrowers, that are prepared to be flexible, if you are too rigid. It 

seems to me that at least theoretically, if not North Carolina, some 

of these local or State regulations are too rigid and you are going 

to ultimately punish the borrowers in tight money markets. 

Mr. SMITH. Thank you. 

Chairman NEY. The gentleman, Mr. Watt. 

Mr. FEENEY. Mr. Chairman, if he could just have a moment to 

respond, I would be grateful. 

Mr. SMITH. I agree very much with your concern about the future. I share it. In fact, it is one thing that keeps me up nights regularly. I do not think the restrictions on borrowing or lending are 

going to make a problem. I disagree respectfully that restrictions 

of the kind we are talking about on a small portion of the market 

are going to have a huge influence on the tide. I agree with you 

in part, and respectfully disagree on the second half, which is that 

the restrictions themselves would make a bad situation worse. 

Chairman NEY. Thank you. 

Mr. Watt? 

Mr. WATT. Thank you, Mr. Chairman. 

Let me do two or three things here. First of all, I apologize to 

the first three witnesses, the ones from my own State whose testimony I missed completely, and extend a half-apology to Mr. Green, 

because I missed half of his testimony also. I had to go out and give 

a speech this morning, so I had to miss your testimony. 

48

Second, let me say how valuable I think this discussion has been 

because at some level we are talking about potentially the difference between simplifying things by making it easier for borrowers to understand and compare loans, which is if you put everything into the interest rates, people understand interest rates and 

at least they can compare. If you allow other options that may 

lower the interest rate and people do not understand them, it can 

be really a confusing market situation for consumers. 

More education favors people who can understand and who have 

time to understand and who have options. Simplicity favors people 

who, even though they may end up with a marginally higher interest rate, can understand how to compare and shop. I do not know 

that there is a right or wrong answer to a lot of these things, but 

this discussion I think has helped. 

Mr. Nadon, I know that you speak for your organization and you 

also have an individual business hat, so it is not necessarily so that 

the organizational position would be consistent with your own 

business’s position because you are talking for a more global group 

of people who may be doing different things. The one thing that 

Mr. Miller did not ask you about, I do not think, unless I missed 

it, apparently Option One does not offer mandatory arbitration. Is 

that right? 

Mr. NADON. It is not part of our contracts. 

Mr. WATT. Okay. Yet I guess what you are advocating, the NeyKanjorski bill would allow mandatory arbitration, you are saying 

that that is something that should be done in the industry even 

though your company itself does not do it. 

Mr. NADON. I think the view there is that, I will give you my 

own personal view, as well as what I think where the industry is. 

My personal view is that there is actually a right place for arbitration. I think there is a way that it can— 

Mr. WATT. That brings me to actually the final point I want to 

make, because your view is that if the yield-spread premium is appropriately disclosed, as you do in your disclosure, although you 

can argue about whether disclosure is effective or not. 

I practiced law for 22 years and did a lot of real estate. I never 

went away from a real estate closing thinking that anybody in the 

real estate closing, including a lot of times the lawyers, knew what 

was going on by the end of the closing, despite all of the disclosures. So I am not a big disclosure fan, but people can disagree 

about that. 

What you are saying is that if the yield-spread premium is appropriately disclosed, as you do in your company, then you think 

it is appropriate, but Ney-Kanjorski does not necessarily mandate 

what you do in your company in terms of disclosure. They just say 

we are not going to count yield-spread premiums in our calculation 

of fees. 

So what about the companies that do not do that kind of disclosure? I mean, we are not mandating the kind of disclosure that 

your company uses in this legislation. And yet before you had the 

disclosure, your company’s position was that yield-spread premiums, I mean, it was not a good thing. 

49

Mr. NADON. We used borrower credit, which effectively got to the 

exact same place and disclosed it in a very clear and transparent 

manner. 

Mr. WATT. All right. But what about the places where it is not 

disclosed clearly? 

Mr. NADON. I think that there should be a lot of discussion on 

how do we make sure that everyone in this industry is disclosing 

in a very clear, simple language, transparent manner so that any 

consumer when they walk away from the table, there are some 

things they should know. 

They are not going to know all of everything that is in a contract, 

and most of it frankly is written for attorneys, in my opinion. I am 

not an attorney so I do not understand it. But there are some critical components that should be just very, very plain and simple 

that says this is what is happening. 

Mr. WATT. Okay. My time is up, but I would just say, I have 

looked at appendix D and after 22 years, I am not sure it would 

be all that helpful to somebody to have even your disclosure. I am 

not questioning the intent. I guess this just goes back to my belief 

that disclosures do not effectively do it. You are closing a transaction. You are doing a loan transaction and you usually just do 

not have time to be studying disclosures. I just do not think they 

are that effective, but I am not saying that the motives are not 

good. 

Mr. NADON. And the benefits are clear, from our perspective, of 

having that tool there. 

Chairman NEY. I thank the gentleman. 

Mr. McHenry? 

Mr. MCHENRY. Thank you, Mr. Chairman. 

Thank you all on the panel for being here today. I certainly appreciate it. I appreciate half the panel, Mr. Chairman, being North 

Carolinians. It means a lot to me, being a Tarheel myself. 

Mr. Eakes, you reference the fact that Self Help has given some $4 billion in loans over the last 20-some years; over 40,000 families. What percentage of those loans, how many have been subprime? 

Mr. EAKES. I would say all of them have been to credit-impaired 

individuals. That is my definition of ‘‘sub-prime.’’ 

Mr. MCHENRY. How would you define ‘‘sub-prime’’ for someone 

else? Is that your normal definition? So all of these have been subprime. 

Mr. EAKES. They have all had credit blemishes that did not make 

them qualify for the traditional conventional loan. 

Mr. MCHENRY. But in terms of family homeownership, so all $4 

billion has been for homeownership. 

Mr. EAKES. That are unconventional, yes. 

Mr. MCHENRY. Unconventional. Okay. 

Well, you said in a press release and in your written testimony 

that sub-prime loans go to foreclosure 10 times more than prime 

mortgages, and one in five ends in foreclosure. What are your statistics for your organization? 

Mr. EAKES. Were you here for my testimony? 

Mr. MCHENRY. Actually, I was. 

Mr. EAKES. You were. 

50

Mr. MCHENRY. I was. I left right after it. So my apologies to the 

half of the panel that my colleague from North Carolina saw. 

Mr. EAKES. We went our first 11 years and had not a single foreclosure. We have had a total now, it is less than one-tenth of 1 percent cumulative. It is a very, very small number of foreclosures. 

Mr. MCHENRY. So on what do you base your 10 times more likely? 

Mr. EAKES. We have a database that looks at all sub-prime loans 

and has the terms and disclosure of the interest rates, all those 

terms. We paid $250,000 for a database to be able to analyze that. 

So in my analysis, and the Mortgage Bankers Association produces 

data annually as well, that in States like Ohio, Ohio has the highest foreclosure rate in sub-prime loans of any State in the nation, 

and it is public data. 

Mr. MCHENRY. So you have maybe less than 1 percent that have 

been foreclosed? 

Mr. EAKES. My original point was that having been an experienced sub-prime lender before it was even called that, that if you 

have really high foreclosures, one of two things are happening: you 

are making loans to people who really should not have been approved for a loan; or number two, there are features in the loan 

that have stripped the wealth and made it unaffordable and unable 

for the borrower to succeed. 

The most catastrophic thing we are facing right now is that the 

studies that have been done in Chicago and Pennsylvania and 

other places suggests that anywhere from 20 percent to 30 percent 

of sub-prime loans given in a certain year will eventually foreclose. 

So the 10 percent number that I mentioned, that is how many were 

in foreclosure at one point in time. 

But if we had 20 percent of sub-prime loans in total that were 

foreclosed, and that is a very conservative estimate for right now, 

based on these databases. What is happening in the industry, the 

reason Joe Smith was so worried, is increasingly we are now seeing 

interest-only loans and hybrid ARM loans, your exotic products. We 

are going to have 40 percent to 50 percent of those loans eventually 

foreclosing. 

Mr. MCHENRY. Let me also go to another person who is in this 

marketplace. Mr. Nadon, could you address those questions? 

Mr. NADON. Yes, our volume members are a lot different from 

Self Help’s. I am not familiar with their statistics at all. I can just 

tell you that yesterday I went back to the people in our organization in Irvine, California and asked them the question: What percentage of our loans life to date have ever ended in foreclosure? 

And the number is 3.72 percent on close to $100 billion worth of 

volume. 

Mr. MCHENRY. So less than 4 percent. 

Mr. NADON. It is not 20 percent. 

Mr. MCHENRY. It is not 20 percent. 

Mr. NADON. That has not been our experience. 

Mr. EAKES. Let me explain the difference there. If you take a 

year’s loans in 1998, that cohort, and say let’s take it throughout 

time, and say how many of those eventually will default, the number will be 20-plus percent. 

51

Mr. MCHENRY. Well, 100 percent of us in this room are going to 

die, so therefore by your statistics we are all dead. Was that surprising to anyone? 

Okay. 

Mr. SMITH. You are going to reduce that to present value, aren’t 

you? 

Mr. MCHENRY. Banking jokes. All right. But in 2004, Self Help had some $45 million in loans you made, and $8 million of those have been delinquent real estate, 

or delinquent. 

Mr. EAKES. I am sorry. Say your number again. 

Mr. MCHENRY. In 2004, Self Help made about $45 million in 

loans. Is that correct? 

Mr. EAKES. Are you talking about Self Help Credit Union or all 

of Self Help? 

Mr. MCHENRY. Self Help Credit Union. 

Mr. EAKES. That sounds like it might be right. 

Mr. MCHENRY. Sounds like it might be right. Well, you had over $8 million in delinquencies in real estate. So that is pretty close to 

your stats. 

Mr. EAKES. Yes, and that is exactly my point. With low-wealth 

families, which is what we focus on, people who do not have a large 

downpayment, the thing I will tell you right up front is those families will have more delinquency, but they do not default. They cure 

it. So yes, people who do not have cash reserves, they get behind, 

but they catch the loan back up. And that is a good thing. That 

is what I think the sub-prime market has helped do. 

But those loans do not default and ultimately produce losses for 

the lender. That is what I am telling you. A low-wealth family will 

have a crisis, just like other families. They will have death, illness. 

They will all have death, illness, divorce, job loss. If you have a 

cash cushion, a middle-class family that has $10,000 of cash, you 

will deplete that cash and then you will catch it back up when you 

get on your feet. 

Chairman NEY. Speaking of death, the time of the gentleman has 

expired. 

Mr. MCHENRY. If I may say one final thing. That is close to your 

20 percent statistics you are giving for other people, that you have 

20 percent delinquency yourself. So it is an interesting finger you 

are pointing at other segments of the industry, but you are not realizing what you are doing yourself. 

Mr. EAKES. Do you understand my distinction between delinquency, which means that you are 30 days behind in your payment 

at a various point, versus default, where you have been foreclosed 

on at 90 to 120 days past due. And the number you are citing is 

the 30-day figure, not the ultimate default and foreclosure. 

Mr. MCHENRY. Mr. Chairman, I have two follow-up questions if 

I may submit them for the record. 

Chairman NEY. Without objection for the record. 

Mr. MCHENRY. And if Self Help will be so kind as to answer 

them. 

Chairman NEY. The gentleman, Mr. Scott? 

It will be submitted for the record, then you can respond. Thank 

you. 

52

Mr. Scott? 

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

Let me ask the panelists to examine very carefully in this legislation the financial education component, the toll-free number component, specifically because you all are the ones out there that can 

help us to make sure that we got it constructed right; to make sure 

we got the level of funding in it that needs to be. At this point, it 

is $58 million. 

Is that adequate—and I know, Mr. Nadon, that you had mentioned that an interesting proposal, within your own industry and 

others, that could contribute in. 

It is one thing to say in a bill, ‘‘We are going to get a financial 

education program, we are going to set up a toll-free number, we 

are going to get money down to the grassroots, we are going to get 

them into the communities, we are going to set all of this up.’’ But 

do we have the right amount in there to do the job? Mr. Nadon, in your opinion, do you think $58 million is enough 

to do all that we are doing in addition to staffing around the clock 

a 1–800 number? 

Mr. NADON. I am not sure that it is. 

The thing to go into my mind, just as a business guy, is that we 

do not know how many phone calls will come in. We do not know 

how long our customer service reps, if you will, will have to be on 

each one of those phone calls. We do not know how long it will take 

to get all those people up to speed so they can do their job right. 

We do not know what kind of telecom system we need, what kind 

of I.T. infrastructure we need. 

So it is very hard to come up with a business plan—or a number 

for that, rather, without a business plan that, kind of, shows you 

what kind of dollars you have to invest. 

Mr. SCOTT. Well, Mr. Nadon—because I have a couple of other 

questions for the others—because you are out on the street, you are 

there, and others as well could do this as well, this is a hearing, 

and the purpose of this hearing is to obtain information and assistance from you all that is very valuable in helping us. 

I would like to ask each of you, and especially Mr. Nadon, if you 

could submit to us, in preparation for the markup of this bill, to 

make sure we have it worded right, to make sure we have the 

amount of money in, to make sure we have an effective business 

plan with who, what, where and how, as we go forward. 

And as you look at the education component in this bill, help us 

and advise us as to what we need to add to it—in an amendment 

form or as we mark it up in this committee—because everybody on 

this committee concurs. Education is a critical part of helping and 

getting the help to the people in the first place. It is not all that 

needs to be done. 

We need to put most of what is in the Ney-Kanjorski bill and the 

Watt bill as well. But certainly, we all concur that education is a 

vital component and certainly have to do that. 

So if you could, I would appreciate that. Yes, I think you want 

to respond to that. And please be brief, because he is going to bug 

me and I have three more questions I want to ask. 

Ms. ADAMS. I just want to say no, that is not enough money, for 

those of us who are on the street, doing the education and the 

53

counseling. In North Carolina, our law provided for pre-counseling 

education for people in high-cost loans. 

Our legislature forgot to fund that. Those of us who are trained—

and North Carolina provides training through the Housing Finance 

Agency for counselors to provide that education. Those of us who 

do it, it costs about $250 to really educate and help a consumer understand the complicated process and their options and choices. And $58,000— 

Mr. SCOTT. Million. 

Ms. ADAMS. $58 million is a million for each State. We have 100 

counties in our State. And it is $8 million to pass out to major metropolitan areas. You need to double that, just to start with. 

Mr. SCOTT. Very good, thank you. 

Yes, sir? 

Mr. GREEN. Congressman, I just want to point out that we, the 

Bond Market Association, spent a lot of our own money on investor 

education and financial literacy Web sites. But as part of the major 

settlements that occurred a couple of years ago, the State securities 

regulators—the NASD and the SEC—have significant funds set up 

to allocate and award grants for financial education and investor 

education. 

This committee has clear, broad jurisdiction over that end of the 

marketplace. You might let those regulators know that financial 

literacy should be part of that equation. 

Mr. SCOTT. Excellent. Thank you very much. 

Ms. LOWRIE. Congressman, I agree with what all the panelists 

have said. I think the industry, the various industry associations, 

in addition to whatever comes out in a uniform national standard 

or legislation, should step up to the plate. 

I mean, in addition to what the Bond Association has done, the 

Mortgage Bankers Association has put out on its Web site a home 

loan learning center for consumers to go and ask questions, go 

through the education process. We have also supported the uniform 

real estate settlement procedures, simplifying the mortgage process. 

Mr. SCOTT. Thank you all very much. 

I have to get to my final question, and that is to the two issues, 

it seems to me, that we really have to resolve is the question of a 

national standard for assignee liability and the issue of preemption 

because we have to have some agreement on that. 

Coming out of Georgia, of course, as you know—and I point to 

the gentleman from North Carolina because we called upon one of 

yours, Michael Calhoun, whom you may know, with the Center for 

Responsible Lending. There he is, back there. 

Well, Michael knows we called upon him in Georgia. That was 

before I got to Congress. That was my last bill we worked on back 

3 years ago. 

The assignee liability issue, we need to have a national standard 

by that. Now we have what is called limited liability, assignee liability. We have strict assignee liability. We have liability in which 

you have some shelters in there from lawsuits. 

I mean, where do we get the standard for assignee liability? And 

is it North Carolina’s motto? And could you wrap that in, for me, 

with a clearer understanding of your requirements for preemption? 

54

I think you mentioned a floor, as opposed to a ceiling. But I think 

you went through that pretty fast. 

But please give us your feelings on what should be in the national standard for assignee liability. 

Mr. EAKES. You are asking me, right? 

Mr. SCOTT. Yes, if you would, Mr. Eakes. 

And then you, Mr. Green. 

Mr. EAKES. The issue around assignee liability is the following. 

If you have an innocent borrower and an innocent investor—assignee—with a loan that had a problem made by the lender or the 

broker, and it comes to foreclosure—so it was an abusive loan, 

made by someone who is no longer there; that is the primary 

issue—who bears the loss because the broker or the lender is no 

longer there? 

Who bears the loss? Should it be the individual homeowner who 

is now in foreclosure, who was abused? Or should it be the investor 

pool? 

And that is the challenge of assignee liability. I have now personally negotiated with Standard & Poor’s, Moody’s, Fitch’s, Fannie 

Mae, Freddie Mac—virtually all the major companies in America 

who do sub-prime loans. 

And at least for those first groups, we came to a standard that 

basically said: only for high-cost loans would there be assignee liability. So it is very limited to begin with. 

There is a standard that was passed in New Jersey and New 

Mexico that all those other—not the major industry groups, but the 

ratings groups and Fannie and Freddie, the guardians of the secondary market, have all signed off on it. So we have a standard. 

The standard that is in this bill will simply not work. It is worse 

than what we currently have. 

Mr. SCOTT. That was my other question on that. This assignee 

liability in the Ney bill— 

Mr. BACHUS. [Presiding.] I hate to bug you, but I think your time 

has expired. 

Mr. SCOTT. All right. I will yield back, Mr. Chairman. Thank 

you. 

Mr. BACHUS. I have great respect for you. 

Mr. Pearce, do you have a question? 

Mr. PEARCE. Sure, Mr. Chairman. Thank you. I was fascinated 

by my colleague from Georgia’s questions. 

Mr. Smith, if you were going to guess at the number of problem 

loans in the sub-prime market in North Carolina right now, what 

would you guess? And I am talking about the ones that Ms. Adams 

described. And those are just horrendous examples. 

Mr. SMITH. The best proxy I have to answer your question is that 

the rate of foreclosures in the State have gone up—doubled—in the 

last 5 years. Now we have had a little bit of a remission in the last 

year, which is a blessing, so let’s hope that continues. 

I think if it were looked through, I believe a fair bit of those 

would be in the sub-prime market. What is ironic is that it is even 

higher in metro areas, which have not had the industrial problems 

we have had and the loss of jobs and the like, so it has less to do 

with economic conditions than it has to do with something else. 

But that is my best proxy. 

55

Mr. PEARCE. So your guess is that a high percent? 

Mr. SMITH. Yes. 

Mr. PEARCE. Would you guess about 50 percent of the sub-prime 

loans? 

Mr. SMITH. Well, no. I would say that the rate of foreclosure has 

gone up. And I do not know whether my friend Mr. Eakes’s 20 percent idea is correct or not. 

Mr. PEARCE. Okay. 

Mr. SMITH. But the events in our State suggest that it is a high 

rate. And it is probably in sub-prime. 

Mr. PEARCE. The other 80 percent then, it is people trying to live 

within the letter of the law. They provide a product at a little bit 

higher price or something? 

Mr. Eakes, you said that you all have been working in that market for 20 years. How much escalation do you give the sub-prime 

loans that you all work? In other words, if you were taking a look 

at a mortgage in a prime lender status and then you looked at subprime, how much do you all escalate it? Or do you at all? 

