LEGISLATIVE PROPOSALS ON

REFORMING MORTGAGE PRACTICES

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

OCTOBER 24, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–74

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LEGISLATIVE PROPOSALS ON REFORMING MORTGAGE PRACTICES

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39–912 PDF 2008

LEGISLATIVE PROPOSALS ON

REFORMING MORTGAGE PRACTICES

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

OCTOBER 24, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–74

(

(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 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 

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 

KEVIN McCARTHY, California

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on: 

October 24, 2007 ............................................................................................... 1

Appendix: 

October 24, 2007 ............................................................................................... 125

WITNESSES 

WEDNESDAY, OCTOBER 24, 2007

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

on behalf of the Conference of State Bank Supervisors .................................... 29

Bowdler, Janis, Senior Housing Policy Analyst, National Council of La Raza .. 63

Bryant, John Hope, Founder, Chairman, and Chief Executive Officer, Operation HOPE .......................................................................................................... 69

Calhoun, Michael D., President and Chief Operating Officer, Center for Responsible Lending ................................................................................................. 61

Dugan, Hon. John C., Comptroller, Office of the Comptroller of the Currency . 21

Gruenberg, Hon. Martin J., Vice Chairman, Federal Deposit Insurance Corporation, on behalf of Chairman Sheila C. Bair ................................................ 20

Johnson, Hon. JoAnn M., Chairman, National Credit Union Administration ... 25

Kroszner, Hon. Randall S., Governor, Board of Governors of the Federal 

Reserve System .................................................................................................... 27

Lackritz, Marc E., President and Chief Executive Officer, Securities Industry 

and Financial Markets Association .................................................................... 99

Lampe, Donald C., Womble, Carlyle, Sandridge and Rice, PLLC ....................... 102

Pfotenhauer, Kurt, Senior Vice President for Government Affairs and Public 

Policy, Mortgage Bankers Association ................................................................ 97

Reich, Hon. John M., Director, Office of Thrift Supervision ................................ 23

Rock, Bradley E., Chairman, President, and Chief Executive Officer, Bank 

of Smithtown, on behalf of The American Bankers Association and America’s Community Bankers .................................................................................... 96

Savitt, Marc, President, The Mortgage Center, and President-elect, National 

Association of Mortgage Brokers ........................................................................ 101

Shelton, Hilary O., Director, NAACP Washington Bureau .................................. 65

Taylor, John, President and Chief Executive Officer, National Community 

Reinvestment Coalition ....................................................................................... 67

APPENDIX 

Prepared statements: 

Marchant, Hon. Kenny ..................................................................................... 126

Antonakes, Hon. Steven L. .............................................................................. 128

Bair, Hon. Sheila C. ......................................................................................... 143

Bowdler, Janis .................................................................................................. 153

Bryant, John Hope ........................................................................................... 159

Calhoun, Michael D. ......................................................................................... 167

Dugan, Hon. John C. ........................................................................................ 195

Johnson, Hon. JoAnn M. .................................................................................. 206

Kroszner, Hon. Randall S. ............................................................................... 226

Lackritz, Marc E. .............................................................................................. 236

Lampe, Donald C. ............................................................................................. 241

Pfotenhauer, Kurt ............................................................................................. 253

Rock, Bradley E. ............................................................................................... 270

Savitt, Marc ...................................................................................................... 281

Shelton, Hilary O. ............................................................................................. 292

Page

IV

Prepared statements—Continued

Taylor, John ...................................................................................................... 296

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Kanjorski, Hon. Paul E.: 

Joint statement of the Appraisal Institute, the American Society of Appraisers, the American Society of Farm Managers and Rural Appraisers, and the National Association of Independent Fee Appraisers ........... 312

Statement of Lenders One/National Alliance of Independent Mortgage 

Bankers .......................................................................................................... 326

Statement of Maureen McGrath on behalf of the National Advocacy 

Against Mortgage Servicing Fraud .............................................................. 329

Statement of the National Association of Realtors ........................................ 334

Meeks, Hon. Gregory: 

Letter from Hon. Martin J. Gruenberg containing additional information 

in response to a question posed at the hearing .......................................... 336

(1)

LEGISLATIVE PROPOSALS ON 

REFORMING MORTGAGE PRACTICES 

Wednesday, October 24, 2007

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 10:06 a.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Members present: Representatives Frank, Kanjorski, Waters, 

Maloney, Gutierrez, Watt, Sherman, Meeks, McCarthy of New 

York, Miller of North Carolina, Green, Cleaver, Bean, Moore of 

Wisconsin, Davis of Tennessee, Perlmutter; Bachus, Baker, Pryce, 

Castle, Royce, Manzullo, Biggert, Shays, Miller of California, 

Capito, Feeney, Hensarling, Garrett, Brown-Waite, Barrett, 

Neugebauer, Price, Davis of Kentucky, McHenry, Campbell, 

Bachmann, Roskam, and McCarthy of California. 

The CHAIRMAN. The hearing will come to order. I apologize for 

being late. I had a problem this morning picking up my cleaning. 

And when I complained, the cleaner told me that it was the fault 

of Congress because they couldn’t get good workers. So, I apologize, 

and I’m looking for a new cleaner. 

This is a very important hearing, and I am very appreciative of 

all the work that has gone into it. I want to thank all of the witnesses. Every one of the witnesses today has either in person or 

through his or her organization been a very constructive participant in this discussion about what to do. 

And I want to say this: We have, I think, a very important piece 

of legislation, and I believe that it is important for us to pass this 

before we adjourn. And the good news for people who worry about 

hasty legislation, not necessarily good news for everybody’s family, 

is that the majority leader has just announced that we will be 

meeting on the 4th, 5th, and 6th of December and the 11th, 12th, 

and 13th of December. So we have some time, and we’re going to 

be pushing back some of the markup on this. 

I want to say two things: I think it is very—don’t look at me, 

Gresham, it’s the majority leader’s fault. I am very much convinced 

that we will pass a bill out of third party that is very much like 

what has been introduced. I am also convinced that it will not be 

exactly what has been introduced. This is not an area where dogmatic certainty behooves anybody. We are dealing with some new 

phenomena. We are dealing with a relatively new financial phenomenon, and that’s really want I want to talk about today. I want 

to really just set here the conceptual framework. 

2

We have seen in the past 10 years or so, maybe more, great 

changes in the way mortgages are originated. Innovation in the financial sector is of course very important, and we should be clear. 

Innovation does not lead to deeply rooted new practices unless it’s 

of value. There are innovations that wither and die because they 

don’t serve a real function. What we have in the mortgage area are 

a set of innovations—basically origination by people outside the 

banking system—by brokers not working for banks, accessing pools 

of money that are not subject to deposit insurance. 

And we then have the phenomenon of the secondary market. I 

want to be very clear. I regard both of those as very good things. 

These are positive and beneficial additions to our ability to finance 

housing. The problem is not within innovation, because I think 

there’s a self-correcting here. If the innovation doesn’t serve a positive function, it does not survive in our market economy. 

The problem is that there is an inevitable tendency for innovation to outstrip regulation. That’s why they call it innovation. And 

our job is to have a regulatory framework that keeps up with the 

innovation in a way that allows the benefit and the value of the 

innovations to flourish while providing the safeguards against 

abuses that it’s the job of regulation to do. I believe that we have 

seen much more of a problematic level of activity in the unregulated than in the regulated sector of mortgage origination. 

It is not because the people doing the origination in the unregulated sector are morally inferior to those in the regulated sector. I 

think that morally most people are good, but there are some people 

who are abusive. The problem is that we have in place with regard 

to banks and credit unions a set of regulations enforced reasonably 

by regulators which hold in check some of the abusive practices, 

and we don’t have that in the unregulated sector. 

And so the first part of our job is to extend in general the kind 

of regulation that has served us well, in my judgment, in the regulated sector, to the unregulated sector. And that means you allow 

the process to flourish, but you try to prevent abuses. 

The other area that we deal with here is the secondary market. 

The secondary market has been very important. It has clearly provided increased liquidity, and that means more money for people 

to buy homes and live in their homes. But, as with any other phenomenon, it has a potential for abuse. And in particular, and I 

quote Ben Bernanke here, what he calls the originate-to-distribute 

model, provides increased liquidity but it also diminishes responsibility. 

The regulatory framework provided responsibility. Banks that 

lent money to people when they shouldn’t have, and who were visited by the representatives of some of the people at this table who 

said that really was not such a good idea; don’t do it again. And 

in effect, what we’re trying to do is to replicate that in the other 

area. 

But you also have in the secondary market the problem that the 

lack of responsibility that could exist at the origination level could 

then be passed along. And I know there are people who have said 

that if we do anything to the secondary market in any way to increase any kind of regulation, we will destroy it. The notion that 

3

even a reasonable and mild form of regulation is somehow fatal to 

any kind of market activity is a frequent argument. 

As I said before, people who want to read it and experience it at 

its fullest should go back to the Congressional Record of the 1930’s 

and read the debates about the establishment of the Securities and 

Exchange Commission when the country was told that sort of regulation would kill the market. 

Indeed, we are now in a situation in which one of the problems 

in the market is a lack of investor confidence. We have added overreaction here. People went from being too sanguine about some of 

this paper to being much too negative about it. I believe that rules 

that give the investor some better assurance that what they are 

being offered has a certain quality to it that is market enhancing, 

not market destroying. And if we do it right, we can help restore 

investor confidence and that obviously is a very important issue. 

So we have a form of increased responsibility not on the ultimate 

investor, but on the securitizer, the people who actively package 

and sell this, because those are people whom we believe can be 

charged with some additional duty to make sure that what they 

are selling is material that should have been done in the first 

place. And I was pleased to see that Chairman Bernanke has 

agreed that some of this is done. 

Now I understand there are people who say we should do nothing. We should be very clear. We are now in the most serious financial crisis the world has seen since the late 1990’s. I believe it will 

be one that we will surmount. I don’t see terrible disaster looming, 

but we are in a serious crisis. It is inconceivable to me that we, 

the Congress, and the regulators working together, would do nothing to diminish the likelihood of a repetition of some of these 

abuses. The innovations in the mortgage market have produced a 

lot of new homeowners, which has led to a degree of financial crisis 

far beyond what anybody expected. 

And I think there was—I didn’t see a lot of people predicting that 

the subprime crisis was going to spill over into the mortgage market in general, that jumbo mortgages would be in trouble. I didn’t 

see many people predicting that the mortgage crisis was going to 

spill over into the financial market at large. I know there are people who now say that they knew this was coming all along. I am 

waiting for the e-mails in which they made that statement dated 

sometime ago. Apparently, all of those e-mails were purged, because while a lot of people now tell me they saw it coming, I don’t 

remember anybody telling me they saw it coming when it was coming. And I think the very fact that we were taken by surprise, all 

of us, to the extent that we were, is one argument for doing some 

things and putting some things in place that have to be done. 

To summarize, I believe that—and I’m very grateful. We have 

had a very participatory process. We will be marking this bill up 

probably in a couple of weeks. It’s an intensive period but it is, I 

think, a high priority for members. I do expect, as I said, that the 

basic outline will be preserved, but we have some specifics where 

people will be discussing things. 

There are additions. The chairman of the Capital Markets Subcommittee has some very important additions that he has proposed. There are some proposals that were made in the testimony 

4

that seem to be very important. There are aspects of the bill introduced by the ranking member that are important, and I should say 

that 2 years ago at this time, the ranking member and I and our 

two colleagues from North Carolina were trying very hard to work 

out a bill. I wish we had been able to—I wish we had been allowed 

to go ahead. We might have avoided some problems. 

But I think there is on both sides here a recognition of a problem. There will be some differences about how to resolve the problem. But there is and has been for some time a common recognition 

of a problem and the need to try to preserve a flow of mortgages 

while diminishing abuses. That’s the job of this committee. 

I will now recognize the ranking member. We’re going to, because 

of the importance of this, take the full 20 minutes on each side for 

opening statements. So there will be 20 minutes of opening statements on each side. I plan to be here all day. I have cleared my 

calendar. It will be a long day, but it is very important that we do 

all this, and the other members will be free to come and go. Their 

staff members will be here. I believe this is a hearing which will 

have a major impact on what we do. 

The gentleman from Alabama. 

Mr. BACHUS. Mr. Chairman, I appreciate you holding this hearing. The testimony of the witnesses will be helpful to us as we consider measures to curtail predatory practices going forward to ensure that mortgage credit remains available for those subprime 

borrowers who are worthy of it and have the ability to repay it. 

The committee has a history of coming together in a bipartisan 

way to address serious issues, and I hope that will be the case in 

this regard. I will say that the role of Congress is not to either insulate or bail out borrowers or investors or lenders when they 

make bad decisions. And that’s whether or not you’re talking about 

someone borrowing for a home or a large financial institution. I 

hope that whatever we do, we don’t end up with a taxpayer-funded 

bailout or a taxpayer guaranteed result. 

There has been some recognition, I think, by all of the members 

for some time that we needed to move and eliminate predatory 

lending. For that reason, last July, several committee Republicans 

and I introduced a subprime lending reform bill to combat abusive 

practices and to encourage greater accountability and transparency 

throughout the mortgage industry. 

In taking action on this matter, our goal should be to correct existing problems if we can, while not creating new problems. Let us 

not forget that subprime lending has made it possible for millions 

of low- and middle-income families to purchase homes. Even after 

the events of the past several months, 85 percent of subprime borrowers are making timely payments and enjoying significant benefits of homeownership. There has been talk about many of them, 

their mortgages will adjust in the future, but the market is already 

anticipating that, and many of the lending institutions are working 

with the borrowers on a one-to-one basis and adjusting the contracts, and I applaud that. 

I think that’s primarily how we’re going to deal with this going 

forward is for borrowers and lenders without the interference of the 

Congress or the government in the process. That’s always of benefit 

to everyone, because it’s never—we have said this in many, many 

5

hearings; foreclosure is never in the best interests of a lender, a 

borrower or an investor. And that ought to be a strong motivation 

for all of them to get together. When the Congress gets involved, 

they sometimes only complicate things. As I said earlier, when the 

government gets involved, it usually is at taxpayers’ expense. 

Preserving the dream of homeownership and access to credit 

makes the dream possible and should be a high priority as we work 

together on legislative responses. And we do need to appreciate the 

fact that when there are foreclosures in neighborhoods and communities, it not only hurts the homeowner, it not only hurts the lender 

and the investor, but it also hurts those communities. It’s essential 

that we be sensitive to the plight of homeowners facing sharply 

higher payments as their adjustable rate mortgages reset. And we 

should be especially mindful that any new limitations we impose 

on mortgage lenders do not make it less likely that families can refinance their mortgage loans with more affordable financing. I 

think the action of the House Judiciary Committee and their bankruptcy legislation very much is going to threaten the availability of 

lending going forward. 

As we evaluate legislation, we should consider carefully how 

similar legislation on the national and State level in the past has 

affected the availability and affordability of credit to those who 

need it most. We need to determine whether the laws on the books 

today have had their intended effect, or whether in some instances 

they have actually harmed the low- and moderate-income families 

that they’re designed to help. 

The data on this subject has been studied and interpreted by a 

number of industry and consumer groups as well as academics. 

Their conclusions vary greatly. Hopefully our testimony from the 

witnesses will bring some clarity to that subject. In this regard, I’ll 

mention that North Carolina—and we’ve talked about the North 

Carolina bill, and Title 3 of this legislation adopts the North Carolina model. But I will say that in many North Carolina towns, the 

amount of mortgage foreclosures and predatory lending loans is 

significantly higher than other places in the country, and one wonders how a law which even I have said has many good provisions, 

it certainly hasn’t prevented predatory lending in the past. 

As legislators, while the conclusions we make and the actions we 

take have far greater weight than the reports of those who simply 

analyze the data, we have both the privilege and the responsibility 

of acting in the public’s interest. That responsibility is particularly 

great when the things we do affect the hopes, dreams, and basic 

needs of all Americans. 

The legislation before us, like all regulatory interventions, requires a balancing of interests. The competing values in this case, 

the availability of credit on one side, and protecting borrowers from 

sharp practices and unethical conduct on the other. Our task is to 

strike an appropriate balance between these costs and benefits. 

The testimony of the witnesses will help us judge where that balance lies. 

At this time, Mr. Chairman, I’d like to recognize the gentlelady 

from Illinois for 3 minutes. 

The CHAIRMAN. The gentlewoman is recognized. 

6

Mrs. BIGGERT. Thank you, Mr. Chairman, and thank you for 

holding today’s hearing. I would like to welcome our distinguished 

witnesses. After 9 months and 6 hearings and one resolution addressing the subprime and foreclosure issues, I’m glad that we 

have reached this day. 

As we proceed, I’d like to outline a few items that I would urge 

my colleagues to take into consideration, first, do no harm. Our 

committee should aim to preserve access to credit and homeownership opportunities for qualified low- and middle-income borrowers. 

While we work to protect homeowners from unscrupulous practices, we should not, for example, characterize all subprime loans 

as predatory. Of the 68 million American homeowners, 50 million 

hold mortgages, and 13 million of them are subprime mortgages, 

and approximately 750,000 homeowners with subprime loans are in 

foreclosure. This number is expected to rise to millions next year, 

but we must keep in mind that the majority of homeowners will 

keep their homes. One or more of today’s witnesses may utter the 

phrase, ‘‘Don’t throw the baby out with the bath water,’’ and I 

couldn’t agree more. 

Second, I would like to see as a final product here is one that 

facilitates transparency in the mortgage market, creates a level 

playing field, promotes strong underwriting standards, and fosters 

competition. Achieving these objectives is important for both the 

primary and secondary mortgage market participants. It’s a win for 

all consumers, lenders, and investors if they more clearly understand the loans. Bad actors and bad products are more likely to fall 

by the wayside. Liquidity and credit will expand, and homeownership is sure to flourish. I hope we will look at including the issues 

of mortgage fraud and financial counseling in a bill. 

And third, I’d like to thank the chairman for his comments today 

in Politico, in which he was quoted as saying that everything is negotiable. And while I must say I have never before heard him 

admit that he is not the emperor, I nonetheless appreciate the sentiment behind his quote and look forward to working with him. It’s 

important for future American homeowners and the economy that 

we put political agendas aside and get this right. Too much action 

and we worsen the problem. Too little action and we allow it to 

happen again. 

So I look forward to working with my colleagues on both sides 

of the aisle to craft common sense and balanced legislation. Thank 

you, and I yield back. 

The CHAIRMAN. Before I recognize the chairwoman of the subcommittee, I would just say to my colleague from Illinois that if I 

were the emperor, it is certainly was a good thing that I went to 

the cleaners today. 

Mrs. BIGGERT. Yes. You must have clothes. 

[Laughter] 

The CHAIRMAN. The gentlewoman from New York is now recognized. 

Mrs. MALONEY. Thank you, Mr. Chairman. And I want to congratulate you on the introduction of this ambitious and comprehensive bill and to welcome the witnesses that will help us refine it. 

This bill clearly demonstrates the intent of the chairman and 

Democrats in the House to address the subprime crisis in a thorVerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE
7

ough and effective way. Over the course of this congressional session, we have held a number of hearings in my subcommittee and 

in the full committee on the critical problems posed by the meltdown of the subprime mortgage market. 

Those hearings made it clear that this is a many-headed Hydra 

of a problem, and that we need to be careful that as we chop of 

one head, a new, more vicious one does not sprout in its place. 

Early in this process, one mortgage banker said to me that any solution must change the incentives of all market participants. I 

came to fully appreciate why that is true through the testimony I 

heard and the hearing record that we put together. 

This is not a problem that can be blamed on a few rotten apples 

among brokers or mortgage originators. It is not a problem that 

can be laid at the doorstep of any one sector, whether it is the 

securitizers, the secondary market, or the primary lenders. Regulators failed to act, but past Congresses also failed to pick up on 

the failure. 

This bill attempts to change the incentives of all participants 

across the board. For that, it is a bill that the Democrats can be 

proud of. Like many bills that attempt to tackle so many aspects 

of one problem, it has many rough edges, some of which members 

have already noted, and we will be working on it through the legislative process to smooth that out. I, for one, plan to listen carefully 

to the comments of all stakeholders, consumers and to see what 

tweaks might be needed or added. 

This hearing is the first in that process, and I look forward to 

the testimony. 

The CHAIRMAN. The gentleman from South Carolina is recognized for 2 minutes pursuant to the list I have been given by the 

ranking member. 

Mr. BARRETT. Thank you, Mr. Chairman. To our distinguished 

panel, thank you for being here. I think we can agree on a couple 

of basic things. One, that those bad actors who engage in illegal 

acts should be punished, and laws against fraudulent activity in 

the mortgage market should be enforced. 

I think we can also agree that lenders are making loans that 

they should not make, and people are borrowing money that they 

probably can’t pay back. I also think that many homeowners out 

there should be afforded the access to credit as long as they can 

pay their loans back. 

However, we may disagree on one basic point. I believe that the 

free market does the best job of providing affordable and accessible 

products. And I do think that includes mortgages. Through legitimate innovation in the private mortgage market, more people are 

able to get mortgages at lower rates than ever. And I can’t deny 

that there have been some major problems, and there’s some need 

for some short-term help. But long term, these are better remedied 

through the natural market actions and targeted regulations, both 

of which we’ve started to see. I think it would be a major mistake 

to shift this market through excessive and rushed regulations 

which may likely lead to unforeseen consequences. 

I wonder if the consequences that the majority party has expanded the government’s role in the mortgage market, at the same 

time they want to make it exceedingly difficult for the private 

8

mortgage lenders and brokers to conduct business. While we do 

need to ensure that customers are protected by making sure that 

their mortgage practices are transparent and reasonable, and that 

fraudulent activities are punished, we cannot afford to regulate the 

subprime mortgage market out of existence, and make it so that 

less wealthy borrowers can only borrow from one lender—the Federal Government. 

As a former small business owner, I can personally attest to the 

power of relationships when providing credit. I was a small furniture dealer. And there’s a lot of power—a lot of power—in looking 

somebody in the face and shaking their hand. In many cases, that’s 

much stronger than a contract. Something tells me our Federal 

Government won’t be able to quite provide that same service to our 

homeowners. 

I look forward to your testimony. I look forward to working on 

a bill that keeps all this in mind, and I yield back. 

The CHAIRMAN. The chairman of the Subcommittee on Capital 

Markets is recognized for 3 minutes. Mr. Kanjorski. 

Mr. KANJORSKI. Thank you, Mr. Chairman. Mr. Chairman, I 

would like to congratulate you and many of the fellow members 

who have taken the time to work on H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act. It contains a number of new 

provisions that I sought to address in the last Congress, including 

broker licensing reforms and anti-steering mandates. 

As we proceed with this consideration, I will be focusing most of 

my attention on the provisions related to assignee liability, which 

is within the jurisdiction of the Capital Markets Subcommittee, 

and the need for these new national standards to apply uniformly 

across the country. I have also introduced H.R. 3837, the Escrow 

Appraisal and Mortgage Servicing Improvements Act, to address 

many issues not outlined in H.R. 3915, but which also contribute 

to problems in the mortgage lending marketplace. 

The problem of abusive and deceptive lending is complex, and it 

requires a comprehensive solution. H.R. 3837 should be part of any 

solution that the Congress considers. H.R. 3837 also has attracted 

broad support. Some of these parties include the Center for Responsible Lending, the National Association of Realtors, the National Community Reinvestment Coalition, the Appraisal Institute, 

and the National Alliance of Independent Mortgage Bankers, 

among others. At this time, I ask unanimous consent to insert into 

the record statements from the Realtors, the Appraisal Institute, 

and the National Alliance of Independent Mortgage Bankers on 

these proposals. 

The CHAIRMAN. Without objection, it is so ordered. 

Mr. KANJORSKI. Mr. Chairman, I have listened to several of my 

colleagues, and I sense a bit of fear, on the one hand that we are 

going to move too excessively with regulatory order, trying to create or establish stability out of chaos. And on the other hand, a 

fear that the majority party is going to be doing something that 

has been undone in the past. 

The reality is, this committee and the Congress has been struggling for many Congresses to get our hands around predatory lending. We have had some good bills. I have had the occasion to sponsor those bills with colleagues on the other side of the aisle, and 

9

I think if in past Congresses we had seriously moved on those 

pieces of legislation, perhaps some of the problems we face today 

would have not have come to fruition. 

However, all that being said, we do have a serious problem. It 

ranges from being a problem that can be solved, to some people 

saying it could be catastrophic in result. In either regard, it is essential that we provide the rules, regulations, and guidance to the 

financial services industry of this country to be certain that any 

damage that is already done has an opportunity to be corrected, 

and to prevent future damage. 

I look forward to these hearings, in order to see how we can come 

to a consensus. As our ranking member indicated in his opening 

statement, that is what this committee needs, and that is what this 

Congress needs. This is a problem that faces America, not Republicans and Democrats, not working people or businesspeople, but 

all of us, because it is so substantial to our very existence as citizens. 

So I congratulate you on these hearings and I yield back the balance of my time. 

The CHAIRMAN. The gentleman from California, Mr. Campbell, is 

recognized for 2 minutes. 

Mr. CAMPBELL. Thank you, Mr. Chairman. As you indicated earlier, the broad problem that we’re dealing with here is actually a 

problem of the entire economy. This crisis, this lending crisis is 

clearly bleeding into other parts of the economy and has slowed our 

economic growth and potentially threatens a recession. So this is 

not just about this lending, but this is about what we’re doing to 

try and keep the economy growing, rather than see the economy 

falling into shrinking. 

Part of the solution clearly is that people who want to buy 

homes, people who want to restructure their financing, people who 

want to refinance, have the ability to do so, and that the credit 

markets, which are now very, very tight and have tremendous risk 

premiums, become loosened up, and that those risk premiums go 

down. Now this does not clearly mean that we want to go back to 

the bad practices that got us into this problem in the first place. 

But we clearly need to be fostering legislation here that restricts 

those bad practices while allowing the vast majority of lending to 

occur and to actually occur more frequently than it is today right 

now. 

My concern is that this bill could move us farther away from that 

goal rather than closer to that goal. Arguably, the people who engaged in the bad practices are already paying a pretty high price. 

There are a lot of people who are now—companies that are now 

bankrupt. There are a lot of banks and big financial institutions reporting significant losses. But still, some regulation in this area, I 

think, makes sense to ensure that we don’t do this sort of thing 

again. 

But provisions out there that would cause lenders not to lend, or 

originators not to originate, or securitizers not to securitize, because of potential downstream liability, or because of restrictions 

on legitimate loan packages, would not be wise, in my view, and 

would not move us towards an eventual goal of enabling people to 

10

borrow money so we can keep houses selling and this economy 

moving. 

I look forward to hearing the testimony of all the witnesses and 

look forward to working together to ensure that we have a bill that 

moves us towards the solution and not away from the solution. 

With that, I yield back. 

The CHAIRMAN. The gentlewoman from California, the chair of 

the Housing Subcommittee. 

Ms. WATERS. Thank you very much, Mr. Chairman. I, too, would 

like to congratulate you for holding this hearing today, and I am 

very, very pleased to co-sponsor the Mortgage Reform and AntiPredatory Lending Act of 2007, in significant part because I know 

how painstaking and consultative the process was that generated 

it. 

The subprime crisis is large, complex, and far from over. Its impact has been felt nationwide, but not equally distributed across 

the country. Simply put, Californians—California joins the rust 

and sun belts at the center of the foreclosure wave. Foreclosure 

rates in California rank third in the country and are 99 percent 

higher than the same time last year. Meanwhile, as many as 1.5 

million subprime adjustable rate mortgages carry the potential for 

serious financial distress by 2009. H.R. 3915 is designed to make 

sure this doesn’t happen again. 

In that sense, we are here today to talk about prospective actions, not necessarily solutions to the current crisis. But the two 

are clearly linked. I’m concerned that as little as 1 percent of the 

at-risk subprime loans have been modified by services to date, despite highly publicized initiatives. Congress is limited in its ability 

to require the mortgage industry to clean up the mess they made 

in a largely unregulated environment, but the industry’s track 

record should inform our assessment of any claims they make 

today and going forward to having the ability to prevent and address future messes absent significant Federal regulation. 

This said, a delicate balance must be maintained between protecting borrowers on one hand and encouraging innovation in mortgage lending and sustaining the critical secondary mortgage market on the other. H.R. 3915 strikes this balance. Perhaps the most 

important steps the bill takes are to impose a Federal duty of care 

on mortgage originators and minimum standards on all mortgages. 

It is clear to me that we need to prevent the now widespread practice of getting people into loans they can’t afford. To that end, it’s 

reasonable to require licensed originators to present consumers 

with mortgage loan products appropriate to their circumstances. 

Underpinning this must be some minimum standard regarding the 

borrower’s ability to repay, which H.R. 3915 establishes. 

I believe this is a sound standard to impose universally in the 

mortgage market. Indeed, regulated entities have long faced similar standards from their regulators. To prevent mass exodus from 

the mortgage markets, the bill limits damages to 3 times the originator’s fee plus the consumer’s cost. Similarly, although the bill for 

the first time creates securitizer liability, such liability is limited 

to recession—recision of the loan and consumer cost. The bill also 

creates a safe harbor for prime loans and private loans that meet 

reasonable documentation and underwriting standards. 

11

Is this the perfect balance between rights and remedies? I don’t 

know that any of us can know for sure at this moment, but I look 

forward to hearing from the witnesses today on that point. 

In sum, this bill is about incentives, balancing incentives to innovate against incentives to go over the line and marketing inappropriate products to borrowers and then whisking the risk off to the 

four corners of the global economy. I’m particularly pleased that 

H.R. 3915 removes the most destructive of such incentives, severing the link between the compensation of the originator, whether 

a mortgage broker or other entity, and the terms of the loan. Minority borrowers have been disproportionately steered to costly 

loans in part because the fees such loans generate for originators 

are higher than more appropriate products. H.R. 3915 correctly 

prohibits this practice. 

I thank you, Mr. Frank, for this hearing today, and I look forward to working with you to solve this problem. 

The CHAIRMAN. Thank you. Just to let people know, there’s a 

great deal of interest in this, and I think it is useful for people to 

know where the members stand, so we’re going to probably go for 

another 20 minutes or so on opening statements. The gentleman 

from North Carolina is now recognized for 2 minutes. 

Mr. MCHENRY. Thank you, Mr. Chairman. I thank you for holding this hearing. And I agree with the chairman. We need to take 

steps to make sure that both borrowers and lenders who are going 

through this challenge in the mortgage marketplace are good actors, and that goes for both sides of the transaction. According to 

the latest economic forecast, the housing market is in the process 

of correcting itself. We’re at a mid-market correction, which will be 

going on for, well, some say a year, some say more. And it’s a question of how Congress should act, and the proper actions that Congress should take. 

