SUBPRIME AND PREDATORY LENDING: NEW

REGULATORY GUIDANCE, CURRENT

MARKET CONDITIONS, AND EFFECTS ON

REGULATED FINANCIAL INSTITUTIONS

HEARING

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MARCH 27, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–18

(

MARKET CONDITIONS, AND EFFECTS ON REGULATED FINANCIAL INSTITUTIONS

SUBPRIME AND PREDATORY LENDING: NEW REGULATORY GUIDANCE, CURRENT

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

35–410 PDF 2007

SUBPRIME AND PREDATORY LENDING: NEW

REGULATORY GUIDANCE, CURRENT

MARKET CONDITIONS, AND EFFECTS ON

REGULATED FINANCIAL INSTITUTIONS

HEARING

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MARCH 27, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–18

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

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 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

CAROLYN B. MALONEY, New York, Chairwoman

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

LUIS V. GUTIERREZ, Illinois 

DENNIS MOORE, Kansas 

4PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

JULIA CARSON, Indiana 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

AL GREEN, Texas 

WM. LACY CLAY, Missouri 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

PAUL E. GILLMOR, Ohio 

TOM PRICE, Georgia 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

STEVEN C. LATOURETTE, Ohio 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

(V)

C O N T E N T S 

Page 

Hearing held on: 

March 27, 2007 ................................................................................................. 1

Appendix: 

March 27, 2007 ................................................................................................. 67

WITNESSES 

TUESDAY, MARCH 27, 2007

Antonakes, Steven L., Commissioner of Banks, Massachusetts Division of 

Banks, on behalf of the Conference of State Banking Supervisors .................. 15

Bair, Hon. Sheila C., Chairwoman, Federal Deposit Insurance Corporation ..... 6

Braunstein, Sandra F., Director, Division of Consumer and Community Affairs, Federal Reserve Board ............................................................................... 13

Calhoun, Michael D., President, Center for Responsible Lending ...................... 49

Dinham, Harry H., CMC, President, National Association of Mortgage Brokers ........................................................................................................................ 55

Fishbein, Allen, Director of Housing and Credit Policy, Consumer Federation 

of America ............................................................................................................. 52

Johnson, Hon. JoAnn, Chairman, National Credit Union Administration ......... 10

Pollock, Alex J., resident fellow, American Enterprise Institute ......................... 57

Reich, Hon. John M., Director, Office of Thrift Supervision ................................ 8

Robbins, John M., Chairman, Mortgage Bankers Association ............................. 54

Rushton, Emory W., Senior Deputy Comptroller, Office of the Comptroller 

of the Currency ..................................................................................................... 12

Silver, Josh, Vice President of Research and Policy, National Community 

Reinvestment Coalition ....................................................................................... 51

APPENDIX 

Prepared statements: 

Antonakes, Steven L. ....................................................................................... 244

Bair, Hon. Sheila C. ......................................................................................... 68

Braunstein, Sandra F. ...................................................................................... 217

Calhoun, Michael D. ......................................................................................... 288

Dinham, Harry H. ............................................................................................ 392

Fishbein, Allen .................................................................................................. 346

Johnson, Hon. JoAnn ....................................................................................... 118

Pollock, Alex J. ................................................................................................. 428

Reich, Hon. John M. ......................................................................................... 97

Robbins, John M. .............................................................................................. 360

Rushton, Emory W. .......................................................................................... 183

Silver, Josh ........................................................................................................ 315

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Statement of the Consumer Mortgage Coalition ........................................... 440

Letter to Chairwoman Maloney and Ranking Member Gillmor from the 

National Association of Federal Credit Unions .......................................... 457

Statement of the National Association of Realtors ........................................ 459

Series of newspaper articles from the Charlotte Observer ........................... 467

Responses from the Comptroller of the Currency to questions submitted 

by Hon. Brad Miller ...................................................................................... 483

Responses from the Federal Deposit Insurance Corporation to questions 

submitted by Hon. Tom Price ...................................................................... 490

Page

VI

Responses from the Board of Governors of the Federal Reserve System 

to questions submitted by Hon. Tom Price ................................................. 494

Responses from the Center for Responsible Lending to questions submitted by Hon. Tom Price ............................................................................ 498

Responses from the Comptroller of the Currency to questions submitted 

by Hon. Tom Price ........................................................................................ 507

(1)

SUBPRIME AND PREDATORY LENDING: 

NEW REGULATORY GUIDANCE, CURRENT 

MARKET CONDITIONS, AND EFFECTS ON 

REGULATED FINANCIAL INSTITUTIONS 

Tuesday, March 27, 2007

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10 a.m., in room 

2128, Rayburn House Office Building, Hon. Carolyn B. Maloney 

[chairwoman of the subcommittee] presiding. 

Present: Representatives Maloney, Watt, Sherman, Gutierrez, 

Moore of Kansas, Hinojosa, McCarthy, Baca, Green, Clay, Miller of 

North Carolina, Scott, Cleaver, Bean, Davis of Tennessee, Ellison, 

Klein, Perlmutter; Gillmor, Price, Pryce, Castle, Biggert, Capito, 

Hensarling, Neugebauer, McHenry, and Campbell. 

Also present: Representative Bachus. 

Chairwoman MALONEY. This hearing of the Subcommittee on Financial Institutions and Consumer Credit entitled ‘‘Subprime and 

Predatory Lending: New Regulatory Guidance, Current Market 

Conditions, and Effects on Regulated Institutions’’ will come to 

order. Without objection, all members’ opening statements will be 

made part of the record. We have two very distinguished panels in 

front of us today and a very key topic to discuss. Unfortunately, we 

must give up this room promptly at 1:45, so the ranking member 

and I have agreed to limit opening statements to the Chair and 

ranking member of the full committee and of this subcommittee. 

And we are going to do everything we can do in our power to end 

the first panel by 12:30 so that we can hear from the second panel. 

This first hearing of the Financial Institutions and Consumer 

Credit Subcommittee in the 110th Congress addresses a critical 

and escalated issue. We are facing, by all accounts, a tsunami of 

defaults and foreclosures in the primary subprime market. In each 

of our districts, our constituents are encountering payment shock 

as their initial teaser rate ends and their loan is reset to a higher 

rate. This is happening at the same time homeowners are having 

a more difficult time refinancing because their homes are no longer 

increasing in value so they are defaulting and going into foreclosure and losing their homes. Every analyst says that the third 

quarter of this year and the fourth could be even worse than the 

rates of default and foreclosure that we have seen to date. By some 

2

estimates, 2.2 million homeowners with subprime loans made 

through 2006 will lose their homes. As this chart shows, rates of 

default and foreclosure, which were decreasing, are now on a sharp 

increase. We also have a dramatic increase in the number of 

subprime loans being packaged into securities from less than 8 percent of the market in 2001 to 20 percent last year, a more than 

doubling in 5 years. In the last month, a very significant downward 

market correction is taking place in the secondary market. Yesterday, for example, Morgan Stanley announced it was auctioning off 

almost $2.5 billion worth of subprime mortgages from New Century, one of the largest subprime lenders. At least four large 

subprime lenders are already in bankruptcy. The debate has moved 

on to whether the turmoil in the subprime market will infect the 

larger economy. 

Against that backdrop, this hearing takes on as its starting point 

the proposed guidance on subprime lending issued jointly on March 

2nd by the five banking Federal regulators, all of whom are testifying today. This guidance has been endorsed by the Conference of 

State Bank Regulators. The guidance is simple, commonsense: Do 

not make loans people cannot repay. It sets out principles for 

subprime lending, which require lenders to assess a borrowers’ 

ability to pay over the whole life of the loan, that is whether the 

borrower can pay the loan at its fully indexed rate, assuming a 

fully amortized payment schedule. The guidance requires proof of 

income and ability to pay, ending no-doc loans or as they are called 

in the business, ‘‘liar loans.’’ At the same time, it allows for flexibility and underwriting for those who may not have the traditional 

indicators of good credit. This guidance tries to strike a balance; we 

want to maximize the dream of homeownership while minimizing 

foreclosures. 

This is a first in a series of hearings planned for this topic. With 

legislation in mind, I have questions for both panels that go beyond 

the guidance itself to what I consider the larger picture. As this 

chart shows, only about a quarter of the primary market in 

subprime loans is directly regulated by the Federal banking regulators. Another quarter, consisting of mortgage subsidiaries of bank 

holding companies, is indirectly regulated by the Fed. And about 

half, consisting of State regulated banks and finance companies, is 

regulated by a patchwork of State laws. 

Assuming the proposed guidance goes into effect for the federally 

regulated quarter of the market, how can it reach the other three 

quarters? That is the essential question of this hearing. Some suggestions have been made, and I would like the witnesses to comment on them. First, as Federal officials have said, and as Senator 

Dodd has pointed out, the Federal Reserve has broad powers under 

HOEPA, the Home Ownership and Equity Protection Act, to regulate unfair and deceptive practices for all lenders. Should the Fed 

use those powers to extend this guidance to the entire market? I 

understand that some of the regulators support such a move. Secondly, who could enforce that for each of the different sectors? Also, 

what about the suggestion of extending the Fed’s direct regulatory 

powers to the mortgage subsidiaries of bank holding companies so 

that quarter of the market also has to follow the principles of the 

guidance. And next what about the State banking regulators, can 

3

they act to promulgate the principles of the guidance nationwide or 

should we have a national subprime standard tracking the guidance and, if so, who should enforce that? 

I am interested in knowing how to extend the guidance to the 

secondary market. Lenders will not make these loans if they cannot 

sell them. I believe that the GSEs as leaders in the secondary market should stop buying loans that do not conform to the guidance, 

as Freddie Mac has already done. How do you think we can best 

extend the principles of the guidance, not only to the GSEs but also 

to the other secondary market participants? Finally, what can we 

do to help current borrowers in a responsible manner? The regulators have encouraged lenders to exercise forbearance, but how do 

they plan to implement that policy, and can Congress help support 

that effort? I know that Senator Dodd is calling together many of 

the participants to come forward with a plan. 

These are pressing problems requiring prompt attention. Of 

course, we wish the regulators had acted sooner, but I applaud 

them for having taken this first step, and I look forward to their 

testimony. I now recognize the ranking member, Mr. Gillmor, for 

10 minutes. 

Mr. GILLMOR. I would like to thank the Chair for calling what 

is a very important hearing today and also I am delighted to see 

such a distinguished panel. I look forward to working with the 

Chair and others in Congress on this very important public policy 

concern. 

I think it is prudent that the committee begin its investigation 

into predatory and subprime lending by looking into how we got 

here and what the regulators have done to date. The title points 

it out but I think it is critical that the committee distinguish between these two types of lending; predatory lending and subprime 

lending are two different animals. Some in Congress and some in 

the press have blurred the line between the issues but they are distinct problems requiring distinct solutions. In the subprime area, 

there is no doubt that the past several years have seen a general 

loosening of underwriting standards. America has one of the highest rates of homeownership in the world. That is good. And we 

ought to continue to encourage homeownership. However, you are 

not doing anyone a favor by putting them in a house with a type 

of mortgage that when interest rates go up, or when they have an 

economic reverse, they are thrown out of their house. 

During then-Chairman Greenspan’s and Chairman Bernanke’s 

appearances before the committee previously, I have made it a 

point to repeatedly voice my concern regarding the proliferation of 

interest-only and other alternative mortgage products, including 

those with negative amortization. After interest rates began rising 

and the housing market began cooling, mortgage originators were 

pressured by the market to match the volume of the height of the 

boom. This was too often accomplished through a loosening of credit standards and clearly consumers were put into homes they could 

not afford just 2 or 3 years down the road. Today, we find ourselves 

on the leading edge of a market correction that has the potential 

to harm many Americans. Some 20 subprime lenders have already 

gone out of business. There will be pressures placed on Congress 

to react swiftly to correct for the problems of subprime loans. And 

4

while it is a serious problem, I think it is important that we take 

the time to do it right and not be too hasty and do it wrong. And 

I am pleased to yield to the distinguished ranking member of the 

full committee, Mr. Bachus. 

Mr. BACHUS. I thank you, Mr. Gillmor, and I also thank Chairwoman Maloney for having this hearing and I look forward to hearing from our panelists. I think when we talk about subprime lending, the first thing we ought to focus on is the benefits of homeownership. I quote President Lyndon Johnson, he said, ‘‘For many 

families homeownership is a source of pride and satisfaction of 

commitment to community life.’’ The benefits of homeownership are 

profound when it comes to not only families but also communities 

and our Nation as a whole. I think that is really why I know regulators, the Administration, this Congress, we have all set as a priority homeownership for as many Americans who have the ability 

and the desire to own their own home. It improves the educational 

performances of the children whose parents own homes and it reduces crime rates—the higher homeownership goes, the lower the 

crime rates go. And over the last probably 30 years or 40 years 

there has been a recognition that all of our families, whether they 

are low income or low middle income, should have the opportunity 

to participate, have the opportunity to own their own home. It is 

kind of interesting that one of the origins of subprime lending actually was in the Community Reinvestment Act of 1977, as far as the 

statute. The CRA mandates—mandates, not suggests—that banks 

and thrifts meet the credit needs of all communities in which they 

are chartered and from which they take deposits, including lowand moderate-income borrowers. And this committee in the past 

has actually had institutions in and questioned them on their commitment and their participation in extending loans, mortgage 

loans, to individuals or families which had less than stellar credit 

ratings or who really did not have good credit ratings, saying that 

should not eliminate them from being able to purchase a home. So 

there has actually been quite a lot of suggestion as well as statutory mandate in that regard. 

As the chairman said, and as the ranking member said, we have 

had a skyrocketing, not only of the number of these loans and the 

percentage of these loans, but we have had so-called innovative 

new loans, the interest-only loan, the adjustable rate loan. And I 

know last September the regulators issued guidance and again 

came back this last month and issued additional guidance. I have 

looked at that guidance, and I would say that guidance, had it been 

followed, would have resulted in a reduction in the number of defaults. Last March, I drew up legislation, worked with now-Chairman Frank, and he and I agreed on about 80 or 90 percent of a 

subprime lending bill. I wish we passed that bill. We had some 

members who did not want any regulation, and we had other members who wanted more regulation than what was in the bill, so 

sadly, we were not able to build a consensus. But it is a shame that 

sometimes we cannot come together and solve our differences. It 

would have benefitted a lot of Americans who at least in the past 

6 or 8 months have taken out loans. 

I will say this about the guidance, and the reason that I last 

March urged this committee to pass a subprime lending bill, some 

5

people said, ‘‘The regulators are taking care of that.’’ They are not 

taking care of it in that there are—they are taking care of the federally-regulated institutions but there are a lot of State institutions, there are States like Alabama, my State, unlike Massachusetts, we are going to have the commissioner of banks from Massachusetts, you all have taken care of a lot of that problem with a 

strong bill but there are about half of the States out there that 

have no legislation. There are others where it is a hodgepodge of 

legislation and it is interfering with people’s ability to get loans. So 

we still need, because the Federal regulators, they do not include 

regulation of mortgage brokers. And as we found anybody who is 

listening to the news, studied what has been going on, knows that 

we need some legislation addressing mortgage brokers. So I know 

this committee is going to keep up its attempts to at least establish 

some type of national standard. 

I was sort of surprised last night, my bill, the bill that I introduced, and I have a written statement that talks about the different things I did in that bill including look at people’s ability to 

pay, but the one thing about that bill, it was modeled after North 

Carolina because everybody said that North Carolina was the gold 

standard. Last night, ABC News had a documentary on the 

subprime lending market and all the people who had lost money 

and the highlight of the thing they showcased in that documentary 

was a community where like 30 or 40 percent of the people in that 

community have lost their homes. The homebuilder had come in 

there and he had built these homes and a lot of people had come 

and they bought these homes and they were underwater, they were 

losing their homes. Guess where it was? It was in Concord, North 

Carolina, with a strong State regulatory, so I do not know what 

happened there. So it obviously shows that even when you have a 

strong State bill, you have guidance from the Federal Government—I do not know, it would be interesting to know how those 

loans occurred and what happened and whether it was just maybe 

outright fraud. 

But I do look forward to your testimony. The first line of defense 

ought to always be the regulators. You are the professionals; we depend on you to address these problems. The only time that I like 

to see this committee legislate is when you need statutory authority or where you—and I will say this about our bank regulators, 

I think they have been on top of this issue and other issues, at 

least they are on top of it now, I will put it that way. But we still 

need in my mind legislation because we have a lot of State—we 

have a lot of institutions and mortgage brokers who are not regulated, that your regulation does not reach. 

So with that, I would yield back the balance of my time. 

Chairwoman MALONEY. The gentleman’s time has expired. I 

yield 2 minutes to Mr. Miller from the great State of North Carolina. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Madam Chairwoman. In the great bipartisan tradition of this committee, I find 

myself agreeing with much of what my colleagues on the other side 

of the aisle have said. I agree with Mr. Gillmor that we do need 

to be careful in developing legislation in this committee, that we 

not rush into something because subprime lending is in the headVerDate 0ct 09 2002 17:20 Jul 27, 2007 Jkt 035410 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\35410.TXT HFIN PsN: TERRIE
6

lines, but we cannot let the need for careful legislation become an 

excuse for inaction. We should pass legislation this year, this is 

something that has been in the works for a long time. I also agree 

with Mr. Bachus, with whom I had many discussions last year 

about this issue, that we need to continue to support homeownership by the middle class. Homeownership is the single best way 

that the middle class builds wealth, by buying a home, by faithfully 

paying a mortgage month after month, by building equity in a 

home, the equity they build becomes the bulk of their life savings. 

The savings rate for families now is slightly less than zero. We cannot take away homeownership as a way for the middle class to 

build wealth. A healthy mortgage market helps middle-class families build wealth by owning a home. It also makes it possible for 

them to borrow money against their home when they face one of 

life’s rainy days. But we have had in this country too much lending 

that does not help middle-class families build wealth but steals 

wealth from them, predatory loans that strip their equity with upfront costs and fees and loans that a middle-class family cannot 

possibly repay, so in 2 or 3 years they have to be back borrowing 

money again, again paying up-front costs and fees, losing more and 

more of their life savings. We have the example of many States 

that have provided effective consumer protections and have struck 

a balance that middle-class families, they need to borrow money to 

buy a home and need to borrow money against their home to deal 

with life’s rainy days. And we should follow and look closely at the 

example of those States and develop a strong national standard 

that protects every American consumer everywhere. Thank you. 

Chairwoman MALONEY. Thank you. I would like now to introduce 

the panel. They are all distinguished. They have distinguished resumes. We are going to put all of the resumes in the record in the 

interest of time. I would first like to introduce the Honorable Sheila Bair, Chairwoman of the Federal Deposit Insurance Corporation, 

for 5 minutes. 

STATEMENT OF THE HONORABLE SHEILA C. BAIR, 

CHAIRWOMAN, FEDERAL DEPOSIT INSURANCE CORPORATION 

Ms. BAIR. Thank you, Madam Chairwoman, Ranking Member 

Gillmor, and members of the subcommittee. Thank you for holding 

this hearing on the important subject of subprime lending and 

predatory practices in the subprime mortgage market. Homeownership contributes to neighborhood stability and is an important way 

that many individuals and families build wealth. 

Traditionally, homeownership has been a low-risk, stable investment representing the largest asset for the typical family. Government policies, ranging from tax incentives to the formation of government-sponsored enterprises, have long encouraged homeownership in recognition of its important individual and societal benefits. 

Mortgage lending practices that build debt, rather than wealth, 

however, not only harm individual homeowners, but also undermine these important social benefits. 

The mortgage markets have changed significantly in recent 

years, especially for subprime mortgages. Intense lender competition, historically low interest rates, rapid home price appreciation 

and, crucially, investor demand for mortgage paper facilitated the 

7

dramatic growth in the subprime market between 2003 and 2005. 

New mortgage products were specifically designed to attract borrowers with low initial rates which would then reset to much higher interest rates for the remainder of the loan term. These types 

of loans were simultaneously attractive both to borrowers, who 

could obtain larger loans at lower cost for at least a short time, and 

to investors in mortgage loan pools, who were attracted to the 

above-market yields. Particularly pervasive were so-called 2/28 and 

3/27 hybrid ARMs, which combined a fixed introductory rate for the 

first 2 to 3 years followed by significant upward adjustments. 

There is no doubt that many subprime borrowers have benefitted 

from the expansion of mortgage credit. However, rather than building wealth, many other borrowers are now struggling to keep their 

homes. Repeat refinancings have taken equity from their homes 

and adjustable rate features have challenged their ability to continue making payments. In previous years, many of these borrowers could have refinanced their mortgages or sold their homes 

at a profit to repay their debt in full. Now, as home prices have 

stagnated or even declined in many areas of the country, more borrowers find themselves trapped in mortgages they cannot afford to 

pay. 

In 2006, almost three quarters of non-agency securitized 

subprime mortgage originations were adjustable rate mortgages, 

primarily 2/28 and 3/27 hybrid ARMs. Estimates are that at least 

2.1 million subprime hybrid ARMs are outstanding today. This 

means that approximately 1.7 percent of U.S. households have 2/

28 or 3/27 loans. Subprime borrowers are particularly at risk because they already have very little financial cushion. Subprime borrowers spend nearly 37 percent of their after-tax income on mortgage payments and other costs of housing, roughly 20 percentage 

points more than prime borrowers spend. Of ARMs originated in 

2006, a full 24 percent have negative home equity, in other words, 

borrowers owe more than their homes are worth. Financial stress 

on subprime borrowers with adjustable rate mortgages will increase further as rates reset. The FDIC is concerned that the 

subprime borrowers who have taken these loans will face an array 

of serious financial problems. 

In the past year, the FDIC and the other Federal financial institution regulatory agencies issued guidance regarding the risks of 

non-traditional mortgages to address concerns about interest-only 

and payment-option ARMs, which are offered primarily to prime 

and Alt-A borrowers. Since adjustable rate products in the 

subprime market raise similar and additional concerns, the Federal 

banking agencies also proposed a statement on subprime mortgage 

lending. Both of these documents restate two very fundamental 

lending principles: A loan should be approved based on a borrowers’ ability to repay at the fully indexed rate; and borrowers 

should be provided with early disclosures to fully understand the 

costs and terms of the loan. In addition, in January, the FDIC 

issued a supervisory policy on predatory lending. This policy describes certain characteristics of predatory loans and reaffirms that 

such practices are inconsistent with safe and sound lending, and 

undermine individual, family, and community well-being. 

8

The FDIC aggressively addresses predatory lending through examinations and supervisory actions. When examiners encounter 

loans with predatory characteristics, the FDIC takes whatever supervisory actions are necessary to effect correction. Our examination process has led to the issuance of more than a dozen formal 

and informal enforcement actions that are currently outstanding 

against FDIC-supervised institutions that failed to meet prudent 

mortgage lending standards. 

Widespread credit distress in the subprime mortgage market, 

with especially pronounced problems among independent mortgage 

lenders, suggests the need for a comprehensive response that 

assures that all lenders are subject to certain baseline requirements. Guidelines and other supervisory standards promulgated by 

Federal bank regulators apply to only a portion of the market. 