Mr. EAKES. Escalate the interest rate? 

Mr. PEARCE. Or whatever, points or whatever. In other words, 

what do you all do? What is the range of options that you have? 

Mr. EAKES. On the loans that Self Help makes, we charge no 

points at all. We charge a 1 percent origination fee. 

Mr. PEARCE. No points, but 1 percent, so if a loan for a house 

is at 7 percent nationwide, you would charge 8 percent. 

Mr. EAKES. No, no, we charge a 1 percent origination fee, the fee 

for making the loan. Our interest is probably one-half of 1 percent 

higher than a Fannie Mae loan. 

Mr. PEARCE. So you charge a 1 percent origination fee and then 

another half above. 

Mr. EAKES. Interest rate. 

Mr. PEARCE. Mr. Nadon, what would your industry, for instance, 

do in the same situation? 

Mr. NADON. It depends on the risk category that the borrower 

was in. 

Mr. PEARCE. Just give us the range. 

Mr. NADON. Like a double A to a double C. But they really would 

be someplace between 50 to 75 basis points over a conventional 

rate on most of our business. But we do have products that can go 

as high as maybe 300 basis points above. 

Mr. PEARCE. Okay, so anywhere from a one-half of 1 percent to 

3. 

Mr. NADON. Probably. I mean, right now, our current score, our 

waived coupons are around 7.3, 7.35 percent. 

Mr. PEARCE. Mr. Eakes, these are somewhat different measuring 

sticks, so you have basis points versus loans. Would you feel like 

that, at your level at lending, that you leave any of the market on 

the table? In other words, are there people who come to you that 

could pay that do not have such good credit rating and they would 

be willing to, for a fee, have access? And that is simply what we 

are talking about here. 

Do you leave any of the market on the table? That is, I think, 

my question. 

56

At your rate of interest and your performance, do you leave market on the table, unserved people who would come in and would 

pay a little bit more? 

Mr. EAKES. There are parts of the sub-prime market, probably 

the bottom 10 to 15 percent, that we would not make a loan to. 

Mr. PEARCE. But those loans might function? 

Mr. EAKES. We would not make those loans at any rate. 

Mr. PEARCE. Those loans might function and they might be valid 

and good and not fall into the category—I think we universally 

would decry the problem loans that Ms. Adams talked about, but 

that lower 10 percent that you all will not touch, would they be 

performing loans? 

Mr. EAKES. To me? 

Mr. PEARCE. Yes, yes. 

Mr. EAKES. I think, of the question you asked Commissioner 

Smith, there is 10 to 15 percent of the loans that should not be 

made at all. 

Mr. PEARCE. Okay, I understand that. But I am asking about, 

you all are charging a little bit less for some of the sub-prime 

loans. And I am saying: do you leave anything on the table when 

you reach your— 

Mr. EAKES. No, we have no limit on credit— 

Mr. PEARCE. Mr. Nadon, would you want to comment on that? 

What does the sub-prime market, what is the value nationwide? 

Mr. NADON. It is a little over $600 billion last year. 

Mr. PEARCE. So you have $600 million. And those are people that 

you— 

Mr. NADON. Billion. 

Mr. PEARCE. Billion. Those are people that you are saying probably might not fall into the categories that the prime lenders or 

even Mr. Eakes might be willing to lend to. But these are performing loans. 

Do you find 20 percent non-performance in your loans? 

Mr. NADON. No, as I mentioned earlier, when we look at life to 

date, our loans that ended up in foreclosure, on close to $100 billion 

worth of originations, it is 3.72 percent. 

Mr. PEARCE. Okay. 

Mr. Chairman, I know my time is up. 

Mr. BACHUS. Thank you. 

Mr. PEARCE. I would just like to wrap it up by saying this is 

probably as difficult an unraveling circumstance because I do not 

believe we can just go in and say that these loans should not exist. 

When we first talked about non-prime lending into Mexico, I had 

people come to me that knew me personally, that fell into the category that Ms. Adams was talking about, who were saying, ‘‘I live 

paycheck to paycheck. And if you close these down, you are going 

to close the door to me. And so, yes, regulate them. Do what you 

have to do. But please do not close the door to me being able to 

hang on to my house because I occasionally go in and I cash my 

paycheck early and I get the funds to go and pay my bills.’’ 

And so this is a very difficult balancing situation for me. And I 

would just appreciate the input from each of the panelists on my 

questions. 

Thank you. 

57

Ms. ADAMS. If I could just respond really shortly to that? 

Mr. BACHUS. Thank you, Mr. Pearce. 

Actually, Ms. Velazquez was next and she has been waiting. 

Maybe she will ask you a question. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Mr. Chairman, before I proceed with my questions, I would like 

to ask unanimous consent to submit for the record testimony submitted by the National Council of— 

Mr. BACHUS. Without objection. 

Ms. VELAZQUEZ. Thank you. 

Mr. Green, the reach and negative effect of abusive predatory 

lending practices have increased along with the dramatic growth of 

the sub-prime industry. Freddie Mac and Fannie Mae today buy a 

relatively small, but increasing share of sub-prime loans. And some 

analysts expect their share of the sub-prime market to jump to approximately 50 percent within the next few years. 

Do you think the GSEs could play a role in helping to curb predatory lending through their own decisions on which loans they 

choose to buy? 

Mr. GREEN. I know that is a big issue for this committee this 

week, so not to enter that debate. 

Ms. VELAZQUEZ. And I also would like to hear from Mr. Nadon 

and Ms. Lowrie, if you have any opinion on that. 

Mr. GREEN. As I understand it, Freddie and Fannie’s charter is 

not crystal clear, to answer your question directly. But I would say 

that what we are talking about here comes back to the creation of 

a clear and objective national standard that all market participants—wherever they are in the continuum of borrower, lender, 

secondary market, assignee or investor—can understand what their 

responsibilities are. 

And each one has a different responsibility and a different role. 

And just to get back to Mr. Scott’s question of assignee liability, we 

believe that assignees have a role and a responsibility that is clearly defined in the Ney-Kanjorski bill. And it is not the same as the 

lender’s responsibility. 

And that is clearly defined. So I think there is a role for every 

market participant, whether or not— 

Ms. VELAZQUEZ. Including Freddie Mac and Fannie Mae? 

Mr. GREEN. Whether or not their charter allows it, I do not know 

that to be the case. But clearly, every market participant wants 

clear and objective standards that they can count on. 

Ms. LOWRIE. Congresswoman, MBA believes that, along with the 

Bond Association, that the real key here is a strong, uniform national standard. I think we have seen both the GSEs enter into 

what we would call the alternate A, A-minus, in their mission to 

expand homeownership. 

And I think as we see more and more, in an industry, risk-based 

pricing, we move more away from looking at just the conforming 

market, the A-minus market and the non-prime market. The riskbased pricing environment is really kind of creating synergies between all three of those markets. 

So there will be opportunities where both the GSEs and even the 

Federal Home Loan Bank can enter into that in an effort to expand 

homeownership. But the real key to the success in any of that, 

58

whether it is the lenders, the broker community or the investor 

community, is going to be a strong, uniform national standard. 

Ms. VELAZQUEZ. Mr. Nadon? 

Mr. NADON. I cannot really comment too much about what their 

charter is and what they are or are not allowed to do. But I do 

think that they can have a pretty important role in the process. 

We have had very good relationships with both for them for 

years. Freddie was one of the largest buyers of our bonds, actually, 

for a number of years. 

So anything that they can do that would just add another place, 

another outlet for loans, for more capital being available in the 

marketplace, I just have to believe is a positive for consumers. 

Ms. VELAZQUEZ. But would you support uniform standards for 

predatory lending for the GSEs, if they help define the standard? 

Mr. NADON. Oh, I think there should be uniform standards for 

everyone then. 

Ms. VELAZQUEZ. Okay. 

Mr. Green, can you briefly describe the process that a securitizer 

will go through to weed out predatory loans from its pool, addressing whether or not the process includes such actions as providing 

the loan originator name and address to local and State authorities 

or notifying the lender that it no longer will do business with it? 

Mr. GREEN. On the specific question about giving names and addresses, I will have to get back to you on that. But the process—

the policy and procedures that are set up, the sample, the pool of 

mortgages, which can include hundreds if not thousands of mortgages—is pretty sophisticated, but it is only as good as the standard you are looking for. And that gets to the clear and objective 

standard issue because if an objective lacks clarity and lacks objectivity and a judgment has to be made, you can see how that can 

slow up the entire process. 

So trying to get behind someone’s intent or the style in which 

they gave the loan, as opposed to clear, objective standards, really 

makes those policies and procedures make sense. And frankly, the 

standard laid out in the Ney-Kanjorski bill, which requires such 

policy and procedures, requires such due diligence and also requires representation by the lenders themselves to the secondary 

market, the assignee, of this diligence that they undertook, is what 

the crux of those procedures are. 

Ms. VELAZQUEZ. Do you feel that there is adequate support for 

assignees to share information with one another about unscrupulous lenders? Or do you have suggestions for things that would 

help them to better ensure that they do not purchase a predatory 

loan? 

Mr. GREEN. We would have to look further into that, particularly 

as it relates to antitrust issues and those sorts of things. As to 

market chatter branding someone ‘‘bad,’’ I am not sure that is a 

particular market participant’s role. 

It is one reason why government enforcement and government 

laws here are appropriate and necessary and, again, why we support a national standard. But I think it could run into some real 

problems on the antitrust side if there were to be that kind of chatter between market participants. 

Mr. BACHUS. Thank you. 

59

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Mr. BACHUS. First of all, I am going to go from side to side. I 

will try to be brief. 

Ms. Adams, you had something you wanted to tell Mr. Pearce 

last time, I know—Congressman Pearce? I will give you part of my 

5 minutes. 

Ms. ADAMS. Thank you, Mr. Bachus. I promise not to abuse it. 

The purpose of the stories was to, one, put a human face on it, 

but also to tie it to the provisions of the act. And the story of Vance 

County is a story of the failure of having assignee liability. 

We were able to prosecute the bad guy. We were able to get 

funds from him. They were not enough funds to help the families. 

The court ruled that there was no assignee liability and all of the 

people who held the mortgages are out. And so now they are foreclosing on these families. 

These families are in homes that they have $90,000 mortgages 

on, but they are only worth $45,000. We want to work with the 

lenders to try to get them into a loan that they can afford, but 

there is nothing that makes the lenders want to work with us. 

There is no reason they have to work with us. 

And so these people are in foreclosure. We need something to 

hold the assignee liable. 

And that is why we have prepayment penalties, because they factor in the bad loans in the pool. They factor in the abuse of yield 

spread premium by the brokers. And that is the rationale behind 

the prepayment penalty, to protect the investor. 

But no one is there to protect the victim. 

Mr. BACHUS. Mr. Green? 

Ms. ADAMS. Thank you, Mr. Chairman. 

Mr. GREEN. I would just say very quickly, Mr. Chairman, that 

the Ney-Kanjorski bill does have a right to cure provision, so that 

if an assignee learns of a problem loan, they can make it right. And 

it does provide courses of action for the borrowers to take, particularly if there is reckless indifference. 

So I do believe the Ney-Kanjorski bill provides such relief. 

Mr. BACHUS. And actually, the North Carolina bill kind of cuts 

that off, as I understand it. Is that correct? 

Mr. EAKES. Cuts off what? 

Mr. BACHUS. It kind of cuts off the right to cure? 

Mr. EAKES. The right to cure in most all consumer legislations 

says that you have 60 days; you have a period after the loan is 

made. 

Mr. BACHUS. Which is a pretty short period of time. 

Mr. EAKES. A short period that lets the lender use their own due 

diligence. 

Mr. BACHUS. I am a former attorney, but when you get lawyers 

involved— 

Mr. EAKES. But if you allow— 

Mr. BACHUS. If you could have a little longer time, I think it benefits the consumer. 

Mr. EAKES. If you allow— 

Mr. BACHUS. Let me go on. Do you want part of my 5 minutes? 

60

Mr. PEARCE. Let me say to Ms. Adams that I do not disagree 

with you at all. I agree that the people who are unscrupulous, we 

ought to be tearing them up. 

But beyond that point, we have to figure out where to draw the 

line so that we do not close the door to people who would fit there. 

Mr. BACHUS. All right. 

Let me ask, real quick, Ms. Adams, you mentioned—it is Commissioner Smith, right? 

Mr. SMITH. That is fine, yes. 

Mr. BACHUS. You had mentioned coordinated enforcement authority? 

Mr. SMITH. Right. 

Mr. BACHUS. Do these bills, do they both provide for that? 

Mr. SMITH. I am embarrassed to say I do not know. I think it 

is crucial though. 

Mr. BACHUS. Okay. 

Mr. SMITH. Particularly—and I am sorry he is not here, but to 

address the 5 percent problem because there are—well, as a lawyer, you will know, but in dealing with any kind of law enforcement, there is a materiality standard every law enforcer has to go 

through. 

And having more people on the beat, rather than less, would 

be— 

Mr. BACHUS. Now for the federally insured institutions, is that 

coordinated? 

Mr. SMITH. Oh, yes. We coordinate all the time, yes. 

Mr. BACHUS. Okay. Let me just close by saying this. 

Mr. Green and Mr. Nadon—and I commend Option One for your 

best practices—but both of you all have testified previously—in November 2003 in Mr. Nadon’s case and I think last March in your 

case, Mr. Green—that the North Carolina statute actually gave the 

clearest guidance for assignee liability of any of the State laws. 

Is that not true? I mean, you did say you were not totally satisfied with it. But I have your testimony here. You actually referred 

me to the North Carolina law as a good law, I thought. 

Mr. GREEN. I would have to review exactly what I said last 

March. Having said that though, that was at a time where there 

were many States that were coming up with far more extreme 

measures. And North Carolina was, in fact, attempting to try to 

make positive moves in the right direction. 

Having said that, upon reflection of the entire development of a 

national standard, we believe that the assignee liability direction 

that the North Carolina bill takes does not provide the clarity because it just continues to— 

Mr. BACHUS. You did say that, but I guess last year, we have 

been looking for that clarity. And we cannot seem to find it. And 

we have to find it if we are going to— 

Mr. GREEN. Well, we do believe very strongly that the many 

months of drafting that I know Mr. Ney and Mr. Kanjorski and 

many members of this subcommittee and the House have in putting the Ney-Kanjorski bill together, have found that balance. 

Mr. BACHUS. And Mr. Nadon, in November of 2003, you actually 

on assignee liability said—and I do not want to put words in your 

mouth, but I thought you said it is workable and you could do it. 

61

And actually, I think, Mr. Green, you said it does not inhibit 

market capital. 

Mr. GREEN. I think what I said precisely then, I think that was 

part of the oral testimony and in question and answer, was to properly define assignee liability because one of the panelists at the 

time said without assignee liability, there is no teeth in the enforcement of the law. And frankly, we do not disagree with that. 

And I think the Ney-Kanjorski bill provides such clarity to acceptable and appropriate levels of assignee liability, keeps the entire marketplace on notice, whether you are a lender or a secondary 

market provider. 

Mr. BACHUS. Mr. Nadon, let me just ask you to go ahead. 

Mr. NADON. Yeah, I am not an attorney so the assignee liability 

is a little bit outside of my realm. I am just a mortgage guy. 

Mr. BACHUS. Okay. 

Mr. NADON. But I will say this, that we have seen differing opinions on North Carolina about the extent of the assignee liability. 

And from my vantage point as a lender, our position has always 

been that we follow what the Bond Market Association says is acceptable and what the rating agencies tell us that they can quantify. 

And when they get very comfortable, as a lender then we become 

very comfortable. 

Mr. BACHUS. Standard & Poor’s testified at that same hearing 

you did. And they said they were comfortable with it, I thought. 

And this is actually legislation that has been on the books for 

several years. So we have a history with it. I mean, I just want to 

point that out. I am going to introduce that just into the record. 

And this is not a ‘‘gotcha.’’ 

In my mind, you all are pretty comfortable with North Carolina 

on assignee liability. You said it was actually better than most 

other States. And maybe you were talking about New Mexico and 

New Jersey, comparing it. 

Mr. GREEN. I mean, keep in mind, again, back at the time, there 

were several State laws that had standards different than HOEPA 

that were far worse than HOEPA. We believe Ney-Kanjorski is— 

Mr. BACHUS. What about the existing assignee liability provisions under HOEPA? Are they good? Could we go with those? 

Mr. GREEN. We do not believe they provide the clarity, the distinguishing nature. 

Mr. BACHUS. So the Federal statute does not and none of the 

State statutes do? 

Mr. GREEN. Again, one reason why Federal legislation is needed 

is that there is not a Federal statute that gets to where we need 

to get to stop predatory lending and preserve the secondary market. And the State statutes are all over the lot. 

Mr. BACHUS. Okay. Could you take North Carolina, since maybe 

it was one of the closest to what you wanted, and tell me what is 

wrong with it? I am not talking about here. I am talking about just 

send it in. 

Mr. GREEN. Be happy to. 

Mr. BACHUS. Okay. 

Mr. Green? 

Mr. GREEN OF TEXAS. Thank you, Mr. Chairman. 

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Mr. BACHUS. Without objection, I would like to introduce this. 

Mr. GREEN OF TEXAS. Mr. Chairman, I would like to thank you 

for your evenhanded approach to this. You get high marks in my 

book. 

And thank you, the members of the panel, for the information 

that you have imparted today. 

With reference to the prepayment penalty, we seem to base the 

notion that consumers can make mistakes that are to their detriment by having an invidious prepayment penalty, in the sense 

that it is invidious in its effect, upon the premise that if a consumer wants to do it and makes a mistake, then the consumer has 

a right to make that mistake. I am not sure that we do that in all 

cases in society, that we allow consumers to make mistakes. 

I will use an extreme example first. With reference to drug 

abuse, we do not let people consume crack cocaine. We have just 

decided that that is not good for them and it is not good for society 

to allow that to occur. So we have a law that prohibits it. 

And by the way, the person who engages in the consumption is 

indeed a consumer, in a literal sense. But to make this point 

transpicuously clear, let’s talk about securities and securities transactions. 

There is something called a sophisticated investor. If you are not 

a sophisticated investor, when you want to engage in certain securities transactions, we will not allow it. 

Having money is not enough because you are not a sophisticated 

investor. When I purchased my first home, right out of law school, 

I would have signed anything they put before me because I wanted 

the home. And quite candidly, I was not a sophisticated investor 

as it related to prepayment penalties and some other things. 

So I say to you respectfully that I do not agree with the notion 

that we can just allow people who can buy down a half point or 

so the opportunity to make a mistake that will haunt them the rest 

of their lives. I am not sure that I have the solution, but I do know 

that in other areas of business transactions, we have considered 

the sophistication of the person who is engaging in the transaction. 

Now with that said, I want to go back to Mr. Eakes, sir. You 

talked a bit about these prepayment penalties. Can you explain to 

me why it is necessary to have the penalties, given the circumstances that have developed in your State? 

Mr. EAKES. In my State, the prepayment penalties have been 

prohibited, so only 1 percent of sub-prime loans have an override 

where they have prepayment penalties. I do not believe they are 

necessary at all for sub-prime loans. 

Mr. GREEN OF TEXAS. Have you found that people who buy down 

these loans to get the better interest rate, that they truly have the 

sophistication to understand the long-term implications of the prepayment penalty? 

Mr. EAKES. No, they do not. There was a study that Freddie Mac 

did with focus groups and they concluded somewhere more than 50 

percent of the borrowers who had prepayment penalties did not 

even know they had them. 

Mr. GREEN OF TEXAS. Are you familiar with the term ‘‘sophisticated investor?’’ 