My concern is that the chairman’s bill will harm the mortgage 

marketplace and make it further—increase the level of difficulty 

for those facing default and foreclosure now to refinance their way 

out of this, to actually get in a mortgage that they can sustain, and 

so they can stay in their homes. 

I believe that with the assignment of liability, both in the secondary market and the so-called suitability standards, which allow 

trial lawyers to determine whether or not the mortgage broker 

gave them the best, most ‘‘suitable’’—a very ill-defined term—as 

heretofore laid out, that those two elements will further constrict 

the marketplace, the lending marketplace, which has already been 

constricted. 

Finally, the third element of the bill takes the North Carolina 

statute and nationalizes it. The North Carolina law has not been 

all good. I’ll have some colleagues on the other side of the aisle say 

that it was. But we have not had the level of lending in North 

Carolina because of the law that we have in place on mortgages. 

I believe if the Federal Government puts a proscriptive element 

into what can or cannot be lent in the mortgage marketplace, we 

will be further harming those who are trying to get out of dire situations now. So, therefore, if this bill is passed, I believe it will 

deepen the trough of the mortgage challenge that we’re facing and 

really potentially push us into a housing recession. 

12

I think we have to have a very balanced view of how we move 

forward. I think we need to focus on relief for those currently facing default and foreclosure, and then long-term, better disclosure 

and a better understanding in the marketplace of what consumers 

are actually purchasing. 

And so with that, I thank the chairman for holding this hearing, 

and I thank the ranking member for yielding. 

The CHAIRMAN. The gentleman from Illinois, Mr. Gutierrez, for 

3 minutes. 

Mr. GUTIERREZ. Well, thank you, Mr. Chairman. I applaud your 

leadership on this issue. I want to declare my support for H.R. 

3915. I’m proud to be an original co-sponsor of the bill, and I want 

to take a moment to thank Congressman Miller and Congressman 

Watt for their hard work on this issue over the years. 

I was going to introduce legislation on this issue, but I had confidence that my colleagues and my chairman would bring forward 

a good and comprehensive product, and I was right. They have. I’m 

pleased that H.R. 3915 retains the basic provisions of the MillerWatt bill in the last Congress. I’m also pleased that the bill creates 

a national mortgage originator database and establishes a minimum Federal minimum standard for originators without including 

an outright preemption of State law. 

Having said that, I’m concerned that the standards required for 

meeting the definition of a qualifying State law lack specificity in 

several vital areas. For example, the bill mandates that State laws 

require mortgage originators to, ‘‘receive minimum training and 

undergo a background check before becoming licensed.’’ 

I believe we should specify the minimum number of hours of education and training originators must complete before being eligible 

for licensing. We should establish a minimum number of hours of 

ethics training prior to licensing, as well as an annual ethics training requirement to maintain a license. 

I believe we should mandate a criminal background check with 

fingerprints prior to licensing similar to the standards introduced 

in legislation sponsored by Ranking Member Bachus. This type of 

background check will substantially increase the chances of a national database being an effective tool of weeding out bad actors in 

the industry. I believe the general approach to qualifying State law 

standards in H.R. 3915 invites mischief during the rulemaking 

process, and it leaves the door open for some States to even dilute 

their existing standards and still meet the definition of qualifying 

State law. 

I think the bill states that originators are required to make full, 

complete, and timely disclosure, but fails to offer any guidance as 

to what qualifies as a timely disclosure. Is 2 hours before closing 

timely? Two days? We should give regulators more guidance in this 

area. 

Finally, I’m not inherently opposed to capping remedies. But the 

remedies available to consumers must be substantial enough to effect behavior change in the marketplace. 

I look forward to hearing from the witnesses, and I thank you 

all for coming this morning and being with us. And, again, I thank 

Congressman Miller and Congressman Watt, and, you, Mr. Chairman, for improving this bill as we move forward. 

13

The CHAIRMAN. The gentleman from California, Mr. Royce, for 2 

minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. On the issue of assignee 

liability, I believe implementing assignee liability as is done in this 

bill would be an egregious mistake. If we can learn anything from 

the market turmoil over the last few months, we should understand that the problem in the subprime sector has impacted our 

capital markets and it has the potential to spur an economic downturn. 

If assignee liability is improperly applied, players in the secondary market will simply reject the purchase of loans that expose 

them to potential liability that cannot be determined or quantified. 

The likely result will prevent many creditworthy borrowers from 

receiving financing, and the credit crunch will spread even further. 

Second, as the Wall Street Journal points out today, this bailout 

gives delinquent mortgage borrowers a new trick to essentially 

enjoy free rent for up to 30 years if a borrower has to endure the 

sad experience of foreclosure, they’ll have the ability to recover all 

of the principal and interest paid over the entire history of the loan 

as long as they can convince a court that they didn’t have a reasonable ability to pay at the time the loan was originated. It doesn’t 

take too much imagination to see how this could be abused. 

The question I hope our witnesses address is, won’t lenders be 

forced to raise rates for everyone to price this risk into loan products as a consequence of the provisions in this legislation? 

Thank you. I yield back, Mr. Chairman. 

The CHAIRMAN. The gentleman from Texas, Mr. Neugebauer. 

[No response] 

The CHAIRMAN. The gentlewoman from West Virginia, Mrs. 

Capito, ranking member of the Housing Subcommittee. 

Mrs. CAPITO. Thank you, Mr. Chairman. I’d like to thank you for 

holding this hearing today on a subject that certainly has been at 

the forefront of our Nation for many months now, the subprime 

and credit crunch crises. 

Every State and congressional district has been affected, some to 

a greater extent than others. States like California—and I would 

like to pause and say I know all of us in this room are very aware 

of what’s going on in California, and our thoughts and prayers are 

with the citizens of California, and we hope that situation resolves 

itself. But States like California, Virginia, Colorado, and Florida 

have experienced significant problems, with many of their citizens 

utilizing alternative mortgages, who are now unable to afford the 

higher payments. 

On the other hand, my home State of West Virginia continues to 

lead the Nation in homeownership and has had one of the lowest 

rates of foreclosure. There’s no one single entity that caused this 

problem, and responsibility is shared by all relevant parties, and 

I’m sure this hearing will help shed some light on that. 

Regulators were slow to understand the impact of designer loans. 

Lenders were overzealous in their lending practices. Many consumers were not fully aware of or did not comprehend the impact 

of their mortgage resetting at a higher rate. And Congress has 

been unable to act for fear of impacting a housing market that has 

been fueling our economy. 

14

Today, despite increasing foreclosure rates and the forecast of 

more difficult time ahead, there are encouraging signs that both 

regulators and industry alike are taking steps to handle this crisis. 

It is my hope that we can work together in this committee to 

produce a prudent response to this problem. It is important to remember that while subprime lending practices have caused harm 

to some, they have provided many more with the opportunity of 

homeownership when they otherwise would not have had that option. 

We must exert great caution to not over-legislate on this issue, 

and I’ve heard others express that concern, causing harm to those 

who have benefitted from this tool. This is a bipartisan problem 

that will need a bipartisan solution. And it is my hope we can build 

on the work done by the chairman, Chairman Frank, and the proposal that Ranking Member Bachus put forward earlier this year. 

I welcome the input of our witnesses today, both on the proposals 

and their thoughts on the best way to address this problem. As the 

ranking member on the Housing Subcommittee, I look forward to 

working with the rest of the members of the committee on this important issue. And I want to thank the chairman for holding this 

important hearing. 

I yield back. 

The CHAIRMAN. Next, one of the co-authors of the bill, the gentleman from North Carolina, Mr. Watt. We are getting towards the 

end here. 

Mr. WATT. Thank you, Mr. Chairman. The introduction of this 

bill a couple of days ago and the three panels that we will hear 

from today converts what has up to this point been largely a philosophical discussion to a discussion about a practical set of proposed 

solutions to problems that everybody recognizes exist. 

In the philosophical discussion, there is broad bipartisan agreement. I have not heard anybody who supports predatory lending in 

that discussion. I haven’t heard anybody who wants to dry up credit or make credit inappropriately more difficult. I haven’t heard 

anybody who wants to reduce access to appropriate credit or homeownership. I haven’t heard anybody who opposes financial literacy. 

I haven’t heard anybody who opposes steering or who favors steering inappropriately in the market, and I haven’t heard anybody 

who supports making loans to people who have not the ability to 

repay those loans. 

That’s the philosophical discussion in which we’ve been working, 

and our challenge has been to take that broad, philosophical discussion, those pious statements that we all say we believe in, and 

convert them into some legislative language that will accomplish 

the objectives that we say we support. 

I’m hopeful that this legislation will take this philosophical discussion and convert it to a practical set of solutions, and I hope our 

witnesses today will really kind of get away from the broad, philosophical, pious statements that we’ve been making and really get 

into the guts of the bill and tell us what works and what doesn’t 

work so that we can try to address the things that everybody 

agrees need to be addressed. 

So, I’m looking forward to this. I thank the chairman. I thank 

Representative Miller in particular for being out in the front of this 

15

a long time ago. And I hope we can see some light at the end of 

this tunnel, and that the light is not a train coming toward us, but 

some real solutions to the problems that everybody acknowledges 

exist. 

I yield back and thank— 

The CHAIRMAN. Thank you. And now the other Mr. Miller is recognized for 2 minutes. 

Mr. MILLER OF CALIFORNIA. Thank you, Mr. Chairman. I appreciate you holding this hearing and Ranking Member Bachus for 

being involved in this, because it’s long overdue. We’ve been talking 

about the problem in the real estate industry, subprime versus 

predatory for years. 

When the marketplace existed as it did between 2000 and 2006, 

predatory wasn’t a problem. When you have a person’s home going 

up 15, 18, or 20 percent in value a year, and they’re made a loan 

that they can make the payment because it’s negative zero at first, 

and the trigger kicks in, in 5 years, and your house is worth 

$120,000 more than you paid for it, it’s worth $320,000 rather than 

$200,000, it’s easy to sell the home. So the people who were really 

kind of taken advantage of never really were in fact because their 

house was worth more when they sold it as we perceive it to be 

today. 

The problem is, when you look at the marketplace and it’s not 

increasing 15, 18, or 20 percent a year, and when you put your 

home on the market, it doesn’t sell in the first 2 days, the people 

who have been taken advantage of are coming to light, and that’s 

what we’re seeing today. Predatory has been existing. It’s no different last year than it was 6 years ago. The problem was there 

didn’t appear to be a problem because the marketplace was continually rising. 

Now we spent a lot of time focusing on GSCs. We were concerned 

about accountability and stability. I think we did a very good job. 

And if you look at the marketplace today, there’s not a problem in 

the GSC marketplace. The problem that exists today is those people who were taken advantage of. When a lender goes out and 

makes a loan to somebody, that they know when the trigger kicks 

in, they cannot make the payment, they’re predatory. The problem 

we have in the marketplace was that GSCs were limited in the 

amount of mortgages they could put on the marketplace in mortgage-backed securities, and so the private sector came in and bundled loans that looked very similar, but they weren’t. They couldn’t 

be debundled. When a GSC goes in default, they take it back. 

When the private sector did that, the guy who bought the mortgage-backed security is stuck. 

This is long overdue. When you have lenders that don’t acknowledge basic underwriting criteria when they make a loan, they’re 

predators. Yet there’s a tremendous amount of individuals making 

loans in the subprime marketplace that we have to ensure that are 

going to be viable and be there tomorrow to provide a service to 

those people who are not prime lenders but who need a loan and 

otherwise could not qualify for a loan. If we arbitrarily through legislation impact that marketplace, we’re going to hurt the very people we’re trying to help today. And I just urge caution in what we 

do legislatively. Yes, we need to define ‘‘predatory,’’ and we need 

16

to get rid of the predators. But we need not impact those people 

who are trying to help in the subprime marketplace. Because if we 

overlegislate and we impact that marketplace, there’s no place for 

them to go. 

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

The CHAIRMAN. Thank you. We will go to Representative 

Neugebauer for 2 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. I am glad to hear 

that the chairman said that we were going to probably push the 

market forward. One of the first things I was going to say this 

morning is I have felt like this process was moving too fast because 

it is too important. 

One of the things that makes America probably so competitive is 

the fact that we have one of the most efficient capital markets in 

the world, and it is really one of the things that gives us an advantage. 

I notice that the title of this hearing today is ‘‘Reforming Mortgage Practices.’’ Certainly, I hope that is the movement that we 

move in and not overhaul. Really, we have a very efficient mortgage system today. It is the envy of the world. It has brought 

record homeownership. A lot of people have benefitted from our 

mortgage industry and the sophistication and the creativity that 

has come from it. 

Yes, there are some folks who unfortunately ended up in mortgages maybe that they should not have been in. 

One of the things that concerns me about the tenor of this hearing is we have heard people mention a lot of different kinds of 

mortgages, from prime to subprime, and then those people who are 

participating in what all of us think is egregious behavior, and that 

is predatory lending. 

Let’s not confuse the three. As we begin to go through this process, Mr. Chairman, I think it is important that we separate what 

parts of policy we are trying to address here. 

The marketplace is in the process right now of trying to transfigure and try to figure out exactly what happened and how to fix 

this in the future. They are going through some painful processes. 

That is one of the things about a very efficient marketplace, that 

they are efficient but sometimes they are painful. 

I would say that as we move forward, I think one of the things 

we have to say to the American people is we have confidence in 

them. If given the right information in the form of disclosure and 

transparency, the American public can make good decisions. 

That is one of the things that I hope will come from this legislation as we move forward is that we figure out a way to bring the 

right amount of information to our consumers so that when they 

make sometimes one of the biggest decisions that they will make 

as a couple or as an individual of purchasing a home, that they are 

doing that with information. 

What we do not want to do if these markets are trying to unravel 

and to bring liquidity back in the market is create some uncertainty in the marketplace that would make this somewhat of a blip 

in the marketplace even deeper than it is. 

17

Mr. Chairman, regardless of how long it takes, let’s not make political policy here. Let’s make good policy. 

I yield back. 

The CHAIRMAN. The gentleman from New York, Mr. Meeks, for 

2 minutes. 

Mr. MEEKS. Thank you, Mr. Chairman. I want to thank you and 

Mr. Watt and Mr. Miller for having this hearing and working so 

hard on this bill. 

We have to make sure that the wrong messages do not get out 

to the general public. I have talked to some individuals in my district, for example, and they are questioning whether or not they 

should buy a home. 

I think the message still needs to go out there that in fact we 

do need to reverse the paradigm. I tell people in our district all the 

time, no longer should you just own the car and rent the house. 

You should rent the car and own the house, because over the long 

term, homeownership will be an appreciating asset and you can bet 

that car is going to be a depreciating asset. 

That is educating individuals so they understand how important 

this is. What we were trying to do and I believe what this bill was 

trying to do is basically give some checks and some balances, if you 

will, so that we could make some of this confidence in individuals 

when they are going in to purchase these homes that in fact they 

can afford it. 

It is very important, I think, for lenders, to also make sure that 

they are doing the right things. If someone cannot afford a home 

of a certain cost, they should not lend. I do not see how lenders 

benefit by foreclosing on someone’s home. 

What we have had is a situation whereas, for example, the economy heats up. Stocks heated up in the late 1920’s, and dot-com’s 

in the 1990’s. Not for the first time, real estate in the 2000’s. 

Unfortunately, sometimes the commodity gets too heated and 

lenders and borrowers and everyone in between join forces and 

they end up making bad decisions, and eventually the roller coaster 

comes to an end. 

I believe what H.R. 3915 will help to do is provide some of those 

checks and balances. Bill Clinton once said, ‘‘Mend it, don’t end it.’’ 

We are trying to mend it. That is what this does. 

Finally, Mr. Chairman, I would like to add that I am hoping that 

in this legislation we can address a predatory practice that has 

flourished, I know definitely in my district, but I believe all across 

America, as a result of the subprime crisis known as equity stripping. 

I am developing some legislation based on the existing State law 

and I hope that I can introduce some of the amendments and talk 

to the authors of the bill so that we can address this problem called 

equity stripping. 

Thank you, Mr. Chairman. I look forward to working with you. 

The CHAIRMAN. Thank you. We now have Mr. Hensarling for 2 

minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. As interesting as 

our hearing is, there may be a more interesting one going on across 

the hallway, I note. 

18

Clearly, the Nation is facing a bad situation. This committee has 

an opportunity to make that bad situation worse. I fear that we 

will embrace that opportunity. 

We know about the threat of home disclosure. We know about 

the threat to the larger economy. We also have to take note that 

although Adam Smith’s invisible hand is occasionally clumsy, it is 

certainly far more deft and skilled than the iron fist of the congressional mandate. 

We still have to remember that millions of people have homeownership opportunities due to a subprime market. I am very leery 

of any legislation that could under cut that market. 

Clearly, I believe that our government has a role to prevent 

force, to prevent fraud, to promote effective disclosure, not just voluminous disclosure, to promote financial literacy, and also to promote personal responsibility, and to remove barriers to market liquidity. 

We should also take note about what is happening in the marketplace now. The market has a wonderful ability to correct itself. 

New subprime originations are down and down significantly. 

Companies like New Century that had bad business practices have 

gone belly up. 

Lenders all across America are reaching out to homeowners who 

may not be current to try to modify their loans and avoid disclosure. There is almost no player in the marketplace that wins under 

foreclosure. 

As I look at this bill, although I do see some titles which I support, I fear that with a Federal duty of care, I fear that with subjective underwriting terms and subjective terms like net and tangible benefit to consumers, that at the end of the day, we may be 

replicating what we saw in North Carolina and Georgia, and we 

may have a trial attorney’s dream and a homeowner’s nightmare. 

I yield back. 

The CHAIRMAN. The gentleman from New Jersey for 2 minutes. 

Mr. GARRETT. I thank the chairman. I thank all the members of 

all three panels for patiently waiting for your testimony that is 

about to come. 

The chairman began his remarks with the investor confidence arguments to the need for government regulation and went back to 

the creation of the SEC and suggested that any argument therefore 

that was against it rang hollow then and supposedly any arguments against more regulation, I guess, rings hollow in the future 

as well. 

The argument on the other side of that, of course, is history, the 

first we saw with SOX. There was the argument for investment 

confidence, for more regulation, and what did Congress do? We 

used a proverbial sledge hammer to hit something that should have 

just been hit down with a fly swatter instead. Same thing here. We 

see an over reaching approach for action by the Government. 

I do not believe anyone is suggesting that we do nothing about 

this crisis. The facts are that things have already been done. As 

Jeb indicated, the private market has already stepped in. They 

have moved very quickly on this area. 

19

The public sector has also moved and they continue to move with 

the Federal Reserve and they will be moving within the next couple 

of months by the end of the year as well. 

Just on a little side note, I note that the Federal Reserve is 

taken out of this legislation altogether, and I am curious about 

that. I am wondering whether Ron Paul has had some influence on 

the chairman with regard to the Federal Reserve. 

My last comment on this is that no one is suggesting that we do 

nothing. Action has already been taken. We do not want to do more 

harm than good. I think the wisest choice to take here is to move 

very cautiously and to do whatever we do in concert with the action 

that the Fed will take in the nearby future. 

With that, I yield back. 

The CHAIRMAN. The gentleman from Florida, our last 2 minutes. 

Mr. FEENEY. Thank you, Mr. Chairman. I certainly agree with 

my colleagues, Hensarling and Garrett, in their last comments. 

I want to suggest, rather than getting into details, that as we 

deal with this crisis as legislators, we remind ourselves of certain 

truisms in legislative processes. 

Number one, the law’s unintended adverse consequences. We try 

to do some good things and we do not think through the adverse 

consequences that may be much more harmful than any good we 

actually do in legislation. 

I hope we do not do that with the crisis in our credit markets 

today. Related to that is Churchill’s assessment that nobody with 

a heart was not a socialist when they were 20, and nobody with 

a brain was not a conservative by the time they were 40. 

I hope at least part of Congress will act as adults as we respond 

to this crisis because we are very sympathetic indeed to the people 

who are losing their homes. 

Third, I hope we will pay attention to the admonition that it is 

politically expedient but not good policy to concentrate the benefits 

for the few people in this case losing their homes, but to disburse 

the punishment, in this case, to the thousands of people who would 

like to sell homes but will have fewer buyers that can get credit, 

the thousands of people who would like to buy homes in the future 

but cannot get access to credit because we are increasing the risk. 

Finally, I will note it is not just what this committee does, but 

I have begged and pleaded that the bankruptcy reform proposal 

which sounds great but could throw havoc into the credit markets 

combined with what we do here if we do not do it right could take 

a bad tumultuous credit situation and make it irretrievably worse. 

We could take a recession in the housing markets and make it 

a depression across economic lines if we are not careful, because we 

are trying to do good, but not thinking about the real life economic 

consequences of thinking with our hearts and not our brains. 

I hope we use at least part of our brains as well. With that, I 

yield back. 

The CHAIRMAN. I thank the gentleman. I did listen closely to the 

gentleman from Florida. I would ask unanimous consent that the 

socialist writings of the gentleman from Florida and any other 

members at the age of 20 be inserted into the record. Without objection, we will await those. 

20

Not hearing any objection, the record will remain open for those 

writings. 

[Laughter] 

The CHAIRMAN. I know we did not have e-mail then, Tom. Maybe 

you wrote a paper. 

I appreciate the people waiting. It did seem to me important for 

the various members’ viewpoints to be laid out, because we are 

about to deal with one of the most significant pieces of legislation 

that we will be dealing with this year, certainly from this committee. 

We will now begin. Let me begin with Mr. Gruenberg, Martin 

Gruenberg, who is the Vice Chairman of the Federal Deposit Insurance Corporation. The Chair of the Corporation, Sheila Bair, who 

has been a very constructive participant with us in a lot of ways, 

unfortunately is ill today, and we are sorry to hear she is ill but 

we are pleased that Mr. Gruenberg on very short notice was able 

to come in her stead. 

Mr. Vice Chairman. 

STATEMENT OF THE HONORABLE MARTIN J. GRUENBERG, 

VICE CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION, ON BEHALF OF CHAIRMAN SHEILA C. BAIR 

Mr. GRUENBERG. Thank you very much, Mr. Chairman. If I may 

also say that Chairman Bair really has provided very strong and 

constructive leadership on this issue. I do not think there is any 

issue that is of greater priority to her. I will try to do my best to 

sit in for her this morning. 

Chairman Frank, Ranking Member Bachus, and members of the 

committee, thank you for this opportunity to testify on behalf of the 

FDIC. 

Let me say at the outset that while the troubles in housing and 

credit markets have yet to fully play out, they underscore the 

FDIC’s long-standing view that consumer protection and safe and 

sound lending are really two sides of the same coin. 

Poor lending standards and weak consumer protection are the 

root cause of the current problems resulting in serious consequences for consumers, lenders, and the United States’ economy. 

Clear balanced commonsense standards for mortgage lending 

practices will reinforce market discipline and ensure an adequate 

flow of capital to fund responsible lending, including for low- and 

moderate-income consumers with less than perfect credit profiles. 

Legislation or regulation to address issues in the mortgage market should preserve the elements of the current system that have 

worked well for the economy and require all lenders to follow the 

same rules. 

The Mortgage Reform and Anti-Predatory Lending Act is a workable and helpful vehicle for legislative action to establish a national 

standard. The bill would help ensure that borrowers receive mortgages that they can ultimately afford to repay, and that lenders in 

turn understand the credit risks they are taking. 

Requiring mortgage originators to be licensed and registered will 

improve industry professionalism and prevent bad actors from 

jumping from one jurisdiction to another. 

21

The minimum standards set by the bill include many criteria 

that have long been used by lenders to evaluate a borrower’s ability 

to repay a loan. These include verified and documented financial 

information, taking into account all fees and taxes to be paid by the 

borrower, and underwriting loans based on the fully indexed rate, 

and assuming a fully amortizing repayment schedule. 

A clear bright line standard for determining repayment capacity 

such as the debt to income ratio provision in the proposed bill will 

serve an especially important role by acting as a check on the significant portion of mortgage originators that are not subject to regular supervision. 

Without a debt to income limitation, lenders could underwrite 

loans to the fully indexed rate, but at such a high percentage of a 

borrower’s income, that the loan could not realistically be repaid. 

The requirement that loans be fully documented also could be 

under cut without a debt to income standard that ensures a borrower’s fully documented income can support the loan. 

The provisions of the bill requiring the mortgage originator to 

disclose the comparative costs and benefits of mortgage loan products, the nature of the originator’s relationship to the consumer, 

and any conflicts of interest will empower consumers to make better informed decisions about the products and services that are 

being offered. 

Finally, it is important to address assignee liability as a meaningful check on abuse by originators. 

Given the difficulties inherent in enforcing strong origination 

standards, it is appropriate that those funding the lending activity 

bear some responsibility for ensuring that the standards are adhered to by mortgage originators. 

To be effective, however, assignee liability must be based on 

bright line standards so that it does not inadvertently dry up essential credit. 

In conclusion, Mr. Chairman, the FDIC stands ready to work 

with Congress to ensure that mortgage credit is based on standards 

that achieve a fair result for both the borrower and the lender. 

I would be happy to answer any questions the committee may 

have. Thank you, Mr. Chairman. 

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

143 of the appendix.] 

The CHAIRMAN. Next, the Comptroller of the Currency—with 

whom we have had a very good and constructive relationship—Mr. 

John Dugan. 

STATEMENT OF THE HONORABLE JOHN C. DUGAN, COMPTROLLER, OFFICE OF THE COMPTROLLER OF THE CURRENCY 

Mr. DUGAN. Thank you, Mr. Chairman. Chairman Frank, Ranking Member Bachus, and members of the committee, thank you for 

the opportunity to testify on this important legislation. 

The OCC supports the establishment of national standards for 

subprime mortgages, which have been the source of so many recent 

problems in credit markets. We also support the bill’s goal of enhanced regulation of all mortgage brokers, whether used by banks 

or non-banks. 

22

In recognition of pervasive problems in the subprime market generally, the Federal banking agencies tightened mortgage standards 

by issuing guidance on both subprime lending and non-traditional 

mortgages. 

We believe these Federal banking agency standards addressed 

fundamental concerns about underwriting and marketing practices 

for these mortgages, but these standards apply only to federally 

regulated institutions. They do not address similar practices at 

State regulated institutions that are not banks, even though by 

nearly all accounts, such institutions engaged in some of the most 

aggressive mortgage practices. 

As a result, the Federal banking agency standards cannot be 

truly effective unless they extend to non-federally regulated institutions as well, to create truly national standards. 

Such national standards could be achieved through State action, 

Federal Reserve Board rulemaking, or Federal legislation such as 

the bill that is the subject of today’s hearing. 

Regardless of the path chosen, the OCC supports national standards for subprime mortgages similar to the Federal banking agency 

standards. From our initial understanding of the bill, which we 

have only had a limited time to review, it would establish national 

standards for three different categories of mortgages. 

For all mortgages, the bill would establish national sales practice 

standards for mortgage originators through licensing and registration requirements, a Federal duty of care, and anti-steering provisions. 

For subprime mortgages, the bill would through the use of safe 

harbor provisions establish national underwriting standards that 

are more stringent than the underwriting provisions in the Federal 

banking agency standards, and for HOEPA mortgages, the bill 

would lower the APR and fee triggers to make less costly mortgages subject to the enhanced HOEPA regulatory regime. 

These three categories of changes plainly go beyond the Federal 

banking agency standards. That is some of the new national standards apply to mortgages other than subprime mortgages and some 

of the bill’s national subprime standards are more stringent. 

While we support some of these broader standards, others raise 

significant questions and concerns that we hope will be addressed 

as the process moves forward. 

For example, the application of some of the new and extensive 

national mortgage standards to banks that do not provide subprime 

mortgages raises significant issues of regulatory burden and fairness. 

In particular, we question whether the burden of the licensing 

and registration requirements for all bank employees involved in 

any type of mortgage origination is, given existing bank regulation, 

worth the marginal benefit, especially for community banks. 

Likewise, the Federal duty of care and anti-steering provisions, 

which include highly subjective requirements that mortgages be 

appropriate and in the consumer’s interest, will be difficult to enforce and could significantly increase the litigation exposure for all 

banks. 

In addition, the more stringent underwriting standards for 

subprime mortgages would by definition restrict the availability of 

23

credit to subprime borrowers more than the Federal banking agency standards. 

On the positive side, this reduction of credit would help ensure 

that the borrowers who obtain these loans could truly afford to 

repay them. On the negative side, the reduction would prevent 

some creditworthy borrowers from obtaining loans. 

It is impossible to determine ex-anti the extent to which creditworthy borrowers would be denied loans due to the new and stricter standards. This is clearly a tradeoff in the bill. 

In addition, the stricter standards would also prevent more existing subprime borrowers with adjustable loans today from refinancing such loans. 

Finally, the OCC believes that there is an important point to be 

made about the bill’s enforcement remedies. On their face, the remedies appear even handed because they apply equally to banks and 

non-banks, but the reality is quite different. 

Because of existing enforcement provisions in Federal banking 

law, application of the same set of bright line standards to banks, 

brokers, and non-banks would in fact expose banks and their employees to a much wider range of potential enforcement actions 

than would be the case for brokers and non-banks. 

Put another way, banks and their employees would be subject to 

a stronger enforcement regime than non-bank lenders or mortgage 

brokers for the very same violations of the bill’s new provisions. 

We urge attention to the bill’s enforcement mechanisms to ensure that the bill’s standards are as effectively implemented and 

enforced at non-bank lenders and brokers as they would be at 

banks. 

Thank you very much. 

[The prepared statement of Comptroller Dugan can be found on 

page 195 of the appendix.] 

The CHAIRMAN. Next, another of the regulators we have been 

working with, John Reich, the Director of the Office of Thrift Supervision. 

Mr. Reich. 

STATEMENT OF THE HONORABLE JOHN M. REICH, DIRECTOR, 

OFFICE OF THRIFT SUPERVISION 

Mr. REICH. Thank you. Good morning, Mr. Chairman, Ranking 

Member Bachus, and members of the committee. Thank you for the 

opportunity to provide the views of the Office of Thrift Supervision 

on H.R. 3915. 

I applaud your efforts to address the need for enhanced Federal 

oversight of mortgage origination and funding process. I do believe 

that consistent and fair oversight of all players that originate and 

fund mortgages is overdue. While the problems of the current market are complex, the issues that created them are not. 

To address these issues, we must adhere to certain key principles, including sound underwriting, transparency, strong consumer protection, a level playing field, and consistent supervision. 