Moreover, the lack of uniform standards creates negative competitive pressures on insured institutions. A national anti-predatory 

lending standard would help assure basic uniform protections for 

all borrowers as well as create a more level competitive playing 

field for regulated entities. 

There are two possible approaches to creating and implementing 

an anti-predatory lending standard that would apply across the 

mortgage lending industry. First, Congress could pass a law that 

establishes a set of anti-predatory lending standards. A statutory 

approach to establishing such standards could draw from our current and proposed Federal regulatory guidelines, as well as existing 

State anti-predatory lending statutes. It should raise the bar by 

strengthening protections available to borrowers. At its core, it 

should address at least two important areas; one, the ability of the 

borrower to repay the loan; and, two, misleading marketing and 

disclosures that prevent borrowers from fully understanding the 

costs and terms of loan products. Alternatively, or in conjunction 

with the statutory process, the Federal Reserve Board could exercise rulemaking authorities it has under the Home Ownership and 

Equity Protection Act to address abusive practices by all mortgage 

lenders for all loans, not just those that are high cost. We understand that the Federal Reserve is in the midst of reviewing the regulations that implement this Act. The FDIC would strongly support 

them should they decide to make greater use of authorities provided by this law. 

Many abuses might be more effectively addressed by regulation 

rather than statute, especially in areas— 

Chairwoman MALONEY. The gentlelady’s time has expired. 

Ms. BAIR. Okay, sorry. 

[The prepared statement of Chairman Bair can be found on page 

68 of the appendix.] 

Chairwoman MALONEY. The Honorable John Reich, Director of 

the Office of Thrift Supervision. 

STATEMENT OF THE HONORABLE JOHN M. REICH, DIRECTOR, 

OFFICE OF THRIFT SUPERVISION 

Mr. REICH. Good morning, Madam Chairwoman, Ranking Member Gillmor, and members of the committee, I am delighted to be 

here today to have the opportunity to present to you the views of 

the Office of Thrift Supervision relating to subprime and predatory 

9

lending. I have been involved in the banking business for the past 

46 years. During this time, I have witnessed six economic cycles 

characterized by recession, recovery, growth, and decline. During 

one turbulent period back in the 1981/1982 time period, the prime 

rate hit 21 percent, perhaps one of the most alarming periods of 

my own career in the banking business. These experiences have 

left me with two steadfast beliefs about banking and bank supervision: one, that you cannot have too much money in your loan loss 

reserves; and two, you cannot have too much money in your capital 

account. A further precept that I hold is that you also have to protect your customers for without them you have nothing. 

Each of these principles is relevant in the context of today’s discussion. Based on these three guideposts, I believe that I can report 

to you that the vast majority of the institutions that we regulate 

are conducting their banking activities in a safe and sound manner, consistent with consumer production laws and regulations. 

However, we are in the midst of a transition in the economic cycle 

that has troubling activity, particularly from a consumer’s standpoint. The result is a difficult correction in response to certain unchecked lending practices. 

As Members of Congress, I would expect that you have three 

major concerns: your constituency; the financial industry that you 

oversee; and where do we go from here. In my written statement, 

I detail our oversight of subprime mortgage products and OTS’ efforts to combat predatory lending and promote consumer education 

and financial literacy. I want to speak to the nature of the problem 

we are facing, the causes of the problem, and some thoughts on 

how it might be fixed. 

First, two issues obviously have been identified, subprime lending and predatory lending, but these are not synonymous. Certainly not all subprime lending is predatory and not all predatory 

lending is to the subprime market. Appropriately underwritten 

loans to subprime borrowers are in fact important and legitimate 

elements of our financial economy. Timely and appropriate regulatory responses can address issues of predatory lending in our regulated financial entities without restricting credit to worthy borrowers. A significant OTS concern, that I believe is shared by all 

agencies, is striking the right balance. We want to promote responsible lending by the institutions that we regulate. We do not want 

to divert subprime borrowers to less regulated or unregulated lenders. We need to ensure sound underwriting of subprime loan products, which will help to weed out predatory lending. 

Next, the problem of where our subprime lending activities are 

concentrated; it is not primarily in the thrift industry. Current 

total national mortgage debt is approximately $10 trillion. 

Subprime mortgages account for about 13 percent or $1.3 trillion 

of this amount of the national mortgage debt; 2006 data show that 

19 of our 845 thrifts, about 2.2 percent of the total number of 

thrifts that we supervise, have significant subprime lending operations defined as at least 25 percent of capital. These institutions 

hold $35 billion in subprime mortgages equal to about 5 percent of 

total thrift mortgage holdings. Nationwide, there are about 125 

subprime lenders out of the total universe of charters of about 

8,700, so about 1.4 percent of all institutions nationwide have sigVerDate 0ct 09 2002 17:20 Jul 27, 2007 Jkt 035410 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\35410.TXT HFIN PsN: TERRIE
10

nificant subprime programs—loans are originated through mortgage bankers. While there is not consistent data on the number of 

licensed mortgage brokers in the United States, there are many 

more individuals working as loan originators and brokers without 

any type of license or registration. In addition, testing and education requirements are suspect and background checks may be— 

Chairwoman MALONEY. The gentleman’s time has expired. 

[The prepared statement of Director Reich can be found on page 

97 of the appendix.] 

Chairwoman MALONEY. Next, the Honorable JoAnn Johnson, 

Chairwoman of the National Credit Union Administration. 

STATEMENT OF THE HONORABLE JOANN JOHNSON, 

CHAIRMAN, NATIONAL CREDIT UNION ADMINISTRATION 

Ms. JOHNSON. Thank you, Madam Chairwoman, and members of 

the subcommittee. I am Chairman of the National Credit Union 

Administration, an independent Federal agency that regulates or 

insures over 8,400 credit unions with 87 million members. Home 

mortgage lending has long been a part of the way credit unions 

serve their members. Approximately 68 percent of all federally-insured credit unions offer mortgage loans. Those that do not tend 

to be small institutions that cannot afford the required expertise or 

infrastructure. Additionally, the statutory 10 percent loan to one 

borrower limitation makes it more difficult for a small credit union 

to grant large mortgage loans. Credit unions represent 9 percent of 

all mortgage loans outstanding in federally-insured depository institutions. When considering all mortgage lending, including that 

by non-federally-insured lenders, credit unions originated 2 percent; 61 percent of these credit union mortgage loans are fixed rate, 

while 39 percent are adjustable. 

Because mortgage lending has evolved to now include hybrid or 

exotic mortgage products, NCUA has modified the way in which we 

collect information about mortgage lending on our 5300 Report, 

which is the agency’s quarterly reporting tool. This change will enable NCUA to gain more precise information about credit union 

mortgage lending and will enhance our oversight capability. 

The House Financial Services Committee has properly voiced 

concern about the underwriting standards and quality of consumer 

disclosures regarding hybrid loans, including 2/28 and 3/27. NCUA 

shares the committee’s concerns about riskier hybrids that may be 

detrimental to consumers, particularly borrowers in the subprime 

market. Fortunately, these hybrid loans are not prevalent in credit 

union portfolios, partially because of the statutory provisions that 

prohibit prepayment penalties and establish a limit on interest 

rates. 

Demand for mortgages by credit union members remains high. 

Mortgage loans led all types of loan growth in 2006 and comprise 

almost half of all credit union loans. Given NCUA’s emphasis on 

safety and soundness, we continue to closely monitor performance 

indicators in the mortgage lending area. One indicator of a loan’s 

quality, delinquency rates, are relatively low. Delinquencies greater 

than 30 days are at .99 percent and 60 days stands at .34 percent. 

Charge-ops, which occur when a borrower cannot pay, are at .03 

11

percent. While these indicators are good, NCUA is committed to a 

high degree of vigilance in this area. 

NCUA has also issued guidance to credit unions on the topic of 

subprime lending. Beginning in 1995, NCUA recognized the emergency of risk-based lending and outlined the advantages and disadvantages of such lending to borrowers with subprime credit. In 

1999 and again in 2004, NCUA reiterated the value of family-managed risk-based lending programs as a way to reach out to all 

members, including those in the subprime area. At the same time, 

we reminded credit unions of the importance of stringent underwriting and monitoring processes. Recognizing potential problems 

in 2005, NCUA specifically addressed emerging risks in exotic 

mortgage lending by issuing a supervisory alert to all examiners 

and henceforth to all credit unions. This served notice that NCUA 

examiners would be monitoring trends in areas of high value appreciation and evaluating both interest rate risks and credit risks 

associated with these newer mortgage products. 

In concert with my fellow Federal regulators, non-traditional 

mortgage guidance was issued in 2006 and work is now underway 

on proposed subprime lending guidance. As this new guidance is 

developed, NCUA is committed to making certain that disclosures 

are improved and consumer protection strengthened, particularly 

in helping avoid payment shocks and negative amortizations. Those 

consumer protections are a vital part of our discussion today. Credit unions must comply with the same Federal regulations governing 

mortgage lending as do other federally insured institutions, including Truth in Lending, RESPA, OPA, the Federal Disaster Preparedness Act, the Fair Housing Act, and OMDA. 

Additionally, NCUA and the credit union industry have devoted 

significant resources to assist members in disadvantaged communities. This commitment has manifested itself primarily through 

affordably priced loans and financial education. Regarding financial 

education, I would strongly suggest that while it is not a panacea, 

financially literate consumers can be better consumers when it 

comes to avoiding the pitfalls presented by this rapidly changing 

market. NCUA administers the— 

Chairwoman MALONEY. The gentlelady has 30 seconds remaining. 

Ms. JOHNSON.—revolving loan fund, which makes grants to lowincome credit unions to assist with financial literacy and wealth 

building. 

NCUA has closely monitored recent dislocation in the subprime 

market. NCUA is concerned that predatory lending in other areas 

of the marketplace may increase the debt burden on credit union 

members and negatively affect credit union asset quality. Even 

though it represents a relatively small piece of the overall pie, the 

mortgage lending that credit unions do is safe and sound. 

Thank you very much. 

[The prepared statement of Chairman Johnson can be found on 

page 118 of the appendix.] 

Chairwoman MALONEY. Thank you. Our next panelist, Mr. 

Emory Rushton, is the Senior Deputy Comptroller from the Office 

of the Comptroller of the Currency. 

12

STATEMENT OF EMORY W. RUSHTON, SENIOR DEPUTY COMPTROLLER, OFFICE OF THE COMPTROLLER OF THE CURRENCY 

Mr. RUSHTON. Thank you, Chairwoman Maloney, Ranking Member Gillmor, and members of the subcommittee. I appreciate this 

opportunity to talk with you about mortgage lending in national 

banks and our supervision of it, especially subprime lending that 

is so much in the news today. I bring the perspective of 42 years 

as a national bank examiner—through good times and bad. During 

that time, I have had the opportunity to examine banks throughout 

the country, and I have spent the last decade here in Washington 

working on bank supervision policy. 

We at the OCC are very concerned about the problems in the 

subprime market. Yet, it is easy to forget in this environment that 

these loans have enabled millions of Americans, including many 

low- and moderate-income people, to become homeowners for the 

first time. Most of these folks are paying their loans on time, and 

we expect they will continue to do so. Morever, as Ranking Member 

Gillmor has observed, subprime loans are not inherently predatory 

or abusive. Those that are have no place in the banking system. 

When unfair treatment does occur, we in the government have a 

distinct responsibility to help make it right, and we take that responsibility very seriously. However, OCC bank supervision is 

aimed primarily at preventing abuse before it occurs, before damage is done. 

OCC became concerned in 2002 about the growth of exotic mortgages that carried the potential for a big payment shock, and we 

responded in an escalating fashion, privately and publicly. By 2005, 

we were instructing our examiners to more aggressively address 

the risk of these products during their examinations of national 

banks because we concluded that standards had slipped far 

enough. This was at a time, I might add, when home prices were 

still going up. That intervention is one reason that you will find so 

few payment-option negatively amortizing loans in national banks 

today. Shortly after that, we initiated the interagency process that 

resulted in the non-traditional mortgage guidance that was issued 

last fall. 

Our attention today, though, is focused on the subprime sector 

and especially on hybrid ARMs, which now make up the bulk of the 

subprime business. By their very nature, subprime borrowers who 

take out these loans are especially vulnerable to payment shock. 

We have addressed this and other key features of these loans in 

the guidance that is now out for comment. 

The subcommittee’s invitation letter specifically asked what we 

expect the results of that guidance to be, both good and bad. To be 

sure, there needs to be a return to more realistic underwriting 

standards, and the guidance should have that positive effect. It 

makes no sense to make loans that cannot be repaid. But we cannot ignore the likelihood that tighter underwriting will mean fewer 

and smaller loans. 

I want to emphasize, Madam Chairwoman, that national banks 

are not the dominant players in the subprime market. Last year, 

they produced less than 10 percent of all new subprime mortgages, 

and their delinquency rates on these loans are about half the inVerDate 0ct 09 2002 17:20 Jul 27, 2007 Jkt 035410 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\35410.TXT HFIN PsN: TERRIE
13

dustry average. We know of some institutions that have actually 

abandoned their plans for a national bank charter rather than subject their subprime lending to supervision by the OCC. But of 

course these numbers do not matter much to somebody who is facing losing their home through foreclosure. OCC strongly encourages all national banks to work with troubled borrowers to help 

them resolve their problems. 

It is an unfortunate fact, though, that regulatory oversight tends 

to be less rigorous in precisely those parts of the financial system 

where practices are most problematic. We hope the guidance that 

we have proposed will inspire comparable measures by other regulators, as in fact did happen with the nontraditional guidance we 

issued last fall. 

Madam Chairwoman, our capital and credit markets have enabled record levels of homeownership. We play an important role 

in overseeing those markets and in taking action when necessary 

to preserve equilibrium and balance. But our authority does not extend to important components of that market, including many 

originators, aggregators, securitizers, and funding sources. 

In conclusion, let me assure you that my colleagues and I intend 

to preserve bank safety and soundness and fair treatment of customers, and we try to do this through supervision that stems abuse 

without thwarting healthy innovation. Consumers deserve no less. 

We look forward to working with the subcommittee on these issues. 

[The prepared statement of Comptroller Rushton can be found on 

page 183 of the appendix.] 

Chairwoman MALONEY. Ms. Sandra Braunstein, Director of the 

Division of Consumer and Community Affairs of the Federal Reserve Bank. 

STATEMENT OF SANDRA F. BRAUNSTEIN, DIRECTOR, DIVISION OF CONSUMER AND COMMUNITY AFFAIRS, FEDERAL 

RESERVE BOARD 

Ms. BRAUNSTEIN. Thank you. Chairwoman Maloney, Ranking 

Member Gillmor, and members of the subcommittee, I appreciate 

the opportunity to discuss how current subprime practices and 

products effect homeownership and foreclosure. Subprime lending 

has grown rapidly in recent years. In 1994, less than 5 percent of 

mortgage originations were subprime, but by 2005, about 20 percent of new mortgage loans were subprime, many of which were 

adjustable rate mortgages. Many of these loans have increased 

homeownership rates. However, the largest recent increase in delinquency and foreclosure rates are for subprime borrowers with 

ARMs, especially those loans with risk-layering features, such as 

combining items like low documentation loans with simultaneous 

seconds. There are indications that the market is addressing these 

issues for new borrowers by tightening underwriting standards. 

However, we remain very concerned that over the next 1 to 2 years 

existing subprime borrowers, especially those with more recently 

originated ARMs, and those with layered risks, may face more difficulty. As interest rates reset for these loans, some consumers may 

have difficulty with the larger monthly payments. Therefore increases in foreclosure and delinquency rates are likely to continue. 

14

The Board has taken several actions to address concerns in the 

subprime market. It is important to remember that overly broad 

actions run the risk of constricting the market and returning to a 

situation where some borrowers have very limited access to credit. 

We want to encourage, not limit, mortgage lending by responsible 

lenders. 

I would like to note several of our activities in this regard. First, 

the Federal Reserve conducts regular examinations of its institutions for safety and soundness and for compliance with consumer 

protection laws. When we find problems in these institutions, we 

require corrective action by bank management and, if necessary, 

we use enforcement tools to address the problems. 

Second, in response to witnesses in underwriting and risk management at the institutions we supervise, we have issued guidance 

in concert with the other Federal banking agencies. This includes 

the recent proposed guidance on subprime mortgages. This guidance applies to depository financial institutions and the subsidiaries of banks and bank holding companies. The guidance discusses 

prudent underwriting practices, including the capacity of the borrower to repay the loan at the fully indexed rate. The guidance also 

reminds institutions to clearly communicate the risks and features 

of these products to consumers in a timely manner even before and 

when application is taken. 

Third, in 2001, the Board revised the HOEPA rules in response 

to renewed concerns about predatory lending. In this rulemaking, 

the Board utilized its authority to prohibit unfair or deceptive practices. Specifically, the Board issued rules that prohibit a HOEPA 

lender from refinancing one of its own loans with another HOEPA 

loan or flipping within the first year. We also adopted a prohibition 

on demand notes for high cost closed-in mortgages. These revisions 

to HOEPA are cases where the Board determined that they could 

write bright line rules prohibiting unfair practices. However, because determination of unfairness or deception depends heavily on 

the facts of an individual case, it is very difficult to craft rules 

without unintended consequences. The Board has undertaken a 

major review of Regulation Z which implements the Truth in Lending Act of which HOEPA is a part. During this review, the Board 

will determine if there are opportunities to further utilize our 

HOEPA authority. 

Fourth, the Community Affairs offices in the Federal Reserve 

Banks have responded to mortgage delinquency and foreclose in 

ways that are directly responsive to the consumer needs in specific 

markets. Various initiatives conducted in concert with local community partners have identified responsive strategies and helped 

troubled borrowers. A list of these and other Federal Reserve initiatives are included with my written testimony. We will continue 

to pursue opportunities to help borrowers and preserve access to 

responsible lending. 

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

217 of the appendix.] 

Chairwoman MALONEY. Thank you. Mr. Steven Antonakes, commissioner of the Massachusetts Division of Banks, on behalf of the 

Conference of State Banking Supervisors. Thank you for being 

here. 

15

STATEMENT OF STEVEN L. ANTONAKES, COMMISSIONER OF 

BANKS, MASSACHUSETTS DIVISION OF BANKS, ON BEHALF 

OF THE CONFERENCE OF STATE BANKING SUPERVISORS 

Mr. ANTONAKES. Thank you. Good morning, Madam Chairwoman, Ranking Member Gillmor, and distinguished members of 

the subcommittee and staff. My name is Steven Antonakes, and I 

serve as the commissioner of banks for the Commonwealth of Massachusetts. I am also the chairman of the State Liaison Committee, 

making me the newest voting member of the FDIC. It is my pleasure to testify today on behalf of the Conference of State Bank Supervisors. 

The current state of our mortgage market, and the subprime 

market in particular, have been well covered in the media. What 

has received less coverage, and is not as well understood, is the 

interplay between State and Federal mortgage supervision. In addition to regulating banks, 49 States plus the District of Columbia 

currently provide regulatory oversight of the residential mortgage 

industry. In recent years, the States have been working diligently 

to improve supervision in this area. 

In addition to the extensive regulatory and legislative efforts, 

State attorneys general and State regulators have cooperatively 

pursued unfair and deceptive practices in the mortgage market. 

Through three nationwide settlements alone, State regulators have 

returned over $800 million to homeowners. But successes are sometimes better measured by actions that never receive media attention. States routinely examine mortgage companies for compliance 

not only with State law but for compliance with Federal laws as 

well. These examinations are an integral part of a balanced regulatory system. Again, in 2006 alone, States took 3,694 enforcement 

actions against mortgage brokers and mortgage lenders. 

In an effort to further improve State supervision of the mortgage 

industry, significant time and resources have been dedicated to the 

development of a national mortgage licensing system. Recognizing 

gaps in mortgage supervision, the States are creating this licensing 

system to improve the efficiency and the effectiveness of the U.S. 

mortgage market and to fight mortgage fraud and predatory lending. Scheduled to go live on January 1, 2008, this system will create a single record for every State-licensed mortgage company, 

branch, and individual. 

Despite all the actions taken by the States on an individual 

basis, and on a coordinated nationwide basis, we are frustrated in 

our attempts to protect consumers by the preemption of State consumer protection laws. State legislatures have the right to expect 

the laws they pass to be followed by companies operating in their 

States. Thirty-seven States have acted by passing predatory lending laws only to have them voided by the OCC and OTS rulings. 

In regards to regulatory policy, recent developments have been 

more positive and more productive. Both the State and Federal 

guidance on non-traditional mortgage products provide sound underwriting standards and consumer protection provisions. As of 

today, 29 States plus the District of Columbia have adopted the 

parallel guidelines developed by CSBS and the American Association of Residential Mortgage Regulators or ARMOR. Ultimately, 

CSBS expects all 50 States to adopt the guidance. Moreover, CSBS 

16

and ARMOR strongly support the recently proposed interagency 

statement on subprime mortgage lending. Personally, I would like 

to thank FDIC Chairman Bair for her leadership on the development of this statement and for ensuring an appropriate role for 

State supervisors. CSBS and ARMOR are already working to develop a parallel statement for State regulators to use with their supervised entities. 

In my written testimony, I have outlined several recommendations for your reference as Congress seeks to improve the residential mortgage market. In addition to Congress’ focus, the current 

challenges for the mortgage industry have drawn State attention 

as well. As I speak, the Massachusetts legislature is holding a 

hearing discussing the licensing of mortgage loan originators and 

the extension of the Massachusetts State Community Investment 

Act law to non-bank mortgage lenders. We recognize that there are 

regulatory weaknesses in our current system of both State and 

Federal supervision. It is important that we debate and discuss 

these weaknesses. However, we need to move towards finding common solutions. Ultimately, successful regulation of the mortgage industry requires enhanced coordination among the States and both 

State and Federal regulators. Improved coordination and communication will increase accountability among mortgage brokers and 

lenders and provide consistency across the industry to the benefit 

of the borrower. For example, CSBS would like to work with our 

Federal counterparts to encourage our supervised entities to reach 

out to those consumers whose adjustable rate mortgages are scheduled to reset this year. 

Thank you again for your invitation to testify today and for the 

subcommittee’s interest in improving our mortgage market system. 

I look forward to your questions. 

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

244 of the appendix.] 

Chairwoman MALONEY. Okay, without objection, the written 

statements of all of the witnesses will be made part of the record, 

and I thank all of you for your testimony and insights. 

Chairman Bernanke and Roger Cull have agreed that the Federal Reserve has broad powers under HOEPA to regulate unfair 

and deceptive practices for all lenders. I would like to ask all of the 

panelists, should the Fed use those rulemaking powers to extend 

this guidance to the entire market? I know that Chairwoman Bair 

testified in support of such of an action, but I would like to hear 

from each of you for your particular view on this question. Would 

you like to start, Chairman Bair? 