Mr. EAKES. Yes, I am, in the securities context. 

63

Mr. GREEN OF TEXAS. Yes, sir. 

Do you believe that that is a good thing to have in the securities 

market, the sophisticated investor requirement? 

Mr. EAKES. I think it is, yes. 

Mr. GREEN OF TEXAS. Let me ask my namesake. 

Mr. Green, you and I share the same last name. Wonderful last 

name. The color green symbolizes life. 

Mr. Green, do you think that we are dealing with, in many circumstances, persons who are sophisticated enough to understand 

the implications of their actions? 

Mr. GREEN. Well, as you correctly state, in the securities industry, there are suitability requirements. And frankly, even with suitability requirements, there is still a big gap between what investors ought to know and what they do know, which is why investor 

education has become so crucially important. 

Financial literacy is an extension of that. And I think the provisions of the Ney-Kanjorski bill which will expand that education is 

very important. 

But I would actually defer to the originators of mortgages, the 

lenders who deal directly with the borrowers, in terms of the education levels that exist between them. 

Mr. GREEN OF TEXAS. Yes, sir? I will yield to you for a quick response. 

Mr. SMITH. I would just like to respond to that briefly, if I could, 

because it seems to me that the issue really is: what does it take 

to make someone—to make the market work properly; in other 

words, to have parties involved who have relatively equal knowledge, relatively equal bargaining power and the ability to negotiate 

based on the knowledge of what is going on in the universe? 

I think the problem that there is in the sub-prime market and 

the tragedy, in some ways in my mind, about the preemption actions frankly that the OCC has taken with regard to Georgia’s law 

is, for example, the OCC explicitly preempted a requirement in 

that law that people have direct personal counseling to ensure that 

they were at least getting closer to parity with lenders, so they 

would in fact understand the terms of the transactions and the 

like. 

I do think a policy problem that relates to the sub-prime market 

is the cost—and it is costly—of providing an appropriate level of 

consumer education so that people do approach that ability to bargain. I will say Freddie Mac has done a study that shows—Freddie 

Mac is being mentioned a lot today—but there is a Freddie Mac 

study on, I think it is housing, gold housing or housing gold or 

something that shows a direct and very helpful positive correlation 

between homeownership purchase counseling and success in loans. 

But that, again, is a fairly extensive program. And there is an 

incentive for people to pay attention. 

Mr. BACHUS. All right, thank you. 

Mr. Sherman? 

Mr. SHERMAN. Thank you, Mr. Chairman. 

Mr. BACHUS. And after Mr. Sherman, the order is Mr. Davis, Mr. 

Cleaver, Mr. Clay, Mr. Ford. 

64

Mr. SHERMAN. This panel brings to us consumer protection expertise, business expertise. We up here have a little political expertise. 

And let me tell you that if a bill is written that does not have 

preemption, in effect is not both the ceiling and the floor, it does 

not have a chance of passing. So we can attack the concept of having national preemption and not pass any bill at all. The effect will 

be, in many States, no consumer protection at all and, for many 

lenders, those that are national banks, no restrictions at all. 

So I hope that we get some consumer protection. I can understand how those of you from North Carolina prefer the North Carolina bill. 

I am from California. And the bill that I have cosponsored is 

modeled after California law. 

Mr. Nadon, you say you charge more in North Carolina than for 

identically situated loans in adjoining States or perhaps in California where the law is different. Can you quantify how much more 

a sub-prime borrower is going to pay? 

Mr. NADON. Yes. 

Mr. SHERMAN. Is it 50 basis points? 100 basis points? 

Mr. NADON. Yes, when I asked our secondary marketing department, which does our pricing for us, that question and I gave them 

the loan parameters—$150,000 loan, single-family, owner-occupied, 

80 percent LTV, 45 percent debt ratio—and gave them some basic 

credit risk parameters and said, ‘‘Take that loan in California, put 

it in Pennsylvania, put it in North Carolina. Tell me what the differences are.’’ 

And North Carolina was the highest priced loan. 

Mr. SHERMAN. By how many basis points? 

Mr. NADON. It is 55 basis points higher. 

Mr. SHERMAN. Fifty-five basis points higher than what? 

Mr. NADON. Than California. And I believe it was 50 higher than 

Pennsylvania. 

Mr. SHERMAN. Gotcha. 

Regina, is that your experience as well? 

Ms. LOWRIE. Yes, Congressman, that has been our experience. 

And an interesting point to note, when you talk about prepayment 

penalties and the value that they bring to the consumer in lowering rate and giving them the choice. 

And I have heard a couple times here today that we have not 

seen that hurt consumers or raise interest rates in North Carolina. 

But the one thing we have to remember is that when you single 

out one State out of a national mortgage market, that State is 

being subsidized by all of the other States’ loans that are in the securities. 

So if we are looking at billions of dollars of securities on Wall 

Street—and you can speak to this, Congressman. 

Mr. SHERMAN. I have limited time. I mean, there are two different approaches. One could say, hey, it does not really raise costs. 

The other could say it raises costs for North Carolina borrowers. 

And the third approach is it raises costs for all borrowers. 

But the next issue is: what are the default rates in sub-prime 

loans? We have heard everything from 20 percent to 3 percent. 

65

And when I say default, I do not mean somebody is 30 days late. 

I mean the loan goes to foreclosure. 

Mr. Green, would the bond market be interested in buying a 

portfolio of loans if they thought one in five of those loans would 

go to foreclosure and they as lenders were going to end up owning 

the property as a result? Using the definition of you having to take 

the property back, what kind of foreclosure rate would be acceptable to the bond market? 

Mr. GREEN. And I sit between 1 in 5 here and 4 in 100, which 

are the Mortgage Bankers Association statistics. But the bond markets, if they can reasonably predict with reliability a foreclosure 

rate, can price it. The question is at what price? 

Remember, the only portfolio that has zero foreclosure risk is the 

portfolio of Treasury securities. 

Mr. SHERMAN. But what I am asking is, I mean, certain borrowing is just such junk that the bond market does not want to 

deal with it. I mean, there are junk bonds and there is really junk. 

At what point does an expected foreclosure rate of even 5 percent 

or 10 percent cause that portfolio to be such junk that your members do not want to deal with it? 

Mr. GREEN. The question is, are there investors that want to 

take those risks? And can it be reasonably priced? And is there 

adequate information to price it reasonably? 

And if there is, which comes to clarity and reliability of the information, it can be priced. 

Mr. SHERMAN. I was hoping that you could resolve the conflict 

between those sitting on your right and left. And you really cannot. 

Mr. GREEN. I think it is impossible to. But I think we feel comfortable with the statistics that we seem to come out of. 

Mr. SHERMAN. Yes, and it is also tough to predict because we are 

talking about sub-prime loans being made, say, in the 1990’s, predicting what portion of them will default and go into foreclosure in 

2012. Who knows? 

It has been said that we are all dead in the long run. These loans 

only have to live 30 years. And so the question is how many of 

them die of unnatural causes, namely foreclosure? 

Mr. BACHUS. Thank you. 

Mr. SHERMAN. Have I used up all my time? I guess I have. 

Mr. BACHUS. But you have established we all die, I think. No, 

I am just joking. 

Mr. SHERMAN. If I can just go to this prepayment penalty issue, 

some would paint the picture that a prepayment penalty is something that only a poor or uneducated borrower would tolerate. 

I would ask Mr. Green, aren’t there a lot of very sophisticated 

corporations that sell bonds with call premiums, that in effect go 

to the market and say we want to get a good, low interest rate on 

our bonds and we will agree to a prepayment penalty? 

Mr. GREEN. Well, yes. In fact, most municipalities, when they 

issue bonds, they are typically 10-year call bonds. And by virtue of 

that, they lock in a very favorable rate. 

Mr. SHERMAN. So if we were to go to municipalities, corporations 

and say, ‘‘You are not allowed to issue a bond with a call premium,’’ then all those very sophisticated borrowers would be upset 

because they would have to offer higher interest rates. 

66

Mr. GREEN. Well, that would be a factor that the investment 

community would price into it. And I think that would be a limitation. 

Mr. BACHUS. Thank you. I think you have established that, in sophisticated situations, sophisticated investors do agree to prepayment penalties. 

Mr. Davis? 

Mr. DAVIS OF ALABAMA. Mr. Chairman, we have established— 

Mr. BACHUS. You can pursue this line of questioning. 

Mr. DAVIS OF ALABAMA. Mr. Chairman, we have established that 

everything dies except for 5 minutes in committee hearings. That 

goes on and on. 

Let me direct this first question, Mr. Smith, to you because I suspect you might be the most knowledgeable person in the committee 

to answer it. Some of us on this side of the aisle were critical of 

the OCC preemption, not because we opposed the idea of a national 

standard, but because we think that we are the ones who ought to 

be doing it. 

We think the Congress ought to be doing it, as opposed to the 

OCC doing it, without Congress’s consent or even knowledge in this 

instance. One of the things that is unclear to me about the NeyKanjorski legislation is the degree to which it widens the scope, 

narrows the scope or matches the scope of OCC preemption. 

I do not want to spend my whole 5 minutes on this, but can you 

quickly give an answer as to the degree to which Ney-Kanjorski 

matches OCC preemption? 

Mr. SMITH. Well, what I have suggested is that Ney-Kanjorski 

should not preempt the ability of States to enforce national standards. 

Mr. DAVIS OF ALABAMA. I understand that and I agree with you. 

But I am asking in terms of— 

Mr. SMITH. I think what Ney-Kanjorski would do, to the regard 

that it deals with normative provisions and loan terms, the kind 

of stuff that has been debated already, it would virtually totally 

preempt or come close to totally preempting State laws. 

Mr. DAVIS OF ALABAMA. So your opinion is— 

Mr. SMITH. And I think that is what the proponents expect. It 

is what they want to do. 

Mr. DAVIS OF ALABAMA. All right. 

Does anyone on the panel disagree with that proposition, that 

Ney-Kanjorski would be just as preemptive as the OCC regulations 

that were announced a year ago? You are all nodding your head 

in agreement. 

Does anybody think, per chance, that Ney-Kanjorski would go 

even further than the OCC has gone with respect to preemption? 

And she needs to take it down, so let me just go person by person. 

Ms. Adams, you are nodding your head that you think Ney-Kanjorski is even more preemptive than OCC? Just a quick yes or no? 

Ms. ADAMS. Yes. 

Mr. DAVIS OF ALABAMA. All right. 

Mr. Eakes? 

Mr. EAKES. Yes. 

Mr. DAVIS OF ALABAMA. All right. 

67

Mr. Green? 

Mr. GREEN. Technically, yes, but it creates a better national 

standard. 

Mr. DAVIS OF ALABAMA. Okay. 

Ms. Lowrie? 

Ms. LOWRIE. Yes. And MBA wants to actually look at maybe 

some areas where it may go a little too far. 

Mr. DAVIS OF ALABAMA. Okay. 

Mr. Nadon? 

Mr. NADON. Yes. I think yes, and it creates a better standard. 

Mr. DAVIS OF ALABAMA. Okay, because this has been a subject 

of some confusion in meetings I have had. So it seems we have established that Ney-Kanjorski goes even further than OCC. 

Let me ask another broad set of questions. I have been asking 

this for 1.5 years and I have yet to get an answer, so I am going 

to take one last crack with this panel. 

We know that the HMDA data is coming out. We know that 

there is going to be, we have reason to believe, indications that 

sub-prime lending is far higher in the African-American and Latino 

community than the Caucasian community. 

And the first line of defense to those statistics is that well, you 

may have higher levels of poverty, for example. You may have 

lower incomes in the black and Latino community, so that could 

make some higher credit risk and could account for a disparity. 

But then we also see data that says the amount of sub-prime 

lending is twice as great in the affluent African-American community as in the low-income white community. So I want to ask the 

same question of each member on the panel. 

Do any of you believe that the disparity in sub-prime lending between blacks and whites is purely a function of the market? 

Mr. Smith, yes or no? And I rush simply to give everybody a 

chance to answer that? 

Mr. SMITH. No. 

Mr. DAVIS OF ALABAMA. All right. 

Ms. Adams? 

Ms. ADAMS. Absolutely no. 

Mr. DAVIS OF ALABAMA. Mr. Eakes? 

Mr. EAKES. No. 

Mr. DAVIS OF ALABAMA. Mr. Green? Did not get an answer from 

you, just a head shake. 

Mr. GREEN. I would say no. 

Mr. DAVIS OF ALABAMA. Ms. Lowrie? 

Ms. LOWRIE. No. 

Mr. DAVIS OF ALABAMA. All right. 

Mr. Nadon? 

Mr. NADON. No. 

Mr. DAVIS OF ALABAMA. Okay. Now that is striking to me. And 

I compliment you on your candor. So I want to turn to this question: given that you all believe that this disparity is not just based 

on the market, what is the industry doing right now, without waiting for Congress, without waiting for us to wave our magic wand, 

if we had one, what is the industry doing right now to address 

what you all just acknowledged is a problem that is not marketbased? 

68

Ms. Lowrie, do you want to take a crack at that? 

Ms. LOWRIE. Thank you, Congressman. 

Well, first of all, the Mortgage Bankers Association, as the trade 

association representing our members, has really made a concerted 

effort through our Web site to go out, through the Home Loan 

Learning Center, to try and educate consumers because I think it 

gets back to education. It also gets back to diversity in our industry. 

We are serving a much more diverse market today than we were 

serving 10 years ago. And if we look at demographics across the entire country and the percentage of immigrants, minorities and lowand moderate-income borrowers that have come into the market 

and now there are innovative products and solutions, this is a 

whole new segment of the market that we need to be able to support, educate. 

We need a more diverse workforce population that speaks the 

various languages of these different segments of the marketplace. 

So the industry has a big responsibility and has already started efforts in those areas in addition to working— 

Mr. DAVIS OF ALABAMA. Last quick question. 

Mr. NADON. If I could just expand on that? Just real quickly? 

Mr. DAVIS OF ALABAMA. As long as it does not come out of my 

time. Go ahead, please. 

Mr. NADON. One of the very practical things that we have done 

in our organization is for the last year, we have had the National 

Fair Housing Alliance working side by side with our associates to 

make sure that just even in the wording of a policy or procedure, 

that we do not have words or phrasing that might get in the way 

of our doing the right thing for our customers. 

Mr. DAVIS OF ALABAMA. Last 30-second point because I am a little bit past my time limit. 

Ms. ADAMS. But please let me address that. 

Mr. DAVIS OF ALABAMA. As long as I get my last 30 seconds, 

sure. 

Mr. BACHUS. You are already 40 seconds over, but I am going to 

give you that last 30 seconds. 

Mr. DAVIS OF ALABAMA. Thank you. Thank you, Mr. Chairman. 

Go ahead, Ms. Adams. 

Mr. BACHUS. Is this an Alabama thing? 

Ms. ADAMS. NCRC conducted testing of 12 sub-prime lenders 

with retail outlets. And in our testing, which is in the written 

record, we uncovered a 45 percent rate of disparate treatment 

based on race. We also found that when we test, people are not 

given the same information. The white tester was given different 

rates than the black tester when they walked in the door. 

When we did testing on upper-income African Americans—the 

North Carolina Fair Housing Center did testing on upper-income 

African Americans to kind of find out why that 2-to-1 disparity existed, we found that they were not getting the same information. 

They were given different loan products with different rates and 

different terms. 

And there is still difference in treatment. So I refer you to our 

written response because we do have an answer to your question. 

69

Mr. DAVIS OF ALABAMA. And let me sneak this in, as I think you 

would agree this is an important question. 

Ms. Adams, you have explained what the industry is doing to address this problem. 

Recognizing that my time is out, so if you would be extremely 

brief, Ms. Lowrie, could you or Mr. Nadon or Mr. Green take a 

crack at the following question: what tools does this institution, the 

House of Representatives, need to give you to combat what you 

have acknowledged is a problem of actual discrimination in some 

instances? What can Congress do legislatively and statutorily to 

better arm the industry to deal with this problem? 

Thank you, Mr. Chairman. 

Ms. LOWRIE. Very quickly, first of all, a strong, uniform national 

standard, strong consumer protections, objective compliance standards and I think the funding to support the consumer education 

and counseling, not just before application, before the borrower 

commits to the obligation of paying that loan back, but also to help 

those that do get in trouble on the back end with possible foreclosures, counseling to work them through so they can keep their 

home and not lose it through foreclosure. 

Mr. BACHUS. Thank you. We appreciate that 9 minutes of questioning. 

Mr. Cleaver? 

Mr. CLEAVER. Thank you, Mr. Chairman. I will reduce my number to accommodate the 9 minutes from my colleague, Mr. Davis. 

In part because my questions are along the same lines that he 

was raising, would any of you or all of you agree that sub-prime 

lending has been highly profitable? 

Mr. NADON. I can tell you from personal experience that the margins in our business have been cut in half in the last 18 months. 

In an industry that was working historically for 200 to 225 basis 

point pre-tax margins for years, we are now operating at about a 

100 to 110 basis point margin. 

And we think that is going to be the way the future is, which 

I think is a positive because I see that as just one more sign of our 

industry truly maturing. This is the normal process that goes 

through any maturing business and we are seeing a lot of that. 

And so now it becomes very important for us to emphasize a lot 

of our effort on cost control. One of the reasons why we are advocating getting a national standard for every lender in this country 

to follow and for regulators to have to pay attention to is because 

our IT costs, our training costs, our staffing costs, compliance costs, 

all of those are things that consumers have to pay. 

Mr. CLEAVER. If we did away with prepayment penalties—Congress—is there any prediction on how the market would react? 

Ms. LOWRIE. There have been studies done by some of our members within our organization that would show that rates would increase by about 100 basis points. And there are studies out there 

that we could share with the committee, to have you review. 

Mr. CLEAVER. Anyone with a different? 

Mr. EAKES. We believe, based on the data in North Carolina and 

other States that do not have prepayment penalties, that there is 

no premium in the interest rate now. So in fact, while people’s rate 

70

sheets may show that they get a half a point lower, in reality, it 

does not work that way. 

You do not pay a higher interest rate, in reality. And there is a 

Harvard study that has done that. We have done that study in 

North Carolina. 

And I can explain why, but I have already gotten the hook a couple of times, so I will be quiet. 

Mr. GREEN. Except that, in the secondary market, the risk of 

prepayment and the identification of that risk is part of the pricing. 

And a prepayment penalty is clear, identifiable. And if someone 

has agreed to it and it has been properly disclosed and educated 

and they have agreed to it and it makes sense from the total transaction, that does give a degree of certainty that gets priced into the 

deal, which also reduces the interest rate. 

Mr. CLEAVER. Okay. I am working fast, Mr. Chairman. 

Mr. BACHUS. You have all sorts of time. I mean, you really do. 

Mr. CLEAVER. If a sight-challenged person was in need of a seeing-eye dog and they need this in order to make it, to get around, 

and someone provided the seeing-eye dog, who also had schizophrenia and would bite the person periodically, he would help the 

person but, you know, every four or five blocks, he would bite him. 

And if the sight-challenged person were your cousin, what would 

you do for your cousin? 

Ms. ADAMS. Sir, that is exactly what is going on in the marketplace right now. 

Mr. CLEAVER. Absolutely. 

Ms. ADAMS. But the cure exists within these two bills. The reason the prepayment penalty works is because—Mr. Green says it—

they will market anything if you are willing to bear the risk. 

Mr. CLEAVER. No, no, no. 

Ms. ADAMS. So if the dog bites, okay, one, you do not get that 

dog; you get a dog that is properly trained. 

Mr. CLEAVER. No, all the dogs bite. 

Ms. ADAMS. But if you have that dog, you muzzle it. You train 

it and you restrict it so it does not have the ability to bite that person. 

Mr. GREEN. But you do not kill the dog. 