First and foremost, sound underwriting is fundamental to the 

success of mortgage lending. It protects both lender and borrower 

in the mortgage process. This fact alone highlights the importance 

of the effective oversight of the mortgage origination process. 

24

We support the effort to require national licensing and registration of all mortgage originators who are not subject to Federal or 

State banking oversight. We suggest any national system should 

include adequate capitalization standards, competency testing requirements, and background checks for all principals and staff. 

Again, for mortgage originators that are not subject to State or 

Federal banking oversight. 

Second, in addition to a Federal duty of care, I encourage the 

committee to consider modifying compensation incentives to mortgage originators, to consider a longer term pay out on loan origination, to protect the borrower customer’s economic best interest. The 

typical compensation structure, for example, for life insurance 

agents might provide a good model. 

Third, transparency is critical to the proper functioning of the 

markets. When market participants lack adequate information to 

evaluate their current positions or potential investments, markets 

break down. 

Fourth, sound consumer protections are integral to promoting 

properly functioning markets. Just as market participants need accurate information to evaluate the markets, consumers need clear 

and balanced disclosures to be able to understand mortgage products. 

We support the provisions of H.R. 3915 that promote clear and 

balanced disclosures for consumers in the mortgage origination 

process. 

Consumer protections that address unfair and deceptive acts and 

practices in mortgage lending and other lending and financial service activities also make our markets stronger. This is the premise 

behind the OTS proposal on unfair and deceptive acts and practices 

that we issued in August. 

For action in this area to be effective, however, it has to be applicable to all relevant players. With this in mind, we intend to work 

closely with the other Federal banking agencies at this table on 

how to address these issues following the November 5th comment 

deadline. 

Effective regulation and oversight of the mortgage origination 

and funding process requires a level playing field for all market 

participants. We also appreciate the recognition of a safe harbor for 

certain loan products in this bill. 

Based on our review and experience, these safe harbor loans are 

typically soundly underwritten and enjoy a high level of transparency with respect to their terms and occupy the most competitive part of the market. Hence, a level playing field. 

A final point for your consideration in evaluating options for reform in the mortgage origination and funding process is joint State 

and Federal oversight of mortgage banking activities, such as that 

which currently exists in the supervision of State banks. 

Establishing a partnership between the States and a Federal 

overseer to set and enforce minimum mortgage origination funding 

standards would ensure accountability and consistency throughout 

the mortgage lending process. 

It is important to stress that a partnership would not necessarily 

involve establishing a Federal mortgage banking charter but rather 

25

impose a Federal/State partnership to regulate existing mortgage 

banking entities and ensure nationwide uniformity. 

The OTS has extensive experience in overseeing and supervising 

mortgage banking operations, and I believe would benefit the current mortgage banking market. 

I would be happy to share my thoughts on an OTS role in overseeing such a State/Federal national mortgage banking program. 

In closing, I want to mention that mortgage foreclosures and possible solutions to the problem will be among the primary issues 

that will be discussed at the OTS’ National Housing Forum to be 

held at the National Press Club in Washington, D.C., on December 

3rd. Of course, you are all invited and we would be delighted if 

your schedules would permit that you could attend. 

Thank you, Mr. Chairman. I would be happy to answer questions. 

The CHAIRMAN. Thank you. Having attended last year’s Forum, 

I regret that my schedule keeps me from going, but I would second 

your urging of the members. I found that very useful. Since the 

President’s White House Ball will be that night, it would not be an 

extra trip to Washington. I would urge members to accept that invitation. 

Next we have JoAnn Johnson, the Chairman of the National 

Credit Union Administration, another one of the regulators with 

whom we have had the privilege of working. 

Chairman Johnson, please go ahead. 

STATEMENT OF THE HONORABLE JOANN M. JOHNSON, 

CHAIRMAN, NATIONAL CREDIT UNION ADMINISTRATION 

Ms. JOHNSON. Thank you, Chairman Frank, for this opportunity 

to testify regarding proposed mortgage reforms. This is a timely 

and important subject that merits congressional oversight, and I 

commend your interest in helping consumers make more informed 

and beneficial choices surrounding what is arguably the most important purchase they ever make, their home. 

The credit union industry comprises a relatively small slice of the 

overall mortgage lending pie. Federally insured credit unions made 

about 2 percent of all mortgage loans in the first half of 2007 and 

9 percent of mortgage loans made by depository institutions. Sixty 

percent of credit unions offer mortgage loans. Those that do not are 

generally smaller institutions lacking the infrastructure and expertise to manage a significant portfolio. 

Federal credit unions also have a 10 percent loan to one borrower 

limit imposed by statute which makes mortgage lending less feasible for smaller credit unions. 

Sixty-three percent of credit unions’ mortgage loans are fixed 

rate. In the first half of 2007, fixed rate loans grew 14 percent 

while adjustable loans rose only 2 percent, a result of consumer reaction to a rising interest rate environment. 

Non-traditional mortgage lending such as interest only or payment option loans while offered comprised less than 2 percent of 

first mortgage loans. 

Earlier this year, we noted market trends suggesting greater 

prevalence of these products and we amended our call reports to 

specifically collect data and get a more accurate picture of the credVerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE
26

it union activity. Mid-year results confirm NCUA’s belief that credit unions have not delved very deeply into the kinds of alternative 

products that have made this hearing unfortunately necessary. 

We believe that there are three primary reasons why these 

riskier loans are not widespread in the credit unions. First, as 

noted earlier, many credit unions lack the expertise and resources 

to underwrite these types of loans. 

Second, over 2 years ago, we issued guidance addressing problems associated with both credit and interest rate risks in non-traditional lending. This translated into more stringent examinations. 

Third, the Federal Credit Union Act prohibits prepayment penalties. 

NCUA has proactively monitored trends and mortgage lending 

over the past decade and has issued guidance to the industry accordingly. As far back as 1995, NCUA in a letter to credit unions 

discussed potential pitfalls surrounding risk based and subprime 

lending. 

In addition to our oversight of the financial side of the mortgage 

lending ledger, NCUA also takes a robust approach to enforcement 

of consumer protection laws through our examination process. 

Combined with careful review of member complaints, NCUA evaluates each credit union’s compliance with the law and gains a more 

complete picture of how a credit union makes mortgage loans. We 

also issue regulatory alerts to ensure compliance with a full range 

of consumer protection laws. 

This all contributes to a credit union industry that is enjoying 

relative stability in the midst of some very real dislocations in the 

mortgage market. While demand for mortgages remains high, delinquencies are low. 

This brings me to the recently introduced legislation that will 

hopefully improve the mortgage lending menu by making choices 

more understandable while eliminating the abusive practices that 

have gotten some borrowers in dire financial straits. 

The Frank/Watt/Miller bill addresses several practices in ways 

that contain very real positives for consumers. For example, making all originators subject to the same duty of care standards, requiring a determination of suitability, and eliminating unfair prepayment penalties, single premium credit insurance, and mandatory arbitration are important and sensible aspects of the legislation. 

We also support the licensing and registration for mortgage originators who are not depository institutions. Further enhancements 

to HOEPA outlined in the legislation particularly regarding fees 

also represent a step forward. 

I want to bring to your attention the omission of NCUA from 

joint rulemaking. There are several provisions in the bill that 

charge Federal financial institution regulators with writing regulations for the institutions they regulate. 

Although credit unions are properly subject to this legislation, 

none of my colleagues at this table have supervisory or enforcement authority over them. NCUA is concerned that important aspects of credit union operations, as well as appropriate regulatory 

distinctions, would not be accounted for in the writing of the rules 

if NCUA is not jointly involved. 

27

I respectfully ask that you consider amending the legislation to 

include NCUA in the process. 

Congressman Kanjorski also has introduced a bill addressing 

other aspects of the home mortgage lending industry. NCUA commends that effort as well, particularly the aspects that improve 

consumer disclosures and transparency related to mortgage servicing. 

In conclusion, I would like to comment on a fundamental element 

of any discussion on mortgage lending facing consumers, the need 

for increased financial education, and while it is not a panacea or 

substitute for rigorous regulation, I believe that all of us have a responsibility to promote a more financially aware borrowing public. 

Thank you very much. 

[The prepared statement of Chairman Johnson can be found on 

page 206 of the appendix.] 

The CHAIRMAN. Thank you. Next we will hear from Randall 

Kroszner, Governor, Board of Governors of the Federal Reserve 

System. 

Governor Kroszner? 

STATEMENT OF THE HONORABLE RANDALL S. KROSZNER, 

GOVERNOR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. KROSZNER. Chairman Frank, Ranking Member Bachus, and 

members of the committee, I appreciate the opportunity to appear 

before you today to discuss recent problems in the subprime mortgage market. 

The recent increase in foreclosures has created personal financial 

and social distress for many homeowners and communities. Congress is appropriately concerned about these developments as is the 

Federal Reserve Board. 

Promoting access to credit and sustainable homeownership are 

important objectives and the Board believes responsible subprime 

mortgage lending can help advance both goals. 

In carrying out its consumer protection responsibilities, the 

Board believes it is extremely important to strike the right balance 

by seeking to protect consumers from predatory practices without 

restricting credit from responsible lenders to borrowers with shorter or lower rated credit histories. 

Consumer protection laws take two different but complimentary 

approaches. One focuses on disclosure and the other on development and enforcement of substantive protections that prohibit particular practices. 

To be effective, disclosures must give consumers the information 

that they can readily understand at a time when the information 

is relevant. To that end, the Federal Reserve will propose improvements to the rules governing mortgage disclosure and the timing 

of those disclosures. 

The Federal Reserve is keenly aware, however, that disclosure 

may not be sufficient to combat abusive practices. We share the 

concerns of Congress that certain lending practices may have contributed to the problems we are seeing in the subprime market 

today. 

28

Therefore, the Federal Reserve plans to exercise its rulemaking 

authority under the Home Ownership and Equity Protection Act, 

HOEPA, to address unfair and deceptive mortgage practices. 

We plan to propose rules by the end of this year that would apply 

to subprime loans offered by all mortgage lenders. We are looking 

closely at practices such as: One, prepayment penalties; two, failure 

to offer escrow accounts for taxes and insurance; three, stated income and low documentation lending; and four, failure to give adequate consideration to borrowers’ ability to repay. 

Enforcement of consumer protection measures is also critical to 

protecting consumers from irresponsible or predatory lending. The 

regulatory scheme for the mortgage industry has become extremely 

complex and some mortgage lending extends beyond the Federal 

banking agencies’ oversight. 

This underscores the importance of collaborating with the State 

banking agencies and other organizations to address concerns in 

the subprime mortgage lending market. 

To this end, we have launched a cooperative pilot project with 

other Federal and State agencies to conduct reviews of non-depository lenders with significant subprime mortgage operations. 

Congress is appropriately concerned about the problems in the 

mortgage market. As with the regulations, I believe it is important 

that new laws carefully target lending abuses without unduly restraining responsible lending. Getting this balance right is particularly critical now as many borrowers are facing adjustments and 

may need to refinance into more affordable loans. 

The bills before this committee would provide for a nationwide 

registration and licensing system for all mortgage brokers that 

would help limit the ability of bad actors to move to a new State 

after having run afoul of regulators in other States. 

Legislation would also address concerns about loans made without consideration of a borrower’s ability to repay. The Board firmly 

believes that lenders should give due consideration to the borrower’s ability to repay a loan before the loan is extended, so long 

as the rules are flexible enough to allow creditors to consider pertinent factors and individual circumstances of particular consumers 

and to innovate prudently and fairly. 

The bill would hold securitizers and loan purchasers liable for 

bad actions of mortgage originators. The securitization market is 

critical to increasing the resources available to fund home purchases and great care should be taken to ensure that investors in 

securitization markets can quickly and accurately assess and mitigate the risks, including compliance risks, of mortgages sold in this 

market. 

Finally, the bill would ban abusive practices for HOEPA loans, 

such as prohibiting the financing of single premium credit insurance, an important thing to be done. 

The bill would also extend HOEPA’s protections to more loans by 

amending HOEPA’s cost triggers. These potential actions merit discussion, and we welcome the opportunity to continue to work with 

congressional staff and Members of Congress on these and other 

provisions of the new bill. 

I thank you very much for the opportunity to appear before you. 

I look forward to your questions. Thank you, Mr. Chairman. 

29

[The prepared statement of Governor Kroszner can be found on 

page 226 of the appendix.] 

The CHAIRMAN. Thank you. There are two votes, but we will finish the testimony from Commissioner Antonakes, and then we will 

take a break and come back and begin the questioning. 

I am very glad to welcome my State Banking Commissioner, 

Commissioner Antonakes. 

STATEMENT OF THE HONORABLE STEVEN L. ANTONAKES, 

COMMISSIONER, MASSACHUSETTS DIVISION OF BANKS, ON 

BEHALF OF THE CONFERENCE OF STATE BANK SUPERVISORS 

Mr. ANTONAKES. Good morning, Chairman Frank, Ranking Member Bachus, and distinguished members of the committee. 

My name is Steven Antonakes and I serve as the Commissioner 

of Banks for the Commonwealth of Massachusetts. I am also the 

State voting member of the FFIEC and a founding board member 

of the State’s nationwide mortgage licensing system. It is my pleasure to testify today on behalf of the Conference of State Bank Supervisors. 

Chairman Frank, we commend you for holding this hearing today 

on these important issues. CSBS supports the direction of the Miller/Watt/Frank bill and looks forward to working with you and your 

staff as we move towards mark-up. 

This morning, I would like to leave you with five points from my 

testimony. First, 10 weeks from today, our nationwide mortgage licensing system, 4 years in the making, goes live. The system seeks 

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

market, to fight fraud and predatory lending, to increase accountability among mortgage professionals, and to unify and streamline 

State licensing safeguards. 

On January 2, 2008, Massachusetts will begin using this system 

to license mortgage lenders and mortgage brokers. To date, 40 

State mortgage regulators have committed to coming onto the system. 

Chairman Frank, Representatives Watt and Miller, CSBS appreciates that your bill, H.R. 3915, incorporates our system as part of 

the regulatory infrastructure. I would also like to thank Representatives Bachus and Pryce for their support that H.R. 3012 gives the 

State licensing system. 

This State system is more than a database. It is the foundation 

for coordinated multi-State mortgage supervision. Included in my 

testimony is some suggestions for refining H.R. 3915 to maximize 

the effectiveness of the system. 

Second, Chairman Frank, we endorse your bill’s establishment of 

consistent standards to address responsible lending. 

Third, CSBS strongly supports the approach of establishing these 

standards as a floor, as opposed to a ceiling. States must retain the 

flexibility to address emerging issues. This allows States to establish best practices, which may become the foundation for Federal 

legislation. 

For example, the Truth in Lending Act was originally implemented by my home State of Massachusetts in 1966, and the first 

30

predatory lending law was originally enacted by North Carolina in 

1999. 

Fourth, States must have clear authority to take enforcement actions against violation of these standards for the benefits of consumers in our States. 

The residential mortgage market is now global in its scope, but 

the consequences of lending abuses will always be local. Given our 

proximity to the communities we serve, State regulators and law 

enforcement agencies are uniquely posed to respond quickly to the 

needs of our consumers and our homeowners. 

Fifth, CSBS commends Congress for facilitating State and Federal coordination by giving State authorities a vote on the FFIEC. 

Since the States joined the FFIEC, cooperation between the Federal banking agencies and State authorities has improved dramatically. However, we encourage Congress to make sure that States 

are included in any new Federal rulemaking processes for mortgage providers. 

The FFIEC provides the most appropriate forum for developing 

these new rules. We suggest that this mechanism best leverages 

State experience in developing the rules required to implement 

your legislation. 

Finally, I would only add that I believe I am the only person at 

the table who actually regulates banks, credit unions, mortgage 

lenders, and mortgage brokers, and I do love all of my children. 

[Laughter] 

Mr. ANTONAKES. There has been a great deal of discussion today 

by the members that no single party or groups of parties are responsible for the issues we face today, and I do agree with that position. 

We do support stronger safeguards for loan originators and we 

believe that your bill will effectively carry that through. However, 

it is important also to note that it was underestimating and misstating of credit risks and the failure of internal controls by depository institutions and non-depository institutions that significantly 

contributed to the problem we face today. 

Thank you for the opportunity to testify. I would be happy to 

take any questions you may have. 

[The prepared statement of Commissioner Antonakes can be 

found on page 128 of the appendix.] 

The CHAIRMAN. Thank you. The committee will be in recess. We 

have only two votes, about 8 minutes left on this one, and then a 

quick 5-minute vote. We should be able to be back in less than 20 

minutes, and we will immediately begin the questioning. 

[Recess] 

The CHAIRMAN. The hearing will reconvene. We will begin the 

questioning with my two co-authors here, along with the gentleman 

from New York. We will begin with the gentleman from North 

Carolina, who is one of the major authors of this bill, Mr. Watt, 

who is recognized for 5 minutes. 

Mr. WATT. Thank you, Mr. Chairman. Let me thank the witnesses for being here and particularly thank the FDIC representative and the Comptroller of the Currency, and Mr. Antonakes. 

Measured against the standard that I set in my opening statement, which was taking this from a philosophical discussion to a 

31

practical discussion of the bill that is in front of us, I would have 

to say I was not overwhelmed by the testimony of the other witnesses on that criteria. 

I am hopeful that if you have not already done so, maybe you 

have in your written testimony because I confess, I did not get a 

chance to read it all, if you have not already done so, I hope you 

will take a very aggressive look at the bill that is now before us 

because Mr. Reich, Ms. Johnson, and Governor Kroszner, your testimony could have been delivered and was delivered several weeks 

ago outside the context of a bill. 

We now have a bill in front of us that we really aggressively 

need your feedback on. If you are not going to play that role, then 

I am not sure that it is going to be that helpful to us. 

I appreciate the platitudes and the bragging about what your 

agency has done or what you have done, but at this point, we are 

looking for feedback on a bill that is in front of us. 

It would be helpful to get some feedback on the bill. That having 

been said, Mr. Reich suggested, although there is nothing about it 

in this bill, some things that we ought to, I guess, be considering 

putting in the bill, one of which was to allow a longer pay out to 

brokers. You suggested that, did you not, Mr. Reich? 

Mr. REICH. I did. 

Mr. WATT. The question I wanted to ask was whether under the 

mechanism that we have set up that allows rulemaking to occur, 

that would not be able to be accommodated or would it or would 

it not be able to be accommodated under the authority that we 

gave the regulators to write rules for the road going forward in this 

area? 

Mr. REICH. It could be that the Fed may have that authority 

under their rulemaking authority. 

Mr. WATT. My question is on the language in this bill that allows 

more than the Fed to be involved in rulemaking. Have you read the 

bill? 

Mr. REICH. Sir, I have not read the 66 pages in the bill. 

Mr. WATT. No wonder we did not get any comments on the bill. 

Did you understand the hearing today was about the bill? 

Mr. REICH. Absolutely. I have read a summary of the bill and 

was informed that we could submit a more detailed—we just received it 2 days ago—that we could submit a more detailed statement by Friday of this week, which OTS intends to do. 

Mr. WATT. I will not ask any more questions about the bill. 

There is a provision in there that allows rulemaking to occur. It 

seems to me that if we need to make it clearer that rulemaking authority extends to the ability to have a longer pay out for brokers, 

we could make that explicit very easily. 

I am not sure—I do not believe that authority is already in the 

bill. I guess there is no sense in us debating it if you have not read 

the provision. 

My time has expired. I appreciate the constructive comments 

that were made by some of the regulators. I encourage the other 

regulators to please read the bill and give us some feedback. Do not 

just wait until we do something or do not do something and then 

say well, you know, this is my public invitation to you all to play 

a constructive role in this process. 

32

I think the Chair has already pointed out that we would like to 

get this done some time and move the bill. The quicker you all 

could get back to us, the more I would appreciate it. 

I thank the chairman and yield back. 

The CHAIRMAN. I thank the gentleman. I would reinforce that. I 

should acknowledge that we did want to make a commitment to 

having the broadest possible consultations on the bill, which meant 

that we did not introduce it—it is a shorter than usual interval between the introduction and the hearing, but that is why we agreed 

that the record will be open for the rest of the week. 

The gentleman from Alabama. 

Mr. BACHUS. Thank you, Mr. Chairman. Mr. Dugan, I am going 

to ask you and Mr. Reich, you all have said you do not think your 

member institutions ought to come under the national registration 

and licensing provisions. 

Have you read my bill dealing with national registration and licensing? 

Mr. DUGAN. I confess I have not. 

Mr. BACHUS. Have you, Mr. Reich? 

Mr. REICH. I have not. 

The CHAIRMAN. His was introduced earlier. 

[Laughter] 

The CHAIRMAN. My apology does not cover his bill. 

Mr. BACHUS. In fact, I read two articles, one in a New York publication, a Today Business publication, which obviously had not 

read it either when they talked about the different proposals. 

I separate out registrations and licensing. What we require of everyone is that they register. Let me tell you why I did that. When 

you look at the mortgage originators that originated some of these 

fraudulent loans, some of these loans where mis-information was 

supplied, some of them were from your member institutions. They 

were not all mortgage brokers. 

In fact, my staff and I—I do not have this statistically, but one 

time, we have used the figure of about 40 percent of them were 

from either federally or State chartered institutions that were regulated. Sixty percent of them were mortgage brokers. 

If you only require mortgage brokers to register, which is basically what is being said, but you do not require mortgage bankers, 

there is obviously a gap in the system today. We would not be proposing that if we didn’t have—whether it is 25 percent, 30 percent 

or 35 percent—you are dealing with hundreds of thousands of these 

that have been made by originators that were working in a bank. 

I do not know of any in a credit union, but I am sure there may 

be. 

With that in mind, let me tell you what I require of your members. The licensing requirements in my bill, because you have different requirements to set up, but the registration requirements 

are that they provide contact information. 

The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators, they maintain databases on bad actors. If you do not register, if you are not included, 

your people making loans in your banks are not included in that 

registration, and we have no way of knowing they are there. 

33

Mr. DUGAN. Mr. Bachus, let me be clear. We do agree and think 

there are good provisions in the bill that require banks to report 

bad actors to a database and we also agree— 

Mr. BACHUS. We are talking about registration. Some on both 

sides have endorsed it. I know the chairman is looking at it. It requires them to keep contact information. We want to know where 

they are. That is disclosure. 

We want them to submit to a criminal background check and 

submit fingerprints. That is what a lot of the States require now. 

An applicant has to submit to a credit check, which sometimes exposes losses as a result of fraudulent practices. That is all it requires them to do. It is very effective when it is used. 

If we have a turf fight—the FDIC, we have approached them and 

they have not, at least from our correspondence, and the Federal 

Reserve, in fact, Chairman Bernanke and Secretary Paulson both 

said there is a need for some sort of national registration or database. 

I would just like you going forward to take a look at that. 

Mr. DUGAN. We certainly will. 

Mr. BACHUS. Do not confuse the licensing provisions. You have 

your own. You have your own provisions. You require certain educational standards. The State and federally chartered institutions 

are exempt from that for a good reason, but not the registration. 

We would have an incomplete registration. 

If we are going to fully protect—we cannot ever fully protect, but 

if we are going to at least try to know who these people are and 

where they are, because they move from State to State, in fact, 5 

percent of mortgage originators did 95 percent of what I would call 

the over-the-top bad loans. Most of them, their license had been revoked in one State and they moved to another State. 

Mr. DUGAN. We would be delighted to have a greater dialogue on 

that point. You are absolutely right. We have been sort of 

conflating licensing and registration. It is the licensing part that 

puts more substantive regulatory and compliance requirements 

that would have to be put in place that I think raises the bigger 

questions. 

Mr. BACHUS. If you do not know the history before they come or 

if they do something while they are originating loans at your institutions, then they leave, and they are not a part of it. 

Mr. DUGAN. We support that part of it. 

Mr. BACHUS. Thank you. The only other question I would ask is 

I would ask the Federal Reserve, I noticed that in the rulemaking 

process under this legislation, they are excluded. They have decades of constructive experience in developing legislation. 

I was just wondering, do you have any comment on that, Governor? 

Mr. KROSZNER. Thank you very much. If you were to include us, 

exactly as you had said, we would bring years of experience, years 

of expertise, and knowledge to consumer protection and community 

affairs’ issues. I think we would have something valuable to add to 

the rule writing process. 

Mr. BACHUS. Thank you. 

The CHAIRMAN. We will go to the gentleman from Pennsylvania, 

the chairman of the Capital Markets Subcommittee. 

34

Mr. KANJORSKI. Thank you, Mr. Chairman. Chairman Johnson, 

you mentioned the escrow and appraisal bill that I have introduced 

in your opening remarks. I am pleased to see that you are favorably disposed to it. Also, I noticed the Federal Reserve through 

rulemaking is considering doing something in the escrow area. 

What I appreciate is the fact that Chairman Frank and I have 

agreed to mark up this legislation, H.R. 3837. If your agencies 

could, by next Monday, give us any of your comments on this bill, 

so that it either may be joined with the pending bill or stand individually. We think it has an opportunity to move, and it could go 

a long way in helping future problems in the system. 

Also, I wanted to say to you, Chairman Johnson, that I agree 

with you, and I note that Chairman Frank stated that NCUA was 

not on the list of agencies involved in writing the rules in H.R. 

3915. I assure you, this is an oversight and not intentional, and we 

are going to correct that as the bill moves forward. 

Actually, what we would like to do is have everybody participate 

as much as possible in helping us move this through. 

The CHAIRMAN. If the gentleman would yield, the gentleman has 

been very much involved in credit union issues, and he is absolutely right, that is an omission that we will deal with. 

Mr. KANJORSKI. One of the issues I am involved in is assigning 

liability. We are going to be talking a lot about this, particularly 

as we consider this bill. 

If we really go too far, we are going to dry up the secondary market. If we do not go far enough, we are not going to really gain any 

positive ground here. 

I think we are somewhat at a loss to know what to do. Again, 

I think we should create a standard, if possible, whereby the writers or the assemblers of these packages should be responsible for 

what they can know, should know, or reasonably discern. 

On the other hand, we should have a clear bright line standard 

to help assignees know what they need to do to meet these tests. 

Do you have any particular views on the assignee liability question? Any of you? If you do, over the next several days, I think you 

can submit it, and it would be very, very helpful. 

To the last gentleman, let me bring up the need for a national 

standard. We are struggling with it. Of course, this bill does not 

provide a clear national standard. I think it should. 

Rather than have a knock-down, drag-out fight because we cannot ever seem to come together as to what that standard would be, 

what I was going to suggest today is that we think about how we 

solved this problem back in 1996 on fair credit reporting. We actually committed and created a national standard, but we gave it a 

life expectancy of 7 years, with the idea that we would have to 

come back and have the Congress address it and correct it or remove it, or do what was necessary to make it more applicable to 

the problem. 

Do you think this provision, if acted upon by Congress in this instance, in creating a national standard but with a time frame and 

a sunset provision, would be a way that we could move to find middle ground and make the system work better to have a national 

standard? 

35

I throw it out at any of the regulators who want to take a shot 

at it. Yes? 

Mr. REICH. I am totally supportive of the notion of sunsetting almost every act of Congress, quite frankly, for a review on down the 

road to determine its effectiveness. 

Certainly in this instance, I would be supportive. 

Mr. KANJORSKI. I tend to agree with you, I am always supporting 

sunsetting. I do not always get my way, but I like to support it, 

too. 

Do you think if we take this legislation and put a national standard into place, is this the time to do it or just leave the legislation 

as it presently is, taking into consideration every State has different conditions? 

Mr. REICH. My personal view is that I would like to see a national standard with a bar high enough that it would satisfy all of 

the States. I recognize that goal is probably not achievable. I think 

working towards a national standard is the right thing to do. 

Mr. KANJORSKI. What if we took, say, the North Carolina standard and adopted that nationally, but put in the 7-year provision 

that it has to be re-visited and reviewed, would that be a way? 

It is going to require an intelligent compromise. We are just not 

all going to agree up here. The House and Senate are not going to 

agree. The Administration is not going to agree. Certainly, the industry is not going to agree. We have seen that happen for a number of years now. 

How do we get past this stumbling block, when we do come very 

close now because of exiguities in the marketplace, that we can 

move something that otherwise could not be moved as well or as 

quickly and as speedily? 

Should we take a shot at it now or should we pass it by? 

Mr. REICH. I wish I knew the answer to that question. 

Mr. KANJORSKI. Cautious. 

Mr. GRUENBERG. If I may say, Congressman, I think the approach taken in the bill as introduced of setting a floor so that we 

establish a national minimum to assure uniformity but then allowing States in their discretion to go beyond that is a reasonable approach. 

Mr. ANTONAKES. Congressman, I would agree. Our preference 

would be to have the floor as high as possible but we would also 

like to have the States have the right to address specific issues 

quickly if they want to go beyond that floor. 

Mr. KANJORSKI. You do not see that is going to have an effect 

on securitizing these obligations? If we have States that have huge 

standards as compared to other States, it is not going to have an 

effect on putting these packages together? 

Mr. ANTONAKES. In my view, at least in Massachusetts, where 

we have a very high standard, it has not impacted the availability 

of credit in the Commonwealth. If laws are crafted carefully, we believe there can be higher consumer protections without impacting 

the availability of credit. 

Mr. KANJORSKI. Thank you very much. 

The CHAIRMAN. Thank you. What duration would you like on the 

sunset legislation for the Office of Thrift Supervision? 

36

Tell me how many years, and we will be glad to file the bill to 

accommodate that. 

Mr. DUGAN. Five. 

[Laughter] 

The CHAIRMAN. When Secretary Paulson proposes his reorganization of the bank regulatory agencies next year, that might get some 

action. 

The gentlewoman from Illinois, the chair—the Ranking Member 

of the Capital Markets Subcommittee. 

Mrs. BIGGERT. Don’t I wish I was chairman! 

[Laughter] 

Mrs. BIGGERT. Thank you, Mr. Chairman. This is a question generally, for whomever would like to answer. 

By restricting which borrower is eligible for loans, do you think 

that H.R. 3915 in its current form will limit access to credit to individuals with less than perfect credit, and as a result, homeownership would more likely be limited to individuals in higher income 

groups, and can the legislation or should it be altered to avoid what 

I think might be this unintended consequence? 

Mr. DUGAN. As I testified, I think the purpose of the legislation 

and particularly the safe harbors, which we believe is kind of what 

lenders and originators will gravitate to because it will prevent 

people from being exposed to liability, its purpose is to restrict the 

supply of credit in the sense of not providing it to people who cannot afford to pay the loan. 