Ms. BAIR. Yes, we would defer to the Fed and the decision they 

make, and I understand they have it under review, but we would 

strongly support them if they did decide to use those authorities. 

Chairwoman MALONEY. Okay. Director Reich? 

Mr. REICH. I, too, would be supportive of the Fed taking a look 

at HOEPA to determine if it can be expanded in a way that would 

not result in a credit crunch to worthy borrowers. 

Chairwoman MALONEY. Chairwoman Johnson? 

Ms. JOHNSON. Uniformities would certainly have its advantages 

and so it would certainly be something we would support. It is not 

17

really my area; we regulate in the credit union area, but seemingly 

the uniformity would be beneficial. 

Chairwoman MALONEY. Mr. Rushton? 

Mr. RUSHTON. The OCC would certainly support and contribute 

to the effort by the Fed if they choose to go in that direction. I 

think, as with the guidance that we have issued in this area, the 

tricky part is the writing of rules that weed out the predatory and 

abusive loans without restricting legitimate credit to creditworthy 

borrowers. But we would support their efforts. 

Chairwoman MALONEY. Okay, Ms. Braunstein? 

Ms. BRAUNSTEIN. Yes, as I said in my testimony, we do plan to 

look at our authority under that statute and to look for opportunities to utilize that authority which would cover all lenders. However, as some of the other panelists have alluded to, there are some 

issues, and it is not an easy process. We need to make sure that 

whatever rules are written are well-calibrated and are very 

thoughtful and are done in such a way to, as Mr. Rushton just said, 

to take care of the bad acts but not overly constrict the markets 

because we do not want to end up with a situation where people 

cannot get responsible loans. 

There are some dangers under HOEPA, and we are going to look 

at that. I am not saying they would stop us, but there are some 

things to keep in mind. One is that HOEPA does carry with it the 

way for people to file private lawsuits so that dictates even more 

that we have to be careful about what we write because it is not 

a matter of the banks being sued that concerns us as much as if 

there is a threat of lawsuits taking place. And HOEPA also carries 

with it assignee liability, which means anybody who touches a loan 

could potentially be sued, that could end up cutting off constraining 

credit because what you may find if there is not a clear, bright line 

drawn in any rule that is written, the lenders may get nervous and 

decide it is not worth doing that kind of credit at all and that 

would be true of secondary market participants, securities, all 

along the line because of the assignee liability. 

So we are going to be looking, as I say, at this authority. We 

think that it is definitely worth looking at, and we will try to figure 

out a way to deal with this but it is not an easy undertaking. 

Chairwoman MALONEY. But don’t you think the guidance strikes 

the right balance now? 

Ms. BRAUNSTEIN. I think for guidance, the benefits of doing guidance is that it is not enforceable, people cannot sue on the basis 

of guidance, and guidance is a tool that can be done very flexibly. 

And the guidance we try to write is principles based so that it 

would apply to more—because the other problem is the industry is 

very innovative and creative, as we have seen over the years, and 

they are constantly coming up with new and evolving products. If 

we craft things that are too narrow in scope and apply only to specific products, then the industry comes up with something else, so 

it is a matter of trying to craft something that is broad enough to 

take care of the bad actions but not overly constrict credit. We will 

certainly be looking at what is in the guidance to see if some of 

that can be moved into rules, but I think that is going to take some 

analysis and study on our part and a lot of conversations with industry and the consumer side and the other regulators. 

18

Chairwoman MALONEY. But don’t you think that loans barred by 

the guidance should not be made, simply put it merely says people 

who cannot afford the loan should not take out the loan, don’t you 

think that those— 

Ms. BRAUNSTEIN. Well, I think a basic tenet of lending is that 

borrowers should have the capacity to repay. The problem with 

crafting that into rule, that could end up banning all asset-based 

lending. There are some cases where asset-based lending may not 

be a bad thing for certain income levels. 

Chairwoman MALONEY. But then the guidance takes in mitigating factors. 

Ms. BRAUNSTEIN. Yes, that is true and these are the kinds of 

things we will be looking at. 

Chairwoman MALONEY. When do you expect to come forward 

with your decision? What is the timetable? 

Ms. BRAUNSTEIN. We have started our review of Truth in Lending. We have held hearings; this summer we held hearings all 

around the country to gather information on this. We are going 

through that information. We are doing a number of other things. 

I do not have an exact timetable to give you. We are proceeding 

and we are being thoughtful about it, and I cannot give you an 

exact end time. 

Chairwoman MALONEY. And the guidance requires ability to 

repay at the fully indexed rate, is that not a good principle for the 

entire market? 

Ms. BRAUNSTEIN. Basically, I think that is true, but again we are 

going to have to look at and study these underwriting practices to 

make sure that—if we codify that in a regulation, it is different 

than putting in guidance, we just want to make sure that we do 

not end up constraining responsible credit. 

Chairwoman MALONEY. Commissioner Antonakes, and then my 

time is up. 

Mr. ANTONAKES. Certainly, I would personally welcome such an 

approach, and we would hope that we could work closely with the 

Fed to best coordinate supervisory as well as enforcement efforts. 

Chairwoman MALONEY. Thank you, and I now recognize the 

ranking member, Mr. Gillmor from Ohio. 

Mr. GILLMOR. Thank you, Madam Chairwoman. You have all 

been in the industry for a long time, and you have seen the up’s 

and down’s in the economy. Right now we have, by every objective 

standard, a very good economy. We have had continual expansion, 

and unemployment is low, but these are good times. I want you to 

give me a little projection of what you think will happen if we do 

not have good times? For example, leading indicators declined in 

March, that is the third consecutive month leading indicators have 

gone down, and that is the first time that has happened since the 

recession of 2001. And you also have a lot of adjustable rate mortgages that are going to be resetting later this year, or resetting 

next year, so my question is, considering the great increase in foreclosures and delinquencies we already have, what is your assessment of what happens if we do go into a recession? If I could just 

get a quick response from each of you. Chairman Bair? 

Ms. BAIR. Well, our economists have done a lot, there is a strong 

correlation between delinquencies and defaults in these subprime 

19

hybrid ARMs and what is going on with home price appreciation 

or depreciation, as the case may be. Certainly you have seen some 

problems in Ohio, so they are definitely connected. At this point, 

we think the problems in subprime are contained to subprime. We 

do not see a lot of spillover, unless something unexpected happens. 

Obviously, we are monitoring it closely, but we do not see any 

broader implications at this point. 

Mr. REICH. I am going to agree with Chairman Bair. I think that 

so far the problems have been limited to the subprime market. I 

was looking at statistics on past dues on various types, the prime 

past dues continue to be very, very low but not in the subprime 

market and the big question is, will there be a contagion or spillover effect if the economic situation in general deteriorates, if there 

are losses of jobs throughout the economy? But at the moment, we 

are not expecting a contagion effect to spill over into other areas 

of the economy. 

Mr. GILLMOR. Chairman Johnson? 

Ms. JOHNSON. We believe that our proactive examination process 

and our guidance that was issued early has helped prevent a large 

number of these types of loans in the first place. Our delinquency 

rate is very, very low and our foreclosure rate currently is less than 

one-tenth of a percent so that could be a slight increase potentially, 

but we think it is very, very small. 

Mr. RUSHTON. The OCC agrees entirely with our colleagues. 

Mr. GILLMOR. So we are okay, all right. 

Ms. BRAUNSTEIN. Yes, Congressman, I could attempt to answer 

that question, but I am not an economist, and there are a couple 

of hundred economists back at my organization who would probably take my head off if I attempted to answer that, so I think I 

will pass on that. I do know that we are closely monitoring the situation and that there is still some uncertainty about the wider effects of this, but I am not the person to address that. 

Mr. GILLMOR. Ms. Braunstein, let me remind you what Harry 

Truman said. Maybe you will give more direct answers to me than 

the economists. He said that he always wanted to have a onearmed economist because they all said, ‘‘On the other hand.’’ 

[Laughter] 

Mr. ANTONAKES. Congressman, I would only add that our concerns have focused on the fact that I believe what you alluded to, 

that the recent foreclosures have not been tied as closely to the traditional reasons for foreclosure, job loss, death, or illness of a 

spouse. And certainly it appears to be more driven from the current 

rate market as well as a decline in housing values. And if you had 

additional factors challenging homeowners, then I think the situation within the subprime market could get worse. So I think that 

speaks of our need to be aggressively addressing these issues now. 

Mr. GILLMOR. Thank you very much, Madam Chairman. My time 

has expired. I thank the panel. 

Chairwoman MALONEY. The Chair yields 1 minute to Mr. 

Hinojosa for a unanimous consent request. 

Mr. HINOJOSA. Thank you, Chairwoman Maloney. I ask unanimous consent that a predatory lending financial literacy brochure 

produced by the Center for Responsible Lending and the National 

Association of Realtors, which I hold in my hands, be entered into 

20

today’s hearing record as well as a statement by the National Association of Realtors on the same subject, which would be very helpful to our hearing today. 

Chairwoman MALONEY. I thank the gentleman, and I now yield 

to Mr. Mel Watt from North Carolina, who has been a leader on 

this issue. 

Mr. WATT. Thank you, Madam Chairwoman, and I thank the 

Chair for convening this hearing, which I think is probably the first 

step toward—this term of Congress—toward the possibility of a 

predatory lending bill and it is that interplay that I want to explore 

a little bit because you have issued some guidance. I assume that 

guidance applies to—who does the guidance apply to? Does it apply 

to everybody? Does it apply to just the people under the jurisdiction 

of— 

Ms. BRAUNSTEIN. It applies to the depository institutions that we 

all supervise plus their subsidiaries and that includes the subsidiaries of bank holding companies. 

Mr. WATT. All right, how do we get it applied to State regulated 

institutions? 

Mr. ANTONAKES. At this point, Congressman, 29 States and the 

District of Columbia have also adopted the guidance as well. My 

office, we actually adopted it as regulation. 

Mr. WATT. If you have adopted—so this guidance now applies to 

everybody, traditional lenders and subprime lenders, right? 

Mr. ANTONAKES. We have other States that— 

Mr. WATT. Either it does or it does not. 

Mr. ANTONAKES. In my State, in Massachusetts, it applies to 

every type of lender. We are working with other States to ensure 

that they adopt the guidance, as well. And we expect that in the 

short term all 50 States will adopt the guidance so it does apply 

to everyone. 

Mr. WATT. Okay, and from this step, the guidance, you are moving, Ms. Braunstein, towards some regulations, is that where you 

are headed or what are these hearings and things that you are—

what is it that you are contemplating doing in the future? 

Ms. BRAUNSTEIN. Yes, it is not really related to the guidance per 

se, but we were undergoing—before the guidance issue came up, we 

were looking at our rules under the Truth in Lending Act. 

Mr. WATT. And where is that headed? 

Ms. BRAUNSTEIN. We are revising that. 

Mr. WATT. That is what I am trying to find out. 

Ms. BRAUNSTEIN. It is heading for a major revision of those rules 

in regards to closed-end credit, which would include mortgages. 

That includes looking at mortgage disclosures and making sure 

that consumers have the information they need for transactions as 

well as, as I mentioned today, we will be looking at our authority 

under the HOEPA portion of Truth in Lending and whether or not 

there are practices that are unfair and deceptive that we can write 

rules on. 

Mr. WATT. Okay, and those rules would be beyond this guidance 

that you are talking about or would it be guidance—would it be 

regulations or guidance? 

Ms. BRAUNSTEIN. No, those would be regulations. 

Mr. WATT. Okay. 

21

Ms. BRAUNSTEIN. And HOEPA and the Truth in Lending Act 

apply to all lenders regardless of whether they are depository institutions or not. 

Mr. WATT. The question I am trying to get to is, is any of this 

going to alleviate the necessity of a Federal predatory lending law? 

Ms. BRAUNSTEIN. I think that is a decision that the Congress will 

have to make. 

Mr. WATT. Okay. And one of the impediments to passage of any 

kind of predatory lending legislation last year was the debate about 

whether it ought to be a Federal preemptive standard or whether 

it ought to be a floor, which would leave States to innovate and do 

what they are doing already. I assume I know what the State position on that would be, or do I know what the State position would 

be, either you support a Federal preemptive standard or you do 

not? 

Mr. ANTONAKES. Well, in the case of my State of Massachusetts— 

Mr. WATT. I cannot get a yes or no answer out of you all, can 

I? We have 5 minutes, I am trying to get to—either you support 

a Federal preemptive standard or you don’t. 

Mr. ANTONAKES. I would support one as long as it did not water 

down existing State rules and allow for State enforcement. 

Mr. WATT. So you would just wipe out a Federal preemptive 

standard even if it was lower than Massachusetts’ standard? 

Mr. ANTONAKES. No, I would support a Federal law if standards 

were set appropriately high. 

Mr. WATT. What if it lowered California’s standard or North 

Carolina’s standard but raised everybody else’s standard, would 

you support it or not? 

Mr. ANTONAKES. I am in a position where our standards in Massachusetts are fairly high so I would come at it from that perspective. 

Mr. WATT. Are you here speaking on behalf of an organization? 

Would your organization support a Federal preemptive standard 

that lowered any State standard that is already in existence? 

Mr. ANTONAKES. That is something we would have to discuss 

within our organization. 

Mr. WATT. So you do not have a position, that is what you are 

saying? 

Mr. ANTONAKES. I do not believe we have taken a formal position 

on that issue. 

Mr. WATT. All right, my time is up. You all have rope a doped 

me for 5 minutes now and nobody has given me an answer to anything. I do not know why you all come over here to testify if you 

will not take a position on anything. I yield back, Madam Chairwoman. 

Chairwoman MALONEY. I thank the gentleman, and I yield 5 

minutes to the full committee ranking member, Mr. Bachus from 

Alabama. 

Mr. BACHUS. Thank you. Actually, I thought that he did take a 

position, but it may not have been the position that the member 

liked. Let me follow up by saying that— 

Mr. WATT. If you do not have a position, that is a position, I 

guess. 

22

Mr. BACHUS. I hope that is not taking my time. Could my time 

start again? 

Mr. WATT. I ask unanimous consent to give the gentleman back 

whatever time I took from him. 

Mr. BACHUS. Thank you. I will say that the gentleman from 

North Carolina and I did work well together last year trying to resolve our differences, but the legislation I offered last year was the 

North Carolina legislation, which is considered a very strong standard. It also gave the attorneys general of the States the right to 

enforce, which you said was important to the State of Massachusetts. It also gave an individual right of action. Let me ask this, 

we have now Federal guidance in place and are moving towards 

regulation. We have 29 States that have adopted the Federal guidance. We obviously have 21 States that have not—I do not know 

how many of those States have a tough State standard, but I would 

ask the committee, what are some of the gaps in regulation as they 

exist today? And let me propose one of them and maybe just ask 

you about this one, most mortgage brokers are honest people, and 

I think they do a very good job for their clients but we have bad 

actors and we have all heard of cases of one broker who made $2- 

to $300 bad loans, loans that should not have been made, sometimes defrauded the institutions, what do you think about national 

licensing and registration? I will just start with Ms. Bair. 

Ms. BAIR. Well, I think CSBS and the States are moving forward 

with a State-based national licensing regime which would not require Federal intervention. I think a significant Federal role in regulating mortgage brokers— 

Mr. BACHUS. Do what now? 

Ms. BAIR. I think a significant Federal role in supervising mortgage brokers, if that is what you are suggesting— 

Mr. BACHUS. Yes. 

Ms. BAIR.I think that would be difficult and challenging. There 

are State apparatuses in place for regulating the loan originators 

as well as banks whom we all regulate. 

Mr. BACHUS. You have the mortgage brokers and then you have 

the loan originators who work for the national institutions. 

Ms. BAIR. Right, right. 

Mr. BACHUS. And they are regulated. 

Ms. BAIR. But you can manage—you can regulate third party relationships. For instance, the banks that we regulate, we regulate 

the third party relationships— 

Mr. BACHUS. What about a national registration or national licensing? 

Ms. BAIR. I would defer to Steve. I think that the States are already putting together a national registry and that they may be on 

that track at a State-based level. 

Mr. BACHUS. Okay. 

Mr. ANTONAKES. Yes, we have worked for 3 years on creating a 

national database, ensuring that all entities licensed by the States 

are entered into this database and we have common sharing of information. We believe it will significantly improve supervision over 

mortgage brokers. I would also add that just as the States have a 

duty to supervise the conduct of the mortgage brokers, the entities 

doing business, including banks that have outsourced their 

23

subprime lending to brokers, have a duty also to supervise that relationship between the banks and the mortgage brokers as well. It 

seems to me that a far better method of coordinated examination 

would include a national bank being supervised by their national 

bank regulator, and also looking at the broker network in tandem 

with States doing simultaneous examinations of those brokers, so 

we could determine from the bank regulator’s perspective whether 

the controls are in place and from the State perspective, ensuring 

that appropriate business practices by the brokers are being adhered to. I think marshaling our resources and working together 

would provide a far better system of supervision. 

Mr. BACHUS. My thought is that we do need a national licensing 

or registration of brokers. As to how it is enforced, I am not sure. 

But I would like any proposals that you all have because I think 

that is a gap in the present system because, as you said, you have 

national institutions that are now farming out their work to people 

outside the bank. 

Mr. ANTONAKES. But, again, we believe our system will capture 

that information and will result in a far better supervisory process 

for the brokers as well as the lenders that are supervised— 

Mr. BACHUS. Well, it will on institutions but how about those 

States which—now, do you require licensing or registration of all 

brokers? 

Mr. ANTONAKES. We require licensing of all non-bank mortgage 

lenders and mortgage brokers and the majority of States require 

similar standards and the system we believe will substantially improve coordination among the States and information sharing for 

the States, the vast majority of States that license lenders and brokers as well. 

Mr. BACHUS. How are these brokers getting away with moving 

from State to State and continuing to make—there has been some 

documentation on some of them making as many as a thousand 

fraudulent loans in three or four States? 

Mr. ANTONAKES. I think the database will resolve that issue because of common information sharing, access to Federal criminal 

databases, the form shopping which exists and which a company 

gets into trouble in one jurisdiction, changes the name, creates a 

straw, that type of opportunity is going to be gone once the database is up and running in less than 9 months. 

Mr. BACHUS. Let me ask one follow-up question. 

Chairwoman MALONEY. You have 30 additional seconds. 

Mr. BACHUS. We talked about loans and defaulting loans, what 

about lending to homebuilders, is that jeopardized? It is a very important industry and obviously as homebuilders experience problem—have you seen a pull back in the amounts of loans to homebuilders? 

Mr. REICH. I think homebuilders who have built speculative 

homes have certainly curtailed their activities and our re-trenching 

in certain parts of the country where supplies of homes have built 

up, so I am aware of and have heard in a number of parts of the 

country that homebuilders are indeed re-trenching. 

Mr. BACHUS. Are there defaulting loans from the banks, institutions—having delinquencies in loans to homebuilders? 

24

Mr. REICH. With one exception, in the State of Florida there was 

an institution that likely will result in some losses to that institution because of an over-build situation and some irregularities, 

which also took place. But on a broader basis, I am not aware of 

losses occurring in institutions because of re-trenching among 

homebuilders. 

Chairwoman MALONEY. The gentleman’s time has expired. Mr. 

Gutierrez of Illinois. 

Mr. GUTIERREZ. Thank you so much. I would like to first just 

talk a moment about the overall banking industry and financial 

services industry because it seems to me that a lot of this is about 

credit and who gets credit in the United States of America. I am 

lucky to be 53 years old, so I remember when getting a Montgomery Ward’s card at 18 percent was hard to get, and then getting a J.C. Penney card. When I got my first MasterCard, it was 

like 150 bucks and they really checked to make sure. Now my college daughter gets invitations every week to get credit. 

So having a conversation about what is happening in the 

subprime without having a conversation about what is happening 

overall in the United States as it refers to how we get credit in this 

country is really doing a disservice to the whole issue. And I would 

like to say that, Madam Chairwoman, I am so happy you called 

this hearing because we have the Comptroller of the Currency who 

does not think that the gentleman from Massachusetts should be 

able to regulate if he makes a decision and he makes a ruling at 

the OCC, he thinks he should preempt him. So it is very interesting to watch both of them sit at the same table as though they 

are both friends and allies of the same people but I do not believe 

they are allies and friends of the same people. 

I think you should be working together not at cross battle from 

one another. And I think that that is a serious job and so as we 

look at this issue, we should see what the OCC is doing in terms 

of trying to preempt because I believe, as many of my colleagues 

on the other side of the aisle, that many of the best things that 

happen in government happen at the local level. But if our State 

attorneys general cannot take actions, and I have spoken to my attorney general, they cannot lock anybody up for doing things that 

are just as fraudulent as the guys at Tyco and Enron have done 

in the subprime industry and in the mortgage industry. I have seen 

examples of it. 

You all in that panel, if you have not seen examples of things 

people should have gone to jail for, then I do not know what you 

have been doing so I am going to assume that you know much 

more than I do and have seen the situations much more than I do. 

So I would just like to say that CitiBank went to CitiGroup and 

CitiFinancial, they are in the subprime industry, so as all levels of 

regulation, you should look at what it is they are doing and how 

it is that they are doing this because they are part of the problem. 

I heard some people say we do not want to constrain credit, well, 

if we do not constrain credit to those who are either not worthy of 

the credit because they do not have the ability to pay and they 

know they do not have the ability to pay going in, that is why in 

great measure we have a subprime industry. There should be considerations. That is why my earlier statement, when I got my first 

25

mortgage back in 1981, I remember bringing all the documentation 

to the banker. I knew that banker. He knew who I was. He checked 

me out. 

Now we are issuing loans, I buy a piece of land and I build a 

house, and we speculate on what it is going to be worth later on. 

Somebody is going to pay the consequences of this subprime industry, 20 percent of the loans. So I want to thank the gentleman, Mr. 

Watt, for bringing things up. 

I want to read something that was put into the record but I want 

to read it again from the Honorable Sheila Bair. It says, ‘‘We understand FRB is in the midst of reviewing the regulations that implement HOEPA. The FDIC would strongly support the FRB 

should it decide to make greater use of its authorities provided by 

HOEPA to address predatory practices. Many abuses might be 

more effectively addressed by regulation rather than statute, especially in the areas as misleading marketing in which the manner 

and types of abuse change.’’ I suggest you do it and that you work 

together and that that is what you are, you are all in public service 

as we are and that we not have to have a hearing so that you can 

communicate with one another about these issues. 

I would like to ask one question of Ms. Bair following up on Mr. 

Watt. In your testimony, you suggest one option for Congress is to 

articulate a set of anti-predatory lending standards through legislation. One of the issues we wrestle with up here is preempting the 

States because, as you acknowledge in your testimony, the States 

have proven to be innovators when it comes to consumer protection 

issues regarding Federal legislation. Do you think Congress should 

establish a floor for protections by establishing a set of minimum 

standards or should we just preempt the States and implement a 

national standard? 