Ms. ADAMS. We have not killed the dog. You factor into your risk 

on the assignee liability. You factor in the prepayment penalty that 

lowers the rate. You factor in the fraud that increases the rate that 

you charge. 

If we put those things in the fees, if we take out yield spread premium, if we take out the incentives for fraud that the mortgage 

brokers do, then you would have lower costs on the investment. 

And I will tell you that having the term—what is it?—reckless indifference is not a standard on assignee liability that makes any 

kind of sense because where is the recklessness when you have 

factored in all the fraud, all the predatory practices? 

And the investor is protected. But the blind man is running 

around being chomped to death. 

Mr. EAKES. We have a system right now that provides an incentive for people to take advantage of the unsophisticated. That is the 

problem is we have financial incentives for the originators of loans 

71

to put people into higher interest rate and into prepayment penalties that they may or may not require. 

There are incentives built into the marketplace to take advantage of the unsophisticated. 

Ms. LOWRIE. And that speaks volumes to why we need a strong, 

uniform national standard. If we think of the laws that are out 

there now on a State-by-State basis and just think of the thousands 

of municipalities that could pass laws over the next 12 to 24 

months and we are sitting here saying we know the consumer 

needs to be better educated, we need to disclose better to them, 

they need to understand, we need to simplify the entire process 

with a strong, uniform national standard to make it easier for the 

consumer to understand, so that that consumer does not get 

abused. 

And then, furthermore, laying it out with one standard that 

needs to be enforced across this country by the States and the departments of banking in each of the States to enforce a strong, uniform national standard. 

Mr. EAKES. I mean, let’s be honest here, when the North Carolina bill passed, I went to the Mortgage Bankers Association and 

to industry leaders and said to them, at this point in time, I could 

help deliver a uniform standard based on the North Carolina bill. 

The response I got was, ′′No, we think we can stop it at the borders 

of North Carolina.′′

It was not that folks wanted a strong, national standard. They 

wanted a weak national standard or no national standard. That is 

the truth. That is the truth. 

Ms. ADAMS. I was there. I witnessed it. 

Mr. BACHUS. All right. 

Thank you. 

Mr. CLEAVER. Thanks, Mr. Chairman. 

Mr. BACHUS. I think for the record, for the panelists, would each 

of you all indicate whether it was the blind man or the seeing-eye 

dog that was schizophrenic? 

Mr. CLEAVER. It is important. 

Mr. BACHUS. Mr. Clay? 

Mr. CLAY. Thank you, Mr. Chairman. 

I thank the entire panel for your participation today. 

Let me start with Mr. Eakes. Last week, Citigroup announced 

that it would not make home loans with mandatory arbitration 

clauses, joining a growing list of lenders that do not use them. 

What are your views on the legislation before this committee and 

how it deals with mandatory arbitration? Can you explain your 

concerns with mandatory arbitration clauses? 

Mr. EAKES. I am glad you pointed out Citibank. I have been negotiating with Citibank for 6 years. And the announcement last 

Thursday was the culmination of 6 years of conversation and negotiation. 

And what they did was prohibit arbitration clauses on any of 

their home loans. There are virtually no sub-prime or prime mortgage lenders left who offer arbitration clauses. 

Wells Fargo is one and Household Finance. They are the only 

two I know of in the entire industry. 

72

So arbitration clauses are basically a moot point now with 

Citibank’s announcement. They also put a limit on all of their prepayment penalties of no more than 3 percent in the first year, 2 

percent in the second year and 1 percent in the third year. 

So what has happened in the last 5 years is the industry has 

adopted best practices and we really do have a better, cleaner industry now than we had 5 years ago. There is no question about 

that. 

Mr. CLAY. Let me ask Mr. Nadon about that. I noticed that you 

offer brokers a signed commitment between brokers. And Option 

One to include a lot of issues, but one is that you will not knowingly submit an application for a non-prime loan for a borrower 

who is eligible for and whose needs are best met by a prime loan, 

along with Option One, reports all fraud to licensing and/or criminal authorities and may civilly sue brokers and agents. 

If some version of this bill passes, do you anticipate the industry 

will experience a void or lose quite a few companies or just the bad 

ones? 

Mr. NADON. I think it is just hopefully the few remaining bad 

players out there. I agree with Mr. Eakes. 

I think there has been tremendous improvement over the last 5 

to 10 years in the way that the industry behaves, all of which has 

been of benefit to the ultimate consumer. Is it where we all want 

it to be at this point? No. that is why we are all here today. 

We think there is more that we could do, certainly within the 

confines of a national standard, to hold everyone accountable and 

try to set real best practices on fraud prevention, on points and 

fees, on all kinds of things, in the way that we are supposed to behave in this industry. 

Mr. CLAY. And you are confident that, along with legislation, 

that the industry has already started by policing itself? 

Mr. NADON. Oh, absolutely, because we really have to take a 

much more aggressive stance on that. And so we have been doing 

things in our own organization for the last 5 years, with quarterly 

educational notices on fair lending and antidiscrimination and 

things like that just for our brokers. 

We do things for our associates every time we hire one and all 

the time that they are working for us. But we are extending that 

out now to the people that are touching the borrowers directly to 

try to educate them on things that they should be doing every day 

to make sure we treat people fairly. 

Mr. CLAY. Thank you for that response. 

Ms. Adams, let me ask you, Representative Davis posed a question and you did not get to answer it. Ms. Lowrie answered it. But 

he talked about racism and how disproportionately minorities are 

steered into sub-prime loans and worse and predatory loans. 

How do we address that through legislation? Can you give me 

some examples of how maybe other States have tried to attack and 

fight racism through the lending industry? 

Ms. ADAMS. I think one of the key things that we have to do is 

the Congress can—one, we have the Fair Housing Act and the 

Equal Credit Opportunity Act. We need more money for enforcement. In fact, there were major cuts to fair housing enforcement in 

the HUD bill this last time. 

73

We need money for enforcement. But we also need the ability for 

State regulators and Federal regulators to monitor and look at the 

pools and portfolios of the lenders and to test them, to have the authority to go in and look at their practices more aggressively 

around these lending. 

We also need Congress to, when these lenders come before you, 

to challenge them about their numbers and to ask them specifically 

what is the cause of the disparities within their ranks. If they say 

that it is credit score, then have them put the proof in front of you 

because I do not believe—all we are asking for is for people to be 

treated the same who have earned the same level of credit. 

And I do not believe that that has panned out. The 2004 HMDA 

data has some really disturbing numbers in terms of the disparities 

that we found amongst the 15 lenders in the five million loans that 

were looked at. 

They cannot be explained away simply by differences in credit. 

But I tell you that if you build upon discrimination by one, taking 

A-prime borrowers from African-American neighborhoods and putting them and locking them in the sub-prime market or worse, in 

a predatory loan, then they get behind and then you create a negative situation for that borrower that took a good A-credit customer 

and made them a C-credit borrower. 

Mr. CLAY. I am bumping into Mr. Ford’s time now, but who 

should enforce the antidiscrimination provisions of law? Should it 

be the State attorney generals or the Federal Government? 

Ms. ADAMS. I believe that we need as much enforcement as possible. We do not have enough regulators at all. We need every regulator with the authority to bring these bad actors to justice swiftly. 

The problem is that a law that does not have an enforcement 

mechanism is worthless to the victim. If they cannot find someone 

who will defend them and protect them, it is worthless. So we need 

as many cops on the beat as possible. 

Mr. BACHUS. Mr. Ford? 

Mr. FORD. Mr. Chairman, thank you. 

I agree. There needs to be some kind of national umbrella. But 

I, like many on the panel, am concerned about what it looks like. 

Ms. Adams or Ms. Lowrie, you were making the point when the 

question was asked about comparing the OCC preemption to NeyKanjorski and whether or not it went further, to my colleague, Mr. 

Davis’s question. You were beginning to say that there were parts 

of it you thought that overstepped. And you talked a little bit about 

it in your testimony. 

Do you want to clarify for 30 seconds? 

Ms. LOWRIE. Not in relation to the OCC or the OTS exemptions, 

but just the exemptions within Ney-Kanjorski. 

Mr. FORD. That is what I am talking about. I am sorry. I assumed that is the point you were making. 

Ms. LOWRIE. What MBA supports and has supported for a long 

time is the strong protections and objective standards as it relates 

to loan origination. And there are some other broad exemptions 

within Ney-Kanjorski as it relates to foreclosures that would impact the States in some other areas. 

We could submit that information to the committee. MBA staff 

could submit it. But we hope to work through some of those quesVerDate 0ct 09 2002 09:33 Sep 08, 2006 Jkt 029453 PO 00000 Frm 00081 Fmt 6633 Sfmt 6633 F:\DOCS\29453.TXT HFIN PsN: TERRIE
74

tions that have come in from our members, basically, that have 

said, you know, beyond the origination fee. 

Mr. FORD. I would appreciate it if you would follow up on that. 

Mr. Green, you have a good man sitting behind you. But let me 

ask you this question. And you make the point about not killing 

the dog, but in relation to Ms. Adams, I mean, I am struggling 

here. And Nadon there is my friend too. 

I am struggling to figure out how do you reconcile the two? Because I think what was said by Ms. Adams is right. There has to 

be somewhere in between that we can land here that will help us. 

How do we get close to training the dog, but not killing it? I 

mean, I read your testimony and I am glad you answered the question for Mr. Bachus because I had some questions about the testimony a little bit as well. 

But how do we reach that kind of middle ground, if I can be so 

bold as to take Ms. Adams comment and use it as kind of a rubric? 

Mr. GREEN. Well, we strongly believe that the sub-prime market 

is the way to ensure that all blind people have access to a dog. It 

may not be the very best dog. 

And not to extend this analogy too far, but the point being that 

if the sub-prime market creates access to capital and people are 

educated and they have rights of action, that there are clear standards that every participant in the marketplace understands what 

is expected of them, including the lender, including the borrower, 

but particularly the lender and the assignee, and the roles of each 

are well-defined and the liabilities are defined and relevance to the 

role that they play in the transaction, I think you will create an 

environment where you will be able to root out even more predatory lending. 

And I think I agree with everything that has been said here 

about the progress that has been made. You will root out more 

predatory lending and you will still preserve the ability of that subprime market to provide dogs of different varieties. 

Mr. FORD. I hear you. And I do not know how we do that exactly. 

I remember when I was in school and I was not very good at any 

sports, but they put me on most of the teams. And whenever one 

person in any drill that we were participating in did not meet the 

standard, we all were punished. 

And although I had very little to do with why this guy behind 

me was too slow to actually finish the doggone thing in the right 

thing, if he did not finish, we all had to do it over. So we encouraged him to find a way to do it right. 

I have to think there is a way to do that. And I understand there 

are real concerns about what North Carolina has done. I certainly 

do not want to do anything to squeeze people out of this business 

or hurt people who want to access capital. 

But it just seems to me that there has to be a way. I mean, you 

all do not do this, but people who you—a lot of folks you know—

we find kids in school who do not have jobs and we give them credit. We have to figure out a way to do this better than we are doing. 

But the bad actors out there, I know you want them out of the 

business as much as I want them out of the business. And we have 

to be able to—I do not mean—I want to attribute that to everybody 

on the panel. But there has to be a way to find to do this. 

75

I will close on this. I want to close with Steve. 

This question of financial literacy—and I know your commit- ment. Ms. Adams laid out pretty clearly that $80 million is insufficient. 

What could we do? What could this committee do to help? 

Because I trust everybody on the panel. But I trust the way you 

kind of put these things together with the big South Carolinian you 

have behind you there, but figure out how we can get together and 

figure out how can we put a business model together for this, to 

figure out what it would cost nationally to do this? 

Because we have a pretty sad state of affairs in my district in 

Memphis. And we have the highest bankruptcy rate in the country 

in my State and the second highest in the country in my city—

something we are not proud of. 

How can we help come to better understand that? And I would 

ask the chairman and even the ranking member of the committee, 

who I know are as committed to this as any on this committee, to 

figure out how—can we figure out some model that will give us a 

cost to do something at this level? 

Mr. NADON. I think it is possible to put something together that 

we could submit. And I think Mr. Scott’s recommendations are a 

great first step. 

But I would take it to another level. If there is something that 

Members of Congress could be able to do somehow, if they could 

influence this, this is what I would ask. 

Mr. FORD. Thank you, Mr. Chairman, for letting me go over time 

for a little bit. I apologize. 

Mr. NADON. For most people in this country, the single largest 

financial transaction they will ever go through is either the purchase or the refinance of the mortgage of a house. It is complicated, 

a lot of things going on, a lot of information to know about, a lot 

of questions they should be able to ask. And they should be able 

to understand what kind of answers they are getting and whether 

they are good or bad answers. 

Interestingly enough, there is nothing that I am aware of in our 

school systems today that teaches someone, going through grade 

school or high school or even into college that I am aware of, that 

teaches people the value of having a checking account, why that 

matters, to be banked, that teaches them what a credit score is and 

why it matters to pay their bills on time and how that will influence their ability to accumulate wealth in the future, that teaches 

them what a real estate transaction is all about so they would be 

able to get into the marketplace more educated than they start out, 

the way we are doing things today. 

So somewhere between an educational financial literacy component within Ney-Kanjorski bill, but somehow the next generation 

and the generation after that, I think we all owe them something 

better than we have given them so far. 

Ms. ADAMS. NCRC and its 600 members would love to work with 

Congress in developing a model that can be effective nationwide. 

Mr. FORD. Yes, sir? 

Mr. BACHUS. Quickly. 

Mr. FORD. I am acting like I am the chairman. 

Yes, sir, Mr. Green. Go right ahead. 

76

Mr. GREEN. The Bond Market Association and its foundation, the 

Bond Market Foundation, would love to work with all of you. We 

have actually invested a great deal of time and money in this, 

doing quite a bit of case studies. 

And targeted audiences like women, young people, the Hispanic 

community are the most underserved. And we have created a family of Web sites under tomorrowsmoney.org to help provide very 

basic fundamental building blocks of financial literacy that get people from knowing nothing to ultimately be planning for retirement 

and home purchases and things like that. 

But it starts at targeting to the audiences you need to target because otherwise, you do not get through. Otherwise, it is too generic. 

Mr. FORD. And I tell you, there is a hunger for it. Because we 

have been approached by the National Association of Hispanic Real 

Estate Professionals that are trying to find from us, is there some 

way you can help us serve our marketplace, our constituents better 

than we do today? 

And it includes information. It includes literacy. It includes financial information. 

But some of it is just getting good products out there and getting 

good services out there in a way that that clientele is going to be 

able to understand and feel good about. 

Mr. BACHUS. Time has expired. 

Mr. FORD. As the chairman knows, for every dollar an American 

earns today, he or she spends, on average, $1.22. All that financial 

literacy you are talking about, we could probably use a little of that 

help here in the Congress too with all the spending we do, so we 

look forward to whatever you all put together. 

Mr. BACHUS. Thank the gentleman. Time has expired. 

Mr. Baca, from California? 

Mr. BACA. Thank you very much, Mr. Chairman. I know that 

most of the questions have been asked. But I want to ask the following question. And any one of you can respond to it. 

I understand from reviewing your testimony that your organizations associated with credit unions offer lending services to underserved—and again talking about the underserved—and of course 

needing the education and the outreach. 

Can you comment on how the two major proposals before Congress—the Ney-Kanjorski and the Miller-Watt-Frank bills—would 

affect your standing in the marketplace with respect to your competitors, as well as your ability to serve minorities—and this is the 

area that we are talking about—serve minorities and the underserved, which are two areas, which is question number one? 

And do you feel that sometimes doing the right thing puts you 

at a competitive disadvantage and that putting additional restrictions on sub-prime lenders could level the playing field? 

Mr. NADON. Well, I can take maybe the first shot at that. And 

I will tell you a compliment that we are paid by our sales force. 

This has been consistent for the last 13 years since we opened up 

Option One Mortgage. 

They think that we are just awesome at responding to and complying with any law change. They think we are terrible at new 

77

products or competitive pricing, things like that. But they just 

know we are totally on it when it comes to compliance. 

And it does put us at a competitive disadvantage. That is a position that our organization has been willing to accept because our 

view of it was— 

Mr. BACA. Is that positive or negative? 

Mr. NADON. We think it is positive in the long run. We think it 

is positive for our associates. We think it is positive for people to 

go home at the end of the day and actually feel good about what 

they have accomplished. That is the environment we are trying to 

create in our workplace. 

And we think that if we can have our associates feel that way 

about their job, that will transfer over to the way that they deal 

with our customers. And we measure, through an outside source, 

customer engagement scores. 

We have very high customer engagement scores, which means 

our customers are pretty happy doing business with us. And they 

refer people to us. 

But that comes at a price. And the price is that we are not the 

biggest. We could be doing a lot more volume than we do today. 

But our wanting to do the right thing and make sure that we are 

complying with the rules the right way slows us down a little bit. 

Mr. BACA. And the first portion, between the Ney-Kanjorski and 

Miller-Watt-Frank, anyone want to tackle that question? 

Ms. LOWRIE. I will. The Mortgage Bankers Association feels very 

strongly that by creating a uniform national standard that has 

strong protections and has clear, objective standards for lenders to 

follow and for consumers to understand, that there will be less 

chance of discrimination. And you are going to have less chance of 

access to capital being removed from a marketplace, so all consumers will have equal access once there is a uniform national 

standard that exists throughout this country. 

And I think we have a fiduciary responsibility to make sure that 

that standard is such that it not only protects the consumer, but 

it also gives them access to the capital within their marketplace 

and not be deprived. 

Mr. BACA. How would you be able to determine, if you are looking at a uniform standard right now, less discrimination? How 

would you be able to detect that there is discrimination? And how 

is that discrimination applied? 

Ms. LOWRIE. Well, I think it was mentioned earlier about the 

HMDA data. And all lenders are required to report under the 

Home Mortgage Disclosure Act. And I know that there have been 

some comments that initial reviews of the HMDA data is evidencing discrimination. 

I would say though, I would submit to you and to the committee, 

that a big part of that is due to the fact that we have reached out 

to so many more borrowers through the alt-A and the non-prime 

market in a risk-based pricing environment. And when you look on 

the surface at the HMDA data, you do not see credit score; you do 

not see a lot of the information that causes that borrower to be a 

higher risk to the investor and ultimately to cause that consumer 

to pay a higher rate. 

78

So in answer to your question, that is how we will have to look 

at it. And there will have to be in-depth studies, but not just initial 

reviews of the HMDA data, detailed studies looking at all of the 

data, including the credit score. 

Mr. BACA. Mr. Eakes? 

Mr. EAKES. I wanted to introduce to the record a table comparing 

the Miller-Watt-Frank bill and the Ney-Kanjorski bill and a summary that describes the weaknesses we see in the Ney-Kanjorski 

bill. 

Mr. BACHUS. Without objection, part of the record. 

Mr. EAKES. The problem really is in the details. The problem I 

have with the existing Ney-Kanjorski bill is that it does not work 

for the flipping standard; it does not work for the definition of fees. 

It reauthorizes single premium credit insurance and mandatory arbitration, where the industry has largely done away with it. 

So it is not the intent of that bill that I am faulting at all; it is 

that the details of implementation in almost all of the sections in 

Title I, they do not work. And I think I will leave my written table 

to go into that in much more detail. 

But that is my basic problem, is that the intent is good. But as 

of right now, the Ney-Kanjorski bill is an industry bill. It does not 

have a single civil rights group or wealth advocate group, community or consumer group that has sat at the table to help draft and 

fix the language. 

I spent the last 6 years of my life working in 20 different State 

legislatures the details of these standards all across the country. 

And it is just that it is an industry bill at this point. 