It is a tradeoff, as I said. I think it will restrict credit. You hope 

that it will only restrict credit so it will not go—let’s call it bad 

credit—that would go to people that cannot afford it, but there is 

a risk that there will be creditworthy borrowers who could shoulder 

the loans that a willing lender would be willing to make that loan 

to who will be prevented from doing so by the very bright lines that 

we have in it. 

I would note in a few places, those bright lines are brighter and 

stricter than what the Federal banking agencies agreed to do in 

our guidance. I think as I said, it is a tradeoff about whether you 

want to really be sure that people can repay and risk that fewer 

people will get credit and fewer people will be able to at least initially purchase a home. 

Mrs. BIGGERT. Thank you. We have been talking about the 

subprime loans. Does anyone think that the prime loans helped to 

create the current housing finance problem? If not, is there any 

reason to think it was their regulation? 

Mr. DUGAN. Most people believe that the current problems that 

we have started in subprime. Certainly right now, we have problems in market liquidity for other mortgages. The real problems 

that I think most people have focused most dramatically on happened in the subprime area. 

Mrs. BIGGERT. There should not be any changes in the regulation 

for the traditional prime loan? 

Mr. REICH. I do not believe there should be. 

Mr. GRUENBERG. I think, Congresswoman, the general approach 

to this bill in effect is to carve out the prime mortgages and focus 

the attention of the protections on the higher cost segment of the 

market, which really has been the focus of the issues. 

37

Mr. DUGAN. If I may, that is true for part of the bill, but there 

are other parts of the bill that have standards that apply across 

the board, the Federal duty of care, the anti-steering provisions, 

and the like. To that extent, they do go beyond the subprime market to the prime market as well. 

Mrs. BIGGERT. You think those are good? 

Mr. DUGAN. I think there is a question about them. As I testified, 

some of the provisions have quite subjective language in it that we 

fear will be difficult to implement, and I think more pronounced 

problems that we are responding to, as your question suggests, 

have been in the subprime area, and I guess our guidance has been 

more focused on that area, and I think that makes sense. 

Mrs. BIGGERT. Vice Chairman Gruenberg, the FDIC has been 

such a good supporter of financial literacy, and I appreciate it, and 

Chairman Johnson, too, and all of you for all that you have done 

to promote the financial literacy and financial education. 

Do you think legislation that seeks to combat fraud in the mortgage practices should also—would you support counseling for borrowers? 

Mr. GRUENBERG. I think counseling is a valuable adjunct to the 

protections and can be certainly helpful to borrowers in trying to 

deal with the complex mortgage products; yes. 

Ms. JOHNSON. I would agree. The focus on financial education up 

front, whether through the counseling, for all borrowers to better 

have more clear and concise disclosures and transparency, will aid 

everyone in the market that is securing a loan. 

Mrs. BIGGERT. It is just the problem has been whether mandatory or not, and if mandatory, like what happened in Chicago, people not being able to get the counseling in time and they lost the 

mortgage. 

Do you think it should be mandatory or just notice of the ability 

to get counseling? 

Ms. JOHNSON. I think to continue awareness of this issue, and 

I know through the credit unions that we work with we have made 

financial education a priority, and so it has actually been they have 

taken up the charge without it being mandated by a regulator or 

through a law. 

I think the opportunity is there and hopefully more people will 

grab onto it. 

Mrs. BIGGERT. Thank you. My time has expired. 

The CHAIRMAN. I will take my questions and then we will break 

for the vote. I do want to say to Governor Kroszner, the question 

about the Fed’s ability to produce some regulation, frankly, from 

my experience, the Fed has a lot of unused regulations stored up. 

They should be able to dip into a pile of unused regulations and 

maybe come forward. 

The gentleman from Pennsylvania is correct in terms of the 

omission of the NCUA. That is clearly something we should deal 

with. 

Let me ask, Commissioner Antonakes is representing not just 

Massachusetts but the State Bank Supervisors. There are several 

major elements in this bill. One, I think, is generally agreed on, 

that all mortgage originators should be subjected to rules, and that 

38

the problem has been exactly what the nature of the rules are, but 

we do want all mortgage originators subjected to rules. 

Then there is the question of securitizing liability and how we 

would do that, if and how we do it. Then there is the question of 

the substance of the rules that are applied. 

I was pleased, Commissioner Antonakes, that you say on page 

10, ‘‘A Federal anti-predatory lending standard should say clearly 

and ambiguously that lenders must consider a borrower’s ability to 

repay a loan and include all costs of homeownership,’’ and you 

want this to be a Federal floor but not a ceiling. Is that correct? 

Mr. ANTONAKES. Yes. 

The CHAIRMAN. You speak for the Conference of State Bank Supervisors, and this is one of the more controversial aspects of the 

bill. 

Mr. ANTONAKES. Yes, that is correct. 

The CHAIRMAN. I thought it would be relevant, Commissioner. I 

appreciate your support for the thrust of this degree of regulation. 

When were you appointed Commissioner? 

Mr. ANTONAKES. December 2003. 

The CHAIRMAN. And you were appointed by whom? 

Mr. ANTONAKES. Governor Mitt Romney. 

The CHAIRMAN. Governor Romney. Thank you. 

The question I then have for all the regulators, and I understand—this is particularly for the bank regulators but also for 

Commissioner Antonakes, we were of the opinion that the regulated entities, credit unions and banks, were clearly less of a problem because of the regulation. 

What we were trying to do in some ways was to take the regulations you have applied to the institutions under your jurisdiction, 

codify them statutorily, and apply them to others. 

I take it some think we may not have done that well enough. We 

would certainly welcome help in doing that. We have this too much 

ambiguity and too much rigidity. 

Let me ask the bank regulators, in terms of the effort we have 

made to articulate the standard, should it be tighter, looser? 

Let me start with Mr. Gruenberg and go down. 

Mr. GRUENBERG. Mr. Chairman, I think as a general matter, the 

standard that you have outlined in the bill has been, as you indicated, reflective of the standard generally applied by Federal bank 

regulators. It seemed to us a reasonable approach. 

The CHAIRMAN. Yes. Mr. Dugan? 

Mr. DUGAN. We did try to point out some areas in the testimony 

where the particular standard—the standard I am talking about 

now is the safe harbor standard. I think that is the place that most 

lenders and originators will gravitate to because of the absence of 

liability. 

There are a number of places in those standards that are stricter 

than what we put in place in the Federal banking agencies’ standards. For example, the 50 percent debt to income ratio, the prohibition on negative amortization. 

The CHAIRMAN. We do not want to leave it totally subjective. 

Mr. DUGAN. I understand that. You have to have sharp lines in 

order to have a safe harbor. We get that. We would be happy to 

provide more specific comments for the record. 

39

The CHAIRMAN. I appreciate that. Mr. Reich? 

Mr. REICH. I, too, intend to provide a more detailed written response. 

The CHAIRMAN. I appreciate that. 

Mr. REICH. By the end of this week. I share some of the same 

concerns that Comptroller Dugan just mentioned with the specificity— 

The CHAIRMAN. Let me ask you this. We are at an experimental 

stage here. Mr. Dugan reminded me, there are two aspects really 

of this standard. One is the standard that is applied in the States 

to the extent that the States are—by the way, I have to say with 

regard to national uniformity, I assume nobody thinks—there will 

still be State banks and the FDIC will be regulating them, but we 

are not taking away the autonomy the States now have. I assume 

no one is asking us to do that. 

It seems to me the standard of care has two aspects. One is what 

the States’ jurisdiction allows them to impose and then there is 

also the extent to which that governs the safe harbor. 

Is that intellectually a separable set of concepts? Is it conceivable 

that you would have one rule for the safe harbor and then the 

States would be able from the standpoint of securitization—I understand the argument for uniformity in securitization rules nationally. 

If you were to deal with that as a safe harbor, what is then the 

argument for diminishing State autonomy in their general administrative capacity other than the safe harbor? Is that something that 

makes any logical sense to think about? 

Mr. Dugan? 

Mr. DUGAN. I am not sure I am following the question. The question is if you had an uniform standard for just the S&E liability 

provision but did not have it— 

The CHAIRMAN. But the States could then, if they were administering this rule with the people they regulated, whether mortgage 

brokers or State banks, they could impose greater standards if they 

wanted to. 

Mr. DUGAN. First of all, a huge part of the market gets 

securitized. It is not now but before August, it was about 75 percent of the market that was not Fannie Mae and Freddie Mac that 

got securitized, something in those numbers. You are talking about 

a huge part of it. 

Secondly, I think people would gravitate to the safe harbors just 

because they would want to avoid the Federal liability, and then 

if the States wanted to go beyond that, I do think it would still create issues about uncertainty for people who lend across State lines 

and do it in different States. You are going to have those issues. 

The CHAIRMAN. If you want to go across State lines. They have 

it now, do they not? People want to lend across State lines, are 

there not those differences? 

Mr. DUGAN. For some lenders. 

The CHAIRMAN. Mr. Reich? 

Mr. REICH. I agree with Comptroller Dugan. I do have the fear 

that the safe harbor will result in drying up of liquidity. 

The CHAIRMAN. That is not the question. I was talking about 

whether you could separate out the standard, whether the preempVerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE
40

tion—whether you need one standard for safe harbor but could give 

the States some autonomy elsewhere. 

Mr. REICH. I said at the outset that I would hope it would be possible to have a bar high enough. 

The CHAIRMAN. Let me say this. I appreciate your answers. I 

think we ought to be clear. The argument for extinguishing the 

States’ ability to go above the floor is not rooted in the safe harbor 

concern but it is a general concern that says you do not like the 

States going off on their own. 

I think you could separate out the safe harbor aspect from the 

broader aspect. I think that is this broader philosophical question 

we are dealing with. 

It would seem to me if we were to do that, we would be not preserving the status quo here but diminishing some of the autonomy 

the States now have. I would be very reluctant to see that happen. 

We are going to break now; we have some votes. We will come 

back. I apologize again, but that is the world we live in. 

[Recess] 

The CHAIRMAN. I believe I was the last questioner, so I will now 

call on the gentlewoman from West Virginia. 

Ms. CAPITO. Thank you, Mr. Chairman. 

I have a question on the lowering of the HOEPA triggers concerning whether that would exclude, if you all feel that that would 

exclude some credit-worthy subprime borrowers who would otherwise be able to receive loans and how can we guard against this 

unwanted consequence if in fact you believe that could be a consequence? Do you have an opinion on that? 

Mr. DUGAN. To be honest, we haven’t really done any empirical 

look at what loans would then fall under the lower triggers. I do 

think it is fair to say that in the past, HOEPA loans were viewed 

as so extreme that few institutions provided HOEPA loans once the 

definitions—because it was such a rigorous and what’s the word, 

a scarlet letter of sorts that people wouldn’t make the loans. So 

when you look at our home loan registry, for example, you don’t 

find many HOEPA loans anymore. 

That is not to say that there aren’t rate-spread loans and costly 

loans and 2/28s and the like. By lowering the triggers, you are 

going to have more loans fall into that category. If that is the same 

effect, it will I think have a chilling effect on those loans that fall 

into that category. How deep that goes into the market, we just 

haven’t yet to do the analysis on it. 

Ms. CAPITO. Another question I have, I mean in front of me right 

now we have the FDIC, the Comptroller of the Currency, the Office 

of Thrift Supervision, the National Credit Union Administration, 

the Federal Reserve, and then our State, Massachusetts State Division. Mostly my question is directed to the Federal regulators. 

It seems to me that—would this bill be like defusing regulation 

between all of your separate entities? And then what kind of mechanisms do you have in place to cross-reference with one another as 

to what’s going on? 

It seems to me that if I was a citizen watching this hearing, and 

I hope we have a few watching, I would think to myself, ‘‘We’re 

going to have too many hands in the pie here. Who is really going 

to be overseeing this as a Federal regulator? And what kind of inVerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE
41

fluence is that going to have? Are they going to be talking to one 

another?’’ 

Mr. REICH. Well, we have that environment today. Regulation is 

highly defused and the Federal regulators work together through 

the FIAC to establish conformity and consistency and policy and 

policy administration. So this would be another layer of regulation 

on top of that which we deal with every day. 

Ms. CAPITO. So you don’t anticipate that this would be a problem? It is something you already have the mechanisms in place for? 

Mr. DUGAN. I know it seems like there are a lot of regulators at 

the table, but that is in fact, as Director Reich was suggesting, the 

normal way for all our regulatory schemes, they often involve joint 

work, rulemaking that’s separately. And then we separately, once 

the rules come out, apply it to the institutions within our respective jurisdictions. I don’t think this is much different in that respect. 

Ms. CAPITO. All right. I have one final question on the—we have 

heard a lot about the floor and the ceiling and the modeling after 

the North Carolina Banking Administration in terms of the new 

legislation. I read some data that said that when these new regulations were put into North Carolina it resulted in fewer loans going 

to those low income and minority homeowners. I think it was 

maybe 3 or 4 percent, but it was a significant percent. Do you envision that this type of regulation could actually result in the folks 

we really want to help the most or we want to protect the most not 

being able to have a share of this market? 

Mr. GRUENBERG. Congresswoman, candidly, I don’t think that 

would be the case. I think the issue here that’s well understood is 

the importance of extending credit to people who can afford to 

repay. That really is the key issue. And what you want is a set of 

standards to assure that outcome. 

And the difficulty really occurs when you extend credit to someone and that person cannot pay the loan. So, you know, the experience here is a lot of people got loans who in effect could not afford 

to pay them. And that is really the issue we are dealing with today. 

And at the end of the day you are not doing anyone a favor—

in fact, you create a significant problem by doing that. So I think 

what you really want to shoot for is a set of standards that will 

give you some assurance that people are getting themselves into 

situations that they can afford and can sustain in the long term. 

Ms. CAPITO. Thank you. That’s a good answer. 

I yield back. 

The CHAIRMAN. Thank you. The gentlewoman from California. 

Ms. WATERS. Thank you very much. Mr. Chairman, I have a few 

questions that I would like to ask of some of the presenters who 

are here today, particularly the regulators. First, do you agree with 

that portion of the bill that bans yield-spread premiums? To our 

regulators, first, Mr. Gruenberg, FDIC. 

Mr. GRUENBERG. Yes, Congresswoman, we do agree that is a 

good provision. 

Ms. WATERS. Mr. Dugan? 

Mr. DUGAN. As I said in my testimony, it is quite a broad provision because it is not directed specifically at yield-spread premiums, it is at anything that involves any kind of differential in 

42

compensation and we do point out that that could apply to some 

things that are not based on profit margins, but have some beneficial effects. 

Ms. WATERS. How would you change it? 

Mr. DUGAN. Well, I think that it could be narrowed in some 

ways. That we would like to give some thought to and provide some 

further comments. 

Ms. WATERS. But you don’t have any problems with the concept 

of reducing the ability for originators to earn money based on steering people to higher loans than they can afford? 

Mr. DUGAN. I think the biggest abuses of that authority has been 

in the subprime market. This is not limited to subprime. It applies 

across the board. 

Ms. WATERS. So you think it should be limited to subprime? 

Mr. DUGAN. Maybe. I think that is worth considering. 

Ms. WATERS. Okay. Office of Thrift Supervision, Mr. John Reich? 

Mr. REICH. I would not disagree with limiting it to subprime. I 

indicated in my testimony that in order to make certain that those 

who have an interest in the origination process have skin in the 

game so to speak. That any income that they receive from a mortgage origination ought to be spread out over a longer period of time 

and suggested using life insurance premium income to a life insurance salesman as a possible model. 

Ms. WATERS. Mr. Antonakes? 

Mr. ANTONAKES. I think really one of the biggest problems that 

we incurred is the number of people who would have qualified for 

prime lending but were steered towards subprime products. So I 

think anything that can be done to moderate compensation so that 

incentives aren’t provided to push people into weaker products 

should be considered. 

Ms. WATERS. Okay. Quickly. Do all of you agree that we should 

take a real hard look at no-doc loans? Or should they just be outlawed altogether? 

Mr. DUGAN. What we did at the Federal Banking Agency Standard to say the presumption is that you shouldn’t have them, but 

there are some cases in which it may be— 

Ms. WATERS. Basically you shouldn’t have them. 

Mr. Gruenberg? 

Mr. GRUENBERG. I would generally agree with that, Congresswoman. 

Ms. WATERS. Office of Thrift Supervision, Mr. Reich? 

Mr. REICH. There are institutions, Congresswoman, that have 

been making these types of loans for 20 years or longer and have 

a successful record. 

Ms. WATERS. So you think they should continue no-doc loans? 

Mr. REICH. I personally do not favor either, no-doc loans or stated income loans. 

Ms. WATERS. Okay. Board of Governors, Federal Reserve, Mr. 

Kroszner. 

Mr. KROSZNER. As you know, we are looking at exactly this issue 

with respect to our HOEPA regulations and we are taking a very 

hard look at where, if at all, they would be appropriate. 

43

Ms. WATERS. All right. Let’s go to the elimination of prepayment 

penalties. Mr. Gruenberg, do you think we should eliminate all prepayment penalties? 

Mr. GRUENBERG. Certainly in the subprime— 

Ms. WATERS. I cannot hear you. 

Mr. GRUENBERG. Certainly for subprime mortgages, which is 

where they predominate, there seems to be no reason to have prepayment penalties. 

Ms. WATERS. Mr. Dugan? 

Mr. DUGAN. As we did in our guidance, I think the focus should 

be you should never have prepayment penalties that extend beyond 

the reset date of an unadjustible rate loan. 

Ms. WATERS. Mr. Reich? 

The CHAIRMAN. Could I clarify that? Would the gentlewoman 

yield? 

Beyond, you mean before the reset? 

Mr. DUGAN. Before. Excuse me. 

The CHAIRMAN. Before the reset. 

Mr. DUGAN. The penalty shouldn’t go beyond, right. 

The CHAIRMAN. You should not have a prepenalty that would 

lock you into it beyond reset. Thank you. 

Mr. REICH. I agree with that. I also believe that prepayment penalties result in a lower interest rate for the borrower. 

Ms. WATERS. Ms. Johnson? 

Ms. JOHNSON. Federal statute prevents credit unions from charging prepayment penalties already. 

Ms. WATERS. Do you think others should have prepayment penalties? 

Ms. JOHNSON. Well, I’d leave that judgement to the members, 

but it works for credit unions. 

Ms. WATERS. Mr. Antonakes? 

Mr. ANTONAKES. I think they should be very limited if not outlawed. 

Ms. WATERS. Do you agree that the standards that are being set 

with this bill would take a look at the teaser rates and whether or 

not you are judging to pay based on the terms that the teaser rates 

or the ability to pay beyond the teaser rates when the new rates 

are triggered? 

Mr. GRUENBERG. I believe the basic purpose of the bill is to require underwriting to the fully indexed rate and to the borrower’s 

ability to pay. 

Ms. WATERS. Does everyone agree with that? 

Mr. DUGAN. Yes. 

Mr. REICH. Yes. 

Ms. WATERS. Okay. I think my time is up. Thank you very much, 

Mr. Chairman. 

The CHAIRMAN. You could end on a roll. 

The gentleman from New York, the chairwoman of the Financial 

Institutions Subcommittee. 

Mrs. MALONEY. Thank you, Mr. Chairman. 

I would like to ask the Vice Chairman of the FDIC, Mr. 

Gruenberg, to follow up on statement that Sheila Bair made recently when she advocated for servicers to restructure adjustable 

rate mortgages, the so-called 2/28s and 3/27s, into a fixed rate 

44

mortgage at the initial rate saying that only about 1 percent of 

these mortgages have been modified. And how would this work 

given the complicated process of securitization? 

Mr. GRUENBERG. I’ll take a crack at that although I think it 

would be best obviously to ask Chairman Bair. I don’t think there 

is any more urgent issue confronting us in this subprime mortgage 

area than dealing with the subprime mortgages that are in the 

process of resetting and that are going to reset the rest of this year 

and next year. 

You have hundreds of thousands of people who really are going 

to be placed at risk of losing their homes. And this whole issue is 

complicated by the fact that, as you know, most of these subprime 

mortgages are tied up in securitizations which significantly complicate the ability to restructure them so that the borrower can afford to pay them on a long term basis. 

I think what Chairman Bair has proposed is a workable way for 

servicers, since most of these mortgages are in securitizations, it is 

the servicer that is really trying to work out these mortgages rather than the lender or the originator. 

What has been proposed is that the servicers simply modify these 

loans to fix their rate for the term of the mortgage at the starter 

rate. The point being that for subprime borrowers who have been 

making their payments at the starter rate, the fact is that in many 

cases, the starter rate is actually higher than the prime rate. And 

for these borrowers to allow them to continue to make the payments, to stay in their homes and for the investors to avoid the 

cost of foreclosure is really a far more preferable outcome and a 

very workable one. That is really the heart of what has been proposed. 

Mrs. MALONEY. She has proposed it, but people are not following 

through. Only 1 percent have responded. This Congress has modernized FHA. It has had FASB change modification and restructuring rules for the servicers and it is not happening. 

She likewise called for mass restructuring and what did she 

mean there? And how can we get this 1 percent up? Because that 

is really the crux of it. Everybody says they want to help, but it 

is just not happening. 

Mr. GRUENBERG. I think that is the critical issue. I think this 

proposal is a workable way for servicers to address this issue. 

There are some servicers that I think are moving forward with constructive programs. I think the challenge here is really to get the 

servicers as a group, to adopt a set of common approaches that will 

be effective in modifying these mortgages so that the homeowners 

can stay in them for the long term. 

Mrs. MALONEY. And following up on that, what do you recommend current standards include to prevent this sort of widespread problem in the future? 

Mr. GRUENBERG. I think the standards going forward—as you 

know, the regulators have issued a set of guidelines relating to 

subprime mortgages, fundamentally requiring underwriting to the 

fully indexed rate and other protections. 

Mrs. MALONEY. Do you wish to add anything to that recommendation? 

45

Mr. GRUENBERG. I think there are a series of recommendations 

and we have additional protections and most of them are embraced 

in the legislation that has been introduced. I think that would be 

a reasonable way to proceed going forward. 

Mrs. MALONEY. John Dugan. Lehman Brothers and others have 

predicted that the next few years, in the next few years literally 

millions of families will lose their homes. Some predict that more 

people will lose their home than they did during the Great Depression. 

What role, if any, do you think the OCC can play to keep as 

many homeowners as possible in their homes? 

Mr. DUGAN. Well, first of all, we have already issued guidance 

to our lenders who have made these loans, who are the servicers 

of the loans to work with their borrowers to try to find ways to 

avoid foreclosure because the fact of the matter is when you foreclose on a home, just purely from an economic point of view on the 

point of the investor, you lose a tremendous amount of value. 

Mrs. MALONEY. We are all aware of that, but the action is just 

recommending to borrowers— 

Mr. DUGAN. And the alternative of restructuring in ways so that 

we may have to take some loss but not as much loss as you would 

take if you would foreclose should be in the economic interest of 

people to do that. 

And I think encouraging servicers who service those loans or 

lenders who own those loans to be creative, to go out and to do the 

kinds of things you were just referring to earlier, I think those are 

constructive ways to proceed. 

Mrs. MALONEY. Thank you, my time is up. 

The CHAIRMAN. The gentleman from New York. The gentleman 

from North Carolina began this round of questioning. It was so 

long ago people may have forgotten. It is the gentleman from New 

York’s turn now. 

Mr. MEEKS. Thank you, Mr. Chairman. 

Let me ask, I guess Mr. Kroszner, or anyone else on the panel. 

In my opening statement I talked about this practice known as equity stripping where individuals promised to help homeowners 

avoid foreclosure by buying their home and selling it back to them. 

Instead, they strip out all the equity making it nearly impossible 

for the former owners to buy their home back. My question to you 

is are you aware of this practice and from what you have seen thus 

far of H.R. 3915, do you think that it can address it? 

Mr. DUGAN. If I could begin? We are aware of it. We have published guidelines that address it specifically and direct our banks 

not to engage in that activity. 

Mr. MEEKS. Let me ask this also. If H.R.— 

Mr. KROSZNER. I agree. 

Mr. MEEKS. I saw everybody shaking their heads saying they 

agree. Any disagrees? 

If H.R. 3915 was a ceiling, if it was a ceiling and I guess I will 

ask Mr. Dugan this, first, would you have any objection to local enforcement by State AGs or the banking regulators? 

Mr. DUGAN. Well, I think this is a very good question, because 

as I mentioned in my testimony, you have a situation where while 

you have a nominal consumer litigation, civil litigation that applies 

46

to everybody, in the case of banks, you also have the agencies at 

this table there that would have the ability to impose quite stiff 

penalties and fines in how they do what they are going to do. But 

for the unregulated sector—not regulated, Non-federally regulated 

sector that are not banks at the State level, there is a much lower 

level of enforcement that would be provided to them. And the bill 

does not really speak to that. 

What you are talking about would be a suggestion that would 

add additional enforcement authority with respect to that. And 

that would partly level the playing field and provide a more even 

kind of enforcement regime. 

Mr. MEEKS. Mr. Steven Antonakes, what do you say? 

Mr. ANTONAKES. Well, I would beg to differ with my colleague 

with regard to the lack of enforcement actions. With 3,600 actions 

taken last year by the States, alone, and probably more than that 

taken this year, you know, is there room for improvement and raising the bar in some States? Absolutely. We are working hard to do 

that. 

But, again, a ceiling I think is difficult because then you preempt 

States from the ability to react to local issues and go beyond that 

ceiling and the ceiling becomes static and, you know, who knows 

what the mortgage market is going to look like 5 or 10 years down 

the road. So I think a floor is better. I think State and local enforcement AGs is very important. 

You know, there have been some landmark cases, very large settlements that came from the States. I do not need to name them. 

They are all well known. And I think that is something that we 

will continue to work on. 

Mr. MEEKS. Mr. Gruenberg, let me ask you a question on a 

slightly different topic, something I read this morning. I think Merrill Lynch reported a write-down of at least $5 billion. Some outside 

analysts predicted it would be $7 billion for the third quarter of 

this year due to losses in the subprime investments. 

I just want to make sure, if I am understanding it correctly, Merrill is an investment bank that does sweeps of customer funds into 

depository accounts which affects the ratio of insured deposits. I 

think that is correct. 

So my question is, will these substantial losses by Merrill have 

any effect on the Insurance Fund? 

Mr. GRUENBERG. I suppose, Congressman, you directed that 

question to me. You know, I think we would have to take a look 

at that. I would want to be cautious about responding to it until 

we actually looked at the facts of which you were reporting on in 

regard to the story this morning. 

Mr. MEEKS. Well, if you can, I would love you to get back to me. 

Mr. GRUENBERG. We will do that very promptly. 

Mr. MEEKS. Thank you. I yield back. 

The CHAIRMAN. The gentlewoman from New York is recognized. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman, and 

I appreciate the panel having patience with us and being here for 

such a long time. I want to go back to something that Mrs. Waters 

was talking about in the beginning, and I know we’ve already 

heard that some of you haven’t had a chance to read the bill because it came out actually late Monday afternoon. So if you can’t 

47

answer it, I don’t mind, you know, if we get an answer back in 

written form, you know, down the road. 

On Title I on page 12, lines 10 through 15, it talks about prohibition of steering incentives. And I guess my question would be, 

would any of you interpret the bill, specifically Title I, as prohibiting indirect compensation for originators? And, again, I don’t 

mind waiting and getting an answer back, because this is the answer that we want from you as we go through the bill. 

The second question, did any of you have an inkling that this 

was coming down the road? Because I’ll be very honest with you, 

I mean, we on this committee have been talking about predatory 

lending, well, for the last couple of years. There has been legislation there. Some of the States—New York, Massachusetts—have 

been looking at how we could stop the predatory lending, especially 

in the minority areas and especially towards our senior citizens. I 

mean, you’re watching, overwatching, supposedly, that. That’s why 

we have this legislation in front of us. 

So nobody had an inkling? And I think this is just the tip of the 

iceberg. I do believe we’re in for a rough ride down the road. I’m 

even wondering if this legislation is coming a liability too late. 

With that, I’ll ask—yes, ma’am? 

Ms. JOHNSON. We actually at NCUA issued a supervisory letter 

to our examiners a little over 2 years ago, back in 2005, specifically 

addressing the exotic loans and subprime, the risk in some of the 

subprime area. We sent the same information then to our credit 

unions. So they knew what we were looking for and what we were, 

you know, what we would be examining. And so we feel that we 

did have a little bit of an early action in this area, and we think 

that’s part of the reason that our numbers aren’t quite so bad. 

Mrs. MCCARTHY OF NEW YORK. I actually had heard that the 

credit unions were not having any problems with these issues, but, 

again, I come back, and even when you heard about it 2 years ago, 

and, again, you’re all regulators, why didn’t you come forward to 

at least this committee? Because we’ve been talking about it. And 

why didn’t we hear from those— 

Mr. DUGAN. Well, speaking for the OCC and for national banks, 

we did have some very significant problems in the credit card area 

with subprime lending, abusive subprime lending that we did take 

some quite aggressive action about it and infused the agency with 

that kind of concern. 

I think it’s fair to say that a relatively small percentage of 

subprime mortgage lending, and particularly the most aggressive of 

it, was done in national banks or their operating subsidiaries. As 

a result, we did not have as big a percentage of those markets. We 

had about 10 percent of originations last year. And of those, the 

rates of default have been well below the national average. So I 

think we do look hard at it. In addition, on predatory lending per 

se, we have always made it clear you can’t do that in national 

banks. We’ve been quite rigorous about that standard. 

Having said all of that, I don’t think anybody anticipated that 

the problem could spread like it has from the subprime markets to 

the prime markets to the credit markets more generally. I think 

that was truly something that was not anticipated. 

48

Mrs. MCCARTHY OF NEW YORK. Well, one of the things that concerned me, and I know Mrs. Biggert had started on it with the 

prime market, the majority of people, especially young borrowers, 

have been taking money in home equity loans basically to improve 

their house and taking a lot of money out, and they’re going to get 

hit probably in the next couple of months with some—so, even 

though we’re talking about subprime, there are going to be a lot 

of prime owners who are going to be hit with this. And I’m just 

wondering if we shouldn’t be looking at that a little more closely, 

too. 

Mr. DUGAN. Well, of course, we do examine for credit issues and 

compliance issues in all of our retail lending, including home equity 

lending. It’s something we pay very careful attention to. As you 

may have seen, a number of the larger institutions have begun setting aside more reserves for losses with respect to home equity 

lending, which we believe is prudent, and that is an area which we 

will be continuing to focus on. 