Ms. BAIR. If you are simply establishing a floor, I do not think 

that you want to preempt additional State protections above that, 

no, I do not think you should do that. There could be another approach, you could try a more prescriptive, very strong standard and 

there might be justification for preemption if you were sure that 

you were raising the bar, not lowering it. But I think the whole 

point of this is to increase broad protections, not decrease them, so 

unless you were confident you were doing that, I would recommend 

against preempting. 

Mr. GUTIERREZ. Thank you. 

Mr. WATT. Madam Chairwoman, could I ask unanimous consent 

to get a response to that question from the other panelists? 

Chairwoman MALONEY. So granted. 

Mr. REICH. I would agree with Chairman Bair; I think enacting 

a standard with a low bar would not be a productive act for Congress to undertake. 

Ms. JOHNSON. I would agree that in that setting a low bar would 

be an exercise in futility. It is not going to get to the heart of the 

problem in protecting the consumer. 

Mr. GUTIERREZ. Madam Chairwoman? Should we set standards? 

Chairwoman MALONEY. Let the other witnesses respond. Mr. 

Rushton? 

Mr. RUSHTON. We would argue against a low bar, as well. 

26

Mr. WATT. Madam Chairwoman, I hate to interrupt him but they 

are not answering the question that has been asked. The question 

is, should there be a Federal preemptive standard, whether it is a 

low bar or a high bar, should there be a Federal preemptive standard? That is the question. 

Chairwoman MALONEY. Okay, then let’s go back to Ms. Johnson, 

do you think there should be a Federal preemptive standard? 

Ms. JOHNSON. I have to be honest with you, it is not an issue 

that we have had a hearty discussion about at the agency. We do 

not have broad preemptive—we do not do a broad preemptive 

power right now and so I would really have to study it before giving an answer. 

Chairwoman MALONEY. Okay, Mr. Rushton? 

Mr. RUSHTON. The OCC has a fairly robust anti-predatory lending standard now. We would certainly support a Federal standard 

so long as it did not dilute ours. We are hopeful that this guidance 

that we have proposed, along with the natural correction that is occurring in the market today, would serve the purpose of stemming 

these abuses. But if it does not, then we would certainly support 

the Congress if it decided to set a national standard. 

Chairwoman MALONEY. Ms. Braunstein? 

Ms. BRAUNSTEIN. The Board has not taken a position on a Federal preemptive standard at this time. 

Mr. ANTONAKES. We could support a Federal preemption standard again as long as the standard was set high enough and allowed 

for State enforcement. 

Chairwoman MALONEY. The Chair recognizes Judy Biggert of Illinois for 5 minutes. 

Mrs. BIGGERT. Thank you, Madam Chairwoman. We are having 

a lot of discussion in Illinois, particularly in the Chicago area, 

about this issue. I think the papers describe one woman who received a mortgage for $3,800 a month while she only brought in 

$2,600 a month. So obviously before the mortgage was even consummated, she was behind in the payments, on the promise by the 

broker that the payments would be lowered as she went along. Obviously, there was a foreclosure. 

One recent law in Illinois was put in that said that in certain zip 

codes in Cook County, there would be mandatory counseling on 

mortgages if your credit score was below a certain level. And everything, I think, has unintended consequences. What happened there 

was that in the area they were worried about racism, that was 

something brought up. And they were also worried that lenders 

were leaving those zip codes and going other places. So the law is 

now out for public comment in all of Cook County, which surrounds 

Chicago, there would be mandatory counseling for everyone wanted 

a non-traditional mortgage, regardless of their credit score, that 

they would have to go to mandatory counseling. 

Now, I believe in financial literacy, but I think that this is carrying things to an extreme, for anyone who ever wants a non-traditional mortgage. And in the zip codes there had been a high percentage of foreclosures and a large percentage of high-risk mortgages that were applied for. So I would just like to ask two questions. One, what would you think of such an idea? And, two, what 

should a lender do when there, when they know that there is going 

27

to be a foreclosure and somebody is in trouble and a lot of these 

will not refinance? Let’s start with you, Chairman Bair. 

Ms. BAIR. Well, I am not sure, you mean my view on the idea 

regarding counseling for non-traditional mortgages? 

Mrs. BIGGERT. Yes. 

Ms. BAIR. I think that the lender needs to have the obligation to 

make a determination that the borrower has the capacity to repay, 

and I think if you have that kind of good underwriting, a lot of 

these other problems go away and it does not sound like that was 

done in the case of your constituent. I think we need to be very 

careful when we start saying that subprime loans will have certain 

requirements and not prime loans because I think you do have a 

potentially discriminatory impact, and I think that is to be avoided. 

A lot of these products are very complex, no matter how much financial education, and a lot of typical homeowners are not going 

to understand them. That is why I think the lenders who are offering these products need to have the onus on them to qualify the 

buyer so that they have a product that they can afford. 

Mrs. BIGGERT. Would anybody else like to address that issue? 

Mr. REICH. Well, I would certainly say that I think the notion of 

having counseling available is excellent but mandating it would be 

something that I would be uncomfortable with. With regard to foreclosures, as you mentioned near the end of your remarks, that the 

impact of foreclosures and what can financial institutions do, we 

have been encouraging our institutions, and I think to some extent 

perhaps all of us at the table have been encouraging our institutions to work with borrowers to try to prevent the foreclosure process through extending payments, re-writing the obligations in a 

satisfactory underwritten matter, similar to as we did following 

Katrina with our institutions in Louisiana and Mississippi, we encouraged their institutions to be understanding and proactive in 

trying to help people resolve their problems and that is what we 

are trying to do today. 

Mrs. BIGGERT. Thank you. 

Ms. JOHNSON. I would like to add that the counseling is a big 

part of the educational process for many of the credit unions. They 

are working with NeighborWorks America and with other organizations and groups out there where counseling actually is a part of 

the process. Understanding that stack of paperwork before signing 

on the dotted line is important and if the consumer is educated on 

the front-end, exactly knowing how those payments may have an 

opportunity should the interest rates rise, etc., will make a better 

consumer and it is good for the institution as well. So I do not 

know as far as mandating it, but I would certainly heavily encourage it. 

Mrs. BIGGERT. Thank you. 

Chairwoman MALONEY. Carolyn McCarthy of New York? 

Mrs. MCCARTHY. I thank you. One of the things that I am curious about, I did not hear it in any of the statements, what is in 

place to penalize those who abuse the system and basically make 

these loans to people that they cannot repay? Is there anything in 

place, are they fined? Some of them are not licensed so they cannot 

lose their license. It goes back to the other question that one of my 

28

colleagues mentioned, that he just goes to another State. So I am 

just curious, what is the penalty for making these kind of loans? 

Mr. ANTONAKES. In the Commonwealth of Massachusetts over 

the summer, we did a sting of approximately 100 mortgage brokers 

that were primarily servicing low- and moderate-income areas, and 

we focused primarily on the issue of stated income loans and to the 

extent that we could document evidence that income stated on 

these loans had been, in fact, inflated. The net result of our examinations where we issued cease and desist orders, essentially shuttering, I believe, nine brokers, putting them out of business, fines 

were involved, and we have made referrals for appropriate criminal 

action to our State attorney general who will be looking to follow 

up. 

Mrs. MCCARTHY. What kind of fines? 

Mr. ANTONAKES. The fines were in the hundreds of thousands of 

dollars. The primary issue for us was— 

Mrs. MCCARTHY. Did they pay the fines? 

Mr. ANTONAKES. We have had some pay the fines and others— 

Mrs. MCCARTHY. Some paid? 

Mr. ANTONAKES. The ones that we allowed to continue in business under very different structures paid the fines, others were—

and those cases involved only a very individual rogue employee 

versus a systemic issue. The ones with systemic issues are concerned with shutting those companies down and not allowing them 

to do business any further in the commonwealth and where appropriate we believe we have made referrals to again our State attorney general, who we will hope will prosecute in what we would believe would be a firmer resolution at the end of the day. 

Mrs. MCCARTHY. So with Massachusetts particularly, there is absolutely no reason for these brokers who are out there to actually 

stop, is there? No answers? 

Ms. BAIR. We regulate banks but we do have regulations and supervisory guidelines pertaining to the relationship of the bank to 

the mortgage broker. 

Mrs. MCCARTHY. What happens to the big guys? 

Ms. BAIR. We bring enforcement actions, we issue cease and desist orders. There can be significant financial penalties as part of 

our regulatory authorities but we can only indirectly impact mortgage broker activity through the relationship with the bank. 

Mrs. MCCARTHY. Over the last 6 years that we have been talking 

about this issue, would you say that a lot of them have been prosecuted or fined? I know I am still seeing it in my district. I have 

a very large minority district. I certainly have brought in a lot of 

the financial institutions to educate my constituents and consumers and that is great. A lot of them, unfortunately, do not come 

to the meetings to learn about it and to hear about it. I have a 

group that I work with, the Community Development Institute of 

Long Island, and basically they look for people who want to buy a 

home. Certainly they would be those who are not qualified to buy 

a home but they have to go to school. And my colleague, Ms. 

Biggert, was talking about it where it is mandatory; this is not 

mandatory. Well, for them it is mandatory because if you want the 

loan, you have to go through schooling because one of the things 

no one ever talks about, some banks do, a lot of them do not, what 

29

are the taxes going to be, what are your utilities going to be? It 

is one thing to say you have a mortgage there, what is your insurance going to be? You hold those things up and most people, a lot 

of people would not be able to afford that. Should that not be into 

the education of the consumer when they are trying to take out a 

loan? 

Ms. BAIR. Well, our guidance specifically requires lenders, when 

they underwrite the loan, to take into account taxes and insurance 

as part of the underwriting process. It is not just the principal and 

interest, it is the taxes and insurance as well. And, yes, I have 

heard anecdotal reports of situations where that underwriting does 

not reflect taxes and insurance and you end up with these kind of 

serial refinancing situations where every time the tax and insurance comes due, you have a situation where the borrower has to 

refinance. 

Just getting back to your original question as well, I would point 

out that under Unfair and Deceptive Acts and Practices authority 

under the FTC Act, the FTC can bring actions though they obviously have limited resources. State AGs as well, under State laws 

prohibiting unfair or deceptive acts or practices, can bring actions 

addressing the type of conduct that you mentioned. 

Mrs. MCCARTHY. I guess what boggles my mind is that, and 

probably because we sit on this committee, when you look at—on 

TV, they advertise constantly you can refinance your mortgage for 

4.2 percent. I yield back my time. 

Chairwoman MALONEY. Patrick McHenry of North Carolina? 

Mr. MCHENRY. I thank the chairwoman. I want to thank the 

panel for being here, as well. Ms. Johnson, at NCUA, in your testimony you said that—you cited some stats on fixed rate and adjustable rate mortgages for credit unions and you said 68 percent of 

credit unions are for mortgages of some size or some scope. To 

what extent do credit unions make subprime or non-prime loans? 

Ms. JOHNSON. Congressman, thank you, that is a good question. 

Sixty-one percent of the loans are fixed, that leaves 39 percent adjustable. In our current 5300 Report, we have not been separating 

out the exotics in the subprime. We have changed that reporting 

method and starting with this quarterly report, we will now be able 

to measure that directly. 

Mr. MCHENRY. So you do not know? 

Ms. JOHNSON. Our educated guess is that it is less than 1 percent. It is very low because the overall numbers for credit unions 

are very low. 

Mr. MCHENRY. But there is no way to know, you do not have any 

data? 

Ms. JOHNSON. We will shortly. 

Mr. MCHENRY. But the answer is, no, we have no data. Okay, 

thank you. 

Ms. JOHNSON. But I think it is important— 

Mr. MCHENRY. I would suggest to you that perhaps these nontraditional loans, non-prime loans may help serve your mission to 

help the underserved. Further, Mr. Reich, with OTS, is it true that 

many of the foreclosures and delinquencies we are seeing are a result of mortgage fraud? 

30

Mr. REICH. It is true that mortgage fraud has become a significant problem, yes. 

Mr. MCHENRY. Do you have any statistics? 

Mr. REICH. I do not have data, I will be glad to get back to you 

in writing if we have data available. 

Mr. MCHENRY. I would certainly appreciate that. That is what 

I am trying to get at is what portion of foreclosures and delinquencies are due to actual fraud because that is certainly a problem in the marketplace. And rather than simply blaming the lender, let’s also look at the borrower, perhaps they have some burden 

here as well. 

Additionally, we talked about a number of things here today. The 

OCC, Mr. Rushton, you testified that national banks are about 10 

percent of the subprime market, is that correct? 

Mr. RUSHTON. Yes, less than 10 percent of the new originations 

last year came from national banks. 

Mr. MCHENRY. Is that based on volume or dollar? 

Mr. RUSHTON. Dollar amount. 

Mr. MCHENRY. Dollar amount? 

Mr. RUSHTON. Yes, sir. 

Mr. MCHENRY. Okay, do you have any statistics on actual percentage of originations and numbers? 

Mr. RUSHTON. The total dollar amount was about $60 billion in 

subprime loans, a little bit less than that in Alt-A loans that are 

below prime but not subprime. Combined, they come out to about 

16 or 17 percent of all of the below-prime loans that were made in 

the system last year. 

Mr. MCHENRY. Certainly. Mr. Reich, you also testified that you 

have seen this economic cycle 6 times, I think that is a fascinating 

amount of experience you have. And you said 13 percent of the national mortgage debt is within subprime? 

Mr. REICH. That is correct. 

Mr. MCHENRY. Okay, so what I have been hearing today is dealing with 13 percent of the mortgage market. What I would ask the 

whole panel, could you say yes or no, is the mortgage marketplace 

working, meaning supply and demand, is that functionally in the 

marketplace? What we have it seems now in the mortgage marketplace nationally with record homeownership is that there was a 

large amount of credit that was available because people were willing to take higher risks with the possibility of return for that risk. 

And then in reaction to that, with the changing economy, the actual mortgage market is constricting. So if we could just go quickly, 

I do not have much time left, to simply say whether or not you 

think it is actually functioning, the mortgage marketplace is actually functioning, just yes or no or perhaps—with my colleague from 

North Carolina, I realize that many of you will say ‘‘maybe’’ or 

something long-winded, if I could just get a ‘‘yes’’ or ‘‘no’’ out of you 

or you could just simply say, ‘‘Pass.’’ 

Ms. BAIR. I would have to say on a macro-level, yes. But on a 

micro-level for individual families, no, for a lot of them it has not 

been working. 

Mr. MCHENRY. Mel, I think you are right about the panel. Number two? 

31

Mr. REICH. I would say yes. If I had the opportunity to clarify 

it, I would say that maybe for 15 percent of the market it is not 

working as smoothly as it should be. 

Ms. JOHNSON. I would say yes. In fact, we encourage credit 

unions to try to assist their subprime borrowers and make a difference between subprime and predatory lending. A lot of subprime 

borrowers out there need to be in a home as well and it can be 

done with proper due diligence. 

Mr. RUSHTON. We say yes, and we believe it will correct itself as 

it has in prior cycles. 

Ms. BRAUNSTEIN. I would say yes, but we do have concerns about 

those areas where it is not working as well as it should be. 

Mr. ANTONAKES. Yes, but it can be improved. 

Chairwoman MALONEY. The gentleman’s time has expired. Mr. 

Clay of Missouri? 

Mr. CLAY. Thank you, Madam Chairwoman. Let me start with 

Ms. Braunstein. In St. Louis, Missouri, it is predicted that almost 

20 percent of all subprime loans will go into foreclosure. This problem that we have in the subprime mortgage industry is catastrophic. This did not happen overnight. The system has numerous 

fail-safes to detect such happenings and why is it that the Federal 

Reserve system did not see this coming? Why is it that our other 

agencies that watch or control banking and commerce did not see 

this coming? Was the problem one of not seeing a situation or in 

just not reacting? What happened and who dropped the ball? 

Ms. BRAUNSTEIN. Congressman, actually, we did see that there 

were issues in these markets and we have been issuing guidance 

on real estate and subprime as far back as the 1990’s to try to address the situations as we saw them. This recent phenomena that 

we are seeing right now, actually the downturn did not come until 

late 2006 so that is a fairly recent phenomena and as soon as we 

saw it, we did issue the new proposed guidance for subprime mortgages. So we have been taking actions all along and we have done 

a number of things with other guidance and regulations to try to 

address the situation. 

Mr. CLAY. Let me go to Mr. Rushton, the Comptroller of the Currency. Ohio, which had the highest foreclosure rate in the Nation 

at the end of last year, plans to issue $100 million in taxable municipal bonds next month to help homeowners refinance mortgages. 

Proceeds from the bond issued by the Ohio Housing Financing 

Agency will finance 1,000 loans with a fixed rate of 6.75 percent. 

The loans will be limited to homeowners with incomes up to 125 

percent of the median income of their county and will take them 

out of their adjustable rate mortgages, interest-only mortgages, and 

avail them the opportunity to move into fixed rate mortgages. Is 

this a solution that can be used on the Federal level? What are the 

pros and cons of this solution on a nationwide basis? And can this 

work as an assist with other programs and solutions to avert home 

foreclosures? 

Mr. RUSHTON. What you have described sounds like an excellent 

solution in terms of a takeout program that will alleviate pressure 

on the borrowers in trying to find financing that is going to be very 

difficult for them to get. It is helpful in another very important way 

in that it gets around all of the restrictions that may apply to some 

32

of these loans that are now in securitizations or subject to other 

servicing agreements where the holders of the loans have not given 

any flexibility to work with the borrowers to help them out. Your 

program would get around that, and it sounds very good based on 

the parameters you have outlined. In terms of a more omnibus application of it on a Federal level, we would be delighted to work 

with the subcommittee in exploring that. 

Mr. CLAY. Thank you for that response. Let me share with the 

panel a recent publication from the Sunday St. Louis Post Dispatch 

with the headline, ‘‘Minorities Beware: Home Loans Reflect Bias.’’ 

And this is a question for anybody who cares to take a stab at it 

on the panel. A recent study by the Center for Responsible Lending 

concluded that black borrowers are 3.2 times more likely to receive 

a higher rate than white borrowers and the disparity decreases 

when adjusted for differences in credit scores, income, and other 

risk factors but significant differences remain. After adjusting for 

such traits, blacks were still 1.6 times more likely to get higher 

rate subprime loans than whites when purchasing a home and 1.3 

times more likely in refinancing, Hispanics too. Tell me how do we 

address that? What do we do? How do we take the race factor out 

of home loans? And I am going to ask the next panel who comes 

forward also, but how would you address the race factor? 

Ms. BRAUNSTEIN. One of the things that we are doing, and I 

think all the agencies do, is we conduct very robust examinations, 

fair lending examinations, in our institutions. We look closely at 

the data that comes out and when there are pricing disparities and 

we use that as an initial screen to go in and gather more information and do very thorough analyses of what lenders are doing in 

terms of pricing and who the loans are made to. If we find that 

they are making pricing decisions based on race, we will refer them 

to the Department of Justice and we have done so. And the problem sometimes is not all these loans—in the statistics you are reading, not all those loans are being made in the depository institutions that are being regulated and having robust fair lending examinations. 

Chairwoman MALONEY. The gentleman’s time has expired. Mr. 

Neugebauer of Texas? 

Mr. NEUGEBAUER. Thank you, Madam Chairwoman. I kind of relate to what Mr. Reich said, I have been in the real estate business 

through most of those cycles and have some scars to show from it. 

One of the things I want to go back to is back in the 1970’s when 

I was in the banking business and originating mortgages, we 

used—kind of the guidelines were set by the marketplace and that 

was Freddie Mac, Fannie Mae, FHA, and the PMI companies. In 

other words, you used their underwriting guidelines and that pretty much set the standard for the markets. And if you made a loan 

that was kind of outside those guidelines, and I was in the banking 

business at that particular time, we just knew that we were going 

to have to hold that loan in our portfolio. And so one of the questions that I have today is as we move down this road I think it is 

important to make the distinction between subprime lending and 

predatory lending, those are really two different issues, and we 

need to be careful here that we are not trying to fix one with the 

problems that exist in the other. But in your mind today with the 

33

sophistication of our financial markets, the fact that those four entities really do not control as much of the flow of the mortgage 

lending activity today, do you still think within the marketplace 

today there are enough market forces that we do not need to really 

start down the road of mandating what the criteria for mortgages 

are going to be? And I will start with you, Ms. Bair, and kind of 

run across the table there. 

Ms. BAIR. Well, I think it is a very perceptive question. In 

securitization, most subprime mortgages are purchased by the socalled private label, the non-agency investors. There is a lot of liquidity these days and there has been an analysis suggesting that 

has played a role in the depressing of lending standards. When you 

were in the business, you held that loan in the books, you worried 

about whether it was going to perform. Now all the stuff can be 

sold off. We are having a securitization roundtable with OTS and 

OCC and the FRB on April 16th, and one of the issues we are 

going to look at is the impact of securitization on underwriting and 

also going forward how to help people restructure loans so that 

they can get into a product they can repay and how we work with 

the investor community to accomplish that. 

Mr. NEUGEBAUER. Mr. Reich? 

Mr. REICH. I am a little reluctant to see Congress become so prescriptive as to proscribe underwriting standards for various types 

of loans. I feel the same way frankly about regulatory agencies becoming overly prescriptive. That takes away the creativity for 

bankers to do what they do best in devising solutions for particular 

borrowers. 

Mr. NEUGEBAUER. Thank you. Ms. Johnson? 

Ms. JOHNSON. Credit unions do use the secondary market, however, many of them retain the servicing, etc. However, credit 

unions are restricted in their investment opportunities and are restricted to highly rated securities so purchasing those is different 

for credit unions. 

Mr. NEUGEBAUER. Okay, Mr. Rushton? 

Mr. RUSHTON. We would be a little wary about endorsing underwriting standards by the government, frankly, because it would be 

difficult to apply to the entities that have become preeminent in recent years. The reason that the GSEs have declined in importance 

is because the investment banks, including Wall Street firms, have 

been able to do this business themselves, and they are selling to 

investors who do not have the same interest at heart in terms of 

consumer protection and other risk considerations as banks do. If 

a standard could be written that could be applied to the Wall 

Street firms and other players equally, then we would probably 

support it, but we would be wary of doing that because you are essentially substituting Federal judgment for that of the willing borrower and lender and funder of the credit. 

Mr. NEUGEBAUER. Ms. Braunstein? 

Ms. BRAUNSTEIN. Yes, we would also be concerned about dictating underwriting standards. As I mentioned even in regards to 

using our HOEPA authority, we want to be very careful that whatever is done is not an overreaction to a specific situation and that 

it does not constrain responsible lending that is out there in the 

market. 

34

Mr. NEUGEBAUER. Mr. Antonakes? 

Mr. ANTONAKES. Well, the Wall Street firms and securitization 

have resulted in a great deal of additional credit being made available but we cannot ignore the fact that they have also created the 

desire for a very high-risk product and the market is adjusting, but 

I would say a little too late and I do believe that the guidelines, 

as issued by the Federal regulators and the States, are essential 

in ensuring that tenets of sound underwriting are adhered to at all 

times. 