Eventually, we will all have to sit down and figure out how to 

make it, like we did in North Carolina. 

Mr. NADON. If I could just add, as a spokesman for industry, we 

agree that there are pieces of the Ney-Kanjorski bill which I truly 

believe is the right long-term solution. But it is not perfect yet. 

There is tweaking that has to be done, tightening up, things that 

have to be modified to make it, I think, the kind of bill that we 

would be, at the end of the day, comfortable with. 

Mr. BACA. So then it would be very harmful. I do not know if it 

would be, but would it be harmful in terms of passing legislation 

that does not really have the details of implementation or to fix the 

kind of language that would be inclusive of everything? 

Mr. EAKES. If we could fix it and have, I think, particularly a 

non-preemptive bill, a bill that sets the floor, then I think it would 

do a lot of good. And the notion that having a non-preemptive bill 

would not do anything is just wrong. 

HOEPA now is a non-preemptive bill. It was so weak that it did 

not do the job. But passing the Ney-Kanjorski bill in the form it 

is in now and preempting the right of States to enforce and to deal 

with the problems that arise newly in each State would be more 

harm than good. 

It would create, I would predict, somewhere between 50,000 and 

100,000 new foreclosures per year based on passing the bill in its 

current form. 

Mr. BACA. I know that my time has run out, but you have indicated that apparently it would be very difficult on the States to enforce that law then? 

79

Mr. EAKES. To enforce the Ney-Kanjorski? The provisions in the 

bill as it is currently written do not have any meaning. They do 

not constrain the bad practices that we have been working with the 

last 6 years. 

So it is easy to enforce because there is nothing that it really is 

prohibiting. 

Mr. BACA. Okay, thank you. 

Chairman NEY. [Presiding.] I did not actually ask a question before. I yielded to everybody so they could get the questions in. And 

I do not want to hold up the next panel. 

But just following the line for a second, I would be curious how 

it creates foreclosures, how the bill creates it. 

Mr. EAKES. The two places I just mentioned. It reauthorizes 

mandatory arbitration, which has been pretty much abandoned by 

all of the players in the sub-prime marketplace. There are only one 

or two that are left. 

So the bill, the Ney-Kanjorski bill now prohibits mandatory arbitration only on high-cost loans. So the rest of the sub-prime market, no one could prohibit it. And it would basically, with impunity, 

be able to come back. 

On single premium credit insurance, I mentioned that earlier, essentially the bill as currently written allows single premium back 

into the marketplace. And no one could stop it. 

Chairman NEY. How does it reauthorize it? It just does not ban 

it. But how does it reauthorize it? 

Mr. EAKES. On which one? 

Chairman NEY. How does it reauthorize mandatory arbitration? 

Mr. EAKES. It says that no other State, no jurisdiction anywhere, 

can deal with it; that you have, by definition in this bill prohibited 

arbitration only on high-cost loans. 

Mr. NADON. And Mr. Chairman, if it is worth maybe noting this 

for people’s files, to my understanding, there is not one State law 

with an outright ban on mandatory arbitration. 

Mr. EAKES. Well, the reason for that— 

Chairman NEY. I think your terminology of reauthorization may 

not be technically accurate, reauthorizing. 

Mr. NADON. And I do not think there has been the commensurate impact on foreclosures as a result of not one State law having 

an outright ban on mandatory arbitration. 

Mr. EAKES. Well, States cannot ban arbitration. It is a Federal 

law. So the reason in North Carolina, we looked at it and we would 

have banned it. 

But there is a Federal law dealing with arbitration. 

Chairman NEY. I want to wrap up because I want to move on 

to the next panel. But looking at North Carolina, we have heard 

about obviously legislation, which goes beyond the minimum protection of HOEPA. 

Other States are lagging behind, frankly, if you compare. If we 

do not do the national standard here, which would bring probably 

25, 28, I am guessing, I think it is 30-some States almost up at the 

standards they do not have, how do you suggest those other States, 

if we do not do a national standard, come up to better standards, 

one? And in what period of time will it take to do that? 

80

Mr. EAKES. Number one, I am all for a national standard, so long 

as it is the floor and that would cover all the States. Number two, 

the States that have not passed bills have still benefited from the 

battles that have taken place in the States that do. 

The fact that Citigroup has just announced that they are reducing their prepayment penalties and having no mandatory arbitration benefits not just borrowers in North Carolina, which is where 

I was primarily focused for the last 6 years, but it would benefit 

borrowers in Ohio and Tennessee and everywhere else. 

Chairman NEY. Oh, so one State does affect another State? 

Mr. EAKES. It does. 

Chairman NEY. So we are not in the areas where we used to be, 

where a State was isolated and what happened there did not affect 

the Nation? 

Mr. EAKES. The lending that takes place in Ohio now is better 

because of the work that was brought to lenders in North Carolina 

5 years ago. If you pass a weak standard, a standard that says for 

prepayment penalties, we are going to set it at 3 years. 

Chairman NEY. But you are not against national standards, per 

se? 

Mr. EAKES. National standard that sets a floor is a wonderful 

thing. 

Chairman NEY. But I am just saying, you are not against national standards. 

Mr. EAKES. I have spent the last 6 years of my life trying to get 

national standards, with no help from Congress, by working directly with lenders and industry groups. These guys are to be commended. 

Option One is a great lender. They have, in fact, prospered in 

North Carolina and in the States that have put rules for the good 

guys to prosper. 

Chairman NEY. I want to thank you for your time and patience. 

Thank you. 

Move on to the second panel. 

We will move on to panel two. 

Our first witness is Lisa Bouldin-Carter, the national executive 

director of the BorrowSmart Public Education Foundation located 

in Cincinnati, Ohio. BorrowSmart educates homeowners about the 

home equity borrowing process and ways to avoid abusive lending 

practices and borrowers’ rights and responsibilities. The foundation 

works with credit and housing counselors to get needed information 

and educational materials to the consumers. 

And for the next witness, we turn to our gentlelady from California. 

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

The next witness is Ms. Martina Guilfoil, from my district, 

Inglewood Neighborhood Counseling Services, where she is executive director. 

She received her BA in community development from the Evergreen State College, her masters degree from the University of 

California, Los Angeles and has taken any number of courses in 

her own professional development that include: Achieving Excellence in Community Development from Harvard University; Leadership Development in Inter-Ethnic Relations, Asian-American 

81

Legal Center; Community Scholars Program, University of California at Los Angeles. 

Inglewood Neighborhood Housing Services are responsible for 

any number of programs, including the development and implementation of high-impact community development strategies, such 

as rehab loans, homeownership education, leadership training. And 

I know a little bit about Neighborhood Paint Out. I visited them 

on a Saturday in a paint out. 

And I would like to welcome her to our committee and to Washington, D.C., Ms. Martina S. Guilfoil. 

Chairman NEY. Thank you. 

Next is Alan Hummel. He is the chief executive officer for the 

Iowa Residential Company in West Des Moines, Iowa. He is a licensed real estate broker and certified general real property appraiser in the State of Iowa. 

Mr. Hummel is testifying today on behalf of the Appraisal 

Institut, Association of Professional Real Estate Appraisers, with 

18,000 members throughout the world. The organization promotes 

professional credentialing, standards of professional practice and 

ethics. 

Welcome. 

And last is Jim Nabors from our State of Ohio, actually from 

Congressman Gillmor’s district, although we like to claim, I think, 

Jim in Cleveland too and other parts of Ohio. He is president of 

Mister Money Mortgage of Sandusky, Ohio, is a founding member 

of the Ohio Association of Mortgage Brokers. 

Jim has worked closely with many State legislators. And I was 

in the Senate and I saw firsthand how he helped pass Ohio’s first 

State licensing bill and three other important regulatory bills. 

Jim is the president-elect of the National Association of Mortgage 

Brokers. The association’s members originate more than two-thirds 

of all residential loans in the United States. 

Welcome, Jim. 

And with that, we will start with Ms. Carter. Thanks. 

STATEMENT OF MS. LISA BOULDIN-CARTER, NATIONAL EXECUTIVE DIRECTOR, BORROWSMART PUBLIC EDUCATION 

FOUNDATION 

Ms. BOULDIN-CARTER. Good afternoon. My name is Lisa BouldinCarter and I am the national executive director of BorrowSmart 

Public Education Foundation, a non-profit based in Cincinnati, 

Ohio, which is a national organization. 

Thank you, my fellow Ohioan, Chairman Ney and to the committee, for having me here today to share with you how 

BorrowSmart is educating homeowners to on how to wisely manage 

the investment in their most important asset—their home. 

I hope to explain to you why financial education helps families 

to build personal wealth, but also serves as one deterrent to protect 

borrowers from abusive lending practices. 

We also need a strong Federal law to provide consumer protections everywhere. 

Consumers, especially those with less-than-perfect credit, often 

lack the knowledge to understand their mortgage options, whether 

they are buying a home or refinancing a mortgage. Many programs 

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provide financial education of first-time homebuyers, but until the 

National Home Equity Mortgage Association, NHEMA, established 

BorrowSmart in 2002, none focused on educating the homeowner 

seeking to tap into their home equity. 

BorrowSmart has created unique financial education programs 

that help both consumers and credit counselors understand the 

risks, rights and responsibilities involved in borrowing against equity in one home. To help as many consumers as possible, we distribute our program in two ways: one is to teach the consumer directly and the other is to train practitioners who work with consumers. 

This is a national effort. And we have reached communities 

across the Nation. 

This year, we plan to take it from Birmingham, Alabama, to 

Cleveland, Ohio, as well as many other communities. Our training 

focuses on money management development, making good budgeting decisions, how to work with lenders and spotting red flags for 

possible fraud or inappropriate loan practices or terms. 

We also counsel on foreclosure prevention. All of our programs, 

services and materials are provided at no charge to help current 

and prospective home equity borrowers. 

We partner with responsible mortgage lenders and communityor faith-based housing organizations to reach deep into the grass 

roots level. For example, BorrowSmart premiered its foreclosure 

training for housing counselors and homeowners in collaboration 

with SCANPH of Los Angeles, California and the First African 

Methodist Episcopal Church of Los Angeles, which is known as 

FAME Renaissance. 

We are also working with the Urban League in the City of Orlando to offer foreclosure prevention, homeownership training to 

housing professionals and financial institutions in the greater Orlando-Tampa area. Part of the problem is that, too often, 

uneducated borrowers focus on the size of their monthly payment 

and fail to take into account the risks associated with borrowing 

against equity. 

For an example, an adjustable rate new mortgage note might 

offer an initially low monthly payment, but will the homeowner be 

in the financial position to pay the mortgage when the rate adjusts? This is not to say that a borrower should not take an adjustable rate mortgage any more than one with early prepayment or 

discount points. 

Such features can provide a borrower with a significantly more 

affordable monthly payment, but they must be considered in the 

context of the borrower’s particular circumstances and goals. Each 

participant in a BorrowSmart program uses financial planning 

sheets and enables families to compare loans and to measure what 

they can afford. 

We teach financial counselors to encourage consumers to consider 

at least three lenders and compare products to assure a loan fits 

into their budget and needs. Based on the goal a consumer is seeking, they learn to determine what type of loan is best for their financial situation and how to shop for it. 

Based on my firsthand experience counseling consumers, I believe that borrowers, regardless of the reason they are seeking a 

83

loan, will make a wiser decision if they choose to participate in financial literacy classes, rather than if they are forced to attend. 

While BorrowSmart and other financial literacy programs are helping thousands of people, more needs to be done. 

I commend Chairman Ney and Representative Kanjorski for incorporating Representative Scott’s recommendations and including 

a housing counseling title in their bill, H.R. 1295, the Responsible 

Lending Act of 2005. A well-funded Office of Housing Counseling 

would strengthen the Federal Government’s role in promoting financial literacy and make resources more available for housing 

counseling assistance. 

In closing, let me emphasize that financial literacy is a tool that 

strengthens families. Children who connect to communities because 

they are in a home are more likely to stay in school. 

Homeownership creates stronger tax bases to support hospitals, 

schools and other community services that are important in connecting and sustaining neighborhoods. They are the very basis of 

our society to achieve the American dream of homeownership and 

become involved citizens and community participants. 

By housing counseling and financial literacy programs like those 

provided by BorrowSmart, we can reduce the amount of foreclosures, community decay and blighted neighborhoods. And, just 

as importantly, homeownership enables individuals to create, preserve and increase wealth for themselves and their families. 

With financial literacy, we can change lives. 

BorrowSmart commends the committee for focusing attention on 

the need for financial literacy education and creating solutions to 

eliminate abusive lending practices. We are passionate in our commitment to provide financial literacy education nationally and help 

consumers make better informed home purchasing and ownership 

decisions. 

We hope to have the opportunity to work with you to further financial literacy for all Americans, regardless of social or economic 

status. I thank you for the opportunity this afternoon. 

[The prepared statement of Ms. Bouldin-Carter can be found on 

page 138 of the appendix:] 

Chairman NEY. Thank you for your testimony. 

And we will move on to Ms. Guilfoil. 

STATEMENT OF MS. MARTINA GUILFOIL, EXECUTIVE 

DIRECTOR, INGLEWOOD NEIGHBORHOOD HOUSING SERVICES 

Ms. GUILFOIL. Thank you. 

Good afternoon, Chairman Ney, Ranking Member Waters and 

committee members. It is my pleasure to appear before you today 

to present testimony regarding predatory and abusive lending practices and offer my perspective on necessary legislative remedies. 

My name is Martina Guilfoil and I am the executive director of 

the Inglewood Neighborhood Housing Services, as well as the president of the National NeighborWorks Association. NNA is the national membership association of the 230 NeighborWorks Organizations working to revitalize nearly 3,000 communities throughout 

the country. 

NeighborWorks organizations create and sustain economic 

wealth in low-and moderate-income communities by creating firstVerDate 0ct 09 2002 09:33 Sep 08, 2006 Jkt 029453 PO 00000 Frm 00091 Fmt 6633 Sfmt 6633 F:\DOCS\29453.TXT HFIN PsN: TERRIE
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time homebuyers, providing pre-and post-purchasing counseling, financial literacy training and affordable home-improvement loans. 

NeighborWorks organizations leverage funding they receive by 

the congressionally chartered Neighborhood Reinvestment Corporation now doing business as NeighborWorks America. Since 1993, 

NeighborWorks organizations have assisted over 88,000 households 

to become homeowners and have counseled nearly 524,000 people 

about the homebuying process. 

Our members across the nation work tirelessly to educate potential homebuyers not only on how to purchase a home, but how to 

keep their home once they achieve ownership. Unfortunately, we 

are no match for the aggressive and relentless marketing efforts of 

the predatory lenders working in our communities. 

Education is a tool that can prevent predatory abuse from taking 

place. But NeighborWorks organizations and other community 

counseling agencies do not have the resources to reach out to all 

of those who are being preyed upon. 

For this reason, legislation that protects the consumer is needed. 

In my written testimony, I outline several stories of families. And 

I do not want to belabor those today, especially since the hour is 

late. 

But there are similar characteristics. Each loan is a bit different. 

But there is a common theme, and that is that the borrowers were 

unable to understand the complexity of the loans that they were 

being given; they were unsuspecting that they were being taken 

advantage of. And none of them could afford the loan payments, 

putting them in jeopardy of losing their homes without the intervention of the NeighborWorks organizations to prevent an inevitable foreclosure. 

If we are to make any impact preventing unsuspecting Americans from falling prey to predatory lenders, any Federal legislation 

enacted must protect people of being stripped from their biggest 

asset, their home. 

NNA and INHS vigorously support a national anti-predatory 

lending law that does not preempt existing State law. Any Federal 

law enacted must address these critical areas: education and disclosure, transparency, reasonableness and fairness. 

NNA strongly encourages Federal legislation to err on the side 

of the consumer, as the consumer is the party left worse off by 

these loan transactions. Some of the following provisions we support in Federal legislation include, first and foremost, required 

counseling for high-cost loans. This is not unprecedented, as counseling is required in order to obtain a fully federally insured reverse mortgage loan. 

Educational standards should be clearly spelled out, to ensure 

that the counseling being provided meets quality standards. Counselors should be HUD-certified, which would demonstrate a certain 

competency level; $58 is not enough money. A national hotline 

would act as a good clearinghouse, but would not substitute for 

having a counselor review the good faith estimate or closing statement. 

Loan fees and terms should be fully disclosed. Assignee liability 

protections need to be in place. 

85

We do not ask you to enact burdensome legislation that extinguishes firms’ profitable niches; we simply advise you to construct 

thoughtful and articulate legislation that serves a practical purpose, helping individuals purchase or refinance a home using clear 

and fair lending products. 

NeighborWorks organizations have been making home improvement loans to low-income and credit-challenged borrowers for over 

27 years. The majority of people we assist fit the same profile that 

are targeted by predatory lenders. 

However, our loan performance is far superior to that of predatory lenders. Nationally, the NeighborWorks loan portfolio has only 

a slightly higher 90-day delinquency rate than conventional loans 

and performed better than FHA and VA loans. 

Few of these loans ever go into foreclosure. This experience indicates that, given the right product, one designed for success rather 

than loaded with excessive fees and interest rates, that borrowers 

can achieve and sustain ownership. 

I would just like to address a couple of questions that came up 

previously that I do not think were adequately answered. One had 

to do with the foreclosure rates and the quote that foreclosure rates 

right now have gone down. However, if you look in high-cost markets, as in Congresswoman Waters’s district and the one that I 

serve, where housing prices have increased over 200 percent since 

2000, anybody who got a sub-prime loan or a predatory loan back 

then would have enough value in their property now to sell, so it 

would not show as a foreclosure loan. 

But if you look at the HMDA data and you look at the sub-prime 

lenders that are infiltrating our neighborhoods, they are doing 

more lending than conventional lenders. So we cannot look at the 

foreclosure rate; we need to actually look at the HMDA data because in the high-cost markets, it will not show up. 

And then another question was: what tools can Congress enact 

that can end the lending disparity that we are seeing? And nobody 

talked about the Community Reinvestment Act. 

We can strengthen the lending being done in our neighborhoods 

by banks. I have had a lot of meetings with banks and they are 

receiving outstanding ratings on their CRA requirements, but yet, 

they are not lending in our communities. 

They have ceded these neighborhoods to the sub-prime lenders 

because they are already receiving outstanding ratings on their 

CRA either lending or investment tests. And they are not in our 

neighborhoods. And they have decided that they do not want to go 

in there and they are willing to let sub-prime lenders take that 

market. 

So I am thankful that you invited me here today and for sharing 

my thoughts on behalf of NeighborWorks Association and 

Inglewood NHS. I thank you for your leadership in addressing 

these critical issues. 

[The prepared statement of Ms. Guilfoil can be found on page 

180 of the appendix:] 

Chairman NEY. Thank you for your testimony. 

Mr. Hummel? 

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STATEMENT OF MR. ALAN E. HUMMEL, CHIEF EXECUTIVE OFFICER, IOWA RESIDENTIAL APPRAISAL COMPANY, ON BEHALF OF THE APPRAISAL INSTITUTE 

Mr. HUMMEL. Thank you, Mr. Chairman. 

Much of the testimony and discussion today has centered on the 

credit services side of the issues, which is appropriate. But collateral valuation is a large part of the lending equation and, if not 

properly addressed, could render otherwise meaningful legislation 

lacking. 

Appraiser independence is crucial to advancing confidently toward the American dream of homeownership and financial security 

that goes with it. Sadly, your constituents are paying the price for 

the absence of such appraiser independence, bearing the heavy 

costs of investigations and massive financial failures. 

Here is how the system fails consumers committing to the largest 

investment of their lives. A bloated appraisal is a time bomb. 

If I buy a house with an inflated appraisal, I may not learn the 

consequences until years later. When the time comes to move, to 

refinance, to use my house as collateral, I may learn that it was 

never worth what I thought it was. 