Mrs. MCCARTHY OF NEW YORK. Just one final question. Yesterday we met, the New York delegation met with the Commissioner 

of Banks for New York State, and they’re doing a campaign, an advertising campaign, and they’ve been doing it for the last 6 weeks 

or so, I guess. And out of all the information that has been going 

out there, all the information our congressional office has been putting out there for the State, or the State of New York, only one person—only one person—has actually applied to have it refinanced in 

one way or the other. 

How do you see it out in the other parts of the country about people responding to whatever the banks and other entities are getting 

that information out there to the consumer? 

Mr. DUGAN. Well, I think it is a kind of very well-documented 

problem that on the one hand, studies show repeatedly that the 

sooner a borrower experiences difficulty, the sooner they contact 

their lender— 

Mrs. MCCARTHY OF NEW YORK. Right. 

Mr. DUGAN. —the much more likely that we’ll be able to work 

it out. I think, unfortunately, there is a concern that sometimes a 

borrower thinks of the lender in that circumstance as not his or her 

friend, and so there is an issue about their willingness to do it. And 

try as lenders might, they haven’t been getting the response rates 

they need. 

That is, however, why NeighborWorks America, which a number 

of us sit on the board of, have embarked on a very strong national 

campaign with 800 numbers and the like, and have been using 

community groups working with lenders to try to get that trust in 

neighborhoods where there might be people who would be suspicious of lenders to increase those rates. 

But it is a problem, and it needs more and constant attention to 

make sure that that communication happens sooner rather than 

later. 

The CHAIRMAN. I want to make an announcement, and it may be 

relevant. The Secretary of the Treasury and the Secretary of HUD 

did announce a program that the Administration is doing, I think 

called New Hope, to try and make more of this happen. And we 

will have a hearing a week from Friday in which we will ask them 

49

to report on their progress. Sometimes we find that calling a hearing is more important than having one. 

But we will on a week from Friday be expecting to hear from representatives of the Secretaries of Treasury and HUD and others in 

the Administration on how they have succeeded in doing exactly 

what you’re talking about. Because a lot of the pieces are in place, 

we are told, and they haven’t been connecting. 

And one of the things that we hope to do in this bill, and it may 

not be in here as explicitly as we’d like, is part of the problem is 

at least once a year, it seems to me, people who have mortgages 

ought to be notified who it is they are to call if they have a problem. Because with the secondary market and the servicers, etc., 

some people have a hard time figuring out who it is they’re supposed to call. I think we would all agree it would be a good thing 

in the bill if we were to put some kind of, maybe at least an annual 

notice requirement. 

But we are going to have a hearing a week from Friday in which 

we expect to get reports from the Administration on the progress 

of making that work. 

The gentleman from Louisiana. 

Mr. BAKER. Thank you, Mr. Chairman. Mr. Dugan, focusing on 

the operational aspects of the bill if it were to become operative, 

under debt-to-income analysis, is there an established regulatory 

definition of debt for the purposes of qualifying? 

Mr. DUGAN. There is not an established one. I think the bill 

would have to call for that. 

Mr. BAKER. Is there a variance from mortgage originator to mortgage originator in how they look at debts in qualifying an applicant? 

Mr. DUGAN. Yes. 

Mr. BAKER. So that in one institution, if the mortgage obligation 

represented 49 percent of monthly income, that would be an acceptable qualified borrower. On the other hand, if the same borrower 

went to another institution and had credit card debt, student loans, 

other monthly obligations of a stipulated regular amount, he would 

therefore not qualify at the second institution? 

Mr. DUGAN. Yes. You definitely can have those variations 

among— 

Mr. BAKER. Is there a regulatory definition of what income is 

constituted? For example, are trust fund payments necessarily part 

of the calculus for income? 

Mr. DUGAN. We have not established any specified debt-to-income ratio that’s mandatory to begin with, so we haven’t established it for the components either. 

Mr. BAKER. Is it customary know some markets for people who 

are not low income, not average wage earners, but upper income 

individuals who have no record of credit default or other impairments to their credit record to have a portion of their monthly income in excess of 50 or 60 percent because of the high cost real estate markets in which they reside? As, for example, in New York, 

where I’m told about 29 percent of upper income wage earners 

have mortgages which are in excess of 50 percent of their monthly 

income? 

Mr. DUGAN. Yes, that is correct. 

50

Mr. BAKER. In your view, then, would that market effect be to 

exacerbate the problem that many members of this committee have 

expressed, which you may not be aware of, about the difficulty in 

some individuals getting access to mortgages enabling them to acquire a home in high cost real estate markets, wouldn’t this further 

aggravate that ability to acquire homes if the 50 percent rule becomes operative? 

Mr. DUGAN. That is a potential concern. 

Mr. BAKER. Do you have a view of how the secondary market 

works today with regard to the HOEPA market loans? Is there a 

broad and deep liquid HOEPA secondary market? 

Mr. DUGAN. No there is not, as I mentioned earlier. 

Mr. BAKER. And to what do you attribute that? 

Mr. DUGAN. Well, I think that because of the—it has become 

something of a scarlet letter, the designation of being a HOEPA 

loan. 

Mr. BAKER. So that would be related to reputational risk? 

Mr. DUGAN. In part. 

Mr. BAKER. In that case, were we to be concerned and act appropriately to weed out those who took advantage of particularly lowincome home buyers by licensure of mortgage originators, which I 

believe the bill does provide, by standards of suitability which I believe the bill does provide, wouldn’t those steps necessarily be a 

better tool, given the strength of the regulatory backstop, of course, 

to enforce the matching of customer with financial product than arbitrary limits which are not defined relating to debt and income? 

Mr. DUGAN. Well, those standards that you’ve just described are 

not objective standards. 

Mr. BAKER. Understood. 

Mr. DUGAN. And we have some concern from that standpoint 

about, if you’re talking about something that, you know, must be 

in the interest of the consumer— 

Mr. BAKER. Well, let me rephrase it. Isn’t there a better way to 

describe suitability than necessarily just debt to income? 

Mr. DUGAN. Well, it sort of—I guess what we had thought on the 

duty, what we did—the federal banking agencies, when we did our 

guidance, questions were raised about suitability, and I think 

based on the comments, we decided the better way to address it 

would be through an ability to repay standard as the real focus and 

the objective focus about underwriting at the fully indexed rate. 

And that would get at the question. 

Mr. BAKER. Good. Because I understood it in an earlier response, 

you don’t have a definition of debt today. And there’s no regulatory 

definition for the purposes of qualifying— 

Mr. DUGAN. In the guidance that we did on subprime lending, we 

did define. 

Mr. BAKER. And how was that defined? In simple terms. 

Mr. DUGAN. I’ll have to get back to you on the exact contours of 

it, but we did take into account the—in terms of what the—I do 

remember that it included the principal and interest payments on 

the loan as well as taxes and insurance, the so-called PITY calculation, was the debt that we were talking about. 

Mr. BAKER. Well, for the purposes of the committee’s work—since 

my time has expired, Mr. Chairman, I’ll wrap up—I would very 

51

much appreciate a description of the technicals that go into the determination of a person’s ability to qualify for a mortgage product 

and what, if anything, relates to the suitability of that product to 

that particular applicant’s financial circumstance. In other words, 

help. I don’t think the consequences of the bill as proposed, although not intended, are going to be positive, I think it will restrict 

the flow of capital to low-income individuals, but also to upper income who happen to be aberrantly high in mortgage payments in 

relation to income, and there has to be a way to fix this. And so 

I would urge your assistance in seeking that remedy. 

Mr. DUGAN. Okay. We would be happy to follow up. Although 

what I would say is that we don’t focus so much on suitability as 

ability to repay. That’s the standard. 

Mr. BAKER. I understand. But that’s our problem. 

The CHAIRMAN. The gentleman from North Carolina, a co-author 

of the bill. 

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

Chairman, I’ve served in Congress for almost 5 years now and 

served on this committee for almost 5 years. I’ve worked on this 

issue for almost 5 years. It is stunning to hear the same rote repetition of talking points that we’ve been hearing for 5 years. The 

very same arguments, with little more support than they have had 

all along, and based upon the prepared testimony submitted in advance, very little different from industry as well. 

According to the New York Times, by the end of President Bush’s 

Administration, 700,000 fewer American families will own their 

homes than did at the beginning of his Administration. According 

to Lehman Brothers, 30 percent of the subprime loans entered last 

year will end in foreclosure. Not dip into foreclosure, but end in 

foreclosure. 

The Center for Responsible Lending estimates that 2.2 million 

American families will lose their homes to foreclosure in the next 

year or two. We already have the highest foreclosure rate that 

we’ve had in 25 years, and we will soon have the highest foreclosure rate since the Depression. 

It seems like there ought to be some acknowledgement that we 

have a problem. I didn’t really expect that there would be rending 

of garments and gnashing of teeth at the hearing today. I really 

didn’t think that industry would come forward and acknowledge 

their manifold sins and wickedness, but I expected some acknowledgement of a problem and some acknowledgement of responsibility for the problem, some acknowledge that it was lending practices that put us where we are now, with millions of Americans 

falling out of the middle class into poverty because they’ve lost 

their homes to foreclosure. 

A couple of the Republicans, including Mrs. Capito, have talked 

about North Carolina’s law and said that we don’t want to repeat 

the experience of North Carolina. That there had been fewer loans 

in the subprime market after North Carolina passed its law. The 

Commissioner of North Carolina banks, Joe Smith, has sat there 

at that table repeatedly and testified that since North Carolina 

adopted its law in 1999, there has been no diminution in the availability of credit in the subprime market. None. He can’t find anybody who should be able to get a loan who can’t get a loan. 

52

The business school at the University of North Carolina has done 

a study and found no diminution of credit in the subprime market. 

An industry publication, Inside B&C Lending, looked at lending in 

North Carolina, subprime lending in North Carolina, and subprime 

lending in other States, and found no difference in the availability 

of credit or the cost of credit. Are you aware of any study that finds 

that credit is less available in the subprime market in North Carolina because of the consumer protections of North Carolina? Any of 

you? 

[No response] 

Mr. MILLER OF NORTH CAROLINA. Okay. Now there may be fewer 

loans. That’s not an unintended consequence. That’s an intended 

consequence. One of the characteristics of predatory lending is to 

trap people in a cycle of borrowing so they have to borrow again 

and again, and they can’t pay their loan. They have to borrow 

again. They have to pay a prepayment penalty to get out of the last 

one. They have to pay costs and fees to get into the new one, and 

they systematically are stripped of the equity they had in their 

loan. If there are fewer loans being made in North Carolina, that’s 

what we intended. That means the law is working. 

Mr. Dugan, I was surprised by your concern that some of what 

is in this law is a subjective standard. The law is filled with subjective standards, as you must know. There was a great old English 

common law case that fraud can have no all-embracing definition 

lest—that the fraud is better left undefined lest the craft of men 

should find a way of committing fraud that might escape a rule of 

definition. That pretty well tells you the reason for having some 

subjective standards, so that there’s not a way to get around it. 

And now we’ve heard from industry they want bright line, clear 

rules, but they want to maintain market innovation. That’s what 

worries me. They’ll innovate their way around anything that we do. 

Mr. Dugan, are you not familiar with the idea of the reasonable 

man rule in law or proximate cause in securities laws, suitability 

standard, know your customer requirement, churning, all of those 

subjective standards? Has the securities law not worked because it 

has subjective requirements. 

Mr. DUGAN. I never said that I wasn’t aware of subjective standards in the law or that all subjective standards were bad. What I 

said was that there has been a huge problem in the subprime market. The bill imposes a duty of care that applies to all mortgage 

providers, not just subprime mortgage providers, with a subjective 

standard. And my point was only that when you have a subject 

standard and the penalty is litigation, you’re going to get a lot 

more of it. 

Mr. MILLER OF NORTH CAROLINA. Well, if it is true that they 

want to make sure that we protect market innovation and they 

continue to innovate, how can we come up with an all encompassing objective standard that they can’t innovate around? 

Mr. DUGAN. Well, as I said before, I think to me, the most important standard that’s being put in the bill that’s being discussed is 

the ability to repay, to make sure that these loans are underwritten at the ability to repay based on verified income, which as 

we talked about earlier, something that we support in our own 

guidance. 

53

There are a number of specific standards that are in the bill that 

do those things. And what we were just talking about is a subjective standard on top of that that extends well beyond subprime 

lending. And that, I think the former way is in my view a better 

way to get at those issues. 

The CHAIRMAN. The gentleman from Georgia. 

Mr. PRICE. Thank you, Mr. Chairman. I want to thank every 

member of the panel for their perseverance and for their patience 

in both our schedule, and the level of interest in this issue is significant, huge issue for so many folks across this Nation. 

Coming from Georgia, I would—I don’t know exactly what happened in North Carolina, but I do know that in Georgia, intervention by governmental entities can significantly alter the availability 

of capital and dry up capital for folks who are interested in purchasing homes. We saw that 4 or 5 years ago with changing assignee liability. And literally overnight, the people who wanted to 

be able to purchase homes were unable to find capital to purchase 

homes. 

So we can go too far. I haven’t heard, I don’t think, enough of 

that sentiment from folks who just 6 months ago or so we heard 

essentially all that sentiment. Mr. Antonakes, you said in our 

March 27th hearing, ‘‘at this time we don’t see the need to ask 

Congress for additional authority or additional legislation, regulation appropriately deal with the issues.‘‘ 

The Fed reiterated that. The OCC said we agree. We believe the 

nontraditional guidance the agency has 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 don’t think we 

need anything else. 

The Thrift said I’ve expressed some support to take our guidance 

to subprime lending and make it a standard would apply to all institutions. 

So I guess I’m a little surprised by the testimony that I heard 

this morning, and I would ask what happened? How—what’s the 

current lovefest now with the Federal Government getting involved 

in the federalization of home mortgages to a greater degree? 

Please? 

Mr. DUGAN. Well, I think what at least we at the OCC have always testified is that we did and continue to think that the guidance that we issued is adequate for the banks that we supervise. 

But what we have always been concerned about is that same 

standard would be applied across the board to the less, what we 

believe is the less-regulated entities at the State level. And in my 

view, and as I said before, that’s why you need some kind of uniform national standard. 

Now that can be accomplished by States adopting the Federal 

guidance, and many States have been doing that. It could also get 

there through Federal Reserve rulemaking to a large extent under 

their HOEPA authority, or you could get there through Federal legislation. Whichever way you choose, we do believe that there ought 

to be an even level playing field, a national standard. 

Mr. PRICE. And I appreciate that, Mr. Dugan. In your testimony, 

you said—because I was struck by it, ‘‘some creditworthy borrowers 

54

would be denied loans.’’ I think that’s a message that hasn’t gotten 

out. Remember, this bill that we’re looking at doesn’t apply to the 

folks who don’t have any problem getting credit. It doesn’t apply 

to the folks whose income is such that they don’t get to that level 

where they have to come under cause for concern by our friends 

who want the government to be able to make their decisions instead of themselves. 

So it applies to those folks who are at the margins and are trying 

their best to get into a home. Yet what you have testified to, which 

I strongly believe would be the case, is that some creditworthy borrowers would be likely to be denied loans. So where is it that we 

go too far in making it so that those folks who are trying to live 

the American Dream, who are trying their best to work hard, to 

provide for their families, who have the dream of getting into their 

own home, but we at the Federal level say, oh, no, you really don’t 

know. We can make a better decision for you. Just trust us. Trust 

us. We’ll make a better decision. Where do we step over that line? 

Mr. DUGAN. Well, as I testified, I think there are some places in 

the bill that go beyond what the Federal agency standards are. But 

I will say that any time we draw standards that are intent to reduce the supply of credit to, in cases where there have been abuses 

or problems, you run the risk of also reducing it to some creditors 

that would be eligible for it. And when we enacted our guidance, 

we believed that the situation had gotten problematic enough that 

it was worth taking that risk with respect to certain categories of 

practices. And I think that’s the same animus that’s driving the 

legislation. 

There are some places where the categories in the safe harbor in 

the bill go beyond what our guidance does. And personally and 

from the OCC, I’d like to—we’d like to see some adjustment to 

some of those things, and we’d be happy to provide some of those 

more detailed comments to the committee, as the chairman has invited us to. 

In addition, the bill does provide the regulatory agencies the 

power to make some adjustments to categories over time, which I 

do think, if the committee does go forward with this legislation, it’s 

very important to have that authority not only put in the legislation but described in a way that makes sure that regulators do feel 

free to make adjustments that they believe are appropriate. 

Mr. PRICE. My time has expired, Mr. Chairman. Thank you. 

Mr. GREEN. Thank you, Mr. Chairman and I thank you and the 

ranking member for holding this hearing. It is exceedingly important that we talk about these issues, and I thank the witnesses for 

appearing today. To provide some additional input, permit me to 

ask, is there anyone among you who believes that the subprime 

market is overregulated. If you think it’s overregulated and that we 

are about to do a disservice by imposing some, what I call sensibility, kindly raise your hand. Anyone think the subprime market 

is overregulated? 

All right, now, is there anyone who is of the opinion that the 

subprime market—this is by the way, in court called voir dire—it’s 

a French term—meaning to speak the truth. So, this is a truth-telling portion of this hearing for you. Is there anyone here who believes the subprime market is underregulated? That we ought to do 

55

something about some of the concerns. If you think it’s under-regulated, I hate to have you do something as simple as raise your 

hands, because it sometimes appears to be childish, but would you 

raise your hand if you think it’s under-regulated? 

The CHAIRMAN. The gentleman, help out the recorder, for the 

benefit of the record. 

Mr. GREEN. Thank you, Mr. Chairman. You were a great trial 

lawyer in a previous life, obviously. Because people who read these 

records have no way of knowing what actually occurred, it is incumbent upon me to ask the recorder to note that all persons have 

raised their hands, unless I have missed someone. All persons have 

raised their hands, connoting that the subprime market is not 

under-regulated. 

Now, given that it’s not under-regulated, and given that Congresswoman Waters went through quite a list of things that are of 

concern, from pre-payment penalties to teaser rates that don’t 

properly adjust such that you qualify for a teaser rate, but you 

don’t qualify for the adjusted rate—she went through a number of 

things. Congress has to do something about this. 

We really, in my opinion—well, let me just ask. Is there anyone 

who thinks Congress should take, not a laissez faire attitude, but 

a lazy attitude, and do nothing? If you think that we should do 

nothing, raise your hand. All right, looks like we opted—there’s one 

person who thinks maybe doing nothing is good. Governor? 

Mr. KROSZNER. I don’t think doing nothing is good and that is 

where the Federal Reserve is going to exercise the power that Congress has given it, to write HOPEA rules addressing many of the 

issues that have been raised. 

Mr. GREEN. Governor, let me be very pointed. Are you of the 

opinion, Governor, that Congress should do nothing about the prepayment penalties, about the teaser rates, and not qualifying for 

the adjusted rate, about the whole notion that persons are put into 

loans and some cases where in persons who are making—originating the loans are aware that they cannot make the notes at 

some point where there’s an adjusted rate—do you think that we 

should do something about this? 

Mr. KROSZNER. These are real challenges and these are things 

that you have given the— 

Mr. GREEN. Sometimes when folks finish, I don’t know if they 

have said, ‘‘yes’’ or ‘‘no.’’ So I have to ask you, would you kindly 

say yes or no. Should we do something about it? 

Mr. KROSZNER. If you can do it in such a way that it doesn’t restrict responsible lenders from running credit that can be used responsibly, then you should do something about it. 

Mr. GREEN. Okay. All right, everybody can qualify, but we all 

agree that there’s a role for this—for Congress in this process. And 

if Congress should do something about it, we have to get beyond 

this notion of, as my grandfather who is a Methodist minister 

would put it, wanting to go to heaven but not wanting to die. If 

you want to get to heaven, the only way you can get there—there’s 

one way. Nobody goes without—that’s the way it happens. 

So, given that we all want to get there, then Congress has to do 

what’s known as ‘‘bite the bullet.’’ We really do have to make the 

hard decisions about some of the things that everybody wants to 

56

see regulated or something done about, but few people—not enough 

people have the courage to step forward and try to make a difference. 

So, I am just going to beg that persons understand—as my time 

is running out—that we have difficult decisions to make. But this 

is why we get the big bucks, to make the tough decisions and go 

back and face the crowd and say that we did what we thought was 

appropriate under the circumstances prevailing at the time. My 

final question is this—because there’s some question about people 

changing their minds. 

My suspicion is that at one point some of you believed in the 

Easter Chicken, also known as the Easter Bunny. And at some 

point, my suspicion is, you changed your minds and you no longer 

believe in the Easter Chicken. If you still believe in the Easter 

Chicken, raise your hand. 

Okay, it’s pretty obvious, as we mature and as we receive additional empirical evidence, we ought to have the maturity to change 

our minds, and do what is appropriate given the new evidence that 

we have acquired. I thank you, those of you who have metamorphosed into better people. God bless you. I yield back. 

The CHAIRMAN. The gentleman from Connecticut. 

Mr. SHAYS. I’d like to note for the record that my colleague didn’t 

point out to the transcriber how many people raised their hands 

about the Easter Chicken. I think there was one and it was a Member of the House. Would the gentleman—I don’t want to use my 

time. 

The earthquake hit last year, at the end of last year, beginning 

of this year. When does the tidal wave hit the foreclosures? What 

quarter are we going to see a lot of foreclosures? I’d like to ask 

each of you. Let’s go right down. Your estimate of when you’re 

going to see the largest number of foreclosures. 

Mr. GRUENBERG. Congressman, I think we’re actually entering 

that period now. I think the large volume of the subprime, hybrid 

ARMs, these 2/28s, were made in the last quarter of 2000— 

Mr. SHAYS. I have 5 minutes, so you think it’s— 

Mr. GRUENBERG. —started last quarter 2005, 2006. 

Mr. SHAYS. That was the earthquake. I want to know when the 

tidal wave hits. 

Mr. GRUENBERG. This quarter and into next year is probably 

going to be the peak. 

Mr. DUGAN. I would agree. I think September had the highest 

monthly volume of resets but that high volume, even though it’s a 

little bit large, extends right up through next year. So, through 

next year I think is the— 

Mr. REICH. Second to third quarter of next year. 

Mr. SHAYS. Thank you. 

Ms. JOHNSON. We would say through the middle of next year. 

Mr. KROSZNER. I’d agree, through the middle of next year. 

Mr. ANTONAKES. I’d agree as well. 

Mr. SHAYS. Thank you. If people started to—and banks, with 

their customers, started to renegotiate the terms of the loan, could 

that make a noticeable difference on what happens next year? 

Mr. GRUENBERG. As you know Congressman, most of these loans 

are held in securitizations, that is the real challenge here, and I 

57

think what is probably needed is a broad effort by the servicers 

who are responsible, for most of these loans to modify as many as 

possible so that you can have long term effects for the homeowners. 

Mr. SHAYS. Any other comment? 

Mr. DUGAN. Yes, modifications could make a very significant difference. 

Mr. SHAYS. Okay, but the challenge would be what—getting the 

institutions to identify themselves and identify who their customers 

are? 

Mr. DUGAN. No, it’s not a question of identifying who the customers are, it’s often getting the customers to acknowledge and to 

work out a different modification rather than just not paying on 

time, partly. And partly it’s a systemic issue. We have high volumes of figuring ways to do that that are more efficient. 

Mr. SHAYS. Let me just, so I am sure I’m understanding what 

you’re saying—the institutions themselves would have a lot of customers to renegotiate with and maybe not be able to handle the 

volume? 

Mr. DUGAN. The servicers. 

Mr. SHAYS. The servicers. Thank you, okay. Basically, we had 

homeowners—we had renters encouraged to buy and we in Congress took great pride that we were seeing minorities have ownership that they didn’t have before and a good chunk of it was with 

the subprime market. I’m told that people who practically couldn’t 

even afford a second month payment in rent could end up buying 

a house under the subprime market. 

If that’s true, without sounding insensitive, when there is a foreclosure—in a sense did these individuals really ever own the home 

in the first place. And the question is, should our effort be to try 

to help them keep the home or is it in their best interest not to 

own it? 

Mr. GRUENBERG. Congressman, I think it’s important to keep in 

mind that the majority of the subprime mortgages were 

refinancings by existing homeowners and the issue really is that 

for many of these people, they had mortgages they could afford to 

pay. They were encouraged to refinance into mortgages that they 

cannot. And that’s part of why this is such an urgent— 

Mr. SHAYS. Would you all agree with that? Because that’s something I think is quite significant. 

Mr. DUGAN. I think there is a huge part that is refinancing, but 

getting back to your question, but I do think that not every loan 

should be restructured. Some are going to have to be required foreclosure because some people can’t afford to make the payments on 

the loan even on a restructured basis and foreclosure is the only 

option. No one wants that, but in some circumstances that will be 

the case, for the very reasons you suggest. 

Mr. SHAYS. Does anyone disagree with that? 

Mr. REICH. I would add that I think—I would perhaps oversimplify that there are perhaps three categories of borrowers in the 

subprime arena. One would be investors who had no intention of 

ever occupying the property. The second would be people who were 

misled by the products they got into. They thought they could afford it but they didn’t fully understand the terms and the third category would be those people who thought they understood the 

58

terms but ultimately did not realize that the rate resets would be 

taking place. 

The CHAIRMAN. Thank you, gentlemen. We have heard the bells. 

I’m going to—I think we can get in these two last sets of questions 

and we can dismiss this panel. So, we’ll go to the gentleman from 

Missouri first and we can move quickly. We are going to have a 

problem. 

Mr. GREEN. Mr. Chairman, may I ask for unanimous consent to 

insert into the record a letter from the National Fair Housing Alliance? 

The CHAIRMAN. Yes, without objection. I also have a letter from 

Countrywide responding to some accusations made about them at 

our last hearing, which will be put in the record, withouot objection. 

The gentleman from Missouri. 

Mr. CLEAVER. Thank you, Mr. Chairman. I’ll be very quick. 

There are—I met with some of the people from the financial industry in my home district in Kansas City, MO, and they seem to believe that if we bring forth some new regulations, that somehow 

the credit crunch will be exacerbated. Do any of you agree with 

that? To bring on some regulations with regard—similar to that 

which the Chair and Mr. Miller are proposing, that it creates a 

greater credit crunch? 

Mr. REICH. Well, the devil is in the details, Congressman. It depends upon, ultimately, what the legislation looks like. 

Mr. CLEAVER. Okay, so, do you think it—would you agree with 

the editorial writer in today’s Wall Street Journal, that this would 

give delinquent mortgage borrowers a new trick to essentially enjoy 

free rent for up to 30 years? 

Yes, sir— 

Mr. GRUENBERG. I wouldn’t agree with that, Congressman. 

Mr. CLEAVER. Mr. Comptroller. 

Mr. DUGAN. I think the issue with—it goes back to some of these 

questions about suitability and the details of the legislation. The 

concern is, could people avoid making payments on loans by inserting defenses that would otherwise not be available? I don’t think 

that’s the intent of the legislation. I think there’s an effort to work 

with the language to prevent that. 

Mr. REICH. To be honest with you, I didn’t fully understand your 

question. I’m sorry. 

Mr. CLEAVER. Okay, because my time is running out. Thank you. 

Ms. Johnson? 

Ms. JOHNSON. I haven’t read the editorial that you’re speaking 

to and that line taken out of context so I’m not sure that I could 

provide an answer. 

Mr. CLEAVER. Governor? 

Mr. KROSZNER. My hunch is that they are engaging in a little bit 

of hyperbole, but I think it’s exactly as we said before. It really depends on the specifics of the legislation and we’ll craft it narrowly 

focused—legislation addresses things like, well-crafted—repay that 

we could do through our Hope Regulations could address some of 

these issues. 

Mr. CLEAVER. Commissioner? 

59

Mr. ANTONAKES. And given the way the legislations draft and 

with the rulemaking process, I think that unattended consequence 

would be avoided. 

Mr. CLEAVER. Thank you. 

The CHAIRMAN. I thank you and I just would say that my attention was called to the Wall Street Journal editorial and the notion 

that somebody could get a 30-year stay here is, even by their 

standards, extremely bizarre. The gentlelady from Wisconsin. 

Ms. MOORE OF WISCONSIN. Thank you, Mr. Chairman, and I’ll be 

brief, given the time. As I listened to the testimony, particularly 

the last comment by Director Reich, I believe it was, you talked 

about people who typically default on these loans as investors who 

never intended to occupy it, people who didn’t understand the 

terms and conditions, people who thought they understood, and it 

really doesn’t place any liability. 

Those comments are the people who are putting the products out, 

it’s just consumers are just too dumb and I’m saying that because 

I am—I believe I’m a cosponsor of the chairman’s bill and I was—

I along with Mr. Hodes, another member of this committee. We 

have put a bill together that we think addresses some of the 

other—another problem with the way these loans are written. People in the mortgage broker industry, unlike prime loans, are not required to include escrow accounts. 

So, you can write up a loan that people think they can afford. 

You know, they’re going to pay $700 a month, but they don’t have 

property taxes and escrows and other important escrows and at the 

end of the year suddenly they are hit with a huge—$2,000 or 

$3,000 tax bill and they’re being foreclosed on. I’m wondering if you 

think that it would be a sage and wise thing to include that in 

there. 

I’ll tell you, I am one of the people who believed in the Easter 

Bunny, sorry. Because I have to boil up several dozen eggs every 

year and I have to believe in the Easter Bunny. But there are people who will argue that they don’t need the bank to handle their 

money in an escrow. That they can use those monies themselves 

to invest. 

But given the nature of subprime loans, I’m just wondering if the 

panel thinks that it wouldn’t be wise, given that there will be some 

sort of legislation to include the requirement: number one, that escrow accounts be included in the loan; and number two, that a second provision of our bill would be to require them to use licensed 

appraisers and not just mortgage bankers who are out there trying 

to get the value to fit the kind of loan they want to make. 

Mr. REICH. I absolutely believe that there are many good things 

in this bill, including the requirement that principal, interest, 

taxes, and insurance be required for loans to subprime borrowers. 

Mr. DUGAN. I actually don’t think that requirement is in the bill. 

Ms. MOORE OF WISCONSIN. It is not. That’s why I’m saying, I’m 

proposing. I— 

Mr. DUGAN. I would agree with that. To be honest, I was a little 

surprised it was not in the bill. 

Ms. MOORE OF WISCONSIN. Right. 

60

Mr. DUGAN. But I think that in the subprime market, escrowing 

for principal and interest, I think would be a sensible addition to 

the bill. 

Ms. MOORE OF WISCONSIN. Did you hear that, Mr. Chairman? 

The CHAIRMAN. Well, if the gentlewoman—also in the bill that 

Mr. Kroszner filed and I said earlier that I thought we could go 

ahead with that. So, we did touch on that earlier and I think in 

fact one of the witnesses, Chairman Johnson, did also allude to 

that in her testimony and I plead guilty to the charge of under-regulating and I’m prepared to adjust my habits and regulate some 

more. The gentlewoman is recognized. 