Mr. NEUGEBAUER. I want to go back to Ms. Bair just for a 

quick—one of the things I was noticing that as this subprime thing 

started kind of unraveling, a lot of the repurchase agreements 

started being put back, and I guess from a regulatory standpoint, 

have you all been kind of reviewing not only the ability of the repurchasing folks, when banks or financial institutions are holding 

those for investment purposes? 

Ms. BAIR. There have been a lot of put-backs, and I think that 

is another area of concern. The representations and warranties 

part of these securitization agreements can sometimes be quite 

broad in enabling the securitization program to put the loans back 

and that is obviously a problem for us because they have not held 

capital. We have assumed those assets have gone. So, yes, it is another thing that we are looking at. We are concerned about it, we 

are tracking it, but at this point, I do not think that it presents 

a fundamental safety and soundness issue for insured institutions. 

It is certainly something we are very aware of and scrutinizing. 

Chairwoman MALONEY. The gentleman’s time has expired. Brad 

Miller of North Carolina, also a leader on this issue. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Madam Chairwoman. Mr. Rushton, you testified that the subprime mortgage 

lending market had made homeownership much more available, 

that many people could get into a first home as a result of 

subprime lending, which I do not doubt is correct, but the Mortgage 

Banker’s Association’s estimate is at 55 percent of subprime loans 

are refinances and only 45 percent are for the money to purchase 

homes with, is that correct? 

Mr. RUSHTON. I do not have any reason to disagree with the 

MBA’s numbers on that. 

Mr. MILLER OF NORTH CAROLINA. Okay, and their estimate is 

about one quarter of subprime loans to purchase a home or for first 

time purchases, does that sound correct? 

Mr. RUSHTON. Yes, sir. 

Mr. MILLER OF NORTH CAROLINA. So it is about 11 percent of 

subprime mortgage loans are actually to purchase a first time— 

Mr. RUSHTON. If that is what the math comes out to. 

Mr. MILLER OF NORTH CAROLINA. Okay. Do we have any data on 

the defaults and how much of the defaults are refinances, how 

many that are mortgages to purchase a home with, and particularly a first time? 

Mr. RUSHTON. That data may be available, sir, but I do not have 

it with me today. We would be glad to try to supply that to you. 

Mr. MILLER OF NORTH CAROLINA. Okay, where is it available? 

Mr. RUSHTON. Back at our office. 

35

Mr. MILLER OF NORTH CAROLINA. Okay, I would be very interested in seeing that. 

Mr. RUSHTON. Okay. 

Mr. MILLER OF NORTH CAROLINA. And there has been a lot of assumption in the reporting on this question in the last couple of 

months that the defaults were mainly folks who were just spendthrifts who were buying more house than they could afford and 

could not pay their mortgages. Do you know if there was any information that shows that is in fact what is happening or people who 

got in trouble, the usual kinds—death, divorce, job loss, necessary 

home repairs? 

Mr. RUSHTON. The precise reason that a borrower develops financial problems is not something that we track, but we can try to run 

that down. 

Mr. MILLER OF NORTH CAROLINA. Okay. Just to pick on somebody different, Ms. Bair, Mr. Clay asked about the OMDA data 

which shows that about 17 percent of white families who are borrowing for mortgages, we are not talking about all borrowing, we 

are talking about mortgage borrowing, which is something that is 

usually more restricted to the middle class or in subprime loans 

but almost half of Latinos and more than half of African American 

families. The Center for Responsible Lending has analyzed that 

further and found that every other objective criterion went into 

value assets, income, credit history, everything else, even when 

that is taken into account, there are still substantial disparities, is 

that consistent with your own observation? 

Ms. BAIR. Yes, we are very concerned about this and have addressed it in the draft subprime guidance that is out for comment 

now. Some of the lending analyses we have been doing on subprime 

mortgages that have been securitized, which is most of them, show 

that there is a big percentage, I think 14 percent, where the FICO 

score was actually over 700. 

Mr. MILLER OF NORTH CAROLINA. Right. 

Ms. BAIR. Which leads you to wonder, why is this person in a 

subprime loan? 

Mr. MILLER OF NORTH CAROLINA. But Freddie Mac, I think, estimated a couple of years ago that 25 percent of the subprime mortgages they purchased were from borrowers who qualified for the 

bond market. 

Ms. BAIR. There is a problem that borrowers are not referred up. 

A lot of lenders just specialize in subprime so if they qualify a person, that is the product that they do instead of referring him to the 

prime products. 

Mr. MILLER OF NORTH CAROLINA. And that is, in fact, something 

that Ms. Braunstein also raised, so perhaps both of you, one thing 

that I have heard argued is that African Americans are simply 

choosing different mortgage products, and I have some difficulty 

imagining an African American homeowner walking into a financial institution, a lender of any kind, and saying, ‘‘Can I get a 2/

28 mortgage with a teaser rate that I can qualify for but an adjusted rate I cannot possibly pay and a 4 year prepayment penalty.’’ Do you really think that African Americans are consciously 

choosing different mortgage products, either or both of you but you 

can go first, okay? 

36

Ms. BRAUNSTEIN. I do not know that it is a conscious choice. 

What we heard, in fact, in the hearings that we did over the summer anecdotally and what we have seen in conversations is that 

there is an enormous amount of push marketing that goes on in 

minority neighborhoods where the purveyors of these subprime 

mortgages are very actively involved in marketing and that same 

level of marketing does not go on by prime lenders. 

Mr. MILLER OF NORTH CAROLINA. Ms. Bair? 

Ms. BAIR. I was just going to say I think this is a broader problem—minorities more frequently having high-cost products. We 

have created an Advisory Committee on Economic Inclusion and we 

are trying to look at this broader issue. We want to understand 

why banks are not in there more and to what extent we can get 

mainstream prime bank lenders to do more aggressive marketing 

and servicing in these communities. I think a lot of this is being 

driven by the lender, not by the borrower, and we would like to see 

if we can get banks reaching out more to these neighborhoods. 

Chairwoman MALONEY. The gentleman’s time has expired. Mr. 

Price of Georgia. 

Mr. PRICE. Thank you, Madam Chairwoman, and I want to 

thank you also for holding this hearing. It is an important area, 

one that in my home State of Georgia we have dealt with for a 

number of years, serving in the State legislature we had some interesting challenges a number of years back, as some of you may 

recall. I have had some conflicting meetings this morning, and I 

apologize. I want to thank each of you for coming and I have read 

significant portions of your testimony, and I appreciate the perspectives that you bring to the table. I do not want to repeat specific 

questions that were asked, and I am sure they have been and I will 

review the record for that. But I would like us to step up kind of 

to the 30,000 foot level, my understanding is that each of you have 

stipulated here today that you believe that the mortgage banking 

system is working in our Nation right now and obviously I guess 

the correlate of that is it is accomplishing some good for the majority of folks who are accessing that system. I think the big question 

is whether or not the Federal Government has a further role in defining what ought to occur or whether the guidelines in the regulatory apparatus that we have in place right now are capable of 

correcting whatever ill view we, anybody believes is in place or has 

occurred over the last couple of years. So my question, and coming 

from a firm sense of belief that the Federal Government is relatively incapable of being flexible in promoting or providing guidelines for any industry, I would ask each of you just the general 

question whether or not you believe that the current system we 

have in place, the regulatory system we have in place, is capable 

and will in fact correct the system or correct any ills that have 

been alleged or whether you believe that further action by the Federal Government in this specific area is helpful for our overall system. And if we could start, Mr. Antonakes, at this end and kind 

of head on down, I would appreciate it. 

Mr. ANTONAKES. I do believe the constructure of regulation will 

appropriately deal with these issues, and I do believe, that being 

said, that within the States we can coordinate and do a better job, 

and with the States and the Federal Government we can coordiVerDate 0ct 09 2002 17:20 Jul 27, 2007 Jkt 035410 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\35410.TXT HFIN PsN: TERRIE
37

nate and do a better job. I think that will result in even more effective supervision of really every entity involved in the transaction, 

including the broker, the lender, the funder, and then the 

securitization process as well. 

Ms. BRAUNSTEIN. At this time, we do not see a need to ask Congress for additional authority or additional legislation. We think 

that what is there now is appropriate and can deal with the situation. 

Mr. RUSHTON. We agree. We believe the non-traditional mortgage guidance the agencies issued in October, as well as the 

subprime guidance that we now have out for comment, uniformly 

implemented by all regulators, along with the natural operation of 

the market, is all we need right now. We do not think we need anything else. 

Ms. JOHNSON. If you believe that consumers are better off with 

traditional mortgage products and traditional type loans, there is 

one area where Congress could facilitate with the credit unions 

when we are talking about the underserved areas and the minority 

population in particular. All credit unions are not able to adopt underserved areas, and I think credit unions are a traditional federally-regulated institution that could reach out to this population in 

particular and help in the subprime are. We encourage with due 

diligence credit unions to make these types of loans to help people 

get into homeownership so that is one thing that needs to be or 

could be changed with the statute. 

Mr. REICH. The market is in the process of correcting itself. We 

have issued guidance for comment, expiring May 7th. Many 

subprime lenders have exited the business. The liquidity for 

subprime lending has essentially dried up and so I think largely 

the market is in the process of correcting itself. Having said that, 

there are a number—there are probably a number of borrowers 

who are going through foreclosure who are not going to benefit 

from the guidance that is proposed. 

Mr. PRICE. If I may, that skirts the question a little bit in that 

the market is correcting itself, but do you—and I do not want to 

minimize the number of foreclosures out there because for each of 

those families obviously it is a significant trial. Do you believe that 

any changes should be put in place to prevent the next cycle that 

might result? 

Mr. REICH. Well, I have expressed some support for Congress to 

take our guidance on subprime lending and make it a standard 

that would apply to all lenders beyond insured institutions. 

Mr. PRICE. I appreciate that. Madam Chairwoman, may I get one 

brief comment from Ms. Bair? 

Chairwoman MALONEY. The gentleman’s time has expired and 

she has spoken on this already several times. 

Mr. PRICE. Thank you. 

Chairwoman MALONEY. David Scott of Georgia? 

Mr. SCOTT. Thank you very much, Madam Chairwoman. If we 

look at the situation as we have it now and with a lot of the testimony that is going forward, with the surveys that have come out 

by Bankrate.com on Monday, and with the fact that I represent the 

State of Georgia, which has the third highest foreclosure rate, with 

the fact that within the next 24 months, 2.2 million homeowners 

38

will go into foreclosure and the fact that in addition to that, Mr. 

Greg McBride, who is the senior financial analyst of Bankrate.com 

in the survey points up this salient fact, that the greatest concern 

that we, and I say ‘‘we’’ in the financial service industry have, of 

which we in the financial service industry are victims of is the complexity, the confusion, the culture, and the language of the financial services area is so confusing that as Bankrate says 40 percent 

of all the homeowners in America, prime and subprime, do not 

even know what they have signed. So it says to me with this information that as we move forward on this issue, one of the most important parts of our legislation should be and must be a major offensive on financial literacy and financial education, which to me 

is the greatest way in which to solve this problem because the 

major concern is how do we come up with that delicate balance 

with which we would be able to put forward legislation that is not 

so overreaching that it will dry up the credit for an underserved 

population which basically has been aptly described, African Americans, the elderly, the poor, which are targeted. This is a targeted 

phenomena by people who, some legitimate, some bad actors out 

there, but there is a predatory lending class of people who target 

this. So the point I want to say going forward is my hope is that 

we will make sure this legislation going forward has a major component piece in it that is a serious financial literacy piece that is 

targeted at African Americans, it is targeted at the community that 

the predators targeted because if the financial services industry, 

and especially those dealing with mortgages and real estate, the 

banking communities, if you do not make sure of this, we may very 

well have to revert to an overreaching legislative piece. So I want 

to make this urge that we have it and that we have a toll free 

number in, that we have human beings at the end of the phone, 

that we have it structured as an infrastructure within the Treasury 

Department where we really take it serious, where we put money 

and resources into the grassroots community, into the AARPs, into 

the NAACP, into those groups that have the legitimacy, into the 

church community, where people who are being targeted listen to. 

And if we get nothing out but one message, before you sign on the 

dotted line, call this number, talk to somebody because if 

Bankrate.com is right in its survey, we have a major, major problem of a lack of a financial education and financial literacy for a 

hugely growing amount of people. 

Now with that said, my commercial for financial literacy being 

said, it concerns me that when Chairman Bernanke, head of the 

Fed, came before this committee a few weeks ago and was asked 

about this question, he used some very rarely used strong language 

from the Fed in regarding any aspect of the economy, he used the 

words ‘‘concern’’ and ‘‘unease,’’ and ‘‘very concerned’’ to describe his 

thoughts on the subprime lending situation. Now, as head of the 

central bank, these are words that are used, as I said, sparingly 

and very often never but do his words of concern and urgency create additional concerns that this subprime meltdown will create 

broader credit crunch were the subprime problem spread to the 

prime mortgage industry and even further into corporate credit? 

Mr. HENSARLING. I thank the Chair. I think I heard earlier—say 

something along the lines that our mortgage markets are by and 

39

large working today or at least perhaps roughly 85 percent of the 

market. Is that a correct assessment of what I heard earlier? 

I think at least I heard you, Mr. Reich, say that at least as of 

now in your opinion with respect to some of the subprime foreclosure issues that are the focus of this hearing, that the market 

is essentially correcting itself. Is that correct? 

Mr. REICH. Well, I indicated that as a result perhaps of the guidance that the regulators have issued, that liquidity has dried up, 

a number of lenders have exited the business. 

Mr. HENSARLING. Which I understand doesn’t help you if it’s your 

home that is actually on the list to be foreclosed. I am constantly 

reminded of an aspect of the Hippocratic oath, and that is, ‘‘First, 

do no harm.’’ 

Now for roughly 85 percent of the market it has worked well, 

and in some respects if the market is beginning to correct itself, I 

just want to make sure that as a Congress we do no harm, since 

we all are aware that we have the highest rate of homeownership 

that we’ve ever enjoyed in the Nation’s history. And at least some 

of that, I assume, is attributable to subprime lending and creative 

mortgage products. 

I want to ensure that we protect consumers from fraud. I want 

to ensure that we protect consumers from either misleading or ineffective disclosure, but I’m not really sure I want to protect consumers, an informed consumer, from making a decision that may 

be a foolish decision because if I circumscribe his opportunities 

then I’m doing it for everybody else in the Nation. 

And I would like to follow up with some comments on the line 

of questioning from the gentleman from Georgia over here, Mr. 

Scott. We haven’t agreed a lot recently, but we certainly agree on 

this. And that is a lot of the disclosures that we see in these real 

estate transactions can be highly misleading using a jargon that 

many consumers do not understand. 

And I myself, my wife and I, closed on a condo here in Northern 

Virginia 2 years ago, and I signed a dizzying array of disclosure 

statements, none of which I understood. And believe it or not, I’m 

an informed lawyer, and if I don’t understand it, I’m not sure how 

anybody else is going to understand it. 

So my first question is, to whoever wants to take it, what can 

we do to make disclosure more effective, and in some cases isn’t 

less more? Whoever would care to take that one, that ball is up in 

the air. 

Ms. BRAUNSTEIN. I’ll take the first shot at that. Since we are the 

rule writers for the Truth in Lending Act, which controls the mortgage disclosures, it’s not everything—people often think that everything you get at settlement comes out of Federal disclosure laws, 

and that’s not really true. There are really only a few pieces of 

paper that are involved with the Federal laws. The rest of it are 

other things. 

But we are engaged in an effort to look at all the mortgage disclosures that are required by the Truth in Lending Act and try to 

make them more understandable. We agree with you that they are 

not optimum at this time. We are planning to engage in consumer 

testing and focus groups. We have gotten away from the idea that 

used to exist in the olden days which was that lawyers sat around 

40

in a room and developed consumer disclosures which ultimately, at 

the end of the day, the only people who understood them were 

other lawyers, and obviously not always even other lawyers. 

Mr. HENSARLING. Well, I commend the effort. I think it is a good 

one, and I think somehow simplicity of disclosure, more effective 

disclosure, what Mr. Scott was speaking of, more effective consumer financial literacy is at least part of what it’s going to take 

to help remedy this situation. 

And I have another question, and that is listening to some people 

engaged in this debate we seem to be going down—in some respects some people seem to be going down what I consider to be 

a slippery slope of only having the lender decide on the suitability 

of a credit product, and that if for some reason the lender chooses 

the wrong credit product then all of a sudden liability will attach 

to the lender. 

It seems to me that a lot of the major players in the market if 

that were true would simply become risk adverse and begin to exit 

this market. And then all of a sudden millions of Americans who 

would have had homeownership opportunities would be denied 

those opportunities. Do you agree with that assessment? 

And once again the ball is up in the air, since I only have time 

for one answer, I assume. Ms. Bair? 

Ms. BAIR. Well, I think borrowers should have the ability to 

repay. It’s an age old underwriting standard, and banks certainly 

are very familiar with underwriting to make sure that when you 

qualify a borrower for a loan, that borrower should have the ability 

to repay the loan. 

I don’t support a suitability standard. I think that’s a securities 

concept. I’m not sure it applies. I think it would be confusing and 

could create a lot of uncertaintly. If we’re talking about ability to 

repay, I think some people confuse the two. I do think we should 

have an ability to repay standard. That’s been around a long time. 

It’s just a commonsense standard. 

Mr. HENSARLING. Thank you. 

Chairman MALONEY. The gentleman’s time has expired. Emanuel 

Cleaver from Missouri. 

Mr. CLEAVER. Thank you, Madam Chairwoman. Can I find out 

first of all those of you who agree—I’m following up on the questions and comments of my colleagues, Mr. Miller and Mr. Scott. So 

can I find out those of you who agree that there is in fact marketing of subprime loans in African-American and low-income 

neighborhoods? Do all of you agree? Is there anyone who does not 

agree? 

What kind of action do you think we should take if we discover 

that there was advertisement going on in a particular neighborhood for joggers to start running in a particular area of the city 

and if they were just given an avalanche of information, flyers 

about jogging in this area and when they jogged in the area they 

were mugged. Do you think that the free market system should 

allow us to continue to allow pamphlets to be distributed in this 

neighborhood about coming to another area where they would be 

mugged or whether something should be done? 

Actually, we’re talking about mugging here anyway, financial 

mugging, so I’m trying to figure out what you think should be done. 

41

Did you understand the question? Did you understand the illustration about passing out leaflets in the neighborhood to get people to 

come jog in an area and they would be mugged when they get into 

the area? Is there anybody who doesn’t understand it? 

Ms. JOHNSON. Congressman, we believe that credit unions can 

actually do a very responsible job of subprime lending, separating 

subprime from predatory lending. There’s a need for subprime 

lending. And again I would say that something that would help 

would be allowing all credit unions to adopt underserved areas so 

that those consumers would have access to another traditional type 

of financial institution. 

Mr. CLEAVER. Okay. Why do you think the marketing is going on 

in African-American and low-income neighborhoods? 

Ms. BRAUNSTEIN. I think that oftentimes there is a perception 

that borrowers in those neighborhoods are more vulnerable and 

that this obviously was a way of generating income on the part of 

the people doing the marketing— 

Mr. CLEAVER. Mugging, mugging. 

Ms. BRAUNSTEIN. And I think that there are a couple of ways 

that we can address that. It’s difficult to stop people from marketing in a neighborhood. However I think, as the Congressman 

from Georgia said, financial education is incredibly important for 

consumers, and we have also tried to encourage prime lenders to 

be more assertive in those neighborhoods. 

Mr. CLEAVER. Is there anyone who disagrees that there’s financial mugging going on directed toward particular neighborhoods? 

Mr. REICH. I don’t doubt that it may be occurring, and to the extent that it is a result of actions by insured institutions who are 

supervised by the regulatory agencies sitting at this table it will 

stop as a result of the proposed guidance, which is out, when that 

guidance becomes effective, when institutions are forced to make 

their loans based upon the abilities, the individual’s ability to 

repay the loan. 

Mr. CLEAVER. Would that include prepayment penalties that— 

Mr. REICH. We have addressed the subject of prepayment penalties in the guidance also. 

Mr. CLEAVER. Thank you, Madam Chairwoman. 

Chairman MALONEY. Congressman Campbell from California. 

Mr. CAMPBELL. Thank you, Madam Chairwoman. I’ve listened to 

a lot of discussion about the difference between predatory and 

subprime, but what I wanted to talk about a little bit is the differences between predatory and poor predatory practices and poor 

underwriting. 

The conditions which have caused this hearing to occur today, 

my perception is that what has been going on is much more attributed to just flat poor underwriting than it is to predatory practices. 

And part of the reason I would say that, and then I’ll ask you all 

to comment on whether you agree with that or disagree with that, 

one of the things we’ve heard a lot about is we have a number of 

these loans out here where the first payment hasn’t been made. 

Well, if the first payment hasn’t been made, that’s really bad underwriting but almost certainly not predatory. In a lot of cases 

there’s bad underwriting but the people have a good interest rate 

and everything else. They just—nobody should have made them a 

42

loan because they just weren’t in a position to pay it back. So do 

you agree that that’s really where the issues are? 

I’m not suggesting there’s no predator. I mean obviously I’m not 

suggesting that. I’m just suggesting that what there’s been a lot of 

lately that perhaps has occurred—gotten to the problem that we’re 

in. 

Ms. BRAUNSTEIN. I think it’s been a combination of lax underwriting, and there also are instances, I’m sure, of predatory lending. I think it would be very difficult to separate and quantify how 

much of which was going on. 

Mr. CAMPBELL. But they are very distinctly different practices. I 

mean arguably predatory, the lender is taking advantage of a potential borrower and making a lot of money on them. With bad underwriting the lender is going to lose money because—if they make 

too many loans that people can’t pay back. 

Ms. BRAUNSTEIN. Well, no. I think there’s a lot more overlap 

than that because even with lax underwriting if there were initial 

fees up front the lender still is going to make something on the 

front end. So I think there’s a lot more overlap between predatory 

and just bad underwriting, and there’s probably some of both in 

this market. 

And as I said, I think it would be very difficult to separate it. 

Mr. CAMPBELL. Anybody else wish to comment on that? Yes. 

Ms. BAIR. You know, I think you’re right. There is a difference. 

I think we were focusing on predatory lending because it’s the subject of the hearing as indicated in the invitation letter. Getting 

back to mortgage fraud, too, another area that we address in the 

draft subprime guidance, these no-doc loans or low-doc loans 

which—and we say in the proposed guidance—in and of itself is not 

a mitigating risk factor. I think a lot of the early payment defaults, 

potential mortgage fraud, there is a correlation between no-doc, 

low-doc loans and these payment defaults. So that’s probably near 

where we’re talking more about poor, very poor underwriting 

versus something—there may not be a balloon at the other end 

that we need to be concerned about—but there still is a problem 

with the underwriting. 

Mr. CAMPBELL. Anybody else wish to comment on that? No? 