Nobody will buy the place and my credit is threatened. The security of my American dream has turned into a nightmare. And I am 

not alone. 

Last year, Congress heard impassioned testimony from Americans ruined by predatory mortgage transactions, compounded by 

bad appraisals. There have been 6,000 mortgage defaults in Monroe County, Pennsylvania, alone. Now even more have lost their 

homes. And the human toll does not even show up on a spreadsheet. 

Unfortunately, America has been to a school of hard knocks since 

Congress passed the savings and loan bailout in the 1980’s. Faulty 

appraisals are still dictated by interested parties, the schoolyard 

bullies of real estate. 

It is common knowledge that if an appraiser does not play the 

game and come in at whatever value is needed to close the deal, 

these bullies will take their lunch money. I do not exaggerate. A 

Michigan appraiser told a mortgage firm that a property was undergoing major renovations, only to be asked, ‘‘What is it going to 

take to have this home appraise?’’ ignoring the partially completed 

construction. 

When an Arizona appraiser refused to come in right, the mortgage broker informed him that, ‘‘I will let the 170 loan officers that 

operate out of this branch know that you are by the book and lack 

the intelligence to effectively get around the law.’’ 

These abuses are not supposed to happen. But feeble oversight 

and underfunded State authorities are ill-equipped to stop them. It 

is as if the truant officer is tossing delinquents the car keys. 

It is bizarre that a current Federal law is distorted to favor those 

with lower educational achievements over appraisers who have 

pursued their professional studies at the highest levels. Yet that is 

how a critical clause in the S&L reform continues to be misread. 

Fortunately, Title IV of H.R. 1295 addresses this issue. 

It is encouraging that 40 percent of appraisers continue to support their professional organizations, refusing to drop out and leave 

87

the field to less qualified licensees, who may be more vulnerable to 

inappropriate pressure. Still, tired of the hassle, many ethical appraisers are abandoning the mortgage markets for more professional endeavors, leaving less accomplished appraisers to serve the 

homebuyers. 

Both bills before the committee offer better ways of doing things. 

We believe that appraiser reform is a necessary part of any solution combat mortgage fraud and predatory lending. 

We support Title IV of H.R. 1295 because it bans inappropriate 

pressure on appraisers, increases accountability of government regulators, and promotes professional standards. We believe that concerns about State legislation can be harmonized with our goal of 

open, even and fair property valuations throughout America. 

Thank you. 

[The prepared statement of Mr. Hummel can be found on page 

196 of the appendix:] 

Chairman NEY. Thank you for your testimony. 

Mr. Nabors? 

STATEMENT OF MR. JIM NABORS, PRESIDENT-ELECT, 

NATIONAL ASSOCIATION OF MORTGAGE BROKERS 

Mr. NABORS. Good afternoon, Chairman Ney. 

Chairman NEY. Do you want to put your microphone on there? 

Thank you. 

Mr. NABORS. Good afternoon, Chairman Ney and members of the 

subcommittee. 

I am Jim Nabors, president-elect of the National Association of 

Mortgage Brokers. I want to thank you for inviting me and NAMB 

to testify today on solutions to predatory lending. 

As the voice of mortgage brokers, NAMB has more than 26,000 

members in all 50 States and the District of Columbia. I want to 

first commend the committee for its leadership on this issue. Mortgage brokers are proud of our contribution to the record rate of 

homeownership. 

We spend a significant amount of time with our customers and 

have a strong understanding of each part of the homebuying process. Predatory lending practices strip borrowers of home equity and 

threaten families with foreclosure, therefore destabilizing families 

and communities. 

NAMB seeks to rid the industry of any unscrupulous actors that 

prey on the vulnerable homeowners. 

NAMB believes there are three critical components to curbing 

predatory lending practices successfully: one, preventing predatory 

tactics without unduly restricting equal access to affordable credit 

for borrowers; two, promoting industry self-regulation and 

strengthening industry professional standards and relieving the 

regulatory burden imposed by the current patchwork of State and 

local laws; and three, providing and enhancing consumer education 

because an informed consumer is less likely to fall prey to predatory lending. 

But first, I would like to discuss the issue of yield spread premiums. We take this opportunity to discuss the benefits that YSPs 

provide to consumers and clarify the misconceptions that many 

hold about them. 

88

Yield spread premiums can be defined as compensation received 

from an originator in the form of a payment that represents the 

difference between the mortgage interest rate and the lender’s 

wholesale cost to fund. All originators, whether a bank, lender or 

mortgage broker, receive compensation upon the sale of a mortgage 

in terms of the spread above the wholesale cost of funds. 

The yield spread premium represents a component of the broker’s or lender’s compensation that is either not included, part of 

or all of the compensation received. Many lenders act as if they are 

brokers and that prior to mortgage loan closings, the lender has, 

in essence, pre-sold the loan to an investor. 

As a result, most banks and other lenders not only receive compensation that is tantamount to yield spread premiums, but also 

receive service release premiums, or SRPs, upon the sale of the 

loan into the secondary market. The key difference is that mortgage broker yield spread premium compensation is disclosed to the 

consumer, but for similar yield spread compensation, whether it is 

yield spread or service release premiums from the lenders, is not. 

A YSP is a tool that allows a consumer with little or no cash and 

impaired credit the option of a low-cost or no-cost home loan because the closing costs and broker and lender compensation are included in the interest rate, which is paid by the consumer over 

time. Without low-cost or no-cost home loans, many consumers, 

many of them first-time homeowners, would be unable to purchase 

a home because of insufficient cash reserves to cover upfront closing costs. 

An issue that has surfaced when discussing proposals to address 

predatory lending is whether YSPs should be included in the points 

and fees threshold under HOEPA. NAMB believes it is imperative 

that any legislation exclude YSPs from the calculation of points 

and fees. 

The YSP is already captured in the APR threshold and provides 

consumers the protections intended and outlined in HOEPA. Including the YSPs in the points and fees threshold will artificially 

cause loans originated by mortgage brokers to be considered highcost, while excluding other identical loans originated by lenders 

that cost consumers the same in terms of points and fees and payments. 

NAMB believes that all distribution channels should be treated 

in a uniform manner and that the option of a no-cost or low-cost 

loan be preserved for the consumer. 

In addition, NAMB seeks legislation which will implement uniform national lending standards to address predatory lending practices effectively, preserve access to affordable credit and improve 

the overall expertise of the mortgage origination industry. NAMB 

supports measures that seek to protect consumers from predatory 

lending practices, including formal licensing, pre-licensure education and continuing education requirements. 

However, we believe to be truly effective, such measures should 

not just apply to mortgage brokers, but to all mortgage originators. 

NAMB also supports a nationwide registry of all mortgage loan 

originators. 

Such a registry should include verified information concerning 

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tion. Without detailed information about the individuals, such a 

registry will not be useful to State regulators, enforcement entities 

and potential employers. 

I appreciate the opportunity to offer NAMB’s views on predatory 

lending reform. I will be happy to answer any questions this committee may ask. 

[The prepared statement of Mr. Nabors can be found on page 218 

of the appendix:] 

Chairman NEY. I want to thank you. 

I wanted to point out, I think the point you made—there are a 

lot of points—but the national registry is critical because that will 

help to catch people. We have used the example before of if somebody goes to another State and you cannot catch them and they are 

doing the same violations. 

But if they are in that registry, you have a better chance, I 

think, of being caught. 

Mr. NABORS. Absolutely. 

Chairman NEY. Mr. Hummel, I wanted to really give you a lot 

of credit for, I think, being horrifically candid with the Congress. 

It is not every group that will come and say, you know, this is—

here it is, laying yourselves open out there. 

I think it is a huge problem. And your willingness to work within 

the bill, I think, will be a very good thing. 

Mr. HUMMEL. Mr. Chairman, I thank you. And I also thank you 

for the language in the bill, particularly Title IV and the three 

points that it addresses. Prohibition against inappropriate pressure 

on the appraiser, when we are in sub-prime or non-prime situations, when individuals unknowingly get upside down before they 

have made their first payment because appraisers have not acted 

appropriately because of inappropriate pressure, that is obviously 

a problem. 

The provisions for oversight and enforcement of all the mortgage 

professionals, not just the appraisers, but also the unregulated 

mortgage brokers, many of which have no sanctions should they 

give inappropriate pressure on appraisers. And obviously, an increase in appraisal quality through professionalism that your language would instill. 

Chairman NEY. And in the small communities—I mean, I am 

going to be frank with you—I have done it myself, where in a small 

community, somebody will say, ‘‘Well, this is the appraiser we are 

going to use.’’ And I will say, ‘‘No, that is not the one I want.’’ 

‘‘Well, this is the one we use.’’ ‘‘Well, it is not who I want.’’ Because in a small community, you know not to take that person. I 

am not saying that they have done something illegal, but you sure 

do not want them appraising your house because it may be up here 

and then you move in and you are already going to be losing, like 

driving a car off a parking lot. 

Mr. HUMMEL. That is exactly the problem that we encounter 

when the correct qualified professional is not used. 

Chairman NEY. And in urban areas, it is harder because not everybody knows everybody, so it is even harder. And in rural areas, 

it is tough too because people do not know certain things. And how 

do you get them up to educational levels? 

90

So I think internally, to try to correct this dilemma, is the best 

way how we are trying to craft changes. And I just appreciate your 

help on that. 

Mr. HUMMEL. Thank you. 

Chairman NEY. I wanted to ask Ms. Bouldin-Carter about, in trying to help people and to help them understand, do you think it 

is a matter of more regulation or is it a matter of more education? 

Ms. BOULDIN-CARTER. I think it is a combination of both. With 

financial literacy— 

Chairman NEY. I mean, to stop predatory lending. 

Ms. BOULDIN-CARTER. Absolutely. With financial literacy families 

begin to understand the documents that they are signing. They 

start to recognize what the terms are of the loan. And they are better able to make a decision that is going to suit their individual 

family needs. 

With regulation, we will have the necessary oversight to make 

sure that things are put into place, where we are regulating what 

is wrong and that we are supporting all the things that are good. 

Chairman NEY. With your organization down in Cincinnati, I 

mean, do you utilize also attorneys or can people be directed to 

Legal Aid? Or how do you do that? 

Ms. BOULDIN-CARTER. What we do, we are a national organization. We just happen to be located in Cincinnati. But we look at 

it holistically. 

When we are doing a training for practitioners, we include everyone. We include the consumer. We include lenders. We include 

practitioners and everyone that is involved in the process. 

We have also done training with realtors. We have done training 

with appraisers. We look at everyone because everyone needs to be 

on the same page. And the ultimate goal is to have an informed 

consumer. 

So we look at this process as a holistic process that has to incorporate everyone that is on the equity or the new homeownership 

team. 

Chairman NEY. Thank you. 

My time is going to be out in a minute, but Ms. Guilfoil, I had 

asked earlier, what about the fact that 25-some States or 26 States 

will be brought up to, I think, better standards under this bill? I 

guess what I am trying to get to is: are there parts of the bill you 

think that are effective in the legislation we have? 

Ms. GUILFOIL. The Ney bill? Well, let me look here. I think that 

creating a floor, although certainly for some States where there is 

no floor, that would be helpful. However, there are definitely States 

where the existing legislation is stronger, in which case I think 

that there is a problem to have preemption. 

Chairman NEY. Okay. 

Well, I want to thank you, all the panelists. 

The gentlelady from California? 

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

I would like to ask Mr. Nabors: is there a standard fee for brokers for originating? And if not, if it differs from lender to lender, 

how do you make a decision about whom you refer to? 

Mr. NABORS. I do not think there is a standard fee that mortgage 

brokers use across the country because of the difference in prices 

91

of the loans. For example, homes in California sell for a lot more 

than they do in Ohio. So the amount of the fee, the percentage of 

the fee, could be expected to be different. 

But there is no standardization there. 

Ms. WATERS. You are from Ohio, are you? 

Mr. NABORS. I am from Ohio. 

Ms. WATERS. What is it like in Ohio? 

Mr. NABORS. Well, I am out in Sandusky, which is a really small 

town outside. But— 

Ms. WATERS. What is it like in Sandusky? 

Mr. NABORS. Well, the average house sells for between $80,000 

and $120,000 or $130,000. 

Ms. WATERS. There is someplace left like that in America? 

Mr. NABORS. Absolutely. It is a wonderful place. You should come 

visit it. 

But consequently, the cost of business is still the same, whether 

the house is located in Sandusky, Ohio, or anywhere in California. 

You still have to do the appraisal. And as an employer, as a mortgage broker, you have to pay rent and you have to pay your employees. 

And so there are a lot of fixed costs. 

Ms. WATERS. But there must be a difference between originating 

a loan for a house that you just described in Sandusky and a $1 

million house in LA. 

Mr. NABORS. Well, I would say one, I do not specialize in $1 million houses, but I think they ought to require an additional appraisal. But appraisals cost the same. I do not want to speak for 

Mr. Hummel. 

An appraisal costs the same whether the house is worth $80,000 

or $400,000. 

Ms. WATERS. No, they do not. I just had this experience. And this 

is what I discovered. 

I discovered that some lenders have in-house appraisers and they 

charge you one thing. Other lenders contract with appraisal firms 

and they charge something else. And I also understand there are 

mortgage bankers who are doing some loan originations and they 

mark up the appraisal fees from the people that they contract with. 

People they contract with charge you $500; then the mortgage 

banker marks it up another $200. So it is not the same. I know 

that. 

I have had a great learning experience recently in trying to negotiate a jumbo loan. And I will tell you, I learned a lot. 

So it is different. I mean, I was so amazed at the difference between the appraisal price of one lender and a mortgage banker that 

I thought, ‘‘How do they do this?’’ They do what they want to do. 

Mr. NABORS. Well, the in-house appraiser is a salaried employee 

of the bank. The outsourced appraiser is, for the most part, being 

paid as-is. 

In Ohio, it is against the law to mark up third party fees. So if 

the appraiser charges us $250, which is the going rate right now 

in Ohio, we can only charge the customer $250. It is against the 

law in Ohio to mark up. 

Ms. WATERS. Ms. Guilfoil, is that true in California? 

92

Ms. GUILFOIL. Actually, I was just thinking about this. The appraisal fee that we charge for our loans has stayed the same from 

when the houses cost $120,000 and now they are going for 

$400,000; it is still the same appraisal fee. The fee has not been— 

Ms. WATERS. What is it in California that would allow a mortgage banker to mark up the fee? I mean, is that not against the 

law? 

Ms. GUILFOIL. It is not against the law. It is basically what the 

market will bear, which is partly why these—the APR and you 

need to know how to aggressively shop to know what it is that you 

are paying for these loans. 

Ms. WATERS. Well, the average person does not know what a 

good appraisal fee cost is. I mean, I had no idea until I saw the 

difference. But I decided that I did not like kind of the overall attitude at one lender. And I said, ‘‘Well, let me check around and 

see.’’ And I saw this great difference. 

You know, literally what I think the average consumer is confronted with are a lot of fees that they have no idea what the 

standard is. You just have no way of knowing. 

And in one sale of a piece of property I had, this little house I 

had for years I decided to sell, there was something in there, a 

$2,000 fee in Los Angeles, something about a county transfer fee. 

And I called the county to find out what this was. 

And they said, ‘‘Hey, we do not have anything to do with that.’’ 

And then when I talked to the real estate person, they said, ‘‘You 

can get rid of it.’’ 

I mean, it was not even real. So how is the average consumer 

supposed to know all this stuff? 

Ms. BOULDIN-CARTER. Financial literacy. 

Ms. WATERS. No. 

Mr. HUMMEL. And through disclosure. One of the things that we 

have been big advocates of is on that disclosure, it should state 

what the appraiser was paid, not what is being collected for appraisal services because I know for a fact that services I provide 

for different lenders, dependent on the complexity of the assignment, they may order a different type of appraisal, which will cost 

more. 

And it is possible that they do not have any appraisal. 

Ms. WATERS. Oh no, they have drive-bys. 

Mr. HUMMEL. They use a valuation model and they still call it 

an appraisal when a true appraisal has not been done. 

Ms. WATERS. Yes, that is right. 

Mr. HUMMEL. So that consumer is being misled into believing 

that they are getting professional services. 

Ms. WATERS. But I learned about that. I learned about the driveby appraisal. 

Ms. GUILFOIL. Congresswoman, I think this is exactly why legislation is needed because you cannot expect the consumer to possibly understand all of these nuances. And I am a firm believer in 

financial education. 

But we can only serve a very small percentage of people that are 

out there getting loans. And they are being taken advantage of. 

The world of mortgage lending has become so complex over the 

last 10 years or so and the burden of responsibility is placed solely 

93

on the shoulders of the consumer. And that is an unfair position 

to place consumers and expect them to become fully educated without Federal relief. 

Ms. WATERS. You are absolutely right. And while I have a great 

respect for financial literacy and all of that, I literally needed to 

take the deal to a friend who is in the business to take over this 

with me and help me to understand what I am getting into and 

how it all works. 

And I want to tell you, I was embarrassed, sitting on this committee, when people think I know something about all of this, only 

to discover I knew very little. And I would not have been able to 

finalize this package in any reasonable way without the assistance 

of my friend, who is an expert. 

And most people do not have that. So thank you very much. 

Chairman NEY. Thank you. 

Mr. Miller? 

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

Mr. Nabors, I have already spoken to mortgage brokers from 

North Carolina. And I certainly welcome that you need to talk with 

mortgage brokers and include them in any discussions on what 

Congress should do about this topic. 

I have some questions based on your testimony and other testimony earlier today about yield spread premiums. I understand that 

yield spread premiums are paid by the lender rather than by the 

consumer. 

And so it would be instead of the commission paid by the consumer upfront? 

Mr. NABORS. Well, our customer would have multiple options. 

They could choose to pay whatever our fee is all upfront. 

Mr. MILLER OF NORTH CAROLINA. Right. 

Mr. NABORS. They could choose to pay part of it upfront and 

have the other part paid by a yield spread premium. Or they could 

choose to have it completely paid by a yield spread premium. 

Mr. MILLER OF NORTH CAROLINA. Okay. So there would be some 

instances when a consumer would pay both a commission and a 

yield spread premium? 

Mr. NABORS. Yes. And that would be fully disclosed to them. 

Mr. MILLER OF NORTH CAROLINA. Okay. Well, would the yield 

spread premium then, the combination depend upon what the consumer was paying in interest? 

Mr. NABORS. It would determine what the interest rate would be 

to the consumer. And it would also depend on what the consumer 

felt was the best way they wanted to handle that transaction, 

whether they wanted a no-cost loan and they wanted— 

Mr. MILLER OF NORTH CAROLINA. You agree that an upfront commission should be included in the fees and points trigger under any 

statute Congress passes? 

Mr. NABORS. Yes. 

Mr. MILLER OF NORTH CAROLINA. But yield spread premium, you 

think should not? 

Mr. NABORS. Yield spread premium, we feel, is already captured. 

Mr. MILLER OF NORTH CAROLINA. Well, if they are doing the 

same thing, if you shift it from one to the other, why shouldn’t both 

be included in the points and fees? 

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Mr. NABORS. The problem is that the only ones required to disclose yield spread premiums are mortgage brokers. The rest of the 

industry that is getting yield spread premium is not required to. 

So if you were to force mortgage brokers to include it in its calculations, it would— 

Mr. MILLER OF NORTH CAROLINA. Right, but if it serves the same 

function as the commission upfront, if you shift it to the back end 

to a yield spread premium, shouldn’t you therefore have some room 

left in the points and fees trigger to reflect it there without any effect? 