Ms. MOORE OF WISCONSIN. Thank you, I think I will yield back, 

given— 

The CHAIRMAN. Thank you. We will now go to the gentleman 

from California, and then we will dismiss this panel. As the last 

thoughts of the day, I plan to stay. This is very important. Some 

members will be back, staff will be here. I apologize to those who 

will be testifying later, there will be fewer members, but it will 

have no less impact, I assure you, on this important deliberation. 

The gentleman from California. 

Mr. SHERMAN. Thank you, Mr. Chairman. I commend you for 

stating that the credit union regulators should also have a seat at 

the table in drawing up the regulations. I think the bill is something I should commend you for. Particularly the concept that we 

should make sure that the borrower has the ability to pay. I commend the gentlewoman from Wisconsin for bringing up the idea 

that property taxes and insurance principal and interest need to be 

factored in in determining ability to pay. And I hope that we would 

specify in the bill, when we talk about ability to pay we mean from 

current income and not based on—yes? 

The CHAIRMAN. The requirement of all the costs—principal and 

income, etc., is in the bill. What’s not in the bill is the escrow and 

the appraiser. Those are the pieces—the full cost piece is in the 

bill, the appraiser and escrow is what would be added. 

Mr. SHERMAN. I thank you for setting me straight. I thought it 

was in and then I heard that it was out and thank you for letting 

me know that at least full costing is in— 

The CHAIRMAN. I’m kind of an expert on what’s in and what’s 

out. 

Mr. SHERMAN. That may be, but—compared to me, you are. And 

I hope that we would specify in the bill that when we’re looking 

to document income, if somebody is a wage earner they have to 

provide that W–2 form or their full tax return. If somebody’s claiming investment income, that they have to provide the 1099s or the 

full tax return and if somebody’s claiming self-employment income, 

they have to provide their full tax return. 

I realize that up until this year we might have taken the idea—

let the regulators just put in all the specifics, but I would hope that 

we would put those specifics in the bill. The bill provides a floor, 

a minimum Federal regulation without a ceiling and therefore we 

don’t end up with a national standard. And I realize that time is 

running out, so I may just ask you to respond for the record, but 

if there’s one witness who wants to respond: 

61

Do we need, in order to have efficient nationwide capital markets, to become the ultimate owners of these mortgages, a Federal 

standard? Perhaps with a few things that some States could opt in 

or out of—opt out of. Or could we really have the benefits of a national securitized market and have every city and State free to impose its own rules? I don’t see anybody really anxious to give an 

oral response. How many more minutes until the bell? Why don’t 

we just take a response for the record? 

The CHAIRMAN. Okay, I thank the panel. This has been very useful and and I appreciate the degree of specificity. The gentleman 

from North Carolina asked for that and I think it came a little 

later than he had asked for it, but it came and we will be really 

keeping track of these things. And I think we have set a good context in which we can make some movement and move some pieces 

around and come up with a consensus bill. The hearing is recessed 

and we will resume right after the votes with a second panel. 

[Recess] 

The CHAIRMAN. The hearing is reconvened. Under other circumstances, I would apologize for the delay, but I do think this has 

been useful. I think it has been very helpful to have all of the people who have an interest in this bill spending a day thinking about 

it, and listening to each other. 

We will move more quickly now, obviously, because there aren’t 

going to be a lot of members asking questions, so we can probably 

finish this in a couple of hours. The House is adjourned for the day, 

so we won’t be bothered either by votes or by members who aren’t 

paying serious attention disrupting things because they have nothing else to do. 

We will now have a serious conversation with people who have 

a great interest in this bill, and I think that will be useful. We will 

begin with our next set of witnesses. Let me get the witness list. 

We will begin with Michael Calhoun. He is the president and 

chief operating officer of the Center for Responsibility Lending. Obviously, without objection, all material that witnesses want to submit will be put into the record. I will say this: There is no need 

either to thank us for having this hearing or to summarize the bill. 

Just get right to it. 

Mr. Calhoun. 

STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT AND 

CHIEF OPERATING OFFICER, CENTER FOR RESPONSIBLE 

LENDING 

Mr. CALHOUN. Thank you, Mr. Chairman. It may be fitting that 

the three sponsors are the ones here now. 

I am going to address my comments first to talk about the assignee liability, which has been one of the key comments. I am 

going to try and follow my Congressman from North Carolina, Mr. 

Watts’, admonition to be specific. And then I will address the North 

Carolina experience as it relates to this bill, and the specific provisions of this bill, finally. 

First, I think it is very important to set straight for the record 

what this secondary market responsibility or assignee liability is 

and what it is not. First of all, assignee liability is a common feature of the law. In contracts in general, including in mortgages, 

62

presently, under present law, the Uniform Commercial Code provides assignee liability for holders of mortgages and other negotiable instruments who are not so-called holders in due course. 

You also have substantial assignee liability, including for mortgages, under the Federal Trade Commission holder rule whenever 

you have a home improvement loan. And you also have significant 

assignee liability for credit transactions, including mortgages, presently under Truth in Lending. And the market absorbs and deals 

with that liability well without either raising the cost or reducing 

the accessibility of credit. 

What assignee liability is not is liability to the individual bond 

holder. No one has proposed that, and that has never been a component of assignee liability under any of the State laws or the Federal bills. 

Finally, it is important that we are not talking about leaving the 

secondary market out there alone holding all the liability for these 

loans. In every sale of mortgages, the purchaser requires the lender, or if it is a later seller, to represent and warrant that the loan 

was made legally, and that if there are any violations or liability, 

the seller of the mortgage has to indemnify the secondary market 

holder for that liability. 

And so the secondary market not only deals with assignee liability today, it is in a position to manage it and to recover from those 

who sell them the loans, and the liability goes back down through 

the chain to the original lender or originator who engaged in the 

illegal conduct. 

Second, I want to address a couple of aspects of the North Carolina experience and bill since it is used as a model for this. I think 

it is relevant to a number of the issues here, including preemption. 

In 1999, the North Carolina bill was enacted and which addressed—it was the higher cost loan sections addressed to equity 

stripping. It initially did not cover open-end loans, and so quickly 

some lenders converted all of their mortgages to open-end loans, 

thus evading the coverage of that bill just as they evaded coverage 

of current HOEPA, which does not cover open-end loans. North 

Carolina came back in 2001, added open-end loans with the agreement of the industry, and that became a model also for other places 

around the country. 

Five years ago, these so-called 2/28s were not the exploding 

ARMs that they developed into. Originally, the payment reset was 

small because the Federal discount rate was so low and rates were 

derived from that. There was not the large payment shock. That 

really developed starting when the Federal Reserve engaged in the 

quarter point march of interest rate bumps. 

And so in 2005/2006, we went to lenders and said, ‘‘Do you realize the built-in payment shocks that these loans have, and are you 

truly going to try to underwrite them based only on the original 

payments?’’ I think the response carries an important message. 

Several of those lenders said, ‘‘We agree these are problematic 

loans and would prefer not to be buying them.’’ 

But we cannot unilaterally impose those standards on the market because if we do, the originators, typically the brokers, will 

take all the business down the street. Most of these lenders got—

for example, New Century—90 percent of their volume from mortVerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00068 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE
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gage brokers. If they said, we are not going to take the loan that 

you want to sell to us; it is most profitable to you, New Century 

loses all their business and it goes down the street. 

I think a couple lessons there are this market will evolve. You 

need to leave States the ability to respond. And also, a specific provision, Title 1 and Title 2, do not currently cover open-end loans, 

and we would recommend that they do so as the North Carolina 

law does, both the original predatory lending law and the additions 

that were made this last summer, which have been incorporated in 

substantial respect into the bill. 

Finally, I want to say there are very many good provisions in 

this bill. It takes the right approach of trying to restructure the 

market. The real concern we have is that we have thrown the baby 

out with the bath water, and that is the baby of effective enforcement. 

In many circumstances in this bill, the only remedy a borrower 

has is a very limited right after the loan goes into foreclosure, and 

they are left effectively with little or no remedy until the loan goes 

into foreclosure. Forcing borrowers to that does not seem to be the 

incentive that we want in the bill. 

We would urge that the remedies in assignee liability be increased but still moderated, moderate with caps both as to limitations to individual actions and caps on damages. But in many 

places in the bill currently, there are no effective remedies for borrowers, which means that—this market is bigger than the stock 

market. There are hundreds of thousands of mortgage brokers. In 

the last few years, there have been 3 million subprime loans each 

year. 

The only way this bill works is with the market self-policing. And 

there need to be incentives in the form of remedies and secondary 

market responsibility or you will not have that policing. Thank you. 

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

167 of the appendix.] 

The CHAIRMAN. Next we will hear from Janis Bowdler, who is a 

senior housing policy analyst at the National Council of La Raza. 

STATEMENT OF JANIS BOWDLER, SENIOR HOUSING POLICY 

ANALYST, NATIONAL COUNCIL OF LA RAZA 

Ms. BOWDLER. Good morning. 

The CHAIRMAN. Good morning, we wish. Good morning. 

Ms. BOWDLER. Oh, good afternoon. Clearly I didn’t have my second cup of coffee today. Sorry about that. Janis Bowdler. I conduct 

the research around housing policy issues at the National Council 

of La Raza. And I was going to start by thanking everybody here, 

but since I have been directed to skip the formalities, I will do that 

and get right to it. 

NCLR is happy to be at this table. For years, many of you have 

heard us. We have been to visit you. We have been talking about 

the fact that Latinos are getting bad loans. Even as we convene 

today, thousands of families are faced with the nearly insurmountable task of saving their home from a foreclosure spurred by a 

predatory loan. 

What NCLR is trying to do in this debate, and what we wanted 

to accomplish here, is really to level the playing field for Latino 

64

borrowers. We have conducted research. We have listened to the 

stories of borrowers. And we have even gone out and interviewed 

practicing mortgage professionals. And this intelligence is the underpinning of our policy agenda to improve the mortgage market 

for Latino families. 

This bill, H.R. 3915, is the first one we have seen that directly 

addresses several key Latino priorities. And we would really like 

to commend the authors and their staff for their hard work and 

diligence on this bill. In my brief time this morning, I would like 

to highlight a couple of key provisions that are important to Latino 

and immigrant borrowers. And we also want to offer some suggestions on how we think it can be strengthened. 

But I am going to start where I normally do, which is to talk 

about the borrowers. And I want to tell you a story about Mr. and 

Mrs. Silva, who actually purchased a home in Lawrence, Massachusetts. They had solid credit histories and stable income, and 

they purchased a home at the top of their purchase range. 

They didn’t find out until much later that the appraisal was inflated, the title work was incomplete, and much of the construction 

on their new construction home was shoddy. In fact, they figured 

it out about the same time that they realized that they had an 

unaffordable 80/20 loan with a reset looming on the first loan in 

the near future. 

The story is a familiar one by now. Their broker assured them 

they had a fixed rate loan. The inflated appraisal limits their refinance options. And no one involved in the transaction was willing 

or able to help them. Nobody is accountable. 

Housing counselors across the country are operating at maximum capacity, but we are still swamped with calls. In fact, NCLR 

has been receiving calls directly from consumers, and two things 

are clear: The market isn’t correcting in a way that helps borrowers; and system-wide protections are necessary to prevent predatory behavior. We think that several of these protections are in 

H.R. 3915. 

Briefly, the bill has a strong anti-steering provision. We are excited to see that it would eliminate compensation-based incentives 

to steer families to expensive or risky loans, and sets the stage for 

additional prohibition on actual steering practices. 

The bill also puts forward an aggressive strategy to license and 

regulate originators. This summer, NCLR partnered with NAHREP 

to interview mortgage brokers serving the Latino community, and 

the response was overwhelming. The brokers told us that they 

wanted to be regulated. They were tired of getting a bad rap. They 

were tired of seeing their own customers get steered towards bad 

loans by unethical brokers. And they want more accountability. 

H.R. 3915 also lays out a common sense ability to repay standard. Lax underwriting standards and unaffordable loans are at the 

heart of predatory lending, and if such a standard had been in 

place, the Silvas likely would have gotten an affordable loan in the 

first place. 

We also want to work with members of this committee to continue to strengthen the bill. We are concerned that the bill’s enforcement standard falls short. Unless we strengthen these standVerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00070 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE
65

ards, borrowers may not get the full benefit of the other new protections created in the bill. 

And again, I expand on these in our written comments. But the 

first that I want to point out is that the bill does a great job of increasing civil penalties under TILA, but caps it when it comes to 

the steering provision. This seems arbitrary, and we want to recommend that the statutes stay as is. This would mean the full improved liabilities would apply for steering. 

It also extends the right of rescission to include violations of ability to repay and net tangible benefit, and it creates a defense to 

foreclosure which we support. However, there is an exception that 

seems to carve out most of the secondary market, and we are concerned that this could have an unintended consequence of setting 

the borrower up as having to access foreclosure as a remedy, meaning the only way the borrower could access their right to rescind 

would be in the foreclosure process. 

Finally, we believe the rescission right would be stronger if it applied to all harms in the legislation. 

Our written statement includes recommendations for improving 

other aspects of the bill, but I promised to be brief so I will close 

here. Again, a sincere thank you, and I would be happy to answer 

any questions. 

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

153 of the appendix.] 

The CHAIRMAN. The next witness is a familiar face for us and a 

collaborator on a lot of stuff, Hilary Shelton, director of the Washington bureau of the NAACP. 

STATEMENT OF HILARY O. SHELTON, DIRECTOR, NAACP 

WASHINGTON BUREAU 

Mr. SHELTON. Mr. Chairman, I too will avoid the normal process 

of thanking you and Congressman Watt and Congressman Miller 

for the great work you did on producing H.R. 3915, the Mortgage 

Reform and Anti-Predatory Lending Act of 2007, and skip right 

ahead to the issues. 

Predatory lending is unequivocally a major civil rights issue for 

our times. As study after study has conclusively shown, predatory 

lenders consistently target African Americans, Latinos, Asians, Pacific Islanders, Native Americans, the elderly, and women at such 

a disproportionately high rate that the effect is devastating to not 

only individuals and families but to whole communities as well. 

According to a recent study by the Furman Center in New York, 

between 2002 and 2006, the percentage of subprime loans to African American borrowers rose from 13.4 percent in 2002 to 47.1 percent in 2005. Furthermore, study after study has shown that African Americans and other Americans of color are targeted by predatory lenders and steered into predatory loans at a disproportionate 

rate regardless of their income or credit history. 

These numbers become especially important as subprime mortgage loans become foreclosures. The impact these foreclosures are 

having and will have on whole neighborhoods and communities, 

predominately populated by African Americans, Latinos, and other 

racial and ethnic minority Americans, will be nothing short of devastating. 

66

A report issued last year by the Center for Responsible Lending 

estimated that one out of every five mortgages that originated during the last 2 years will end in foreclosure. To date, the Federal 

Government has been largely inattentive to the problems surrounding predatory lending, and in fact, some of the rules and proposals we have seen in the last few years appear to go backward 

and take away some of the few protections we have gotten at the 

State level. 

This flies in the face of the NAACP’s belief that the primary responsibility of the government is to protect its citizens, all of its 

citizens, not to exploit them or allow them to be exploited for financial gain of a few. As our democratically elected representatives, 

the NAACP has consistently called on the Congress to enact aggressive and effective Federal law to curb predatory lending. 

That is why the legislation we are discussing today, H.R. 3915, 

is so important. This legislation aggressively addresses problems 

that the NAACP sees every day, including steering, yield spread 

premiums, high costs and fees, and prepayment penalties. 

The NAACP hears about these abusive tactics all over the country every day, and it is our hope that if this legislation is enacted, 

we will not continue to hear stories like the one of a woman who 

called the NAACP national headquarters last month to report that 

she had been convinced to take out a $30,000 home equity loan, 

and that $26,000 of that $30,000 loan would go to pay for points 

and fees. That is absolutely outrageous. 

Unfortunately, as the NAACP knows all too well, we must have 

tough enforcement provisions to ensure that these new laws are adhered to. We cannot allow skirting the law to be seen as merely 

the cost of doing business. We must make the penalties stiff, and 

we must show the industry as well as the American public that we 

mean business. 

In addition to a strong Federal standard to address predatory 

lending, we also believe that States must retain the flexibility to 

address local and regional issues, and that States can and should 

be able to address new abusive products that may arise if and 

when the current problems are addressed. The NAACP believes 

that any Federal policies that are enacted should be treated as a 

minimum standard, and that States should be able to enact even 

tougher laws tailored to address their own unique brand of predatory lending. 

Let me close by saying that while the bill being discussed today 

may not be perfect, we do, however, unequivocally support H.R. 

3915. And while we look forward to working with the chairman and 

others to perfect it and hopefully make it even stronger, we would 

like to make it clear that we deeply appreciate all that you have 

done, Chairman Frank, to aggressively address many of the issues 

at the heart of the predatory lending problem. 

I want to thank you again, and I look forward to your questions. 

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

292 of the appendix.] 

The CHAIRMAN. Next is John Taylor, president and chief executive officer of the National Community Reinvestment Coalition, 

who has been a very active participant in the discussions getting 

us here today. 

67

Mr. Taylor. 

STATEMENT OF JOHN TAYLOR, PRESIDENT AND CHIEF EXECUTIVE OFFICER, NATIONAL COMMUNITY REINVESTMENT 

COALITION 

Mr. TAYLOR. Thank you, Chairman Frank, and Representatives 

Miller and Watt, for your leadership on this issue. I am here today 

to testify on behalf of NCRC, as well as the National Consumer 

Law Center, and the Rainbow/PUSH Coalition. And rather than repeat some of the points that some of my colleagues have made and 

that I have made in my written testimony, I would like to take us 

down a different path. 

Two-fifths of the $3 trillion of mortgage loans made in 2006 were 

either subprime or Alt A. It is estimated now that some 21⁄2 million 

loans are in danger of foreclosure over the next 2 years. This represents over $300 billion in petition losses to the market. By way 

of perspective, the New York Federal Reserve Board moved to 

delay the collapse of Long Term Capital Management because its 

projected losses were going to be about $3 billion, the Fed fearing 

that this would have had a catastrophic effect on Wall Street. 

The mortgage crisis facing us now represents a hundred times 

the projected losses of Long Term Capital Management. We are 

facing a mortgage tsunami unlike any other time in our history, 

and lest you think I am offering a hyperbole by calling this a tsunami, consider that the number of foreclosures in the next yearand-a-half will equal 10 times the number of homes lost in New 

Orleans due to Hurricane Katrina. 

The average number of foreclosures annually used to be roughly 

about 225,000 per year. It is estimated that in January of 2008 

alone, in that one month, we may equal the number of foreclosures 

that we traditionally experience in a year. 

The contagion effect with these 2 million-plus defaults will 

have—the contagion effect that these defaults will have on neighborhoods, bank portfolios, existing housing starts, housing prices, 

the home-building industry, and ultimately Wall Street may pave 

the way for a deep and hurtful recession. 

We find ourselves in this situation for a number of reasons. Most 

importantly, it is due to the lack of needed consumer protections 

and vital regulatory enforcement that would have made such practices illegal to begin with. Alan Greenspan called this in his book, 

this kind of lending, infectious greed and malfeasance. I am sorry 

Mr. Hensarling is not here because he mentioned Adam Smith in 

one of his explanations as the basis for why he had problems with 

this bill. 

And it is interesting that Alan Greenspan talks a lot about Adam 

Smith in his ‘‘Age of Turbulence,’’ his new book. Mr. Greenspan 

noted that Adam Smith’s answer to what he called the most important macroeconomic question was what makes an economy grow? 

Adam Smith said it was four elements: capital accumulation; free 

trade; a role of government; and the rule of law. Smith emphasized 

that what was critical to these four elements was that every person 

must be free to pursue his or her own interests, and that this was 

what in fact would build the wealth of a society. 

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Men and women are not free to pursue their own interests when 

unfair and deceptive lending practices are free to take root and 

strip wealth from the individual. Predatory and usurious lending is 

the antithesis of capital accumulation. It is capital depreciation. 

By free trade, Smith did not mean the freedom to cajole, cheat, 

and rob unsophisticated homeowners. His free market assumed 

that competition was always accompanied by honest and ethical 

dealings. The role of government was to ensure capital accumulation of free trade while staying out of the way of competition. The 

wholesale lack of regulatory enforcement, coupled with inadequate 

laws to protect individuals and promote capital accumulation of 

free trade, now challenge our ability to grow this economy. 

Finally, Smith and Greenspan’s fourth element for growing the 

economy was the need for the rule of law, a catchy phrase in recent 

years in these hallowed halls. In this case, Chairman Greenspan 

was clear about the meaning of the rule of law as it relates to these 

issues. The rule of law, is ‘‘the protection of the rights in the individuals and their property.’’ The protection of the rights in the individuals and their property. 

This bill, H.R. 3915, won’t do much for the 2 million homes that 

are now—2 million families, really, that may contribute to a major 

economic downturn. But it does represent a substantial and comprehensive return to the economic principles, as espoused by Adam 

Smith and Alan Greenspan, that we believe are essential to a vibrant economy. 

This bill supports the belief that anyone who works hard, pays 

their taxes, and acts responsibly will have the freedom to pursue 

wealth for their family and themselves. Removing abusive and unfair lending practices and holding all segments of the capital accumulation system accountable for these practices is simply sound 

economic policy owed by this government to each of our citizens. 

It is imperative that we act now to strengthen H.R. 3915, particularly that we need to ensure that the protections in this bill are 

accompanied with strong remedies, with substantial and bipartisan 

support of the Members of Congress and this Administration. Failure to embrace this long-overdue effort would now be a monumental mistake. 

I can say with a great deal of certainty that given the magnitude 

of this problem and the sheer numbers of innocent Americans 

whose lives and friends’ lives have been impacted by this infectious 

greed and malfeasance, that there will be few congressional districts where this question will be unimportant in the next round 

of elections. 

It is imperative that you strengthen and pass H.R. 3915 in order 

to return sanity and fairness to our system of home financing, and 

thereby support our Nation’s economic promise. Mr. Chairman, we 

look forward to working with you and collaborating with you to 

strengthen this bill and to support the passage of a meaningful, 

strong national anti-predatory lending bill. Thank you. 

[The prepared statement of Mr. Taylor can be found on page 296 

of the appendix.] 

The CHAIRMAN. Our next witness is Mr. John Hope Bryant, who 

is the founder, chairman, and chief executive officer of Operation 

HOPE. 

69

I just wanted to explain. We began with a panel, obviously, of the 

regulators, who are sort of neutral. We then have a panel of mostly 

community groups, and then a panel of people from the business 

side. In each case, I just want to be clear that it has been a practice to solicit from the Republican side a witness. So Mr. Bryant 

is here in particular at the invitation of the Republican side, and 

similarly with the third panel. 

But we did feel with the regulators, community groups, and the 

business groups, that we would be getting, with the particular 

group from the Republican side, a very balanced discussion here. 

Mr. Bryant. 

STATEMENT OF JOHN HOPE BRYANT, FOUNDER, CHAIRMAN, 

AND CHIEF EXECUTIVE OFFICER, OPERATION HOPE 

Mr. BRYANT. First of all, I want to say I didn’t know I was being 

asked to submit from any side. So it is nice to be here. I am on 

the American side. 

I wanted to first say thank you for having this hearing, and to 

acknowledge the presence of Congresswoman Maxine Waters and 

Congresswoman Judy Biggert. 

This hearing, focused on reviewing legislative proposals for reforming mortgage practices in the light of the subprime crisis in 

America, is a critically important if not a historic day. I support the 

spirit of H.R. 3915 as well as H.R. 1752, H.R. 3017, and H.R. 3019, 

which together create a responsible floor for the poor. 

Let me start by saying that this is personal to me. My family lost 

our home in South Central Los Angeles because my father did not 

understand the documents he was signing because, unfortunately, 

he asked the wrong question. Growing up, I remember the pride I 

had every week on Friday nights watching my father make a payroll of his cement contracting business from the front door of our 

home. That was powerful for a son to see. 

But after a while, the workers I knew so well would leave our 

home, and then a mortgage broker, someone I didn’t know at all, 

would show up at the front door, finally convincing my otherwise 

brilliant father that he could somehow have more while somehow 

spending less. The result? My dad was left almost completely defenseless in making the most significant financial and wealthbuilding decision of his adult life, and our family’s, too, a decision 

that in the end negatively impacted my dad and his marriage to 

my beautiful mom, who genuinely loved him. But in the end, their 

marriage ended over money. The number one cause of divorce 

today for all races is money. 

Ultimately, decisions made on that day in South Central L.A. 

had a negative ripple effect years later on my brother, my sister, 

my mother, and me. You see, my dad ultimately asked this person, 

this mortgage broker who was disconnected from any responsibility, the wrong question. He asked what was the payment, when 

he really should have asked what was the interest rate. No one 

should ever ask what the payment is when there is an interest rate 

attached. 

We lost our home not because my father wasn’t brilliant, because 

he was and is today at 83 years of age, but because my dad was 

badly represented, he asked the wrong question, and then he 

70

signed documents he didn’t understand. I suggest a massive overhaul of the mortgage brokerage industry as it relates to mortgage 

lending, and I would suggest that you restrict, if not eliminate, 

negative amortization loans, where every payment you make 

means the broker you get. 

My mother’s story, oddly enough, ended completely differently. 

You see, my mom, who worked a regular 40-hour job, was financially literate. My mother worked more than 35 years at McDonnell 

Douglas Aircraft, now Boeing Aircraft, in Long Beach, and realized 

early on that it was not necessarily about making more money, but 

making better decisions with the money you make. 

My mom bought and sold five homes, and today is retired and 

financially independent, living in Texas. In contrast, my dad today 

is financially dependent, living in a 4-unit apartment building built 

for him by me and my wife on the very street we grew up on. 

Not all children or even most children are financially able to 

build and pay for a home for their father, nor should they. Parents 

should be in a position, if and when they can, to accumulate and 

later, if they like, to pass down assets to their children, not the 

other way around. Some 20 years later, Mr. Chairman, this negative legacy impact of the subprime mortgage crisis for many Americans, and not just minority Americans, are experiencing this today. 

And this is why I am so passionate about financial literacy and economic empowerment. 

We have helped to educate 250,000 children in financial literacy, 

created a thousand low-worth homeowners, and helped 85,000 victims of Hurricane Katrina. I think this gives us some context about 

how people are managing their affairs in this crisis. And I can tell 

you with confidence they are not doing it very well. 

Just one example of this. In L.A., the city of L.A. asked Operation HOPE to partner in a mortgage crisis hotline. We did that, 

and when we launched it 3 months ago, we received 3,000 calls in 

the first day. By the second day, we had received 4,000 calls. 

Now, to put this in the context of Hurricane Katrina, in our busiest month in our nationwide outreach for Katrina, we received 

3,000 calls in a month. So we received more calls in 48 hours from 

L.A., from Latinos, mostly, than we received in an entire month nationwide in responding to Hurricane Katrina. I agree that this is 

an economic tsunami. 

We will soon roll out phase two, and we will have hearings in 

California along the same lines soon. But none of this is enough, 

which is why we need you to act. So here is what I am also suggesting. I am proposing today, and have likewise sent a letter to 

all of the Federal regulatory agencies you had here today, that the 

Federal Government establish, possibly through the Federal Home 

Loan Bank system, a $10 billion loan guarantee fund, structured 

in many ways like an SBA loan guarantee. Here is how it would 

be structured. 

Number one, it would carry a standing fixed rate of 3 percent, 

allowing private lenders to add a maximum of 2 to 3 percent at a 

reasonable fee for administration, overhead, and profit margin. 

There is a precedent here. After the riots of 1992 in Los Angeles, 

the Federal Home Loan Bank did something similar to this, $3 billion. That was repaid. 

71

Number two, allow anyone who had paid their loan on time and 

within the terms of their agreement prior to their rate reset to be 

refinanced under this new program, the theory being that these individuals were already properly underwritten at the original term 

and rate as their loans were performing. 

Number three, and finally, all new loans would be made at a 5 

to 6 percent fixed rate over a 30-year period, and in some unique 

hardship cases, over a 40-year period. While I am all for free enterprise and capitalism, and we work at making capitalism work for 

the poor, I do not believe the poor should be subject to interest rate 

risk, to wild interest rate risk. 

This approach has many benefits, one of which is a temporary 

economic stimulus by adding billions of dollars of new money back 

into the economy when the mortgage economy seems to be stalling. 

Number two, this approach could serve as a unique and new opportunity for the credit union industry, as credit unions were not substantially involved in the original problem, several are large 

enough to make a difference, and because their unique tax structure can afford to make these loans at an even lower price point, 

making it a win/win for all involved. 

On a separate but related note— 

The CHAIRMAN. Mr. Bryant, we are going to have to have you 

sum up fairly quickly, please. 

Mr. BRYANT. Sure. On a separate but related note, I would encourage you to push to keep subprime lending, responsible 

subprime lending, as part of the mix. Subprime lending was not 

the problem. Irresponsible subprime lending was the problem. And 

we should work hard not to cut off capital flowing to the poor. 

Thank you. 

[The prepared statement of Mr. Bryant can be found on page 159 

of the appendix.] 

The CHAIRMAN. Thank you, Mr. Bryant. Let me say first I appreciated in particular your reference to negative amortization because 

that is a provision that was put into the bill. Our colleague from 

Illinois and others talked about it. It was one that I think one of 

the witnesses in the first panel specifically opposed. So we appreciate your talking about the need to deal with negative amortization. 

And let me just ask, the problem when your father was misled 

into signing these documents, when was that? 

Mr. BRYANT. That was 20 years ago. 

The CHAIRMAN. I think that is important, to show that we are 

not—and I appreciate that because some people said, well, this crisis is going to work itself out. Don’t over-react. But I think you 

help us understand that we are talking about some structural problems in this industry, and simply waiting it out for a month or two 

doesn’t resolve it. I appreciate that. 

Let me ask the—Mr. Calhoun, you did address this some, but the 

argument that we have heard from some of my colleagues that the 

North Carolina experience has been kind of a fizzle. Would you address that? 

Mr. CALHOUN. Two things. One, in terms of the impact on credit 

availability, there have been references to there was a slight—it 

72

was a range of 3 to 4 percent reduction in lending compared to 

similar States after the enactment of the North Carolina law. 