Okay then one of my concerns on this, Chairman Bernanke of 

the Federal Reserve, when he was here, was indicating that one of 

the—I think he indicated that the greatest risk factor to recession 

this year was if housing were to take a hard fall. 

The object of what we’re doing here, I hope, is to solidify 

subprime mortgage lending and not dry it up because if we dry it 

up, I think we could potentially put a bunch of houses on the market, take a bunch of buyers out of the market, and potentially create something that drastically hurts the economy. 

Another figure that’s been out there lately has been, I think, the 

13.7 or 13.8 percent, something like that, of subprime loans which 

are currently behind in payments. I frankly can’t recall whether it’s 

30 days, 60 days, or 90 days. 

If that’s the case though, it does mean that 86 percent of these 

people with—it wouldn’t be subprime if the credit weren’t marginal. So it does mean that 86 percent of these people with marginal credit because of the subprime market have been able to buy 

43

homes whereas without the subprime market they wouldn’t. Any 

comments on the loan—because obviously in a subprime you’re 

going to have a higher loan default ratio than you are in a prime 

market or in the A-whatever-it-is market that’s in the middle. 

Any comments on whether that—it’s obviously higher than it 

was, but is it way too high on a historic basis? 

Ms. BAIR. Well, it is high. Historically, they have been higher, 

but we’re seeing a strong correlation between payment resets and 

home price depreciation in areas with these default rates. And the 

adjustable rate products have significantly higher delinquency 

rates than the fixed rate products. 

The problem is to help people restructure into a product that 

they can afford. One thing we’ve been looking at is whether we can 

transition borrowers into fixed mortgages, and that might be the 

silver lining in all of this. We’ve been doing analysis of the rate 

sheets of the major subprime lenders. The rate for their 30-year 

fixed is actually only 40 to 50 basis points higher than the starter 

rate on the 2/28 which a lot of these people are in. 

So we’re thinking that if you can qualify borrowers for a 2-year 

starter rate, you can qualify them for a 30-year fixed. And we’re 

hoping that perhaps as these interest rates reset, and people have 

to refinance, we can get more people into 30-year fixed that would 

not have the payment shock. 

Chairwoman MALONEY. Time has expired. There have been a 

number of issues raised about targeting vulnerable borrowers and 

I wanted to note that the subcommittee will be having hearings on 

this particular subject. The Chair recognizes Congressman Ellison 

of Minnesota. 

Mr. ELLISON. Thank you, Madam Chairwoman. I wonder if, Ms. 

Bair, you could comment on how the clustering of a number of foreclosures that come about in connection with subprime loans impacts a neighborhood. 

Ms. BAIR. Well, it could have a very negative impact on neighborhoods. I mean this is as I indicated in my statement, one of the 

reasons we support and endorse and promote homeownership and 

welcome it and subsidize it. I support all of this is because one of 

the many social benefits is that it stabilizes neighborhoods. 

If you have a series of people in a situation that their homes are 

going to be foreclosed, and they are in danger of losing their homes, 

that’s a tremendous stress not only just on the family but on the 

neighborhood as well. 

Mr. ELLISON. Does it have any other kind of spillover effects beyond just the physical reality of foreclosure? I mean what happens 

to these homes? Are they bought by other homeowners? Are they 

bought up by people who can buy them cheaply? 

Ms. BAIR. I think the first choice is always to try to keep people 

in their homes, to try to undertake loss mitigation techniques to restructure the loan to keep them there. 

Yes, there are adverse economic effects as well. If we have a lot 

of foreclosures and a lot of housing stock going on the market, that 

could further depress a market that’s softening in a lot of areas already. 

Mr. ELLISON. Now what about those—I mean I’m glad that you 

pointed out that you try to get the bank to redo the loan with the 

44

borrower, but is that always possible? I mean what if the bank has 

sold that loan? Can they go back to the same bank where they got 

it? 

Ms. BAIR. That is a problem. We’re having a roundtable on April 

16th with the representatives of firms that securitize these loans 

because there may be some issues about whether the terms of the 

securitization agreements may inhibit the ability to restructure. 

That’s a key area that we’re going to be looking into at this roundtable, so I don’t have a good answer for you right now. 

Mr. ELLISON. So for example if somebody—if a bank were to have 

sold that loan and it got bundled up and packaged with a bunch 

of other loans who then does the borrower go to and try to—is it— 

Ms. BAIR. They would go to whoever is servicing the loan at that 

point. That would be the firm, the entity that would be getting the 

restructuring. But again, whether the servicer has the latitude to 

restructure the loan under the securitization agreement is what we 

need to deal with and we don’t have a good answer. We think there 

is significant latitude, but that’s one of the things we want to get 

into at our roundtable. 

Mr. ELLISON. Another question I wanted to ask you, and it goes 

back to the gentleman who was asking a few questions before, just 

in terms of how people make money on these loans, if it’s a broker, 

isn’t it the case that they already have an incentive to make sure 

that the borrower is going to be able to pay the loans because once 

they do the deal they get their money and they’re out? Is that 

right? 

So the question of whether it’s bad underwriting or good underwriting or the quality of the underwriting, from a broker’s standpoint, once the deal is done and their fees are paid it really doesn’t 

matter whether it’s a well underwritten loan or not. Am I right or 

wrong? 

Ms. BAIR. Well, I think there are a lot of really good mortgage 

brokers out there who don’t want to— 

Mr. ELLISON. And I’m not trying to disparage mortgage brokers. 

Ms. BAIR. And I think the reputable mortgage brokers do worry 

about whether their loans perform in terms of maintaining a relationship with lenders. But there are—as Commissioner Antonakes 

has pointed out and others on this subcommittee—significant problems with the conduct of some mortgage brokers. In that case, they 

are just trying to make a quick buck. You’re right. 

Mr. ELLISON. Yes, and I guess whenever you ask a question 

there are the connotations of the question, and people try to control 

for those so they don’t put anybody down, but leaving all the nice 

stuff aside, after the mortgage broker does the deal they’re going 

to be the most reputable person on the Earth, but they have completed their work— 

Ms. BAIR. No, they are not on the hook for that. 

Mr. ELLISON. Right. Let’s just talk about the loan officer a little 

bit. After the loan officer has—let’s say they’re the one who did the 

deal. After that loan is sold, they’ve made the money they’re going 

to make out of it and they’re done; am I right? 

Ms. BAIR. Yes. 

Mr. ELLISON. So when it comes down to whether or not—so there 

really is a more serious problem than just whether—I mean they 

45

actually—in some ways there is an incentive to have loans underwritten in a way that facilitates the doing of the deal but not necessarily the paying of the mortgage. 

Ms. BAIR. I hate to qualify, but I really do feel like I need to. I 

think lenders, responsible lenders, do worry about their reputations 

and their relationships with those who acquire their mortgages to 

keep this pipeline open. So I do think there’s some reputational 

risk that serves as an incentive to have well performing assets. 

That said— 

Mr. ELLISON. Ms. Bair, it sounds like you’re saying that I’m 

wrong and that— 

Ms. BAIR. You’re not wrong. 

Mr. ELLISON. Okay. 

Ms. BAIR. There’s no doubt that securitization has had an impact 

on the loosened underwriting standards we’ve seen by lenders. 

There’s no doubt about it. 

Mr. ELLISON. Thank you. So the answer is yes. There is an incentive— 

Chairwoman MALONEY. The gentleman’s time has expired. 

Thank you. 

Mr. ELLISON. 30 seconds? 

Chairwoman MALONEY. We’re running out of time. We have two 

more speakers, Joe Baca of California and Al Green of Texas, and 

then we have to conclude this first panel so that we have time for 

the second panel. 

As I said in my opening remarks, we have a time limit on the 

amount of time we can be in this room and we need to have time 

for our second panel. 

Joe Baca of California. 

Mr. BACA. Thank you very much, Madam Chairwoman. Thank 

you very much for having this hearing. I think it’s very important 

to a lot of us, especially what’s going on nationwide. 

We realize the impact that it has on the poor and the disadvantaged, especially as it pertains to African Americans and Hispanics, 

so we appreciate having the hearing, and I appreciate the gentleman’s question right now, and I wanted just to follow up a little 

bit with it. 

Is there a list of those who abuse the system right now, and 

maybe when we talk about an educational process that needs to be 

done, whether it’s financial institutions, financial education? What 

we need to do though is those mortgage brokers that are abusing 

this system, we need to put out a list of those individuals so we 

can begin to educate our communities—these are the bad lenders 

out here that are abusing the system, that are taking advantage 

of the poor, the disadvantaged and others who are just out to make 

a profit and they don’t care about the individual in terms of the 

loans. That needs to be done, so I appreciate that. 

But I want to get back to a specific question. And I want to know 

the impact of subprime lending on Latino homeowners. What control will be put in place to protect consumers from predatory practices and especially how will you ensure that the exorbitant fees 

and rates associated with subprime practices will not occur with future borrowers? 

46

That is question number one. Any one of you can answer that, 

or Ms. Braunstein, would you please tackle that? 

Ms. BRAUNSTEIN. Well, that was one of the reasons that we have 

issued the proposed subprime lending guidance was to address 

some of those issues about borrowers and hopefully—I think that 

guidance is already taking effect in the marketplace and will continue to. 

Mr. BACA. But how are we holding them accountable and what 

oversights are we doing on those individuals who continue to still 

give out the loans? So there has to be some accountability for those 

that continue to prey on the poor, the disadvantaged, especially 

when I look at Inland Empire, where I come from, there’s a high 

number of foreclosures and defaults in my area. So we’re not holding those individuals accountable yet we have people that are losing their homes. And this is for the very first time that they’ve 

bought a home, they maintain a home but they have some bad advice because someone wanted to take advantage. 

Ms. BRAUNSTEIN. Most of the bad actors to which you refer are 

not in the depository institutions, which is who we regulate and supervise. If we find that there are practices that are illegal or fraudulent in our institutions we do take action, however a number of 

the actors in the market that we’ve just talked about are not being 

supervised directly by anybody. 

Mr. BACA. Who’s responsible for supervising them? 

Ms. BRAUNSTEIN. Pretty much the States. 

Mr. BACA. And why aren’t they? 

Mr. ANTONAKES. Well, I beg to differ with my colleague in terms 

of them not being supervised. They are being supervised. And our 

database— 

Mr. BACA. If somebody is making the statement that they’re not 

supervised, then there is a concern right here, and that’s affecting 

us in our communities. If somebody is saying that the State isn’t 

doing it and yet when you look at the foreclosures in each of the 

areas and its impact—and specifically when it has—and I’m concerned from the Hispanic perspective, the foreclosures and people 

that are losing their homes right now. 

Something needs to be done. There has to be the accountability. 

There has to be that oversight. 

Mr. ANTONAKES. I agree completely, Congressman. And I would 

only add that broker supervision largely falls to the States. 

Through our database we will have a collection of public enforcement actions against brokers. I would also add however that certainly the securitization of loans has created incentives for prudent 

underwriting standards to become lax and for brokers to push 

through loans. 

However those loans can only be pushed through if they’re funded by someone, if there’s a product available. The broker can’t do 

that on their own. And that is done through other firms, lenders 

and national institutions and also provided by direct financing from 

companies from Wall Street. 

I would suggest—and we’ve done it in my State in Massachusetts 

many years ago—that if a bank has lines of credit with either a 

lender that is pushing through predatory loans or loans that aren’t 

underwritten appropriately that the national regulator through the 

47

COA authority has a responsibility to take that into account, those 

practices. If they know that they’re doing business with inappropriate lenders, then they should take action. 

Chairwoman MALONEY. The gentleman’s time has expired. Mr. 

Green from Texas. 

Mr. GREEN. Thank you, Madam Chairwoman, and I thank each 

of the witnesses for appearing today. In one of our great documents 

we connote, indicate if you will that all persons are created equal. 

Apparently something happens between creation and loan acquisition because for whatever reasons we are finding that invidious 

predatory lending impacts some ethnic groups more than others 

and the question really is what will we do about it. 

But before going to the question, let me just mention testing. 

Every time, every single time we have employed testing we have 

found that invidious discrimination exists, every single time. Given 

that we know that it exists, what have we been doing to combat 

it in terms of prosecuting persons? Can anyone comment, please? 

Ms. BAIR. Again, we only regulate depository institutions, statechartered depository institutions, in the FDIC’s case. We identify 

outliers based on the HMDA data. We do very vigorous compliance 

reviews of the banks that are shown to be outliers under the 

HMDA data. We’ve referred cases already where we’ve identified a 

pattern or practice of discrimination to the Justice Department for 

prosecution, so we take it very seriously and we very vigorously examine for it. 

Mr. GREEN. How many cases have been prosecuted by the Justice 

Department in the last year? 

Ms. BAIR. That I wouldn’t know. We could try to find out for you. 

Mr. GREEN. Anyone have any information? Do you know how 

many within the last 5 years? 

Ms. BAIR. We could contact the civil rights division of the Justice 

Department. No, we don’t. I don’t know off the top of my head, but 

we could try to find the information for you. 

You’re interested in financial services areas, yes? 

Mr. GREEN. Yes, I’m interested in knowing what we actually are 

doing, given that we have empirical data to suggest that certain 

things are occurring. 

Ms. BAIR. Right. 

Mr. GREEN. What are we actually doing about it? 

Ms. BAIR. Well, the availability of HMDA data, to the level of detail we currently have, is relatively recent. We just began getting 

this level of detail last year, so our ability to use this as a tool is 

a fairly recent vintage. 

Mr. GREEN. Let me move on to something else. We have a number of families who will lose their homes and as a result they will 

have credit problems. What are we doing to give them an opportunity? Assume that you are foreclosed on, what are we doing to 

give them an opportunity to reenter the credit market and have another opportunity to own a home given that we know that we have 

a circumstance with the housing prices falling and with a lot of 

these loans being subprime? What are we doing to give them an 

opportunity to get back into the housing market? 

Mr. REICH. Well, to the extent that these families are in homes, 

the mortgages are held by the depository institutions that we reguVerDate 0ct 09 2002 17:20 Jul 27, 2007 Jkt 035410 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\35410.TXT HFIN PsN: TERRIE
48

lators regulate, we are encouraging the institutions to work with 

these families prior to the foreclosure completion to forestall a foreclosure or to try to prevent a foreclosure from taking effect. 

Mr. GREEN. After foreclosure, what are we doing? We have literally, my suspicion is, millions of persons who will find themselves 

losing their homes, and we want to give them an opportunity to get 

back into the market. 

Let me go to the next question. What about the cost of this? 

What is it going to cost in terms of dollars with all of the foreclosures? What will be the amount of money that the marketplace 

will lose due to the foreclosures? Anyone know? 

Mr. REICH. It’s difficult to project. 

Mr. GREEN. Is it billions? 

Ms. BAIR. I think there is a recent study, it’s not a government 

study, that estimated—I think it was about $140 billion over the 

next 6 years. 

Mr. GREEN. $120 billion? 

Ms. BAIR. $140 billion. 

Mr. GREEN. Total? 

Ms. BAIR. Over the next 6 years. We can get you a copy of the 

study. I’m going off the top of my head, but I think that was the 

ballpark about what they—that is one private sector study. 

Mr. GREEN. If we bonded many of these persons who are going 

to be foreclosed on, would they—with a better interest rate would 

they be able to stay in the marketplace and maintain their homes? 

Anyone? 

As some States are doing, bonding? 

Ms. BAIR. Sir, I’m sorry. I should not have spoken off the top of 

my head. Over 6 or 7 years—would result in loses of about $112 

billion. It’s 143,000 foreclosures every year over the next 6 years. 

Mr. GREEN. Here’s my closing comment, Madam Chairwoman, 

and thank you. We are spending about $333 million a day on the 

war. We seem to find the money to cure the ills that we deem to 

be a priority. It seems to me that we ought to do more to find a 

way to help people maintain their homes given that we know that 

some of the circumstances that are causing them to lose their 

homes are somewhat shady, and that’s being kind. I think we need 

to do more, and I yield back the balance of my time. 

Chairwoman MALONEY. That’s a good point to end on, and we are 

out of time. I would like to follow up on the point that the gentleman made on enforcement or the lack thereof. And I would like 

to ask a question. My time has expired, so if you would, get back 

to me in writing. 

If the guidance were made for the whole market, who would enforce that for each of the different sectors? The Truth In Lending 

enforcement plan would give the FTC enforcement authority over 

a large part of the market, but as several of you have testified the 

examination powers of the Federal banking regulators are important. So your comments—if you could, get back to us in writing on 

how we would make the enforcement go forward. And I would just 

like to end with that point that many of you made that the bankers 

will not be selling these loans if lenders don’t make them. 

49

And going back to the guidance, which basically says that you do 

not make loans to people who cannot afford it, would in many ways 

adjust and correct this market. 

I would like to say that the Chair notes that some members may 

have additional questions for this panel, which they may want to 

submit in writing. And without objection, the hearing record will 

remain open for 30 days for members to submit written questions 

to these witnesses and to place their responses in the record. 

I want to thank you for your testimony today and for your attention to this very pressing problem. Thank you very much. 

[Recess] 

Chairwoman MALONEY. The subcommittee will come to order. We 

have a limited amount of time remaining to us. Our second panel 

this afternoon consists of several distinguished members as well. 

We have: Michael Calhoun, president of the Center for Responsible 

Lending; Josh Silver, vice president of research and policy for the 

National Community Reinvestment Coalition; Allen Fishbein, director of housing and credit policy for the Consumer Federation of 

America; John Robbins, chairman of the Mortgage Bankers Association; Harry H. Dinham, CMC, president of the National Association of Mortgage Brokers; and Mr. Alex Pollock, resident fellow, 

from the American Enterprise Institute. And without objection, the 

witnesses’ written statements will be made part of the record. You 

will each be recognized for a 5-minute summary of your testimony. 

The Chair now recognizes Mr. Calhoun for 5 minutes. 

STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT, CENTER 

FOR RESPONSIBLE LENDING 

Mr. CALHOUN. Thank you Madam Chairwoman, Ranking Member Gillmor, and members of the committee, for the opportunity to 

speak to you today about the causes, the impact, and most importantly the reforms necessary to address the foreclosure crisis seen 

today in the subprime market. First, I think it’s important to look 

at what the typical subprime loan today is like, and when you do 

that, you will quickly see a lot of the origins of our problems. 

The typical subprime loan today has a built-in payment shock of 

40 to 50 percent, even if market rates do not increase. For example, 

a typical subprime loan starts at 71⁄2 to 8 percent, and when it readjusts as you have heard about today, it will jump to nearly 12 

percent again, even when market rates do not change. That same 

loan typically has no escrows for taxes or insurance, making them 

due in a lump sum, which further stresses the borrower. It’s based 

on undocumented income and it typically comes with a prepayment 

penalty that most borrowers end up paying. As a result of that, our 

research shows that over 2 million borrowers in the subprime market will lose their homes. 

And it is important to put that in context, as people have said 

today. Subprime loans make up less than one-sixth of the overall 

mortgage market, yet they are producing almost two-thirds of all 

foreclosures in the entire mortgage market today. We have done 

further research which is set out in detail on page 13 of my testimony, that shows the macro impact of this on homeownership. 

Going back over a 9-year period, it shows that the net impact is 

50

almost a million more families lose their homes as a result of 

subprime lending than are to homes as first-time homebuyers. 

That’s driven by two pieces of data. As Representative Miller 

noted, a very small percentage of subprime loans are in fact first 

time homebuyer loans. And then second, you have these very high 

levels of foreclosures. You put those together and you have the fact 

that today the subprime market has been a destroyer not a creator 

of homeownership for American families. As Chairwoman Bair 

noted, that’s not only tragic, it’s unnecessary. As she pointed out, 

a subprime borrower can receive a standard 30-year fixed rate 

mortgage at a lower rate and lower monthly payment than they 

would receive one of these 2/28 TSR arms with a built-in payment 

shock. But market dynamics make it more profitable for participants in the mortgage market to give them that much riskier loan. 

What reforms are needed? 

First of all, of course, the guidance that we talked about should 

be implemented. There are major attempts though of push-back by 

some lenders who openly criticize that guidance, and that must be 

fought off. Second, the HOEPA Authority under the Fed; the responsibilities of the GSEs to meet the standards must be followed. 

Families in foreclosure also need help with workouts. FHA, which 

I think you will address soon, will play a major role. 

There also are two legal impediments for these families now that 

I urge you to investigate. First the tax code often makes loan forgiveness taxable to the borrowers, so even if they are able to get 

loan forgiveness, they can still get a notice from the IRS saying 

that they owe tens of thousands of dollars in additional taxes. Second, the Bankruptcy Code is presently stacked against homeowners, making it almost impossible for them to modify and get relief when they are behind on their mortgage. 

Finally, there needs to be action on a national bill for sustainable 

home lending. At the top of that list needs to be addressed the 

broker role, which is being addressed today. First, under current 

law, brokers are generally allowed to disclaim any duty to the borrower. It needs to be affirmatively established that they have a fiduciary duty to the borrower. Second, today, brokers are even allowed to receive bonuses for putting borrowers in higher interest 

loans than they qualify for. That should stop, most importantly for 

enforcement. Lenders need to be held responsible for the acts of 

brokers. That’s the self-enforcing market mechanism that’s been 

needed. 

There’s been talk here of education. Let me suggest—we don’t 

tell purchaser’s of insurance policies to go educate themselves by 

reading insurance books to make sure that their insurer doesn’t go 

out of business. It is much the same in the mortgage market. There 

need to be substantive standards. Education has a role, but it won’t 

be the only solution. 

Finally, there needs to be flexibility. It was indicated today that 

the 1999 North Carolina Mortgage Predatory Lending law did not 

address a lot of the practices that we see today that developed in 

only the last couple of years. I think you will see further action by 

North Carolina in this legislative session. 

Thank you for this opportunity to share our comments. 

51

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

288 of the appendix.] 

Chairwoman MALONEY. Thank you very much. 

The Chair now recognizes Mr. Silver. 

STATEMENT OF JOSH SILVER, VICE PRESIDENT OF RESEARCH AND POLICY, NATIONAL COMMUNITY REINVESTMENT COALITION 

Mr. SILVER. Chairwoman Maloney, Ranking Member Gillmor, it 

is an honor to be here today as a voice for the over 600 community 

organizations that comprise the National Community Reinvestment 

Coalition. NCRC is the Nation’s economic justice trade association 

dedicated to increasing access to fairly priced credit and capital for 

minority and working class families. We stand on the precipice of 

a mortgage tsunami in the United States. 

According to the FDIC, interest rates are due to rise for borrowers of one million subprime loans in 2007, and another 800,000 

borrowers in 2008. In numerous cases, unsuspecting borrowers discover that the introductory TSR rates on subprime ARM loans have 

expired and are replaced by unaffordable monthly payments. More 

than 14 percent of outstanding subprime loans were delinquent by 

the end of 2006, 

The final regulatory guidance on non-traditional mortgages and 

the proposed guidance or subprime arm loans are necessary but not 

sufficient to save us from hundreds of thousands of foreclosures. 