Mr. NABORS. Well, I guess. As I said, our concern at NAMB is 

the fact that yield spread premium, mortgage brokers are the only 

ones that have to report it, so that other people would—other lenders and bankers who are charging the exact same fee because the 

payment is the same and the rate is the same would not fall into 

the HOEPA trigger. 

Mr. MILLER OF NORTH CAROLINA. I have a couple of documents 

here that are apparently from public sources: one from the 

MBA’s—Mortgage Bankers Association—sub-prime handbook and 

the other is apparently just off the Internet. And both, although 

they are both public documents, both do say that these say that 

these are not for distribution to the general public, but are for 

mortgage professionals only. 

They both list their wholesale mortgage rate sheet. They both list 

credit scores down one side, maximum loans on the other and interest rates for people with different scores. 

And then this one was from Argent Mortgage Company. It appears to say that any mortgage as much as one point higher than 

what would be here, based on the FICA score, would result in a 

payment rebate of .5. Is that a yield spread premium? 

Mr. NABORS. I am sorry, could you say that again? 

Mr. MILLER OF NORTH CAROLINA. Sure. Do we have a copy I can 

give you? I am not sure we do. 

This is from Argent Mortgage Company. It has down one side the 

credit score. Across it, it is the amount that it will finance. And 

then, within that grid—it shows the loan to equity at the top. 

And then within that grid, it shows an interest rate. 

Mr. NABORS. Right. 

Mr. MILLER OF NORTH CAROLINA. At the bottom, it appears to 

say that if the interest rate is 1 percent higher, that there is a 

bonus to be paid of .5, if it is one point higher. If it is two points 

higher, the bonus to be paid is .75. 

Is that a yield spread premium? 

Mr. NABORS. You know, I do not do business with Argent. 

Mr. MILLER OF NORTH CAROLINA. But you do business. I mean, 

you do business with other lenders. 

Mr. NABORS. Right. 

Mr. MILLER OF NORTH CAROLINA. Is that the way yield spread 

premium rates works? 

Mr. NABORS. I understand the tiered pricing. But I have never 

dealt with someone that had anything like that on the bottom. 

Mr. MILLER OF NORTH CAROLINA. Okay. 

North Carolina’s law does not include yield spread premiums in 

the calculation of points and fees. But it does have a steering proviVerDate 0ct 09 2002 09:33 Sep 08, 2006 Jkt 029453 PO 00000 Frm 00102 Fmt 6633 Sfmt 6633 F:\DOCS\29453.TXT HFIN PsN: TERRIE
95

sion in law requiring a mortgage broker to make reasonable efforts 

with lenders with whom the broker regularly does business to secure a loan that is reasonably advantageous to the borrower, considering all the circumstances, including the rates, charges and repayment fees, terms of the loan and the loan options for which the 

borrower qualifies with such lenders. 

There is no exception to that. That is a blanket requirement. 

Why should there not be such a blanket requirement in the law? 

I believe that the Ney-Kanjorski draft—and we all can see that 

these are works in progress—provides an exception that if a borrower signs something saying they waive that duty not to be 

steered—not to have been steered—then there is no such requirement. 

Why should there not be a provision like North Carolina’s provision in Federal law? Why should there be an exception to that? 

Do you think that should be your duty? That you should be 

under a duty to use reasonable efforts to get a borrower the best 

loan? 

Mr. NABORS. I believe that mortgage brokers do use reasonable 

efforts to get their customers the best loan they can. 

Mr. MILLER OF NORTH CAROLINA. Okay. And do you think that 

should be a legal requirement? 

Mr. NABORS. I think yes, it should. 

Mr. MILLER OF NORTH CAROLINA. Okay. And do you think there 

should be any exception to that? Do you think that consumers 

should be able to sign a one-page document, like this one here from 

the earlier testimony, saying that they waive that? 

Mr. NABORS. Well, the question is what is in the best interest of 

the customer? 

Mr. MILLER OF NORTH CAROLINA. Right. 

Mr. NABORS. Okay. Different circumstances. In some cases, what 

is really best for the customer may seem more expensive, right? 

For example, if I can use an example, if you are applying for—

for the most cases, we are talking about money purchase mortgages 

here, but we should also be talking about refinances and— 

Mr. MILLER OF NORTH CAROLINA. I think we are talking about 

refinances here. When you look at loan to value and these loans 

are only being made where there is a whole lot of equity in the 

house. 

Mr. NABORS. Right. 

Mr. MILLER OF NORTH CAROLINA. I think we can assume that 

those are refinances. 

Mr. NABORS. Right. But they could also be home equity loans, 

where someone just wants to draw the equity in their home out. 

If you come to me and say, ‘‘Look, I need to borrow $20,000. My 

daughter is getting married in 2 weeks.’’ 

Mr. MILLER OF NORTH CAROLINA. Right. 

Mr. NABORS. I can come up with two options. I can come up with 

a lower case option that gives you the best rate at the lowest cost 

and you can have it in 60 days. Or I can come up with, through 

another lender, a higher rate with some higher fees and you can 

have the money in 10 days. That is your choice. 

96

Now if the customer does not have the option of exiting out, we 

would pretty much have to tell them, ‘‘You have to take the 60-day 

option.’’ That is truly the best rate. 

Mr. MILLER OF NORTH CAROLINA. Let me give you another example. Based on what this appears to say, and that is that a consumer wants to borrow $100,000, and they have an 80 percent loan 

to equity rate, their credit score is 620, according to the wholesale 

mortgage rate sheet, they should get a 7 percent interest rate. 

Instead, they get a 9 percent interest rate. And the broker receives a rebate—a bonus, a yield spread premium, perhaps, of $75, 

$100; well, 75 percent would be, what, $750? 

Chairman NEY. Mr. Nabors, the time is way over, but if you 

would like to answer that? 

Mr. NABORS. Are you using the MBA sheet or are you using the 

Argent sheet? 

Mr. MILLER OF NORTH CAROLINA. The Argent sheet. They are the 

same effect. 

Mr. NABORS. As I said, I am not familiar with the Argent. 

Mr. MILLER OF NORTH CAROLINA. I am not asking about this. I 

am not asking you about this. I am giving you the example, using 

this as an example. If that has happened, if a loan is simply 2 percent higher interest rate, no other difference, but as a result of 

that, the lender is paying .75 points or I think actually one point 

would be more the normal going rate, to the broker, would that appear to be a violation of a steering prohibition? And why would it 

not be? 

Mr. NABORS. Well, one, I think it would be yield spread premium 

and have to be disclosed to the borrower. I have never seen one 

where it was a 1 percent markup paid you one point. 

Mr. MILLER OF NORTH CAROLINA. It is usually two. I said two instead of—and that would give you one point. Should the law allow 

that? 

Mr. NABORS. Well, if you are going to make 2 percent on a loan, 

okay? I can say there are many places that you can get a customer 

a better deal—and they are in a 2 percent premium or a 2 percent 

yield spread premium—than you can at 9 percent on a 620 borrower. 

Mr. MILLER OF NORTH CAROLINA. Okay. But unless there is some 

difference like that, that does not appear on this sheet, if you just 

have a consumer who could have gotten a 7 percent loan on the 

very same terms, instead gets a 9 percent loan but the broker gets 

a 1 percent additional yield spread premium in addition to whatever upfront commission they would have, does that strike you as 

something the law should allow? 

Mr. NABORS. If that is part of the agreement between you as a 

customer and me, as part of my total compensation, that has been 

disclosed to you, it would be okay. But if this is a bonus that is 

played outside the plan, if it is not disclosed on a good faith estimate or anything else— 

Mr. MILLER OF NORTH CAROLINA. So if a consumer signs a piece 

of paper— 

Chairman NEY. I have to note, we are so far over. 

97

But, you know, if you would like to follow up with the question 

in writing though, Mr. Miller, and have it answered, without objection, we could do that. 

Mr. Kanjorski? 

Mr. KANJORSKI. Thank you, Mr. Chairman. 

I guess I want to take a point of special privilege. I heard Ms. 

Waters conceding that congressmen do not know everything. And 

you do not want to tell the general public that, do you? 

This is a very complicated field. And while some of the questioning was going on, we had to concede, as writers of one of the 

bills here, that we started out trying to define what a sub-prime 

loan was, then conceded we did not have the capacity to put a definition in the legislation of what is a sub-prime loan. 

So we started to go at just characteristics that were common in 

loans that are considered ‘‘sub-prime.’’ But one of the points Ms. 

Waters, in her conversation with me, pointed out that we have to 

protect people. And indeed, we do. 

We used to rely on the small communities where everybody had 

a lawyer or a priest or a minister, a mentor or a friend and that 

the mortgage market was relatively regional or small around that 

small town. Now we are into a global market. 

Now a lot of us move on a constant basis. Some of us end up in 

California, God forbid. 

But no, but as a result, we do not have someone to go to that 

is knowledgeable. And we basically rely on professionals. 

And for better or for worse, realtors, builders, mortgage bankers 

are considered professionals. And yet, they are in a competitive 

world where they are really trying to make transactions and not 

necessarily charged legally with the responsibility of representing 

the best interests of the borrower. And we run into great conflict 

there. 

And I wish that we could almost require all borrowers to take 

a financial literacy course to understand how to negotiate and what 

questions to ask. And I think that is what you offer some people. 

But I am impressed with so many people that do not seek this 

out, do not understand it and do not care and are still rather blind 

in going into these transactions and, only after the fact, discover 

what has been disclosed to them in that stack of documents that 

every time I have ever entered into a mortgage, I have signed, but 

I could not tell you what is in them because I do not read them. 

And I confess to that. And I know Ms. Waters sits home and 

reads every document in her closing and knows thoroughly what it 

means. 

Ms. WATERS. Every line. Every line. Every letter. 

Mr. KANJORSKI. But what we have to find is some common bond 

here, as to what we cover. 

One of the questions, Mr. Hummel, I wanted to ask you in this 

area on appraisal: we did not include collusion, but we should, I 

think. And what are your thoughts on that, from the appraisal perspective? 

Mr. HUMMEL. I wholeheartedly agree. And in our testimony, I believe we indicate that collusion should be included as one of the 

prohibited acts. 

98

We have talked about extortion, coercion and bribery. But it is, 

in fact, you know, an ‘‘it takes two to tango’’ operation. The appraisers themselves are not going to be able to perpetrate the fraud 

themselves so collusion is a necessary— 

Mr. KANJORSKI. I am sympathetic to that, but as a lawyer, I am 

thinking about: how do you prove collusion? 

Mr. HUMMEL. There are standards in place already, the Uniform 

Standards of Professional Appraisal Practice, that allow other appraiser professionals to be able to review a document and state 

whether or not that is independent judgment. 

Mr. KANJORSKI. Okay. 

Mr. HUMMEL. Or whether or not that appraiser has acted in a 

manner that is not what his peers would have done; therefore, it 

would be in collusion with someone else. 

Mr. KANJORSKI. And so I take it your testimony would be that 

we should certainly include collusion into the package? 

Mr. HUMMEL. Certainly. 

Mr. KANJORSKI. The other question on enforcement, what we 

tried to do with the Ney-Kanjorski bill was maintain State enforcement and not create a Federal bureaucracy. And particularly with 

the nuances of real estate law and financing law in the various 

States being as different as they are, we felt that the closer we 

could keep it to home, particularly at the State level, at the attorney general level, that would be the best thing to do. 

What are your thoughts on enforcement? 

Mr. HUMMEL. I am in agreement with using that methodology. 

And what does not exist now but would exist under Title IV of 

1295 is the authority of such entities such as the appraisal subcommittees, who have funds available to them, but they do not 

have the Federal ability to make grants to States for enforcement. 

States right now—the State appraisal licensing agencies—are in 

a predicament. They really would like to do what is right, many of 

them. 

But their funds are restricted. Many of the funds colleted 

through appraised licensing fees go into the general fund and 

leaves them short of funds able to provide enforcement. 

The legislation under Title IV of 1295 would allow Federal fund 

grants to go to the States for further enforcement. That way, we 

are keeping the enforcement within the State, where the appraisers 

are, where the attorney generals are, and given the resources available for that. 

Mr. KANJORSKI. And you are saying we should add that provision? Or that provision being there covers that problem? 

Mr. HUMMEL. I believe that that provision is covered within Title 

IV. 

Mr. KANJORSKI. Okay, okay. 

Now I if could, Mr. Nabors, the yield spread premiums, some testimony on the earlier panel said that they go as high as 10 percent. 

Is that your experience? 

Mr. NABORS. I have never seen a loan that had 10 percent yield 

spread premium paid on it. And I have been in the business for almost 29 years. 

Mr. KANJORSKI. What would your experience say the percentage 

would be? 

99

Mr. NABORS. I would say the average fee a broker earns somewhere now is between 1 and 3.3 percent, depending on the amount 

of the loan. And I think that a 10 percent yield premium already 

had to throw that loan into HOEPA under the existing conditions. 

But I have never seen that in my career. 

Mr. KANJORSKI. Do you think we ought to do any requirement of 

not just disclosure forms, but a face-to-face language disclosure? 

That when certain categories of people come in for borrowing and 

they are going to be put in what we consider sub-prime lending 

rates, that they be told that this is not a premium rate; this is a 

sub-prime rate? And make that a requirement of the law? Would 

that make a difference? 

Mr. NABORS. Well, one, I think another form for a customer to 

sign, I mean, they already are signing like 80 to 90 forms, that 

most part overwhelm them. 

I think that the ability to us to go through financial literacy and 

do more education and to give them the ability to shop rates is 

going to be the safeguard against that problem. They are going to 

get—the way they are going to get the loan that they are entitled 

to is to shop more than one place, to call around and find out what 

program best fits their needs. 

Mr. KANJORSKI. I understand that. 

Ms. GUILFOIL. If I may? I just wanted to tell you that the reverse 

mortgage, which is very popular for seniors right now and it is very 

complicated to understand and it is not for everybody. There is a 

provision in the regulation that if it is a federally insured reverse 

mortgage, you have to obtain counseling and there has to be a firewall. 

So the counseling, the person giving the mortgage—and in our 

market, Wells Fargo is a big provider of reverse mortgages—they 

cannot do the counseling. And you have to go to an approved, 

HUD-certified counselor to get the counseling, which we do. 

And in many cases, we advise the people that, for what they are 

looking for, the reverse mortgage does not make sense, that they 

need a home improvement loan or an equity line or something. So 

it is not unprecedented to require a firewall of education on the 

kinds of loans that can strip people from their equity in their property. 

Mr. KANJORSKI. And one side of a category because remember 

what you are doing here is you are limiting people’s freedom to go 

out and buy a home in their timeframe, the type and under the 

conditions they decide to do. Suddenly, to some people, you would 

be saying, ′′Well, you have to go through some sort of process before 

you can have the same access to that home, as compared to most 

of us.′′ That is quite a constriction of freedom there. And how do we balance that out? 

Mr. NABORS. Congressman Kanjorski, right now, any HOEPA 

loan under Section 32 provides additional disclosures, as well as an 

additional waiting period to close. So any loan that is under the 

new HOEPA triggers as proposed, again not all sub-prime loans, 

but those that would fall under the new HOEPA triggers, would include that. 

Mr. KANJORSKI. That is the very highest category. 

100

Mr. NABORS. Would already include that additional disclosure, as 

well as that additional waiting period. 

Mr. KANJORSKI. What is that timeframe? 

Mr. NABORS. Three days after the initial disclosure before they 

can actually close the loan. 

Chairman NEY. Time has expired. 

Ms. BOULDIN-CARTER. Can I just? 

Chairman NEY. Yes. 

Ms. BOULDIN-CARTER. I just wanted to say that one of the things 

about the financial literacy program that BorrowSmart offers is we 

do have a loan comparison chart where, in our classes, be it that 

we are talking to the consumer or the practitioner, we educate that 

you need to send your clients out to talk to three lenders; ask each 

and every lender apples to apples questions. 

You then fill in the chart and return it back to the counseling 

agency. You are then sitting with an uninterested party who is 

going to help you look at the form and decide what is the best product for you, what are the costs of that product and what you can 

afford to pay. 

Mr. KANJORSKI. That is great advice, but a lot of people do not 

take it. And the question is: should we enforce it by law or regulation? That is the question. 

Ms. BOULDIN-CARTER. If you enforce it by law, people are going 

to go to the classes, but they may not necessarily get what is being 

delivered. If you make it available and make sure that we do something in terms of PSAs, 1–800 telephone numbers, as Congressman 

Scott has spoken about; we put it out there so that people know 

that they have an option. 

Homeownership is about options, about education and about financial literacy. And we have to make sure that families understand it, because when they understand it, we do not have neighborhood decay and individuals take that house and continue to 

have a home. 

Chairman NEY. Thank you. Just a point of clarification before we 

move to Mr. Scott, do the people take that checklist and take it to 

the lender and check it off, ask them the questions? 

Ms. BOULDIN-CARTER. Absolutely. 

Chairman NEY. Thank you. 

Mr. Scott? 

Mr. SCOTT. Thank you very much, Mr. Chairman. And I was able 

to catch some of the testimony, as I was in the process of another 

meeting back in my office, so I did not miss it all entirely. 

Ms. Carter, first of all, let me thank you for your recognition of 

the value and importance of financial literacy and financial education and thank you for the kind words you had to say about this 

committee’s efforts and our willingness to include financial education, a toll-free number and resources to help get financial literacy into the hands of our targeted group. 

Because information is the key. He who has information is powerful. He who is not is a victim of predatory lending. That certainly 

has been the case. 

Let me ask you, Ms. Carter, how can we keep track of unsavory 

lenders who target vulnerable populations, earlier rather than 

later, after the damage has been done? 

101

Ms. BOULDIN-CARTER. I really believe that what happens is the 

counseling agencies in the individual communities are the best recordkeepers. These are the individuals that actually work with the 

consumers in their neighborhood. They know who are the lenders 

who are preying upon their families that they are working with. 

When you were talking about families that are being offered 

these deals that are too good to be true, they just are not true. And 

as we train nationally, one of the things that we find out is the 

counselors that we are training or the practitioners that we are 

training, they can name names. 

They can tell you who are the individuals that are in these urban 

communities, that are in these low-to moderate-income communities. One of the options that we would be able to—that I believe 

could be enforced would be the 1–800 number would be taken a 

step further so that practitioners would have an avenue to report 

who is doing the unscrupulous lending in their individual communities. 

Mr. SCOTT. Yes, and that is exactly why we feel that the 1–800 

number is so vital to any effort, because it is two-way. It gives us 

an opportunity to measure the size and scope of the problem. It allows us to be able to get that kind of information. If we can get 

individuals to call in and when they ask for assistance, we will be 

able to also ask them back a question or two. 

That is what is critical. Education is not a one-way street. It is 

a two-way street. 

A one-way street for information is called propaganda. A two-way 

street is education, give and take and back and forward. And that 

is why we feel an important ingredient in this process is that we 

have a fully staffed individual on each end of the conversation. 

Mr. HUMMEL. Congressman Scott, if I may? You were asking how 

do you find about this unscrupulous lender before it is too late? I 

would like to tell you that the appraisers and appraisals are normally on the front end. And I can tell many times, prior to being 

engaged for that appraisal, what the intent of that particular lender is and whether or not they are trying to buy an appraisal or trying to understand the risks of their collateral. 

And if we had available to us, being one of the practitioners, that 

ability not just to call an 800 number and say, ‘‘Hey, there is someone out here that is using inappropriate pressure and fraudulent 

practices,’’ and not only give a call to that 800 number, but to have 

a mechanism in place, that if that was a currently unregulated 

broker, that that person be regulated. 

And that is part of what we are trying to accomplish here, I believe, is a more regulation of the unregulated individual so when 

they pull those stunts, we have the ability to provide enforcement. 

Mr. SCOTT. And when you have that 1–800 number out there, 

those who have a desire to engage in that activity will know that 

there is something out there that could report them. 