I think it is careful that you drill down in those numbers because 

when you break it out into purchase loans versus refinancing, you 

actually found an increase in purchase loans, and the reduction 

was all in the refinancing. And again, that is not a reduction in the 

amount of credit outstanding. It is a slight slowdown in the flipping 

of these loans, which are typically refinanced— 

The CHAIRMAN. Yes. Let’s address this specifically because I was 

asked this: Are you worried? I was told that this would mean fewer 

loans being made. The answer is, I am not worried. That is why 

we are doing it. If all the loans that were made should have been 

made, we wouldn’t have a problem. Let’s be very clear. The purpose 

of this is to keep some loans from being made that should not have 

been made in the first place. 

And to the extent that we saw this in the refinance, and Mr. 

Gruenberg, in particular, I know said, and Mr. Dugan kind of reinforced this, that many of these—a great majority of these loans 

that went bad were refinancing. Yes, some of these people 

shouldn’t have refinanced. And the bill says that people should not 

be induced to refinance if they are going to receive no tangible benefit from it. 

So to the extent that there was a reduction in refinancing, that 

is probably a good thing and probably an intended, not an unintended, consequence if what were prevented were refinancings that 

benefitted only the financing people. 

Mr. CALHOUN. I think one of the key things is the bill has now 

been revisited about 3 times, and every time the amendments and 

the strengthening of the bill has been done with broad industry 

support, including that of, you know, several of the major banks in 

this country. And that applies as well to the changes that were 

done— 

The CHAIRMAN. All right. I appreciate it. Let me ask all of you 

because many of you are involved, in some cases directly, Mr. Taylor, and in others as advocacy groups, with—this is a bill that is 

going to help going forward. We have people who are now trapped 

in these foreclosure situations. 

One argument is that by cracking down some on credit and putting in higher standards, we are going to make it harder for people 

to refinance their way out of trouble. Would you address the extent 

to which that accusation is valid, that this bill could hurt people’s 

ability to refinance their way out of trouble? Mr. Taylor, let’s start 

with you. 

Mr. TAYLOR. So in other words, do nothing to the people who got 

injured by the system because they got loans that put them under 

water. And therefore, do nothing because they are going to be further hurt by the system. 

I have never heard such ludicrousness in my life. I mean, unless 

we—first off, this bill is going to prevent the kinds of activity that 

put those 2 million families in jeopardy. It is not going to do anything to help them get out of jeopardy. It is not—yes. 

The CHAIRMAN. Let me ask specifically: Does anything in this bill 

prevent a refinancing for someone who ought to be able to get acVerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00078 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE
73

cess to refinancing if that would help them get out from under 

something? 

Mr. TAYLOR. No. 

The CHAIRMAN. Mr. Calhoun? 

Mr. CALHOUN. If I can respond specifically, the crisis in today’s 

credit market is—the point that has been made, is due to the absence of standards. If you want to increase liquidity, a pre-condition is you have to put standards in place that will assure the market that these are reasonable loans that will be repaid. 

Second, it is just a matter of—if you are in a hole, the first thing 

to do is stop digging. And refinancing borrowers who are in trouble 

now into a loan with high fees, prepayment penalties, and steering 

just makes it less possible for them to have any chance of saving 

their homes. 

The CHAIRMAN. Finally, Mr. Bryant? 

Mr. BRYANT. Mr. Chairman, just the opposite is true. First of all, 

it is not 2 million mortgages on the bubble; it is 4 million because 

there is another reset coming after this. This is—just the opposite 

is true. First of all, people are already having a problem refinancing their loans. So it is not like there is a boondoggle of refinancing going on right now. 

Number two, this bill will actually create an environment where 

refinancings can get done because the market does not respond 

well to a pack of clarity. Right now, there is a cloud in the market. 

No one is lending anything. There is a crisis in confidence. Everything is locked up. By introducing this bill to the marketplace, you 

create a floor for which people would know how to operate and 

know what is appropriate. 

The CHAIRMAN. Thank you, Mr. Bryant. I just have one final 

comment. But I appreciate that point because I think what we are 

trying to do here is market-enhancing. To the extent that you provide good standards and people can have more confidence, I think 

it works better. 

Let me just address a comment to Ms. Bowdler and Mr. Shelton. 

One of the things that we are aware of, and Mr. Green mentioned 

this, one of the factors here that should not be neglected is that the 

data that we have gotten from the Home Mortgage Disclosure Act, 

thanks to my former colleague Joe Kennedy, who worked very hard 

sitting here and helped get that through—thanks to that, we now 

know that the chances of your being put into a subprime loan, everything else being equal, are greater if you are African American 

or Latino, a condition that this country should not tolerate. And 

that has exacerbated this. 

And so we have this legislation. As we go forward, we are going 

to try to work together on subprime, but also on fair housing and 

to deal with the regulators because it is a problem and it is compounded by the element of discrimination. 

So I do want to make clear we are very well aware of that. The 

latest data was discouraging. In the City of Boston, the data 

showed that middle income African Americans were more likely to 

be in a subprime mortgage than white people several classes lower 

in the income scale. And we haven’t forgotten that aspect of it. 

Mr. Baker. 

Mr. BAKER. Thank you, Mr. Chairman. 

74

Mr. Shelton, I wanted to ask your view of the performance of 

Fannie and Freddie in their role in the secondary market, Fannie 

Mae and Freddie Mac, and their business function. What is your 

perspective of their role in the market in facilitating homeownership, especially in relation to lower income first-time home buyers? 

Have they been a positive? 

Mr. SHELTON. From my perspective? 

Mr. BAKER. Yes. 

Mr. SHELTON. They have basically been quite positive. The problem has been that they have not been actively engaged in helping 

to make sure that we are protecting consumers along the way. 

They are there, and they are able to provide greater market, greater resources to be able to allow poor and moderate income Americans to be able to live out the American dream by owning their 

own homes. 

If the question is, can they do more, the answer is, very clearly, 

yes, they can and yes, they should. 

Mr. BAKER. My point was or that I was attempting to make was 

that this is a business enterprise that operates for a profit that facilitates homeownership and has a cafeteria style of products that 

they have innovated and offer that enables people who otherwise 

might not qualify for a loan from a portfolio lender, who is going 

to keep that asset in its own bank walls—you are able to sell it off 

to Fannie and Freddie as long as it meets certain criteria that they 

must approve. In fact, they actually have little boxes that they 

send out to the originators, and if you are the guy taking the application, you stick the numbers in and it cranks out a result. 

That process is obviously blind to the nature of the applicant. It 

comes back with statistics on a piece of paper that go in and come 

back. That process, I take it, has worked fairly. Would you agree 

with that? 

Mr. SHELTON. You are saying has it worked fairly well? 

Mr. BAKER. Fairly well? Fairly? Pretty good? 

Mr. SHELTON. It has worked fairly well. We have had meetings 

with Freddie Mac and Fannie Mae to talk about other ways we can 

expand their ability to do a better job of protecting consumers as 

they are going to purchase those mortgages. So if the question is, 

can they do more, the answer is yes. If the question is, are they 

providing a valuable service, the answer is yes. If the question is, 

will this bill help along in that process, the answer is yes there as 

well. 

Mr. BAKER. I didn’t get to that question yet, but I will in a 

minute. I have also had meetings with Fannie and Freddie and discussed ways that they could improve their business, too. 

I would also point out that when you look at the elements that 

Fannie uses to determine if borrower ‘‘X’’ should be entitled to an 

extension of credit, one element of that calculation is the debt-toincome ratio. It is 65 percent. The bill has a 50 percent cap. 

Now, there is no clear definition of what constitutes debt, so that 

is a little bit in the air right now. My point to you—and let me give 

you my little diatribe. No one on this committee I am aware of has 

ever expressed defense of those who abuse their fiduciary duties. 

In fact, we all are joined together to ferret out those who have 

abused their privilege—in my case, I have been sort of suggesting 

75

to Fannie and Freddie a change in their ways—and we will go after 

with vigor those who abuse this responsibility. 

There can be, however, reasonable differences between people as 

to how we should accomplish this reform. I merely point out the 

DTI issue as one of several steps. The consequence of this, although some will argue to the contrary, I do not believe can be argued. 

If your debt-to-income ratio is going to be capped or else you are 

outside safe harbor, consequently secondary market interests are 

going to be concerned about acquisition, and under the Fannie 

black box method you would qualify at 61 percent, there will be 

people who will be prohibited from entering into a homeownership 

opportunity that would otherwise be found to be an appropriate 

contractual obligation that might lead that family to live in that 

home for many years to come. 

I just don’t understand why we can’t discuss the regulatory environment with an eye toward market operation and toward consumer protection. The two are not mutually exclusive. Is it your 

view that every originator of mortgages has violated their responsibilities to borrowers? Is it most? Is it some? Is it a small percentage? In my view, it is a small percentage, and we ought to go get 

them, and I will hold hands with anybody to go do it. 

But we cannot ignore the consequence of policy which will ultimately restrict the flow of credit to people who otherwise would 

qualify, given the role of Fannie and Freddie in the marketplace. 

Do you agree with what I have just said? 

Mr. SHELTON. Some of it. Let me just say that first, the idea here 

is to make sure that those who are able to take out loans for mortgages can sustain those loans, that they very well will not end up 

losing their homes, their life savings, and their futures in many 

cases. 

Very clearly, under today’s circumstances, we are very clear that 

the standards are not clearly in place. We are seeing now millions 

of Americans actually jeopardizing the very American dream that 

we all work so hard here in Washington to be able to secure. 

Mr. BAKER. Well, let me point out that the investor market is 

also tied in parallel with that— 

Mr. SHELTON. I understand there is legislation— 

Mr. BAKER. If I may, sir, I will tell you that the investor end of 

the world is also tied because they are losing zillions. Every time 

homes go into foreclosure, it is not the way to make money. And 

nobody is interested in seeing failure. And so I suggest to you we 

are seeing this similarly. 

Mr. SHELTON. Well, we are seeing this similarly. Perhaps the response in how we move from where we are now to a better situation for those who are about to lose their homes, and as we prepare 

for those who would like to be able to enter the market to experience the American dream by being able to own their own homes, 

is what this discussion is really all about to a great extent. 

This legislation that we are talking about is legislation that we 

very strongly believe will move us a long way in helping to achieve 

that process of making sure we can protect Americans from these 

unscrupulous predatory lenders. 

Mr. BAKER. So my time is—you have expired my time. 

76

Mr. SHELTON. Sorry about that. 

Mr. BAKER. But let me wrap up. So you don’t find limiting the 

current Fannie/Freddie practices in their screening requirements 

and making them ratchet back ill-advised in consequence of this reform effort? 

Mr. SHELTON. Freddie Mac and Fannie Mae have a major role 

to play in this process. I am not as secure in the terminology you 

utilize as being consistent with our vision and our view of these 

problems. But we would be delighted to sit down and talk to you 

about it. 

The CHAIRMAN. And if the gentleman would allow me briefly, it 

is refreshing to have him come to the defense of Fannie and 

Freddie’s practices in this— 

Mr. SHELTON. We are all plowing new ground. 

The CHAIRMAN. And fertilizing it. 

[Laughter] 

The CHAIRMAN. The gentlewoman from California. 

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

Mr. Calhoun, you have been here before, and this committee and 

the Congress of the United States have benefitted from the work 

that you have done. You have been one of the leaders in dealing 

with predatory lending. And I want you to help me to understand 

the yield/spread premiums a bit better. 

As you know, this bill would ban the yield/suspend premiums. 

And I want to know whether or not some of our financial institutions and banks have encouraged loan origination from nonprofits 

and other groups who are benefitting also from the yield/spread 

premiums. Do you know how it all works? 

Mr. CALHOUN. Well, the yield/spread premiums, I think, in the 

provision here is one of the most important because I think the approach of this bill that is really critical is not that it just prohibits 

the end results that we don’t like, such as steering, but it addresses the market incentives that have produced those bad results. And 

the yield/spread premium has been at the core of that, along with 

prepayment penalties on subprime loans. 

I think you heard support from even many of the regulators here 

because lenders are in a position where they can’t correct that 

problem. If they adopt a policy—for example, Option One, one of 

the largest subprime lenders, previously had a policy of not paying 

yield/spread premiums. It even had on their Web site a disclosure 

to borrowers saying, don’t get a loan with a yield/spread premium. 

It creates a conflict of interest. 

They found that the brokers simply boycotted them and took the 

loans to other lenders that did pay yield/spread premium. And the 

result was not that borrowers were protected; Option One was 

forced to reverse its policy and start paying the yield/spread premiums like everyone else. 

So that provision is one of the— 

Ms. WATERS. Aside from brokers, who else was benefitting from 

the yield/spread premiums? Did nonprofits—were they able to 

originate loans and take advantage of earning money that way? 

Mr. CALHOUN. That has generally not been a widespread problem 

in the market that we have seen, and we work with a large number of other nonprofits. 

77

Ms. WATERS. The financial institutions that benefitted from having the brokers and others who were out originating loans, were 

these some of the ones that were getting credit for—getting CRA 

credit? 

Mr. CALHOUN. There has been a problem that CRA credit and 

GSE, Fannie and Freddie, affordable housing credit has in the past 

at times been given for loans that were not constructive, that were 

predatory. And Freddie earlier this year, after we met with them, 

agreed to change practices to that, and Fannie has now changed it 

because OFHEO closed an area there. And so we applaud that 

move. 

One thing that was raised earlier is we need to make sure that 

CRA credit and Fannie and Freddie affordable housing goals are 

used as one of the tools for rescue loans. And for those loans to get 

borrowers out of these exploding 2/28s, those should be given the 

highest credit to both the financial institutions who need CRA credit and also to Fannie and Freddie. 

Ms. WATERS. Thank you. Mr. Taylor, you are from California, 

and we have a big problem. 

Mr. TAYLOR. I am not from California. 

Ms. WATERS. You are not from California? 

Mr. TAYLOR. No. 

Ms. WATERS. Oh, I thought you were. 

Mr. TAYLOR. I get around a lot, but— 

Ms. WATERS. Okay. Let me ask you, because you have been on 

the Hill working on the issue of trying to expand opportunities for 

low- and moderate-income housing for a long time, what would you 

do to strengthen this bill? This seems like a pretty strong bill, a 

pretty good bill. What else would you do? 

Mr. TAYLOR. Well, I think that one of the most important things 

is how to deal with the securitizes because we all know that the 

pipeline that was built from Wall Street that essentially opened up 

the spigot for this kind of predatory capital and predatory loans, 

if there isn’t accountability on that end, I think, you know, we are 

simply not going to deal with one of the major sources of the problem. 

And so having accountability on that end, and having consumers 

have the right to be able to pursue remedies that really discourage 

this kind of activity. What we don’t want to occur is the remedies 

end up being almost like a cost of doing business. 

Now, I am not suggesting that the language can’t be strengthened or we can’t do some things that change things in this bill. But 

I am fearful that the way it is currently written, it is very difficult 

for people to hold people accountable, and it is very—on the broker 

end of things, being fined three times your broker’s fee, you know, 

if you are only caught occasionally and you are willing to pay that 

fee, it may be just a cost of doing business. 

On the securitizer’s side, if you are really insulated because you 

get to sort of determine if you have done due diligence, and you 

have this fairly simple—what we think is a simple process to sort 

of certify that you are in compliance, we don’t think that you are 

going to have the impact on that body that you need to have because they are critical, critical player in this whole process. 

Ms. WATERS. Thank you. 

78

Mr. TAYLOR. I don’t know if one of my colleagues want to add to 

that answer. 

Mr. WATT. [presiding] The gentlelady’s time has expired. I now 

recognize the ranking member of the full committee for 5 minutes. 

Mr. BACHUS. I appreciate that, Congressman Watt. 

Mike Calhoun, I am going to ask you this question. Okay? You 

know the Paulson & Company, the hedge fund, the $20 billion 

hedge fund? 

Mr. CALHOUN. Yes. 

Mr. BACHUS. You are familiar with them? 

Mr. CALHOUN. Yes. 

Mr. BACHUS. You know what their investment strategy is? 

Mr. CALHOUN. We asked earlier, did anyone see this crisis coming. They were one of the people who did, and they purchased stock 

options that were based on their projection that the subprime market would perform poorly. 

Mr. BACHUS. Yes. You know, they profit from the carnage in the 

mortgage—you know, the meltdown in our mortgage market. I 

mean, you are aware of that. Right? 

Mr. CALHOUN. The money that they made came from investors 

who took the opposite side of that projection and who were investing thinking that the subprime market would go up. So it was a 

transfer from some stock speculators who were betting the market 

would go up to those who were betting it would go down. Yes. 

Mr. BACHUS. And yes, I mean, they have said—and people have 

characterized that. I know the American banker, that they were 

basically betting against the American homeowner, and that the 

more people that lose their homes, the more profit they make. I 

mean, absolute—the more foreclosures, the better off they are. I 

mean, that is true, isn’t it? 

Mr. CALHOUN. The more that subprime lenders’ stocks go down, 

that is what they have bet on and that is what determines their 

profitability. 

Mr. BACHUS. But there is a correlation between the number of 

foreclosures and— 

Mr. CALHOUN. Certainly. 

Mr. BACHUS. You know, knowing that, and it was all in the papers that they gave you all, what, a $15 million donation? 

Mr. CALHOUN. Yes. 

Mr. BACHUS. How do they—how does that square up? I mean, I 

am trying to visualize in my mind. You know, they profit from the 

foreclosures and the carnage in the mortgage market. And as 

things get worse, their profit goes up. But then they turn around 

and then give $15 million to CRL. Is that like their conscience is 

bothering them? What is that all about? How do they see you all 

as an advantage to them? 

Mr. CALHOUN. Well, from our perspective, the $15 million is provided for foreclosure relief, to provide attorneys—most of this 

money will be granted by CRL to legal aid attorneys and other attorneys who represent borrowers who are facing foreclosure. 

Mr. BACHUS. Yes. 

Mr. CALHOUN. And there is—and I think this is an important 

point in the larger context of the bill— 

79

Mr. BACHUS. Yes. Let me say this. I am not—you know, you take 

their money and you do something which is constructive, and you 

help people in foreclosure. I am not criticizing you. You know, I am 

not criticizing what you do. I am not criticizing your mission of protecting homeowners, trying to help them in a foreclosure situation. 

I am not questioning your motives or your mission. 

I am just sort of saying—I mean, these guys are driven by the 

bottom line. I mean, they are hard-nosed businessmen. You know, 

been talking about hedge funds and all, and here is a hedge fund 

that kind of bet against—I mean, profits from the misery in the 

American housing market right now. 

And I just—I am trying to figure out, did they tell you why they 

were giving you all the donation? I mean, did they say that they 

are profiting from this so they want to give the money back, or 

what? 

Mr. CALHOUN. I think they recognized that a lot of families are 

losing their home, and wanted to make some effort to do something 

about it. And I think the message in the larger context here is, as 

we talk about the risk of litigation, is we have had a lot of bad 

lending going on and market crashing. 

There has not been a wave of litigation. In fact, it has actually 

been the opposite. There has been a dearth of lawyers to represent 

borrowers who are facing foreclosure even when they had very illegal loans. And that is our concern, that this bill—if you put it in 

the context of the bill that is before the committee and your bill 

today, too—is we fear that you go too far in insulating the secondary market. We believe it needs to be preserved. It is absolutely 

critical and has to be preserved. 

But if you totally insulate it, you make it even harder than it is 

today for borrowers to get relief, even in foreclosure. 

Mr. BACHUS. Okay. I guess all of a sudden I am realizing what—

so the increased litigation against these subprime companies or, 

you know, mortgage companies obviously takes money off their bottom—you know, their balance sheets and their bottom line. And I 

guess it helps drive that stock down, which Paulson & Company 

would profit from. 

Mr. CALHOUN. In most cases now, the loan is owned and the 

credit risk has been passed on to the secondary market. 

Mr. BACHUS. When the secondary market melts down, do they 

profit financially? I guess they would, wouldn’t they? 

Mr. CALHOUN. It depends. Typically, the subprime lender is insulated at that point. 

Mr. BACHUS. All right. Thank you. 

Mr. WATT. The gentleman’s time is expired. I will now recognize 

myself for 5 minutes. Before Mr. Baker walks out, I will say something nice about him. 

Mr. BAKER. I am not going anywhere. 

Mr. WATT. That will make him sit down. The one thing I have 

found about Mr. Baker is when he says something, I don’t always 

agree with it, but it does cause me to look at provisions much, 

much more carefully than I otherwise might. And his questions 

about the debt/equity ratio is one that, before he left, wanted to 

make further inquiry. 

80

In the bill, there is this final product. It is on page 58 of the bill. 

It says, ‘‘A creditor may not extend credit to a consumer under a 

high cost mortgage unless a reasonable creditor would believe at 

the time the loan is closed that the consumer or consumers will be 

able to make the scheduled payments associated with the loan.’’ 

That is the general statement. And then it creates a presumption 

of ability to pay if the debt-to-equity ratio is 50 percent or less. 

Now, if you read that the way it is written, the presumption is 

independent of the general rule. But as a practical matter, I guess 

the question I am raising and the question that Mr. Baker is raising is: Will the 50 percent debt-to-equity ratio become the standard 

as opposed to just creating a presumption? And therefore, if somebody is creditworthy even though they have a debt-to-equity ratio 

higher than 50 percent, will that make it impossible for them to 

get a loan? 

And so I would just invite you all at some point to look more 

closely—I don’t expect you to do it on the fly today—at whether it 

might be more advantageous, as Mr. Baker—I think his suggestion— 

Mr. BAKER. Would the gentleman yield? 

Mr. WATT. —to end the discussion at the end of line 12, where 

we state the general rule and don’t put the presumption in there. 

I am happy to yield to the gentleman. I didn’t want to dwell on 

this, but— 

Mr. BAKER. No, no. I appreciate the gentleman’s courtesy, and I 

will be very brief. First, I want to acknowledge the chairman’s 

mark does allow regulators to go beyond the 50 percent limitation 

that is the presumptive statement of the gentleman. 

But secondly, there— 

Mr. WATT. But if it is a counterproductive—if the market is going 

to read that as if anything that is not fitting in that presumption 

is therefore unallowed— 

Mr. BAKER. I think the gentleman’s perspective is correct. It will 

create—if you are worried about reputational risk as a mortgage 

originator as the securitizer, you are going to look at the statute 

as evidence of what constitutes expected practice, and you will 

have to explain yourself. 

And one other little quick point and I will quit. The DTI ratio 

is not only a problem for low-income borrowers, who generally may 

have a higher debt load; it is also a significant problem in high cost 

mortgage areas like New York, where you typically have someone 

who has much more than 50 percent of income in mortgage payment. And then finally, the debt itself is not defined. 

Mr. WATT. I understood that when you made your original point. 

We don’t want to unintentionally create a consequence that we are 

not looking for. So I would just ask you all to look at that time a 

little bit more aggressively. I will look at it more aggressively also, 

and ask the staff to look at it. 

The other question that was raised in both Mr. Calhoun and Ms. 

Bowdler’s testimony was this question of enforcement. And I have 

been trying to glean my way through this because what you all 

seemed to be saying was that somehow, the anti-steering provision 

would have a lower level of enforcement than other Truth in Lending enforcement provisions. 

81

I don’t see that. It may be true; I am not suggesting that it is 

not true. But if I trace—the anti-steering provision becomes a part 

of the Truth in Lending Act. Then we say on page 19 that there 

is enforcement of the Truth in Lending Act. And then we go back 

at some point and make it clear—I may have lost my place where 

we do that, but at some point we make it clear that nothing anywhere in the bill reduces the rights that people have under the 

Truth in Lending Act. 

So maybe I am missing something here. And if you can enlighten 

me now, do so. If you can’t do it right now, I would invite you to 

do it as we move forward in this process. 

Mr. CALHOUN. In two respects, the liability for steering is greatly 

restricted. First of all, on page 20, line 4, there is a cap for violations of Title 1 of 3 times the originator’s fee. And this was addressed, I believe, in other testimony, to any of the violations of 

Title 1. And that is where the steering prohibition appears. 

And so that would be a cap which typically would be far below 

the typical Truth in Lending damages. And if you have, for example—you know, it has been talked about if there was a loan with 

a broker fee of $2,000 or $3,000, 3 times that would be the maximum cap even though the steering violation could have caused 

much larger actual damages. 

Equally important, there is no secondary market liability for violations of Title 1, which would include the steering violation. So 

you would have no action against the secondary market if you have 

been steered to a more expensive loan. 

Mr. WATT. I like sitting in the chair because the lights don’t 

work to cut me off. But I am going to presume, as we do in that 

section that we were talking about on page 58, I am going to create 

a presumption that my time has expired. And therefore— 

The CHAIRMAN. You managed to fake out the clock when you 

yielded to Mr. Baker, and they thought that you had given up your 

time. So that worked very well. 

Mr. WATT. My time is expired, and I recognize Mr. McHenry for 

5 minutes. 

Mr. MCHENRY. I thank my colleague for yielding. 

Mr. Calhoun, I wanted to follow up on the ranking member’s 

questions. Paulson & Company is a hedge fund that is betting on 

the mortgage crisis getting worse. Correct? 

Mr. CALHOUN. They are betting on subprime loan company 

stocks declining. 

Mr. MCHENRY. As you said, the more subprime company stock 

goes down, the better they do, and apparently the better CRL does 

because you got a $15 million contribution from them. 

My question to you is this. There is also the Brad Miller bankruptcy bill. Reading from Business Week, you have been invited—

the Center for Responsible Lending has been invited by Secretary 

Paulson to get in and advocate for this bankruptcy bill, which 

many regard as having the effect of chilling the marketplace even 

more and harming subprime company stocks and the mortgage 

market. Is that correct? Have you joined the coalition? 

Mr. CALHOUN. We have not made a decision whether to join the 

coalition. We were one of the—we have advocated for bankruptcy 

reform narrowly targeted to this crisis for a long time. 

82

Mr. MCHENRY. All right. Well, it seems—it is apparent that your 

funders are also interested in you helping propagate a crisis so 

they can profit. 

Let me talk about the North Carolina law because a lot has been 

made of this North Carolina law, and I know you have touted it 

significantly. A number of different studies have come out, and I 

know you have seen some of them. But I also know that CRL is 

in the mortgage lending business. From your disclosure with the 

NCUA, you had a 191 percent jump in delinquent mortgages between 2004 and 2005. 

Is this predatory lending? 

Mr. CALHOUN. Our mortgages are fixed rate mortgages, typically 

within 100 to 150 basis points of prime loans. We make them in 

connection with major bank partners, including most of the top 10 

banks in the country. 

Mr. MCHENRY. So you had a 191 percent increase in 12 month 

and over delinquent payments. How do you explain this? I mean, 

apparently you have issues in the mortgage marketplace as well. 

Mr. CALHOUN. We have enjoyed a foreclosure and loss rate in the 

low single digits. An experience that we have and other mortgage 

lenders have in the subprime market is that these loans do have 

greater delinquency. Overall— 

Mr. MCHENRY. So you had a 191 percent jump, and that is acceptable? 

Mr. CALHOUN. Provided—we monitor our loans very closely—provided that those loans cure and catch up. And that has been our 

experience when— 

Mr. MCHENRY. And you have had significant write-downs as 

well. In 2006, you had a 163 percent jump in chargeoffs and a 220 

percent increase compared to 2005. That is significant. 

Mr. CALHOUN. The percentage increases are, but our chargeoffs 

are still far, far below industry standard. 

Mr. MCHENRY. Well, I will accept that. That is fine. But let’s talk 

about the overall issue in North Carolina— 

Mr. TAYLOR. Can I ask— 

Mr. MCHENRY. —because the North Carolina law—I can get to 

you. I only have 5 minutes, sir. But there is a decline, an 11.4 percent decline, in subprime refinancing in North Carolina after the 

North Carolina law went into effect, compared to a 4 percent increase in other States. 

As I see it, as I see it, we have an issue right now of people who 

are trying to refinance out of these high rate loans, high cost loans. 

If we put in place the North Carolina law at the national level, 

which is part of the legislation we are discussing today, that will 

further constrict people’s ability to get another loan and refinance. 

If you look at the North Carolina experience, it is an 11.4 drop 

while at the same time other States experience a 4 percent rise. It 

seems to me that what you are advocating is exactly what the folks 

from Paulson & Company in the hedge funds want, which is to further spread the pain of these losses in the mortgage market and 

make it more difficult for people to get lending to get out of the 

troubles they are in. 

What do you say to that? 

83

Mr. CALHOUN. North Carolina, like other States, saw an explosive boom in subprime lending, including refinancing, since the 

North Carolina law has been in effect. 

Mr. MCHENRY. That is not true. 

Mr. CALHOUN. Our lending—refinancing— 

Mr. MCHENRY. What are your facts? What is your proof on that? 

Mr. CALHOUN. I will be happy to submit to you from industry 

sources the exact volumes— 

Mr. MCHENRY. Because I have three different studies here. 

Mr. CALHOUN. It quadrupled our subprime lending— 

Mr. MCHENRY. Burnett, Finkel, and Kaul in 2004 confirmed this 

notion, finding a 16 percent decline in origination by subprime 

lenders in North Carolina. That is a significant difference. 

Mr. CALHOUN. Subprime lenders or subprime loans? 

Mr. MCHENRY. Subprime lending. 

Mr. TAYLOR. There was one study— 

Mr. MCHENRY. And I am speaking to Mr. Calhoun, sir. 

Mr. CALHOUN. I don’t know which one you are quoting from 

there, that showed— 

Mr. MCHENRY. Burnett, Finkel, and Kaul. 

Mr. CALHOUN. —that showed a reduction between the time the 

act was enacted but before it went into effect. But subprime lending, and the Commissioner of Banks has been here and testified 

several times to this in North Carolina, has grown explosively, 

which is a good thing and which we encourage. We are subprime 

lenders and view that as an important ladder to the middle class. 

Mr. MCHENRY. But just for note— 

Mr. CALHOUN. But it has been a trap door with the abusive loans 

that we have had. 

Mr. MCHENRY. But just for note, there is a—the growth rate in 

subprime lending in North Carolina is 20 percent less than the national growth rate. So it has been further restricted. 

My concern here is that we don’t hurt the very people that all 

of you espouse to help and we all seek to help, those that are in 

very difficult financial situations. And I believe if we put in a government mandate of what mortgages are allowed and not allowed, 

and specify key loan terms that the market can only accept or reject, that we are going to hurt the very people we are seeking to 

help to get out of this mortgage challenge that we are facing. 

So with that, I would be happy to yield back my time. 

The CHAIRMAN. The gentleman from Missouri. 

Mr. CLEAVER. Mr. Chairman, in the interests of time and, since 

I agree with and in most cases identify myself with the comments 

of the panelists, I would forgo any questions. I appreciate the statements from our panelists and I would hold my comments to the 

next panel. Thank you. 