The guidance requires lending institutions to assess borrower capacity to repay at the fully indexed rate, not the TSR rate. The 

sound underwriting in the proposed guidance should eliminate 

many of the abuses in the unsafe and interceptive ARM subprime 

lending. Yet, the guidance does not come close to providing comprehensive coverage. It applies to about half of the subprime lending, which is conducted by banks, thrifts and their affiliates. It 

does not cover prime ARM lending, which can also be problematic 

when TSR rates are low and when the APR is in the upper ranges 

of prime pricing. The guidance also cannot directly cover non-banking institutions, including brokers, appraisers, closing agents, 

securitizers, and services, all of whom contain abusive actors perpetuating and enabling dangerous lending. 

While the regulatory guidance is a good start, Congress needs to 

pass a comprehensive anti-predatory lending bill. You will hear industry representatives insist that policymakers should not overreact and, therefore, choke off lending and the American dream of 

homeownership. These assertions, however, fail to recognize that 

lending markets are broken, as Representative Ellison was trying 

to draw out. The problem is there is a lack of financial incentives 

for the actors, brokers, and securitizers and several other actors to 

behave responsively. 

NCRC’s experience and research demonstrate that the broken 

marketplace needs a major fix in order to avoid the tsunami. 

NCRC operates a foreclosure prevention program called the Consumer Rescue Fund and engages in mystery shopping on a national 

level. In my written testimony, I describe a number of Rescue Fund 

cases in which borrowers of subprime ARM loans experience multiple abuses committed by appraisers, brokers, loan officers, and 

52

servicers. Tragically, NCRC has reaffirmed that these overwhelming abuses are disproportionately experienced by minorities 

and hard-working Americans—the very same families that industry 

trade associations want to protect from more regulation and consumer protection. 

We conducted national level mystery shopping of subprime mortgage companies and brokers in several metropolitan areas. We 

armed our minority mystery shoppers with better qualifications. 

Yet, they consistently received less service, higher subprime 

rates, and fewer loan options than white shoppers. When we combined credit within this data, it withheld the data. We found that 

the portion of subprime lending was higher as a portion of minorities and the elderly was higher enablements in several large metropolitan areas. CRL and Federal Reserve economists have found the 

same things. The lending marketplace is broken and the victims 

are disproportionately minorities, the working class, and the elderly. 

So, I conclude with three major policy recommendations. Congress must swiftly pass a strong comprehensive anti-predatory 

lending bill. The abuses are too pervasive and cut across too many 

actors in the industry to be tackled successfully by regulatory guidance. Second, Congress must pass the CRA Modernization Act of 

2007, H.R. 1289. The Federal Reserve has found that CRA encourages banks to make more prime loans, thus, CRA acts to increase 

product choice in working class and minority neighborhoods. 

CRA also provides fair lending reviews, checking for abusive 

lending. CRA must be applied to all bank affiliates, large credit 

unions, and independent mortgage companies. Recently, NCRC 

called on the Administration and Congress to re-till the FHA program so they could offer rescue refinance loans to victims of predatory lending. In addition, Congress should consider a national foreclosure fund to offer remediation for families experiencing foreclosure through no fault of their own. 

It is time to put American families first. Hundreds of families 

and children are losing their homes every day due to predatory 

lending. That is not a marketplace that is working. Haven’t we deregulated enough? It is time to end the suffering and save the 

American dream of homeownership by passing a strong national 

anti-predatory lending bill. 

Thank you so much. 

[The prepared statement of Mr. Silver can be found on page 315 

of the appendix.] 

Chairwoman MALONEY. Thank you so much. 

Mr. Fishbein? 

STATEMENT OF ALLEN FISHBEIN, DIRECTOR OF HOUSING 

AND CREDIT POLICY, CONSUMER FEDERATION OF AMERICA 

Mr. FISHBEIN. Chairwoman Maloney, Ranking Member Gillmor, 

and members of the subcommittee, it is a pleasure to be here today 

to testify on behalf of the Consumer Federation of America. And, 

we congratulate you for holding these hearings, which are coming 

at the timeliest of times. 

CFA is a national federation of some 300 pro-consumer organizations established in 1968 to engage in research, public education, 

53

and advocacy in support of the interest of consumers. The goal of 

advancing sustainable homeownership is an important one for CFA 

and its members. Homeownership can have many benefits, not the 

least of which is the opportunity it provides to build personal 

wealth. But these advantages are being eroded by the mass marketing of high risk non-traditional mortgage products to many consumers for whom they are not appropriate. What these loan products have in common is that they trade lower initial monthly payments for higher payments later that can escalate dramatically, 

making these loans unaffordable for unsuspecting borrowers. 

The abandonment in recent years by many lenders of careful underwriting based on the borrower’s ability to repay without refinancing or selling their home has made these loans even riskier. 

Of particular concern are the high adjustable rate mortgage products that Mr. Calhoun and others have spoken about that became 

the predominant product in the subprime market. Until about a 

year ago, rising home prices and relatively low interest rates made 

it possible for borrowers to refinance or sell their homes after the 

initial period ended, or if they ran into trouble making payments. 

This masked the fact the fact that many lenders were qualifying 

borrowers based on the loans start rate, when home price appreciation leveled off as it did last year, delinquencies and defaults took 

off rising to the highest level in a decade. 

Delinquencies usually rise when the housing market slumps because borrowers are more likely to encounter difficulties in selling 

their homes. In addition, if the prices fall, borrowers may find 

themselves without the necessary equity to refinance it to a more 

affordable loan. And this is why we are seeing this problem mushrooming right in front of our eyes. The widespread use of exploding 

payment ARMs, and other payment deferred, non-traditional mortgage products points to a fundamental concern about whether consumers really understand just how much their monthly payments 

can jump with these and other risky products. 

In my written testimony, we discuss several examples of research 

indicating that many consumers do not understand these terms. 

CFA believes, therefore, that it is an opportune time to examine 

the efficiency of steps that have been taken and whether additional 

action is warranted. We also believe that more focus should be directed at financial institutions, investors, government, and the nonprofit sector to find creative solutions for keeping at-risk families—

who have been victimized by lax underwriting—in their homes. In 

my written testimony, we summarize three areas of particular attention and I would like to just highlight them. 

First, the lack of accountability for key actors in the marketplace. 

Risk to consumers is vastly different today than risk to the industry. Lender’s today can shield themselves from the full potential 

impact of foreclosures by selling their loans to investors through 

mortgage securities. In effect, higher foreclosure rates have become 

the cost of doing business. This presents risk for individual home 

borrowers who cannot insulate themselves the same way against 

this higher risk. 

Mortgage brokers who originate the majority of subprime loans 

have an incentive to close as many loans as possible and a very 

good reason not to consider the loan’s future performance. The lack 

54

of effective oversight and consumer protections, both the front and 

back ends of the subprime market, are contributors to the problem 

we are witnessing today. 

And we have one suggestion for one of your future hearings and 

that is to invite the Securities and Exchange Commission to be 

here and talk about what they think are the nature of some of the 

problems in the marketplace, and whether current regulations that 

they oversee are adequate. 

Two, the Federal Banking Agency guidance, while it is helpful 

and will help correct some of the abuses in the marketplace, is not 

enough. Additional steps are needed. Finalizing the proposed 

subprime statement that was issued by the regulators on March 

8th would help to restore sound underwriting for subprime loans. 

We support its quick adoption. I would also like to offer a letter 

from some 70 organizations, written to the regulators on February 

21st asking for the issuance of guidance along these lines. 

At the same time, we recognize that there are important limitations to this policy guidance and it will take a long time to be fully 

implemented. Thus, we support the need for a comprehensive rewriting of consumer protection laws, which we feel need to be updated. 

Thank you. 

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

346 of the appendix.] 

Chairwoman MALONEY. Thank you so much, and we are considering having a hearing along those lines. 

Mr. Robbins. 

STATEMENT OF JOHN M. ROBBINS, CHAIRMAN, MORTGAGE 

BANKERS ASSOCIATION 

Mr. ROBBINS. Thank you for the opportunity to speak about an 

issue that has captured the attention of this committee and the financial services industry. As Mortgage Banker’s Association statistics show, delinquencies and foreclosures have risen over the past 

6 months, particularly in the subprime market. In response, regulators have established new standards. Investors have punished 

companies that made bad loans, and I am here today to answer 

your questions about the effect it is having on consumers. 

I believe MBA’s data in a written statement is both objective and 

comprehensive, and I am confident that it is the most authoritative 

in its data because it includes 86 percent of all outstanding mortgages. Economics aside, I want to talk today from the heart as 

someone with 36 years of mortgage experience, and what I have 

seen of late troubles me deeply. Responsible lenders only extend 

credit to borrowers who are willing and able to make mortgage 

payments. They do not trick borrowers into loans that are 

unsustainable and they do not hold on something that is only a mirage of the American dream. 

I have conducted my professional life according to these standards as has nearly every member of the Mortgage Bankers Association. Yet, bad loans were made. They were not made responsibly 

or with the best interest of the consumer in mind. For the most 

part, those making these poor loans have been punished by Wall 

Street and restrained by regulators, and while we must ask what 

55

lessons we should learn from these mistakes, it is equally important for those in positions of authority to help current homeowners 

stay in their homes. 

Working together, I suggest that we accomplish three things: stabilize the subprime mortgage credit system; provide assistance for 

homeowners facing foreclosure; and, finally, prevent this from ever 

happening again. First, reaction from investors has been swift. Already, more than 20 subprime lenders have closed their doors. As 

we watch this, we must remind people not to confuse subprime 

with predatory, and, we must reiterate that while subprime foreclosures are high, at 41⁄2 percent, currently they remain below their 

historic peak of 10 percent. A sound perspective and a prudent regulatory hand will seize investors, calm editorial writers, and most 

importantly, help consumers. 

Second, for subprime borrowers who are facing foreclosure, industry and policymakers must partner to help provide options so 

that as many as possible are able to retain their homes. Chairman 

Dodd recently called for a summit of all parties to address this 

problem. MBA embraces that idea. Further, we at MBA strongly 

encourage all borrowers who find themselves unable to make payments to contact their lender immediately. Lenders lose money on 

foreclosures—in my company, it was $40,999 for each one—and so 

they have have a strong desire to make any number of arrangements that would allow a borrower to start making payments again 

and keep his or her home. 

Third, lawmakers, regulators, and industry must work to ensure 

that this situation does not occur in the future. Borrowers are 

smart. When given good information, they make good decisions, but 

they make poor decisions when they have bad information. And, 

absence of pricing transparency coupled with the daunting and 

complicated closing process has permitted certain actors to prey on 

the unsophisticated. But frankly, every person from subprime to 

jumbo borrower is susceptible when even the chief executive officer 

of FNMA and the Secretary of HUD by their own admission cannot 

understand all the documents at a mortgage closing. 

The mortgage market is desperate for a rewrite of the Nation’s 

settlement laws and a strong uniform lending standard to trap 

predators and bring them to justice. I stand ready to meet with 

each member of the financial services committees to discuss what 

MBA will do to work to accomplish these goals. Together, we can 

ensure that predatory lenders don’t foreclose on the American 

dream. 

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

360 of the appendix.] 

Chairwoman MALONEY. Mr. Dinham. 

STATEMENT OF HARRY H. DINHAM, CMC, PRESIDENT, 

NATIONAL ASSOCIATION OF MORTGAGE BROKERS 

Mr. DINHAM. Good afternoon Chairwoman Maloney, Ranking 

Member Gillmor, and members of the committee. I am Harry 

Dinham, president of the National Association of Mortgage Brokers. NAMB is committed to preserving the vitality of our cities 

and the goal of homeownership. We commend the subcommittee for 

holding this hearing. NAMB is the only trade association devoted 

56

to representing the mortgage broker industry. Mortgage brokers 

must comply with a number of State and Federal laws and regulations. We are subject to the oversight of not only State agencies, 

but also HUD, the FTC, and to a certain extent, the Federal Reserve Board. 

First, let me say, it is a tragedy for any family to lose their home 

to foreclosure. No one disputes this. Foreclosure hurts not only the 

family, but the neighborhood and surrounding communities. As 

small business brokers, we live, eat, shop, and raise our families 

in these communities. When consumers’ properties decline, our 

property values decline. When consumers’ neighborhoods become 

unstable and prone to violence, our neighborhoods become unstable 

and prone to violence. More than any other channel, brokers live 

by the motto: Once a customer, a customer for life. What happens 

in our neighborhoods and in our communities hurts all of us. Mortgage brokers do care. We believe everyone from Wall Street to 

mortgage originators should work together to develop and implement appropriate solutions. At the same time, we must remember 

that today America enjoys an all-time record rate of homeownership, almost 70 percent. 

The challenge we face now is how do we help people avoid foreclosure, and at the same time ensure that they have continued access to credit. We realize that a number of recent reports have focused on the rise in home foreclosures. The truth is that we can 

only speculate on the causes responsible for the rise in home foreclosures. There are a number of possible factors: bankruptcy reform, minimum wage gains, credit card debt, decreased savings 

rate, decreasing home values, second homes, fraud, illness, and 

other life events, to name just a few. 

Do not rush to judgment before we have all the facts. We understand that Congress will be calling for a GAO study on the causes 

of foreclosure. We expect the study to take into account a number 

of possible economic and non-economic factors. We should examine 

the conclusions before implementing any policy decisions that could 

unfairly curtail access to credit. A President challenged the industry to increase minority homeownership by 5.5 million families by 

2010. Wall Street investors, securitizers, rating agencies, underwriters, realtors, and originators responded in an effort to help 

families own homes. 

The events of the past 2 decades have created a mortgage market. Where today Wall Street creates a demand for certain mortgages and sets the underwriting criteria for these mortgages, it is 

this criteria and not the mortgage originator that decides whether 

the consumer qualifies for a particular loan product. With this said, 

all of us, industry, government, and consumers, have a role in helping these families stay in their homes. 

Here is a brief summary of what NAMB is doing to help families 

achieve and maintain responsible homeownership. We support the 

intent behind some of the key principles of the proposed guidance, 

as well as the need to expand this application once finalized to all 

market players to ensure uniformity and a level playing field. We 

continue to advocate for affordable housing, including FHA reform, 

and have pushed for increased mortgage broker participation in the 

57

program. We must make FHA a real choice for non-prime customers. 

We support authorizing VA to provide reverse mortgages and expand access to credit, especially for elderly veterans. Since 2002, 

we are the only trade association that has advocated for education, 

background checks, and increased professional standards for all 

mortgage originators, not just mortgage brokers. We continue to 

oppose the flawed system proposed by CBS Armor, because it is 

riddled with exemptions, enables bad actors to move freely unchecked, and will give consumers a false sense of security,. It does 

not effectively address mortgage fraud or accountability. 

We prepared and submitted to HUD a revised good faith estimate to help improve comparison shopping. Our code of ethics and 

best business practices prohibit placing pressure on, or being pressured by, other professionals and we proposed the development of 

loan specific disclosures to be given to consumers at the shopping 

stage and beginning of funding. This would help consumers avoid 

payment shock. 

Thank you for the opportunity to appear today. I am happy to 

answer any questions. 

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

392 of the appendix.] 

Ms. MALONEY. Thank you. 

Mr. Pollock. 

STATEMENT OF ALEX J. POLLOCK, RESIDENT FELLOW, 

AMERICAN ENTERPRISE INSTITUTE 

Mr. POLLOCK. Thank you, Madam Chairwoman, Ranking Member Gillmor, and members of the committee, for the opportunity to 

be here today. I will use my 5 minutes—and I noticed that the 

Chair is rigorous in enforcing the 5 minutes—to try to make five 

points: One, the classic credit overextension pattern of the 

subprime mortgage bust; two, the trade-off between risk and homeownership as a market experiment; three, fraud; four, the proposed 

regulatory action; and five, my proposal for a one-page mortgage 

disclosure document. Congressman Hensarling and Congressman 

Scott both mentioned the difficulty, as have other commenters, of 

understanding what you are getting into with a mortgage. I propose this one-page disclosure idea, which I will talk about more in 

a minute. 

First, as we all know, the subprime mortgage boom is over and 

the bust is here. And Ranking Member Gillmor, unlike the members of the other panel, I am more pessimistic about where busts 

go, all of the connections that you don’t necessarily see when you 

first look at it, when there are serious credit problems. 

In the mortgage market and in the wider economy, this is consistent with the context, which is that all of the elements of the 

current subprime bust display classic errors of credit overexpansions, which are very familiar to students of financial history, and 

which many of us have lived through before. It is essential to remember that the boom gets going because both lenders and borrowers experience success in the beginning. As long as the asset 

price is rising, taking on risky debt by a borrower and making 

risky loans succeed, and that success and belief in the continuing 

58

asset price rise ultimately sets up the bust. That is true whether 

the asset is dot com stocks, oil, commercial real estate, houses or 

anything else. It is first, success which builds up the optimism 

which creates the boom which sets up the bust. 

Second, there is a constant trade-off being made between risk 

and homeownership. The American homeownership rate, as many 

have pointed out, has moved up to 69 percent. On an international 

basis, this is a good but not remarkable ratio. The United States 

ranks tenth, is actually tied for tenth, among advanced economies 

in homeownership ratio. The mortgage market is constantly experimenting with how much risk there should be, how that risk is distributed, and how it trades off with success or failure of lenders 

and borrowers. If we want the long-term growth and innovation 

that only market experimentation can create, then we will have 

boom and bust cycles. In economics, nothing is free. You can move 

the risks around, but you cannot make them disappear. 

Many people have rightly brought up the long-term, fixed rate 

mortgage loan, which is an excellent instrument, but I would remind the subcommittee that this form of mortgage caused the collapse of the savings and loans in the 1980’s. Subsequent to that, 

to preserve the fixed rate mortgage required vastly expanded 

securitization. But securitization, as other people have pointed out, 

breaks the link between the originator of the mortgage loan and 

who actually bears the credit risk. Nothing is free; everything is 

trade-offs. 

Third, fraud. Unfortunately, booms induce fraud. This is the testimony of history. This results in scandals on the part of both lenders and borrowers in some instances. Thus, we have fraud in multiple directions. Consider in this context, so-called ‘‘stated income’’ 

loans. You would think that the disastrous previous experience 

with this bad idea, then called ‘‘no doc’’ or ‘‘low doc’’ loans and now 

‘‘liars’ loans’’ would have been remembered, but it seems to have 

been forgotten by the lenders. On the other hand, I would like to 

point out that any borrower who lies about their income in order 

to get a loan hardly qualifies as a victim. 

Fourth, it is late in the cycle, as has been observed. Losses are 

rising; credit is tightening; liquidity is disappearing; asset prices 

are falling; and it is hard to do the right thing as a regulator that 

is both in line with prudent standards and doesn’t induce further 

tightness and reduction in credit. It seems to me the proposed 

statement on subprime mortgage lending is in general a sober and 

sensible attempt to balance these pressures, although how to set 

the final balance is still open. 

I will mention what hardly anyone has mentioned today: down 

payments and savings. One mortgage lender was quoted as saying 

recently, ‘‘Well, we’ll just have to tell some borrowers they have to 

save for a down payment.’’ That struck me as quite a novel idea. 

Imagine that. You might have to save. 

Finally, the one-page disclosure: It has been pointed out that the 

complexity and opacity of closing documents, many ironically mandated by regulation and law, makes it hard for borrowers to understand what they are doing, even for quite sophisticated people. I 

have had, as I am sure we all have, the experience of being overVerDate 0ct 09 2002 17:20 Jul 27, 2007 Jkt 035410 PO 00000 Frm 00066 Fmt 6633 Sfmt 6633 K:\DOCS\35410.TXT HFIN PsN: TERRIE
59

whelmed and befuddled by the huge stack of closing documents full 

of confusing language. 

We could have a one-page disclosure form—my written testimony 

details what it should look like—which would make it impossible 

for borrowers to be unsuspecting or surprised that the rate went 

up. Or, to discover they had a prepayment fee after the fact; we 

have to always know that before the fact. 

Thank you, Madam Chairwoman. 

[The prepared statement of Mr. Pollock can be found on page 428 

of the appendix.] 

Chairwoman MALONEY. I thank all of the gentlemen for their testimony. I am told we may have a vote at any moment, at which 

point we will not be able to continue with the panel as another 

committee is scheduled to come in. 

But I would like to ask all of the panelists this one question. 

Even as the subprime market was looking more and more risky, 

the incentives for borrowers, lenders, brokers, and investors kept 

expanding the market into riskier and riskier products. 

How can we change the incentives at each step of the chain so 

that we encourage sound lending practices? And, I would like to 

start with you, Mr. Calhoun. 

Mr. CALHOUN. Thank you, Madam Chairwoman. As I indicated 

in my comments, you can start at the beginning; the majority of 

subprime loans, by a good margin, were originated by mortgage 

brokers. They have in testimony just recently in the Senate stated, 

though, that they believe they have no legal duty to be watching 

out for the best interests of the borrower. And, furthermore, they 

state that they are an independent agent when it comes to the 

lender. And what that means in practical terms is that a borrower 

placed into an abusive and even illegal loan that is originated by 

a broker often has no effective recourse. 

Also, the lender has—rather than an incentive to police the 

broker as has been suggested today—has just the opposite in today’s market. Because the broker claims they are an independent 

agent, it is the lenders who have managed to turn the other way 

in being knowingly ignorant of what happens with an abusive loan. 

And then they say, if there are problems later, don’t blame me. I 

just funded the loan. You go find the broker, and, by the way, that 

isn’t going to help you with the servicer on Wall Street who is foreclosing on your loan. So, there has to be connections of feedback 

and responsibility in the origination chain. 

Mr. SILVER. As an economics student at Columbia University, we 

talked about asymmetry of information and when actors don’t internalize, negative externalities. Those are two fundamental flaws; 

could be two fundamental market failures. And, indeed, that is 

happening, sadly, in the lending marketplace. One way to eliminate these violations of classical economic theory is to create strong 

standards that all the actors must adhere to. 

Last session, we had the Miller-Watt-Frank anti-predatory lending bill. I think that bill established some excellent standards. The 

proposed subprime guidance also establishes some very reasonable 

standards. To enforce these standards, you have to hold the actors 

financially reliable. For example, if people don’t get tickets for 

speeding, you are going to have more speeders and more reckless 

60

driving. Likewise, if we don’t have financial liability on all the actors, brokers, lenders, and the secondary market and servicers, you 

are going to have continued problems and continued passing of the 

buck. Thank you. 

Chairwoman MALONEY. Thank you. Mr. Fishbein? 

Mr. FISHBEIN. This is an important question and thank you for 

asking it. Basic Federal consumer protection laws were written at 

a time when depository institutions were the prime funders of 

mortgages. I am speaking of the Truth-in-Lending Act, HOEPA, 

and the Real Estate Settlement Procedures Act. 

A lot has changed since those laws were written. Mortgage brokers, as has been pointed out, are the channel for 70 percent or 

more of subprime loans. The secondary market has become much 

more active in securitizing these loans. But yet, the basic consumer 

protection laws have not been changed to reflect the new realities 

of the marketplace. 