I am also concerned that many predatory loans are targeted to 

homeowners for second mortgages or home improvement loans. 

Can any of you provide recommendations for how financial literacy, 

financial education can be provided to families after they have purchased their house? 

102

We are going to take this in steps. We know that the whole home 

purchase entity is a step-by-step process. It is the most fundamental activity we can do to start on a road of productive wealth, 

earnings, tax revenue for a community. It is the cornerstone of our 

community. 

So not only do we want the literacy and education out there to, 

as we start the process, but also how you keep that home. What 

are the financial decisions that have to be made? 

So I just wanted to get recommendations from you all that we 

might look at, that would help us with that. 

Ms. BOULDIN-CARTER. Part of the training and the major focus 

of BorrowSmart is to educate the equity borrower. And the forms 

that we have available to the borrower, on one side of the form, as 

I have already spoke about, is the comparison shopping. 

On the other form is a very simple, your monthly budget. What 

can I afford to borrow? What am I looking at? What type of interest 

rate would best fit me at this point in my life? 

What do I want to do with that money? How am I going to continue to create wealth with homeownership if I take my dollars out 

of there? What is a good reason for me to take my dollars out of 

there? 

This is exactly what BorrowSmart training does for the practitioner and for the consumer. 

And quite frankly, Congressman Scott, we will be in Atlanta 

doing this training with HUD on June 8th. And we have already 

left notification for your staff in Atlanta. 

Mr. SCOTT. Oh, great. 

Ms. BOULDIN-CARTER. They are signed up to attend the training. 

Mr. SCOTT. Wonderful. Wonderful. My crackerjack staff is on the 

ball. Wonderful. 

Ms. Carter, in your testimony, you detail the important work 

that grass roots organizations are doing to promote homeownership. How can we supplement their efforts without recreating the 

wheel, so to speak? 

Ms. BOULDIN-CARTER. I do not think we need to recreate the 

wheel; I agree with you very much. The problems with grass roots 

efforts are dollars, dollars, dollars. 

There is so much to be out there and there are so many individuals that need to understand what homeownership means to themselves, to their communities and to the school districts. There are 

not enough dollars that are going into first-time homeownership 

counseling. And there certainly are not enough dollars that are 

going into equity counseling. 

We need to have dollars so that when individuals go, there is 

someone there to open the door. We need to have enough non-profit 

counseling agencies so that individuals that have a question do not 

have to seek; they know that they can go to a local urban league, 

a HUD-based counseling agency, to a church, to United Way, that 

those agencies are there and that the necessary questions can be 

answered. 

With financial literacy, you empower families. And those families 

are able to hold onto the wealth that you just spoke about. 

Mr. SCOTT. Now you have examined the language in our bill on 

financial education and financial literacy. 

103

Ms. BOULDIN-CARTER. Yes. 

Mr. SCOTT. Various components of it; the 1–800 number, which 

we have had pretty good discussions on and everybody sees the 

value of that with the two-way fully staffed. Another part of that 

is to make grants available to grass roots organizations, to like the 

Urban League, like AARP, ACORN, NAACP, church groups, that 

have the credibility with the targeted groups. 

Are you satisfied with where we are with the language in that 

bill? Do you see where we might need to add something to it? 

Ms. BOULDIN-CARTER. My thoughts on that language— 

Chairman NEY. Just to note, the time has expired. But if you 

would like to answer? 

Ms. BOULDIN-CARTER. Okay. The only comment I would have on 

that—and I would be happy to talk with you later about it—is that 

we have to recognize that not all organizations are HUD-approved. 

And because they are HUD-approved, that does not mean that they 

are not a good counseling avenue. 

So the only thing that I would like to say is that we need to look 

holistically to individuals that are out there, in the community, 

that are doing the grass roots counseling. Whether they be HUDapproved or not, they are value-added. 

Mr. SCOTT. Yes, one final little point. I was just wondering: do 

you have any apprehensions or concerns about the effectiveness of 

this program if it is placed in HUD, especially in view of some of 

the latest evidence of dismantling of HUD and a lack of housing 

programs going in there, but being dispersed out to Commerce and 

out to Treasury? 

Perhaps we may need to ask the question: is HUD the right 

place to put this program for it to be most successful, in an agency 

that would care about it and make it work? Is HUD that place? 

Chairman NEY. We need a quick wrap up because we are way 

over. 

Ms. BOULDIN-CARTER. And I am just not sure if HUD is the right 

place because of all of the areas that you mentioned and all of the 

things that are going on. And my final comment would be: if it is 

placed with HUD, HUD generally only funds HUD-approved agencies. So that would leave out a lot of community-based agencies 

and faith-based agencies. 

Chairman NEY. Mr. Sherman? 

Mr. SHERMAN. Thank you. Perhaps our two business witnesses 

could try to clarify, at least from their own experience, what kind 

of default rates sub-prime loans tend to have? We have had wildly 

different estimations on that. 

And I realize you folks are at the originating side. But do you 

have any comment on this great dispute of whether the average 

sub-prime loan is 2 out of 100 or 20 out of 100 that go into foreclosure? 

Yes? From the Appraisal Institute or the mortgage brokers? 

Look, if this is outside our expertise, I realize it. 

Mr. NABORS. It is definitely outside my expertise. 

Mr. SHERMAN. Okay. Let me ask a question that is closer to your 

expertise. What is the average YSP that a sub-prime borrower is 

paying? 

104

Mr. NABORS. Again, it can vary from area to area and how they 

want to be compensated. I can only speak for the knowledge I have 

in Ohio. It is usually about a 1 percent yield spread premium. 

I would point out, there was just a Georgetown study that was 

given at the Federal Reserve that found that people that use mortgage brokers, on average, pay a 1 percent lower rate than if they 

go directly to a lender and pay 1 percent less in closing costs and 

fees than if they go directly to a lender. 

Mr. SHERMAN. So you save 1 percent? You save money, even 

though you are paying the yield spread premium, you are paying 

less? 

Mr. NABORS. Even with it included. 

Mr. SHERMAN. Should there be a new disclosure requirement to 

simply tell the borrower exactly what the mortgage broker is receiving? 

Mr. NABORS. Currently, there is. It is both on the good faith estimate and on the HUD–1 settlement statement. 

Mr. HUMMEL. Congressman? 

Mr. SHERMAN. Yes? 

Mr. HUMMEL. I am sorry, but I now have an answer to your last 

question. 

Mr. SHERMAN. Right. 

Mr. HUMMEL. And the answer is actually coming out of a paper 

which I would respectfully ask be submitted within the testimony. 

Mr. SHERMAN. I would hope the chairman would allow that document to be added to the record. 

Mr. HUMMEL. And what is that indicating, from their studies— 

Mr. SHERMAN. I ask unanimous consent that that be made part 

of the record. 

Chairman NEY. Without objection. 

Mr. SHERMAN. Thank you. 

Mr. HUMMEL. And within that document, it indicates a wide 

range that you have been hearing, but anywhere from 10 to 34 percent, from the study that they have conducted. 

Mr. SHERMAN. Ten to 34 percent go into what? I mean, because 

there are so many definitions of default. You can be late; you can 

be in default; you can be ‘‘in foreclosure’’ or you can be to the point 

where you lose the home. Do you know what they are defining 

here? 

Mr. HUMMEL. With all due respect, I am only quoting what they 

indicated. And you can read the report from there. 

Mr. SHERMAN. Okay, well, it will be part of the record. And we 

will all enjoy reading it. 

Now you talk about inappropriate pressure on appraisers. It occurs to me that appraisers work for those placing the loan—you 

know, for the lender or the mortgage broker. And certainly, the 

people involved want the loan to close. Many of them are on commission. 

And the appraiser wants to be selected for the next appraisal. I 

mean, I can see inappropriate pressure. If somebody pulls a gun on 

one of your guys, that is a problem. 

But there is always the implication that the next job will go to 

the appraiser that helped this loan close. And it also occurs to me 

that a lender or mortgage broker who is paying your member douVerDate 0ct 09 2002 09:33 Sep 08, 2006 Jkt 029453 PO 00000 Frm 00112 Fmt 6633 Sfmt 6633 F:\DOCS\29453.TXT HFIN PsN: TERRIE
105

ble or triple the regular rate would be a particularly coveted assignment. 

What do we do to prevent appraisers from being overpaid and selected on a made-as-instructed basis? 

Mr. HUMMEL. That is the essence of what Title IV under 1295 

attempts to do, and that is providing the oversight for those scoundrels that call themselves appraisers that do exactly what you are 

talking about. Now within my professional organization, it is very 

close to what 1295 suggests, is put in place an enforcement procedure so when this is brought to the attention of officials, that this 

person is not acting properly—that being the appraiser—they can 

have enforcement procedures. 

Mr. SHERMAN. Who would bring this to the attention of the regulators? You have a borrower who is getting a loan and thinks he 

is buying a home that is worth $300,000 and is getting to move 

into a home and thinks he has a good deal. 

You have people in the lending professions who are closing the 

loan. You have an appraiser who, in my example, is being paid 

double the regular rate. 

Now who is going to drop a dime on this transaction, at the beginning? Now 5 years later, when you cannot pay and you cannot 

sell the home for the amount of the mortgage, I could see somebody 

being upset. 

Mr. HUMMEL. Right, exactly. And that is the unfortunate situation is that they always find out after the time bomb has already 

exploded. And so what we are looking for, within this Responsible 

Lending Act, is provisions that, number one, put that appraiser on 

notice that we are going to come back, even if it is 5 years later. 

Now unfortunately, that has already hurt someone. Number two, 

put into place the educational requirements at a level, instead of 

the minimum requirements we have now, educational requirements 

that it have the lenders going to the highest level, the qualified 

professional designated appraiser, rather than the State mandated 

minimum. 

The type of legislation like that would encourage the use of these 

individuals. The types of environments that would allow appraisers— 

Mr. SHERMAN. Well, let me propose one idea. I do not think it 

will catch on. What if all certified appraisers were simply selected 

by lot to do an appraisal so that it doesn’t matter how high you 

came in on the last appraisal, for a particular lender has nothing 

to do with whether you get the next job? 

Mr. HUMMEL. That is a system that is used well within the Veterans Administration. And it is a system that FHA had used in the 

past. And I find that to work very well. 

Mr. SHERMAN. Turning to the other two witnesses, first, I have 

a new homebuyers fair in my district next week and I do not know 

if the gentlelady from Inglewood would want to come up or could 

recommend anybody else? 

Ms. GUILFOIL. No, that is too far away. 

It is the valley. Just kidding. 

Mr. SHERMAN. And they ask us why we want to secede. 

106

Ms. BOULDIN-CARTER. We will certainly send you some budgeting 

forms and some cost comparison forms and we will get them to you 

by the end of this week. We will be happy to do that. 

Mr. SHERMAN. Why thank you. 

Ms. GUILFOIL. Do you have a question? I mean, if you were serious, we do do homebuyer education. 

Mr. SHERMAN. Yes, basically if you want to come, we have a 

table for you. And it is in the valley, which just makes it so wonderful. 

Mr. NABORS. Congressman, our California affiliate would be 

happy to attend. 

Mr. SHERMAN. Oh, absolutely. I think you folks may already be 

involved. But let’s close the loop here. And I should be inviting all 

four of you. 

So let me know. 

The question I have for the first two witnesses are: do we need 

more uniform standards for certified housing counselors? 

Chairman NEY. I would note we are out of time. But if you would 

like to conclude answers to that. 

Ms. GUILFOIL. I think it is a simple answer. Yes, I think it is 

critical. 

Ms. BOULDIN-CARTER. I think it establishes a baseline for everybody. 

Mr. SHERMAN. Well, I look forward to seeing you all in the valley. 

And I know that Maxine is going to be our keynote speaker, opening the housing fair. 

Ms. WATERS. I turn down all requests from the valley. 

Chairman NEY. And we are going to hold very strict to 5 minutes 

for Mr. Davis. 

Mr. DAVIS OF ALABAMA. Mr. Chairman, it has been 25, not 5, I 

thought this afternoon. 

Let me kind of conceptually ask you all a little bit about the preemption debate because we have had a lot of questions about the 

specifics of what should be regulated, what should not be regulated. But I want to ask you kind of a broader set of questions. 

Obviously, I think there is a pretty strong sentiment among not 

everyone, but most people on both sides of the aisle of this committee that there should be some kind of national standard. The 

debate arises over whether that standard should be a floor, with 

the States being able to ratchet above that standard, or whether 

that standard should be preemptive, which is what Ney-Kanjorski 

seeks to put in effect. 

Now in most areas of civil law in this country, from products liability to medical malpractice to non-mortgage-based areas of consumer finance to the level of discrimination protection that is provided, to the extent of family and medical leave benefits that are 

extended, in most areas of civil regulation in this country, the 

States have a broad amount of ability to essentially do what they 

want to do, depending on the political climate in their States and 

the public policy sentiments in their States. 

It is unclear to me, frankly, why mortgage lending should be 

treated differently from the way that we conceive of public policy 

in this country. It is unclear to me why there is something unique 

about the mortgage industry that makes it vulnerable to what you 

107

all describe as a patchwork of 50 States, when obviously that level 

of vulnerability exists in virtually every other aspect of American 

society. 

Mr. Nabors, what is your response to that? What is it that is so 

unique about mortgage lending that makes you cry out for preemption? 

Mr. NABORS. Well, I think that buying a home is the American 

dream. And keeping that home is a continuation of the American 

dream. 

And so I think housing has always been treated differently than 

buying a car or anything else and needs to be. We need Federal 

preemption because of not only the differences in the States, but 

the localities. 

It is causing tremendous problems with lenders who do not understand which area they are allowed to go into and which area 

they cannot. And it has caused, in many cases, discrimination. 

Let’s use the City of Cleveland as an example, as compared to 

the City of Dayton in Ohio. Ohio passed a law that says Ohio will 

regulate the mortgage industry. The City of Cleveland and the City 

of Dayton both determined that they wanted to go higher than 

those thresholds. 

In the case of Dayton, the Dayton ordinance was ruled illegal. 

But in the case of Cleveland, it was ruled legal. So we have a conflicting law. 

And another part of the problem is that the way a lender cannot 

tell, okay, can I do business in Cleveland? How am I going to determine, because they are on a national basis, that property is located 

in Cleveland per se? 

Mr. DAVIS OF ALABAMA. Well, let me ask you a question about 

that proposition because I understand your argument, that the 

more regulations, the more regulatory frameworks there somehow 

would shield or a deterrent because people simply do not want to 

deal with such a wide variety of laws. Let me ask you this. 

California, for example, has what I think is regarded as a pretty 

strong statute, a pretty strong regulatory environment. Is there 

any particular indication that the number of people getting mortgages has diminished in California since this statute was enacted? 

Anybody have an answer to that? 

North Carolina. North Carolina has what is viewed as being a 

pretty far-reaching statute. Any indication that the number of 

mortgages extended in North Carolina has diminished since the 

statute was enacted? 

Mr. NABORS. Well, you could say, okay, the number of mortgages 

have not diminished. But have they kept pace with the percentages 

of the increased volume of mortgages in other areas—for example, 

Ohio or Pennsylvania? 

And I do not think North Carolina has kept pace with the other 

States, as far as new mortgages being generated. 

Mr. DAVIS OF ALABAMA. Well, what about New York? New York 

City has a municipal ordinance. The State has a fairly comprehensive State ordinance. Any indication that New York is not a fairly 

robust market for people who want to participate in the mortgage 

industry? 

You ladies are shaking your heads ‘‘no’’ at that. 

108

Ms. BOULDIN-CARTER. No. 

Mr. DAVIS OF ALABAMA. The point that I am making, Mr. 

Nabors, is I understand conceptually that obviously the industry 

wants as little regulation as possible. I understand that. And I understand that the industry wants to respond to as few regulators 

as possible. 

But that would also be the wish of the automobile industry; that 

would be the wish of every industry that I know of in America. And 

the only reason to honor that, it would seem, would be if we somehow thought that there would be a deleterious impact on consumers. 

If there would be an adverse impact on consumers, then we 

would actually constrain the availability of credit. Now what I am 

hearing is that, in the places that have a strong regulatory environment, there is no reason to think that credit has been unfairly 

constrained. There is no reason to think that credit is less available. 

Do you ladies agree with that? 

Ms. BOULDIN-CARTER. I mean, I think that what it does in all of 

the States—and I am from Ohio as well—I think that it does when 

we have regulations in place, it is a protection mechanism for those 

that are preyed upon the most. And if we have regulations that are 

going to be enacted by the Federal Government, then we have a 

standard. 

If you want to go past that standard, that is fine. 

Mr. DAVIS OF ALABAMA. Mr. Nabors, I would pose this question 

to you. Obviously, there is also wide agreement—certainly there 

was from the last panel—that the incidence of sub-prime lending 

in minority communities is not entirely market-based, that there 

may be an element of what we think of as actual discrimination in 

place. 

We all agree that there is sub-prime lending to all kinds of families, older people, all kinds of people who do not necessarily economically fit in the category that would make them prone for subprime. In other words, what we have right now is not working. 

So to some of us, that suggests that we do need a national standard. But it also may suggest that we need to allow the States to 

keep innovating. 

And what I am trying to pinpoint is: what is the adversity to the 

industry, as opposed to just not wanting it? What is the genuine 

adversity to the industry if the States are allowed to regulate until 

somebody, somewhere gets it right? Because what we have right 

now is obviously not working. 

Mr. NABORS. Well, we feel we need a national standard for two 

reasons. I mean, there are a lot of States out there that still do not 

have any regulations. 

Mr. DAVIS OF ALABAMA. Now everybody agrees there needs to be 

a baseline, minimum national standard. 

Mr. NABORS. There needs to be a base. 

Mr. DAVIS OF ALABAMA. Nobody questions that. 

Mr. NABORS. But in many cases, States have gone too far. Georgia would be a fine example. They needed to roll back what they 

had put in because it was actually hurting the consumer. 

So we feel that the best approach is a national platform. 

109

Mr. DAVIS OF ALABAMA. The last point I will make, because my 

time is out too, everyone cites the Georgia example, Mr. Nabors, 

but it strikes me that the Georgia example frankly is the lesser of 

the opposite proposition. Georgia enacted a law that went too far; 

the market responded. The legislature corrected that and now we 

are back to another baseline. That is kind of how the process 

works. 

And frankly, out of 50 States, Georgia is the only example that 

I ever hear of an excessive law that was passed. And it was corrected. 

So my sense, when I hear the Georgia example, is the overwhelming majority of the time, these States have not passed laws 

that have been excessive. And when they do it, the political process 

corrects that. That is kind of how our life works. 

Mr. NABORS. Congressman, New Jersey would be another example. 

Mr. DAVIS OF ALABAMA. Well, okay, let’s take New Jersey. Has 

the level of lending in New Jersey gone down in the last several 

years? Has the availability of lending for people who need it diminished or dried up in New Jersey? 

Mr. NABORS. I believe it has. Yes, sir. 

Mr. DAVIS OF ALABAMA. You believe it has. 

Mr. NABORS. I can get you statistics on that. I do not have the 

exact statistics. But yes, it has. 

Mr. DAVIS OF ALABAMA. All right. 

Thank you, Mr. Chairman. 

Chairman NEY. I want to thank the members of the panel and 

thank the members of the committee here today, everybody for 

their patience and what was a long, but I think very important 

hearing. And without objection, the written statements will be 

made a part of the record for any follow-up. 

The chair notes 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 the witnesses and to 

place the response in the record. 

With that, the hearing is adjourned. 

Thank you. 

[Whereupon, at 4:18 p.m., the subcommittee was adjourned.] 

(111)

A P P E N D I X

May 24, 2005

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