Having a standard that applies to loan originators, whether they 

are mortgage brokers or lenders, one that would require them to 

operate under a duty of good faith and fair treatment to borrowers, 

would help address some of the basic problems that you are hearing about today. With regard to the secondary market, it would 

help to extend assignee liability so that the purchasers of loans or 

the investors in these loans have some responsibility for loans that 

are not based on ability to pay standards or in fact have predatory 

characteristics. 

Further, would be to make sure that the banking regulators are 

doing all they can to extend the reach of their authority. For example, it is not clear whether the new non-traditional mortgage guidance issued last September and the pending subprime guidance 

reaches to warehouse lines of credit, which depository institutions 

are providing to lenders, or, for that matter, their investment in securities trusts. 

We think all of these things need to be looked at very carefully 

and we encourage the subcommittee to do that. 

Chairwoman MALONEY. Thank you. Mr. Robbins? 

Mr. ROBBINS. The marketplace is working. Over 20 subprime 

companies have gone out of business. Other companies have been 

substantially punished with repurchases and are showing losses. 

So, to the extent that the market punishes bad players, that has 

occured, is occurring, and will continue to occur. But, fundamentally, the system is broken and the system is broken because it is 

not transparent. There is no clarity to this system. 

I don’t think there is one borrower in a thousand who understands the papers that they sign; the number of times they sign it. 

It allows predatory lenders to hide underneath that moray and morass of very complicated papers that they see at a mortgage closing. 

We need licensing of mortgage lenders. We need education, financial literacy, and we need education at all levels, both at consumers 

and at high schools. We need to make the system clear. 

Chairwoman MALONEY. My time has expired. I invite the panelists to respond in writing if they would like to expand further on 

the question. I believe it is an important one. Mr. Gillmor? 

Mr. GILLMOR. Thank you, Madam Chairwoman. I have a question for Mr. Dinham. Let’s assume that most mortgage brokers are 

61

honest. They do a good job. But, as you indicated, there are some 

bad apples. So, my question, is for a borrower under the current 

system, is there any practical way for them to find out if the person 

doing the lending has had any kind of disciplinary action, any 

criminal activity, and if there isn’t a practical way to do that, 

should there be? 

Mr. DINHAM. Yes, sir. We would agree that feature needs to be 

there. I can just relate back to the State of Texas. They have a Web 

site which has all the occurrences against a particular broker. So, 

all you have to do is have his number, which is clearly displayed 

on his wall. And you can go on the Web site and see if there has 

been any kind of a problem that he has been in at that point. So, 

in other words, a lot of us are licensed and we are subject to the 

laws of our States. And those States all have Web sites and they 

all have the ability. And the consumer can go to the regulator and 

find out whether the broker has been in trouble or not. 

Mr. GILLMOR. That would not be all States, sir. 

Mr. DINHAM. Well it would be Texas, for sure. But, I think there 

are 49 States that have registration or licensing at this point. 

Mr. GILLMOR. Thank you. I yield the balance of my time to Mr. 

McHenry. 

Mr. MCHENRY. I’d like to thank the member for the time. To Mr. 

Calhoun, the Center for Responsible Lending, what are the total 

number of residential mortgage loans that you sold into the secondary market in 2006? You alone with the self-help credit union? 

Mr. CALHOUN. I don’t have the exact number. I can tell you that 

it is probably in the range of a billion dollars, but I would need to 

get back with you with a specific dollar amount. 

Mr. MCHENRY. I would certainly appreciate the total number, 

the dollar-value, and what percentage to the marketplace. To both 

CRL and to you, Mr. Silver, you both talk about subprime or 

nonprime hurting the mortgage market and hurting homeownership in essence. Mr. Silver went so far to say the lending market 

is broken. 

I reference you both to the previous panel of all the regulators 

that we had before here. I asked a simple question: Is the marketplace working? The only thing they said unanimously was yes, the 

marketplace is working. The mortgage marketplace is working. 

And so, it is wonderful rhetoric, but I think it is empty based on 

facts. To you, Mr. Calhoun, you referenced that 2 million will lose 

their homes. Over what period is that? Is that your prediction for 

the next year? 

Mr. CALHOUN. We did an exhaustive study: the first to look at 

what happens to loans over the life, not just a snapshot. 

Mr. MCHENRY. Sir, I have very little time. 

Mr. CALHOUN. We looked at the loans originated since at least 

1999 through 2006, and the projection is that over the life of those 

loans, 2.2 million of them will result in the homeowner going bust. 

Mr. MCHENRY. In roughly 30 years, over the period of a 30-year 

mortgage, almost all of these would go into foreclosure. How many 

would go into foreclosure this year? Do you have a number on that? 

Mr. CALHOUN. I can give you numbers. Yes, sir. In my testimony— 

62

Mr. MCHENRY. The 2.4 million you reference in your study would 

say that in essence 30 to 40 percent of subprime loans will go into 

foreclosure, because there are 6 million subprime loans. That is an 

astronomical sum not based on any historical data in the last 40 

years of lending history in the United States. And so, it is rather 

high and misleading before this committee. 

Furthermore, you reference, so just to understand that, there are 

6 million subprime loans in the marketplace right now. You are 

saying that basically a third of them are going to going to foreclosure. 

Mr. CALHOUN. That’s not correct. Those numbers are in error. If 

you look at the data, we say that 19.4 percent; and you look at a 

lot of the rating agencies are 30 percent. 

Mr. MCHENRY. Which is twice as high than any historical high 

and the losses in subprime, and the high was 10 percent. We are 

under 10 percent and right now the subprime marketplace, I think 

Mr. Robbins references what, 41⁄2 percent are facing foreclosure. 

Mr. CALHOUN. Those are different numbers. The 10 percent, the 

41⁄2 percent he refers to are snapshots. How many are in foreclosure right now? Our number is not how many are in foreclosure 

at one particular time. It is if you look at what happens to that 

loan over its life, which is typically a 3- to 4-year time period. What 

percentage of those who foreclose and lose the home before the loan 

is paid off or refinanced? 

Chairwoman MALONEY. The gentleman’s time is up. 

Mr. MCHENRY. Will you answer my questions for the record? 

Chairwoman MALONEY. Certainly, the members can place their 

questions into the record, and I call on Mel Watt from North Carolina. 

Mr. WATT. Thank you, Madam Chairwoman. Mr. Dinham, I just 

want to get a little clarification. There are obviously some problems 

with the broker system, disproportionately generating issues that 

need to be addressed. How do you define who a broker works for? 

How does the industry say? If I come to you and ask you to get 

me a loan, who are you working for? 

Mr. DINHAM. Well, at this point we have contractual obligations 

to the lenders. Otherwise, we sign a contract with them. 

Mr. WATT. So, you are saying your first responsibility is to the 

lender. 

Mr. DINHAM. I am saying that we are a loaner store with products available to the public; and, in other words, we don’t. It’s like 

going into another type of store. We are a mortgage store. We have 

different products for the consumers to use. 

Mr. WATT. Okay, well that’s fine. I guess I have misunderstood 

because most brokers will tell you that they work for the borrower. 

I mean, I am just telling you what my experience is. You are saying that your primary responsibility is to the lender. 

Mr. DINHAM. Yes, sir, because I have a contractual obligation 

with you. In Texas, we have a disclosure that we give to the borrower. 

Mr. WATT. Where you have a contractual obligation to the borrower? 

Mr. DINHAM. No, sir. 

Mr. WATT. None? 

63

Mr. DINHAM. No, sir. I have a disclosure in which I tell him exactly what the relationship is that we are going to have together 

at this point—that we are a contract person and not an agent. 

Mr. WATT. So, if a broker in North Carolina, for example, that 

Mr. Bachus used this morning had a mortgage brokerage company 

that was placing loans had a construction company and then had 

a mortgage brokerage company. And they put out a brochure that 

said, ‘‘There are no sales people in this office. The people you work 

with are working for you.’’ They put this out to the borrower. They 

are working for you to secure the best possible deal on your behalf. 

Then that would be a fraudulent, misleading, dishonest statement, 

is that what you are saying? 

Mr. DINHAM. I am just telling you, no. I am not going to say that, 

because I can’t unequivocally say that. But I think that— 

Mr. WATT. If they were a broker, and they put out a statement 

to me as a borrower, saying that the people you work with are 

working for you to secure the best possible deal on your behalf. 

Would that be a misrepresentation? 

Mr. DINHAM. Not if the statement was coming from me. No, sir, 

it would not be a correct statement. I would like to draw on what 

you brought up about North Carolina though, because there was an 

article in the Charlotte Observer which was out, I think either on 

the 17th— 

Mr. WATT. Let’s let that speak for itself. I will by unanimous consent put the actual series of articles in the record. The articles will 

speak for themselves. And, if you want to address the content of 

the articles, I welcome you to do that. 

Mr. DINHAM. Okay. 

Mr. WATT. Let me just get one more question in to Mr. Calhoun. 

We are operating now in a little bit of a different environment than 

we were operating over the last couple of years when we started 

this process of trying to produce a predatory lending bill that I 

would liken somewhat to what went on at Enron, and a lot of people say we overreacted to the Enron situation. I think there was 

some irrational exuberance in the lending and borrowing market 

and some problems. 

You said that there are a number of things that have come on 

the market since the North Carolina law was introduced that were 

really not addressed in the North Carolina law. Would you give us 

a couple of examples of that and then follow that up with written 

documentation of what you think needs to be added to the North 

Carolina law if we were going to try to use the North Carolina law 

as a Federal standard? 

Mr. CALHOUN. Certainly, the primary development has been 

what I would call the abandonment of traditional underwriting 

standards. Ten years ago when we talked about predatory lending, 

the one point of consensus was its so-called asset-based lending, 

lending against the equity in the home without regard for whether 

the borrower could actually pay the payments on the loan. 

That was the essence of predatory lending is what we have seen 

as the incremental steps. That’s what’s developed over the last 4 

years and I think there are two important things here. One is that 

it has been incremental, this payment shock that we have talked 

64

about today. They didn’t just start lending with these loans with 

huge payment shocks. It got worse and worse each quarter. 

And the dynamic that’s the real concern, when you step back to 

the 30,000-foot level, is we have a situation. 

Mr. WATT. Why don’t you address that in writing, because my 

time has expired. 

Chairwoman MALONEY. The gentleman’s time has expired. That 

was an excellent question. The last question will go to Patrick 

McHenry of North Carolina. And we are called for a vote and this 

will conclude our hearing. 

Mr. MCHENRY. This is a question for the whole panel, so, be prepared. It’s going to be very simple and short answers because we 

don’t have much time. 

Every three out of four loans in the foreclosure process do not 

wind up in a foreclosure sale. In 2005, FMAC studied this issue. 

It was estimated that the average cost of a single foreclosure for 

the lender averages $58,000. Those are FMAC’s numbers. 

Could you expand on why, actually, how about this. Very simple, 

the whole panel will start from left to right here. Yes or no: Is it 

bad for lenders to lend money to people who are not capable of paying it back? Yes or no, Mr. Calhoun? 

Mr. CALHOUN. On an individual level, no. But it is profitable on 

a macro level, and that’s what we have seen here. They’ll lose 

money on an individual loan. 

Mr. MCHENRY. Once more, I don’t have time for long-winded answers. 

Mr. CALHOUN. That’s my answer that you heard. 

Mr. MCHENRY. Which is ‘‘kind of.’’ Okay? Mr. Silver? 

Mr. SILVER. You have to send it back to the lender without considering repayment ability. And, if I might, Representative— 

Mr. MCHENRY. Yes, that is a good answer. Mr. Fishbein? 

Mr. FISHBEIN. Look at the volume of loans handled by consumer 

rescue funds and you see several examples of failure. 

Mr. MCHENRY. Thank you. I don’t have time. Mr. Silver? Thank 

you. 

Mr. SILVER. Yes, on an individual basis I would agree with Mr. 

Calhoun. However, changes in the market allow much higher foreclosure rates and still make profits for lenders than occurred in the 

past. 

Mr. MCHENRY. So, losing money is good? Number four, here. 

Thank you. I appreciate your answer the most. All right, thank 

you. Back to Mr. Calhoun. Do you have a lower cost of funds in 

commercial mortgage subprime mortgage lenders? 

Mr. CALHOUN. No, we get most of our funding through Wall 

Street Repurchase Agreements. 

Mr. MCHENRY. So, you don’t use community foundation grants or 

anything like that? 

Mr. CALHOUN. We received, as I believe you know, grants to set 

up the original loan loss reserves for the loans. But, for example, 

when we securitize loans we sell them on the market and the people who buy them don’t care about anything except the finances. 

And that’s what they pay. 

Mr. MCHENRY. The insurance policy for the loan loss is based on 

grants that have been given to your organization? 

65

Mr. CALHOUN. In part, yes. 

Mr. MCHENRY. So, yes. You have subsidized lending because you 

are able to get money for free? 

Mr. CALHOUN. It gave us start-up funds but our sustainability 

has depended upon it being self-sustaining. 

Mr. MCHENRY. Okay, thank you. Additionally, I want to thank 

Mr. Pollock in particular for his one-page mortgage document. I 

think that’s fantastic. I think that this is something the committee 

should have hearings on and we should move forward on this. At 

this point, I would like to yield my remaining time to Mr. Price of 

Georgia. 

Mr. PRICE. I thank my colleague from North Carolina for yielding. I appreciate the testimony of all of you presented. I think it 

points out clearly that we need much greater financial literacy. 

There appears to be some bipartisan agreement on that and hopefully we will be able to go forward. I am a little troubled by what 

appears to be a relative disdain for willing lenders and willing borrowers. And I wonder what that says about our general sense 

about our markets and about our sense of commerce right now in 

our Nation. 

Mr. Calhoun, I heard you say, you cited all sorts of examples 

about the typical subprime loan and how it leads to troubling results in many areas, and you said that one-sixth of the market are 

subprime loans. Yet, they comprise two-thirds of the foreclosures in 

the market. And that implies that there’s an ideal number for each 

of those. Do you have a sense about where that ideal is? 

Mr. CALHOUN. No. I think what it reflects more is what one of 

the members of the previous panels said—when you tease that 

apart, those foreclosure rates vary dramatically depending upon 

the loan features and that subprime loans that don’t have these 

abusive features the built-in payment shock have less than half of 

the foreclosure rate of the loans that do have those abusive features. That’s our big concern: get those features out and then let 

the market decide what’s the appropriate balance. 

Mr. PRICE. I appreciate that. I have about 30 seconds, I think. 

I want to commend Mr. Pollock for your comment and perspective 

that we are late in this cycle and whether or not the Federal Government action will result in anything good to the entire market, 

I think, is an apt perspective. 

And I would ask, and I am not going to have any time it doesn’t 

look like, but I would ask each of you, and we’ll give this to you 

in writing, whether or not you agree that we are late in this cycle 

and whether or not you believe that Federal Government intervention at this point in this cycle can have any positive result. 

Chairwoman MALONEY. The gentleman’s time has expired. The 

Chair notes that some members may have additional questions for 

the panel which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for members 

to submit written questions to these witnesses and to place the responses in the record. 

I want to thank all of the panelists for your testimony today. 

Mr. FISHBEIN. Chairwoman Maloney, if I may, I had asked if I 

could have a letter that has been signed by 80 groups to the regulators inserted in the record? 

66

Chairwoman MALONEY. Yes. 

The hearing is now adjourned. Thank you. 

[Whereupon, at 1:45 p.m., the hearing was adjourned.] 

(67)

A P P E N D I X

March 27, 2007

68


35410.001
69


35410.002
70


35410.003
71


35410.004
72


35410.005
73


35410.006
74


35410.007
75


35410.008
76


35410.009
77


35410.010
78


35410.011
79


35410.012
80


35410.013
81


35410.014
82


35410.015
83


35410.016
84


35410.017
85


35410.018
86


35410.019
87


35410.020
88


35410.021
89


35410.022
90


35410.023
91


35410.024
92


35410.025
93


35410.026
94


35410.027
95


35410.028
96


35410.029
97


35410.030
98


35410.031
99


35410.032
100


35410.033
101


35410.034
102


35410.035
103


35410.036
104


35410.037
105


35410.038
106


35410.039
107


35410.040
108


35410.041
109


35410.042
110


35410.043
111


35410.044
112


35410.045
113


35410.046
114


35410.047
115


35410.048
116


35410.049
117


35410.050
118


35410.051
119


35410.052
120


35410.053
121


35410.054
122


35410.055
123


35410.056
124


35410.057
125


35410.058
126


35410.059
127


35410.060
128


35410.061
129


35410.062
130


35410.063
131


35410.064
132


35410.065
133


35410.066
134


35410.067
135


35410.068
136


35410.069
137


35410.070
138


35410.071
139


35410.072
140


35410.073
141


35410.074
142


35410.075
143


35410.076
144


35410.077
145


35410.078
146


35410.079
147


35410.080
148


35410.081
149


35410.082
150


35410.083
151


35410.084
152


35410.085
153


35410.086
154


35410.087
155


35410.088
156


35410.089
157


35410.090
158


35410.091
159


35410.092
160


35410.093
161


35410.094
162


35410.095
163


35410.096
164


35410.097
165


35410.098
166


35410.099
167


35410.100
168


35410.101
169


35410.102
170


35410.103
171


35410.104
172


35410.105
173


35410.106
174


35410.107
175


35410.108
176


35410.109
177


35410.110
178


35410.111
179


35410.112
180


35410.113
181


35410.114
182


35410.115
183


35410.116
184


35410.117
185


35410.118
186


35410.119
187


35410.120
188


35410.121
189


35410.122
190


35410.123
191


35410.124
192


35410.125
193


35410.126
194


35410.127
195


35410.128
196


35410.129
197


35410.130
198


35410.131
199


35410.132
200


35410.133
201


35410.134
202


35410.135
203


35410.136
204


35410.137
205


35410.138
206


35410.139
207


35410.140
208


35410.141
209


35410.142
210


35410.143
211


35410.144
212


35410.145
213


35410.146
214


35410.147
215


35410.148
216


35410.149
217


35410.150
218


35410.151
219


35410.152
220


35410.153
221


35410.154
222


35410.155
223


35410.156
224


35410.157
225


35410.158
226


35410.159
227


35410.160
228


35410.161
229


35410.162
230


35410.163
231


35410.164
232


35410.165
233


35410.166
234


35410.167
235


35410.168
236


35410.169
237


35410.170
238


35410.171
239


35410.172
240


35410.173
241


35410.174
242


35410.175
243


35410.176
244


35410.177
245


35410.178
246


35410.179
247


35410.180
248


35410.181
249


35410.182
250


35410.183
251


35410.184
252


35410.185
253


35410.186
254


35410.187
255


35410.188
256


35410.189
257


35410.190
258


35410.191
259


35410.192
260


35410.193
261


35410.194
262


35410.195
263


35410.196
264


35410.197
265


35410.198
266


35410.199
267


35410.200
268


35410.201
269


35410.202
270


35410.203
271


35410.204
272


35410.205
273


35410.206
274


35410.207
275


35410.208
276


35410.209
277


35410.210
278


35410.211
279


35410.212
280


35410.213
281


35410.214
282


35410.215
283


35410.216
284


35410.217
285


35410.218
286


35410.219
287


35410.220
288


35410.221
289


35410.222
290


35410.223
291


35410.224
292


35410.225
293


35410.226
294


35410.227
295


35410.228
296


35410.229
297


35410.230
298


35410.231
299


35410.232
300


35410.233
301


35410.234
302


35410.235
303


35410.236
304


35410.237
305


35410.238
306


35410.239
307


35410.240
308


35410.241
309


35410.242
310


35410.243
311


35410.244
312


35410.245
313


35410.246
314


35410.247
315


35410.248
316


35410.249
317


35410.250
318


35410.251
319


35410.252
320


35410.253
321


35410.254
322


35410.255
323


35410.256
324


35410.257
325


35410.258
326


35410.259
327


35410.260
328


35410.261
329


35410.262
330


35410.263
331


35410.264
332


35410.265
333


35410.266
334


35410.267
335


35410.268
336


35410.269
337


35410.270
338


35410.271
339


35410.272
340


35410.273
341


35410.274
342


35410.275
343


35410.276
344


35410.277
345


35410.278
346


35410.279
347


35410.280
348


35410.281
349


35410.282
350


35410.283
351


35410.284
352


35410.285
353


35410.286
354


35410.287
355


35410.288
356


35410.289
357


35410.290
358


35410.291
359


35410.292
360


35410.293
361


35410.294
362


35410.295
363


35410.296
364


35410.297
365


35410.298
366


35410.299
367


35410.300
368


35410.301
369


35410.302
370


35410.303
371


35410.304
372


35410.305
373


35410.306
374


35410.307
375


35410.308
376


35410.309
377


35410.310
378


35410.311
379


35410.312
380


35410.313
381


35410.314
382


35410.315
383


35410.316
384


35410.317
385


35410.318
386


35410.319
387


35410.320
388


35410.321
389


35410.322
390


35410.323
391


35410.324
392


35410.325
393


35410.326
394


35410.327
395


35410.328
396


35410.329
397


35410.330
398


35410.331
399


35410.332
400


35410.333
401


35410.334
402


35410.335
403


35410.336
404


35410.337
405


35410.338
406


35410.339
407


35410.340
408


35410.341
409


35410.342
410


35410.343
411


35410.344
412


35410.345
413


35410.346
414


35410.347
415


35410.348
416


35410.349
417


35410.350
418


35410.351
419


35410.352
420


35410.353
421


35410.354
422


35410.355
423


35410.356
424


35410.357
425


35410.358
426


35410.359
427


35410.360
428


35410.361
429


35410.362
430


35410.363
431


35410.364
432


35410.365
433


35410.366
434


35410.367
435


35410.368
436


35410.369
437


35410.370
438


35410.371
439


35410.372
440


35410.373
441


35410.374
442


35410.375
443


35410.376
444


35410.377
445


35410.378
446


35410.379
447


35410.380
448


35410.381
449


35410.382
450


35410.383
451


35410.384
452


35410.385
453


35410.386
454


35410.387
455


35410.388
456


35410.389
457


35410.390
458


35410.391
459


35410.392
460


35410.393
461


35410.394
462


35410.395
463


35410.396
464


35410.397
465


35410.398
466


35410.399
467


35410.400
468


35410.401
469


35410.402
470


35410.403
471


35410.404
472


35410.405
473


35410.406
474


35410.407
475


35410.408
476


35410.409
477


35410.410
478


35410.411
479


35410.412
480


35410.413
481


35410.414
482


35410.415
483


35410.416
484


35410.417
485


35410.418
486


35410.419
487


35410.420
488


35410.421
489


35410.422
490


35410.423
491


35410.424
492


35410.425
493


35410.426
494


35410.427
495


35410.428
496


35410.429
497


35410.430
498


35410.431
499


35410.432
500


35410.433
501


35410.434
502


35410.435
503


35410.436
504


35410.437
505


35410.438
506


35410.439
507


35410.440
508


35410.441
509


35410.442
510


35410.443