The CHAIRMAN. I thank the gentleman. Mr. Taylor, do you wish 

to respond? 

Mr. TAYLOR. I am very upset about this last line of questioning. 

Because I didn’t realize this was a hearing on CRL which, coincidentally, does primarily lending to low-income people, which might 

have something to do with why they have high delinquencies. And 

it is delinquencies, it is not defaults. 

84

I mean, their record of serving underserved people is impeccable 

and second to none. And the inference, which I see as just bullying, 

that because you receive a contribution to do something good—I 

mean, all of you up there get contributions from many of the people 

that we are talking about. I find it deplorable that you would attack the integrity of that organization. 

Mr. MCHENRY. If I may respond, Mr. Chairman? 

The CHAIRMAN. Let him finish and then, it is not your time, but 

the gentleman’s time, but if he finishes, I will call on you. 

Mr. TAYLOR. I just think that it is unfair to look at a source of 

income. I think you need to look at what their contribution has 

done, what they have been trying to do. And clearly, for many 

years, they have done loans to people who are underserved. They 

have been a leader in fighting to try to assist the people that you 

say we are all trying to help, and that is underserved people. None 

of us are trying to constrict the market. The only thing we are trying to constrict is bad loans that get people into trouble. 

And I just find your line of comment offensive. And I don’t mean 

any disrespect for that. I am just sitting here offended on behalf 

of CRL because I don’t think it is fair. 

Mr. BACHUS. Mr. Chairman? 

The CHAIRMAN. Yes, the gentleman from Alabama. 

Mr. BACHUS. If I may respond, I would like both—since we have 

gone extra time, I would like—are you talking about the gentleman 

from North Carolina? Are you talking about both of us? 

Mr. TAYLOR. I wasn’t referring to you, Mr. Bachus. That particularly was bothering me. 

Mr. BACHUS. And let me just say this, because I thought you— 

The CHAIRMAN. I was going to recognize the gentleman from 

North Carolina. If the gentleman from Alabama wants me to recognize— 

Mr. TAYLOR. I thought you said—your comments were not designed— 

Mr. WATT. Mr. Chairman, point of order? 

The CHAIRMAN. Yes. 

Mr. WATT. I am just wondering, it seems to me we are wondering, Mr. McHenry has had his say, Mr. Taylor has had his say. 

This is not about CRL; this is about the bill. And I would— 

The CHAIRMAN. I appreciate it. I will give Mr. McHenry a brief 

time to respond. He did have his time and Mr. Cleaver’s time. But 

I will recognize Mr. McHenry. 

Mr. MCHENRY. I appreciate it, Mr. Chairman. And I want you to 

know very sincerely, Mr. Taylor, I know you wanted to answer 

some of my questions. But my questioning—I am from North Carolina. I served in the legislature. I have a large awareness of CRL. 

I know that their studies are vastly different, in many cases, 

from the rest of the industry and the rest of the marketplace. I am 

not questioning Mr. Calhoun’s integrity, never did I do that. I am 

offended that you would say that. 

But let me finish by saying this. I think all of you are respectable 

human beings for coming forward and sitting before this committee 

and taking tough questions. This is a real issue for America. I am 

very concerned about it and all my colleagues are. It is out of genVerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00090 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE
85

uine concern that we want to make sure we do this correctly and 

that we don’t hurt the marketplace. 

The CHAIRMAN. Mr. Cleaver, did you— 

Mr. CLEAVER. I just wanted to say, I will never pass again. 

[Laughter] 

The CHAIRMAN. No good deed goes unpunished, Pastor. You 

should have known that. 

Next, the gentlewoman from Florida. 

Ms. BROWN-WAITE. Thank you. And I apologize for not being 

here this morning. I am the ranking member on Veterans Oversight and that is why— 

The CHAIRMAN. I would say to the gentlewoman, and I would say 

this in general, as chairman, I have come to the view that no member need apologize to me for not being here. Sometimes, I wish 

some members would apologize for being here. 

[Laughter] 

The CHAIRMAN. But I never object when members are not here. 

Ms. BROWN-WAITE. Thank you, Mr. Chairman, for being so understanding. I hope I am not one of those members you would rather not have here. 

When I have spoken to constituents who have contacted me 

about problems that they have incurred about having a subprime 

mortgage, it was a combination of issues that they faced. They 

didn’t realize or they realized it and just the combination of events 

became overwhelming. But when you buy a piece of property, that 

that property gets reassessed at the sale price, the higher price. 

I happen to be from Florida where homeowners insurance is 

overwhelming. And now to add insult to injury, we also are redoing 

the flood maps so people who, when they bought the home weren’t 

in a flood area, they now have to buy flood insurance. So it is not 

just the subprime issue that is causing so many foreclosures. 

I would like to have anyone on the panel comment about that. 

It certainly is a part of the equation, but I don’t think that it necessarily is the whole equation. And I know that insurance rates in 

North Carolina, for example, have gone up. Anywhere along the 

coast they have gone up. And last time I checked, most places reassess the value of a property at or shortly after the property is sold. 

So are we looking at the whole shebang here or are we just saying 

it is the subprime that has caused the foreclosure? 

And any one of you on the panel who would care to answer. 

Ms. BOWDLER. Sure. Can you hear me? I will go ahead and jump 

in and start but my colleagues, please feel free to jump in. 

I think the point you raise is a really excellent one in that so 

much of the dialogue about this bill and about the problems in the 

market have been very global. You know, what is going to go on 

with Wall Street, what are the investors going to do? But really, 

there is also a very transactional nature to this business and I 

think actually it was Mr. Barrett who said it in his opening statement, relationships are important. 

And so what we have seen is those folks on the ground who are 

doing the appraisals and the mortgage brokers who are actually arranging the transactions, they carry a lot of weight. Families trust 

them the same way they trust their doctor or lawyer. So certainly, 

it is NCLR’s position that unaffordable loans, which have really 

86

festered in the subprime market to a large extent are really at the 

core of the predatory lending problem that we have. But the additional problems that you are describing really go to ability to repay 

and whether or not that originator that was sitting across from 

that family took into account the actual taxes and insurance that 

that borrower was going to have to repay, and did they account for 

things like in Florida where situations may change? 

And certainly we believe that they have a responsibility to do 

that. They are an advisor to the borrower. 

Ms. BROWN-WAITE. Well, at closing, there have to be certain 

forms that are filled out, the RESPA form if it went through a real 

estate agent, etc., so that that information is out there, and they 

have to do it to the best of their knowledge. 

Now, rates in Florida, assessment rates, are determined in late 

September for the taxing year. And you can only guess what a 

county commission is going to do, because sometimes it really is a 

guessing game. But they are required to give that information. 

Is it that people get so caught up in the oh, good, I finally can 

buy a home, that this euphoria takes over and the day of reckoning 

is kind of put off in the back here? Regardless of whether it is a 

subprime or not. Which I have a follow-up question. I don’t know 

how much more time I have. 

But what basis would a lender actually have for determining 

which loan is best for a consumer? 

Mr. BRYANT. Before your follow-up question, the issue there is financial literacy. I mean, the same issue—my dad is a brilliant guy, 

a great businessman. But he didn’t understand money. And so if 

you don’t know better, you can’t do better. 

If you are signing documents that you don’t understand, if you 

are asking what the payment is versus what the interest rate is—

and this is not a poor people issue; 80 percent of Americans, according to the Federal Reserve, are living from paycheck to paycheck. 

Financial illiteracy is a universal issue and that has to be addressed. Otherwise, you are just rearranging the deck chairs on the 

Titanic. So that is number one. 

Living by the coast— 

Ms. BROWN-WAITE. But, sir, those figures are in front of you at 

a closing. Those figures are in front of you at a closing to the best 

of the person’s— 

Mr. BRYANT. But if you don’t understand money, if you don’t—

it is what you don’t know that you don’t know that is killing you. 

If you are financially literate, it is hard to understand somebody 

who is financially illiterate. But the issue is here that if you do a 

survey of your staff, you will find that they are living from paycheck. This crisis— 

Ms. BROWN-WAITE. Did they complain to you? 

Mr. BRYANT. Excuse me? I will check my e-mail. 

Ms. BOWDLER. The fact that the documents and disclosures are 

present at closing is really—is one part of the problem that was 

brought up earlier about the timeliness of the information. By the 

time you sit down at the closing table, your bags are packed, your 

earnest money is in. All of that is going on. Everything you sign 

87

at that point is to protect everybody else; nothing about it is actually to protect the borrower or really to even inform the borrower. 

It is like putting in front of you the manual for how to conduct 

your own surgery and then saying, why didn’t you know how to do 

your surgery? 

Ms. BROWN-WAITE. Ma’am, let me just tell you, I have had Realtor after Realtor tell me about people who go to the closing table 

and they say, whoa, didn’t know my homeowners insurance was 

going to be that much, I didn’t know my payment was going to be 

this much. 

They walk away at the closing table because they are informed 

and they are told how much it is going to be. So I am— 

Mr. TAYLOR. If I could respond to that? 

The CHAIRMAN. Quickly. 

Mr. TAYLOR. We actually deal with a lot of consumers who find 

themselves in these problems. And invariably we hear a very similar story of people going in and thinking that the—whether it is 

the broker or the lender, are really operating in their interests. 

And basically there is a lot of kind of blind faith in the process in 

which they think those people are operating in their interests. And 

a lot of people are kind of talked into, you know, you can do this 

loan, it is not going to be a problem, don’t worry about it, this is 

the way everybody is doing it. And they really believe these folks. 

And in Florida, the other major problem you have is you have 

massive amounts of appraisal fraud and valuations that are very 

inaccurate that I think are compounding, which gets at the first 

part of your question. 

The CHAIRMAN. I think we are going to be dealing with the appraisal issue, in fact, in Mr. Kanjorski’s appraisal and other places. 

The gentlewoman from New York. 

Mrs. MALONEY. Thank you. I would like to ask the panelists, beginning with Mr. Calhoun, to respond to this statement that I hear 

often from industry representatives. And some industry representatives claim that any effort to regulate these mortgage products 

would result in an even greater credit crunch, making it difficult 

for people who should have a home and should be able to afford 

one, that the credit crunch will hurt them. So I would like you to 

respond to that claim, Mr. Calhoun, Ms. Bowdler and just down the 

line, anyone. 

Mr. CALHOUN. First, let me say I agree that we need to be extremely careful not to restrict credit. And the bill does this in one 

fundamental way, in that it allows very high interest rates. You 

can charge interest rates, for example, before you even trigger the 

high-cost loan threshold, you can be charging 13 percent interest 

on a first mortgage loan. 

Now that is why Joe Smith, the commissioner of banks, comes 

in and says there are not many people being denied credit when 

you can charge them 13 percent on a first mortgage loan. But we 

think that is appropriate because the market works well competing 

over interest rates. 

What the bill we think appropriately does is eliminate some of 

the gimmicks, for example, locking borrowers in with prepayment 

penalties so another lender can’t come in and refinance them at a 

much better rate. But we need to be very careful not to restrict 

88

credit, that we allow it but channel it toward the interest rate 

where competition—and again, it has to be competition and self-policing that makes this work. We can’t look over the shoulder on 

three million subprime mortgages a year, much less the 15 million 

total mortgages being originated each year. 

Mrs. MALONEY. Would anyone else like to comment? 

Ms. BOWDLER. We agree. And it is really not about cutting off 

credit to the subprime market because we agree that it is important and I think there is a viable market out there that is demanding to be served. It is about fair and equal access to credit. 

We actually went out and talked to mortgage brokers and interviewed them and we found that they were doing responsible business in this area and they were earning a profit. They were making 

a living. It can be done. You can offer fair and safe products in this 

area and make a living. And it sounds like the Congresswoman 

from Florida had access to those kinds of agents that said to their 

borrowers, this isn’t for you, and that is what you should be doing. 

Mrs. MALONEY. Any other comments? 

Mr. TAYLOR. We have a serious credit constriction now and we 

don’t have this law. We have it because we didn’t have this law. 

We have the problem because there just wasn’t standards and accountability that would allow for clean and fair lending processes. 

So we have it. We have this constriction because we—and, frankly, 

I don’t know who the folks are who are saying we are going to have 

a credit crunch if we have this bill. But we sent a bill in last week 

to the Chairman, both this committee and the Senate Banking 

committee, signed by NCRC and the top 10 banks in the United 

States calling for national anti-predatory lending legislation. So I 

don’t know who those folks are, but my suspicion is those are the 

ones who profit from these kind of predatory kind of loans that 

want to not have the law that prohibits that. But I can tell you, 

the mainstream financial institutions who got out of a lot of this 

business a long time ago, yes, sir. 

Mrs. MALONEY. Thank you. I would like the panelists to comment on some of the statements— 

The CHAIRMAN. You had one other—Mr. Bryant wanted to comment. 

Mrs. MALONEY. Excuse me. 

Mr. BRYANT. Just building on that, with mortgage brokers alone, 

you have the wild, wild west out there right now. There are no 

rules of engagement. This provides rules of engagement. It also 

provides a floor, not a ceiling. It’s very important, and I think it 

will create an environment where more capital gets unleashed because people know the rules of engagement. 

Right now there is a credit crunch, right now. So this will hopefully free it up by providing clarity. 

Mrs. MALONEY. I would like the panelists to comment on really 

the statements by Sheila Bair from the FDIC, which called for having mass negotiations to help people stay in their homes. And the 

fact that we have done so much on this committee to help people 

stay in their homes, yet the percentage of people who are negotiating and taking advantage of these tools is only 1 percent. 

What can we do? Fundamentally, this bill moves forward to prevent it, but what can we do to help these people stay in their 

89

homes? Why is it 1 percent, such a low number, and what about 

her idea of mass negotiations? 

Starting with Mr. Calhoun and down. 

Mr. CALHOUN. Congresswoman, there has been a lot of work including by members of this committee and organizations represented here, to try and untie this Gordian knot of how do we 

make the modifications. And we have knocked down a lot of the obstacles. 

At first, there were the pooling and servicing agreements and 

then tax rules. But there are two huge obstacles that remain and 

are blocking modifications and no one has figured out how to get 

around them. And they are the following. 

First, the effect of a foreclosure on security holders depends not 

only on the amount of the loss but when it happens. And so if a 

foreclosure happens under the typical structure, if it happens in 

the first 3 years, it falls to the lowest tranches to pay it. But if it 

happens after that period, other tranches pay it. 

And so it has been reported in the financial press that this is a 

major obstacle because the holders of the tranches, the securities 

who get the later foreclosure losses are telling the servicers if you 

modify this loan, and not all modifications will be successful, and 

move the foreclosure to my time period, I am going to sue you, because you have increased the risk of my security over the original 

structure. 

The other huge obstacle, structural obstacle, that has and will 

continue to prevent modifications is that data shows that somewhere between 40 and 50 percent of these resetting loans have piggyback second loans. And that makes it extraordinarily difficult to 

modify the first. Because the first lienholder is basically going to 

say, I’m not going to take any reduction in my rights or payments 

until you wipe out the second. The second has no incentive, sometimes it is by another lender, usually is in another security. 

That is what led CRL to conclude that there needs to be some 

limited relief in bankruptcy, to create a standard not to force people into bankruptcy but to create a legal standard of this is what 

modifications can be done and servicers, you won’t get sued if you 

do them. 

The CHAIRMAN. The time has expired. 

The gentleman from Texas. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

I guess following your lead, I will not apologize for having to 

miss a fair portion of the hearing due to other commitments. But 

I did understand, Mr. Taylor, that you lamented my absence and 

thought I had a fundamental misunderstanding of Adam Smith’s 

philosophy, as I alluded to the economist and philosopher in my 

opening statement. 

Although it has been a number of years ago, I have actually 

plowed through The Wealth of Nations in its 18th century English. 

I have a degree in economics, graduated with honors, served on the 

House Budget Committee, and serve on this committee. So, please, 

I want to give you your opportunity to illuminate for me what my 

fundamental misunderstanding of Adam Smith may be. 

Mr. TAYLOR. I think the fundamental misunderstanding is whoever communicated what I said to you. Because actually I was 

90

agreeing with the use of Adam Smith in this conversation. And 

what I went on to say is I went deeper into Adam Smith’s—the 

basis for his defining what makes for a healthy economy and I 

talked about capital accumulation, free trade, the role of government, and the rule of law. 

And the things that I emphasized which you didn’t talk about, 

it is no slight on you, you just weren’t talking about it, but is the 

importance of making sure that the individuals’ rights and properties are protected. And that was the thing. So I mean, you probably do know more about Adam Smith than I do. But from what 

I know, and frankly I am quoting Chairman Greenspan, so— 

Mr. HENSARLING. Always a good one to quote. 

Mr. TAYLOR. Exactly. 

Mr. HENSARLING. Mr. Calhoun, I did miss your testimony although I see a portion of your written testimony. 

On page 10 of your testimony, you say, ‘‘In short, improved disclosures are not likely to help borrowers.’’ Why is it that if a—well, 

let me ask it this way. Is there just something fundamentally 

wrong with consumers? Are they just incapable of understanding financial transactions? Why is it that effective informed disclosure 

seems to be an impossibility in your mind? 

Mr. CALHOUN. First of all, we strongly support improved disclosures. But it is not just our opinion, but the GAO studied the issue 

and concluded that improved disclosures were not likely to significantly reduce predatory lending. And the reason is that the market 

currently rewards unscrupulous practices and in fact penalizes 

lenders who engage in responsible practices. 

Mr. HENSARLING. Well, let me ask you this question if I could. 

It continues to be an ongoing debate in this committee, and I have 

been on this committee for almost 5 years. I haven’t exactly heard 

a consensus on the definition of predatory. But if there is effective 

competition within the marketplace, no barriers to entry, if I as a 

consumer, if I understand the financial transaction that I am undertaking and I am over 18 and I consent to that transaction, how 

is that a predatory loan? 

Mr. CALHOUN. When borrowers are steered to loans at much 

higher interest rates than they qualify for, when borrowers are provided loans and given representations that this loan is appropriate 

for you when in fact they have no possible reasonable ability to 

repay the loan short of winning the lottery, and that is what we 

have seen, not just as the exception but widespread throughout the 

subprime market. 

This is an unprecedented market meltdown in foreclosures. And 

it is not that borrowers suddenly became dumber in the last 5 

years, or that divorce, the economy tanking, or anything else has 

driven it. 

They were marketed very poor products and a lot of people made 

a ton of money doing it. The market said, if you put a borrower 

into a higher interest rate loan, I’ll pay you more. If you tag on a 

big prepayment penalty, I will pay you more. If you make it a nodoc loan, I will pay more. 

The head of one of the subprime lenders said, Wall Street was 

telling me, I will pay you more for no-doc loans. Well, what do you 

think I am going to send to Wall Street? 

91

Mr. HENSARLING. Mr. Calhoun, does your organization believe 

that the individual borrower has any personal responsibility to ensure that he is entering into a financial transaction where he can 

afford to repay? Does your organization admit to the possibility of 

predatory borrowing? 

Mr. CALHOUN. There has been fraud by borrowers in the market. 

Although, again, we believe, and I think the numbers support, that 

that is a small part of the problem. 

We strongly believe that borrowers have responsibility. We enforce our loans, including in foreclosure, where we are unable to 

mitigate the loss or work out a modification. We don’t believe that 

borrowers should be guaranteed the best loan. We don’t believe 

that borrowers should be guaranteed a successful loan. 

What we do believe is that the market should put in protections, 

have protections and fair rules. We have analogized it to this. It 

is the time of the year, if you had a football game and we said we 

are not going to prohibit holding, we are going to tell people maybe 

they shouldn’t hold, but there is going to be no prohibition, no penalty if you hold, I think our football games would look a little different than they do now; everybody would be holding. 

And that is essentially what we have here, a floor of reasonable 

regulation. And that is not an easy balance to strike. And we have 

acknowledged that and I think that is one reason it has taken this 

committee so hard looking for that balance. But a reasonable balance of regulation helps borrowers, lenders and investors. 

Mr. HENSARLING. I see my time is over. 

The CHAIRMAN. The gentleman from California. 

I am going to ask the witnesses to try and be a little more concise. 

Mr. SHERMAN. I thank the chairman for not applying that to the 

members. 

One comment about the gentleman’s comments from Texas. I 

mean, this meltdown did not come about just because we had bad 

loans. We had bad loans 3 years ago. It came about because we no 

longer have a rising market. And a rising market hides all the 

transgressions. 

So you can have lots of bad loans, you have a rising market, 

things look okay. But when the market then levels off, the transgressions are exposed, the transgressions are exposed, the market 

then gets even worse and then you have the downturn. 

The chairman in my last comments educated me about what is 

in the bill. And one thing we are concerned about is that ability 

to pay. Now, ability to pay includes ability to pay the property 

taxes. I hope that we specify in the bill that it is the ability to pay 

the property tax you expect to get after you buy the house, especially in those States like mine where, unless you are a senior citizen, the property is going for sure to be reassessed as soon as you 

buy it. 

And so I hope that we are able to fine tune the language so that 

when we say ability to pay the property taxes, isn’t the low bill, 

which in my State can be very low in the hands of the prior owner, 

but instead is the property taxes this consumer is going to face. 

Now, one thing we have in the bill is a 50 percent debt payments 

to income ratio. That is to say in determining whether somebody 

92

can afford to pay, we say we look at their car payment, we look at 

their student loan payment, we look at all the payments they have 

on non-real estate debt, we add in the cost of property, principal, 

interest, taxes, and insurance for the home they’re buying, and we 

look at that whole piece and we can make sure that it does not exceed 50 percent of their take-home pay. 

Is 50 percent the right number? By a show of hands, how many 

think that in order to keep things affordable your total real estate 

payments plus your other debt payments need to be set at only 40 

percent of your take-home pay? 

The record should show no hands went up. 

How many people think we should set that limit at 60 percent, 

so if somebody wants to commit 60 percent to their real estate payments and their other debt payments, that that is an acceptable, 

reasonable thing for a consumer to do? 

Mr. TAYLOR. It depends on the terms and conditions. And— 

Mr. SHERMAN. I am asking you to help us draft just one section 

of the bill. We got a safe harbor, we require a lot of things to be 

in that safe harbor. One of the things we require is some debt payments to income ratio. So assuming the rest of the bill stays the 

same, we are not going to let you write the whole bill, we are only 

going to let you write one number in the bill and that is that percentage. 

Do you write it at 50, speaking on behalf of your organization? 

Knowing that if we set this number too high, we let people get in 

above their heads. If we set the number too low, we turn away 

from homeownership people who want to own a home. We got the 

number in this bill, say the exact bill just as introduced is going 

to pass. You may or may not like the bill. You only get to write 

one number. You want 50 percent, you want another number? 

I see the witness to your left may have a comment? 

Mr. BRYANT. You know, it is interesting, most of this bill deals 

with a floor, sort of a floor approach. 

Mr. SHERMAN. Right, we don’t want to write the Federal bill. In 

this bill— 

Mr. BRYANT. This is the one aspect that deals with almost a ceiling approach. And the paragraph right above it actually deals with, 

basically says you can only write a mortgage the person can afford 

to pay. That may be a more sophisticated, a more reasonable approach to this. 

I don’t know what the right number is, but here is what I do 

know— 

Mr. SHERMAN. Let me just—I have a limited amount of time. Do 

I have anybody here who has a right number, who believes that 

any particular number should be in the bill? 

Ms. BOWDLER. I can tell you that for the 20,000 families who 

come through our counseling network, most of their affordable 

products that they get connected to, those— 

Mr. SHERMAN. Excuse me. This is just one of my many questions. 

Does somebody have a percentage number other than 50 percent 

that they recommend to the committee. 

Ms. BOWDLER. We are okay with 50 percent. 

93

Mr. CALHOUN. Fifty percent, and I think it is key to remember 

that is 50 percent of their gross income before the taxes are out. 

So you are talking about— 

Mr. SHERMAN. Oh, so you are at 50 percent not of take-home pay, 

but 50 percent of gross pay. 

Mr. CALHOUN. And that is how that, I believe, is intended. And 

so it is a much— 

Mr. SHERMAN. So the way I would—in my world, that is a 60 or 

70 percent number. 

Mr. CALHOUN. Exactly. So we think that is plenty high. 

Mr. SHERMAN. That leaves you with very little take-home pay to 

devote to anything else. So you are for 50 percent if it is 50 percent 

of gross pay. 

Mr. CALHOUN. That is how it is done in the industry. That is our 

understanding of the intent of this bill. 

Mr. SHERMAN. Okay, let us move on to another percentage type 

question. Let us say we have stacks each containing 100 mortgage 

applications. We have a stack here where I could tell you statistically 25 percent are going to default and lose their homes. But 

the other 75 percent are going to be able to make it, going to be 

able to pay the loan. I have a crystal ball, I know what economic 

conditions are going to be; 25 percent default, 75 percent people are 

able to move into a home. 

Should government come in and say, don’t make any of those 

loans? Or should government allow the lender to make all 100 

loans? 

Mr. CALHOUN. We think the approach in this bill is right, is set 

fair standards, don’t guarantee success. People get the opportunity— 

Mr. SHERMAN. Okay. But I mean, we could set the standard differently. What I am trying to get at here is, obviously, if we could 

make 100 loans and only one was going to default, we would say, 

hey, that is great, 99 people became homeowners. There is always 

going to be 1 out of 100 that is a problem. 

At the other extreme, we could say, hey, go make 100 loans. If 

10 people get to stay in their house and 90 percent have to move 

back to an apartment, that is okay. 

Where do you draw the line? What is— 

Mr. TAYLOR. If the 25 percent is defaulting because of loss of job, 

then that is acceptable. If the 25 percent is defaulting because the 

originator put them in a loan they really couldn’t afford in a short 

period of time, it is not acceptable. 

Mr. SHERMAN. Okay. 

Mr. TAYLOR. And that is what this bill addresses, ability to pay, 

duty of care. 

Mr. SHERMAN. Okay, that is a fair answer. Anyone else have an 

answer? I yield back. 

Mr. KANJORSKI. [presiding] Several of the witnesses have expressed support for my legislation, H.R. 3837, which Mr. Frank 

and I have agreed to mark up in the coming weeks. We need to 

fix problems related to escrows, appraisals, and mortgage servicing 

in order to develop a comprehensive solution to the complex problem of abusive and deceptive lending. 

94

To help us establish a better record on the need to enact policy 

reforms in this area, I am hopeful that each of you can answer for 

us how some or all of the following questions are understood or relate to your specialties. 

First, why is there a need for mandatory escrowing of taxes, insurance, and other periodic payments for consumers with high debt 

and bad credit? 

Mr. CALHOUN. It is to set a fair rule for the marketplace to compete with. We hear complaints from this as much from lenders and 

brokers as we do from borrowers. 

Brokers come and tell us that they can’t escrow because if they 

do, they will get undercut by another broker who will come in and 

offer a loan without escrow that looks cheaper. 

I mean, Fannie and Freddie require this for similar loans in the 

prime market. And we really want to commend both you in your 

bill and also the leadership that Mr. Bachus has shown with his 

bill and also some of the other provisions. We wrote a letter supporting those. 

Mr. KANJORSKI. It sort of raises the question of financial literacy 

in a way. Is it so often that these buyers are unsophisticated and 

they do not anticipate the need and the value of escrowing, what 

it means, and anticipate the problem of not escrowing? Because I 

think the statistics show that about 60 percent of the regular 

securitized mortgages are escrowed, whereas only about 25 percent 

of the subprime are. And it sounds incredible, because I would 

think it would be the complete opposite. Here, the people who need 

the support system the most are getting it the least. 

Mr. CALHOUN. Our experience, very quickly, has been that most 

borrowers have assumed that escrow was included, particularly 

when it was included in their previous loan. And if you will, the 

broker has come in and said, I can lower your payment by hundreds of dollars a month without, you know, explaining. And that 

they are doing that in large part by not escrowing for taxes and 

insurance. 

Mr. KANJORSKI. That certainly answers my question. 

Why should we improve disclosures for all borrowers who opt out 

of escrowing? And is it successful? 

I listened again to some of your discussion before, in terms of notice and information at closing. I have to be honest with you guys, 

I probably have closed personally maybe 10 or 15 mortgages in my 

lifetime and hundreds of people that I have represented in business 

transactions. I have yet to read all of those documents. 

As a matter of fact, I doubt whether I would have enough time 

to read all of those documents. I remember one rather sophisticated 

closing that took us 12 hours in Philadelphia and I think it had 

158 documents that had to be executed. Certainly people would 

argue that there was notice, real notice, absolute notice. It is nonsense. It was legal notice. 

We comply with this policy of providing a paper and giving notice, but nobody ever reads it. And to be honest with you, the way 

some of us write those notice documents, even if you did read it, 

it would be highly unlikely that you would understand what you 

were receiving notice on. 

Yes, Mr. Taylor. 

95

Mr. TAYLOR. Yes, Mr. Kanjorski. You are actually getting at 

what I think is one of the core fundamental changes in our financial services system, our mortgage lending system that has occurred. And that is when you went to closing, when the average 

person, not highly educated, blue-collar person went to a closing 15, 

20, 30, 40, or 50 years ago, when they went in, they could rely 

upon the integrity of the system. You know, we just didn’t have 

what we have now. 

This is really lenders gone wild, or brokers gone wild. This is a 

system that really changed under our eyes. It is not the same financial system we used to have. 

What is funny, we have more financial literacy, more disclosure 

than we ever had. That is not really solving—it is important stuff, 

but it is not solving it. It has to be solved by putting the integrity 

back in the system and that is going to take this kind of bill. 

Mr. KANJORSKI. Not unlike other things in our society, perhaps, 

where change has occurred. The reality was, you know, in the past, 

you went to your local bank, you went to your local savings and 

loan, or your local credit union and you did a mortgage operation. 

You knew the people across the table, they were going to be your 

neighbors for life, your friends. And everyone looked out for each 

other. 

The other day I had someone come up to me and say, ‘‘I just 

closed and got this mortgage and I found out that Wells Fargo is 

the bank which loaned me the money; I don’t even know who Wells 

Fargo is.’’ 

And in Pennsylvania, where this transaction took place, Wells 

Fargo is thought of as being way across the country. But that is 

how fast these mortgage transactions are sold. People, as a matter 

of fact this individual told me this because he refused to go through 

with the transaction because he said, ‘‘I didn’t make the arrangement to borrow from Wells Fargo.’’ And he did not know who they 

were, although they are obviously a reputable bank. But the transactions are so extreme compared to the way they used to be. 

Now, when we had hearings on this issue in Pennsylvania, it was 

peculiar. The people who had moved from New York to Pennsylvania were very annoyed with Pennsylvania, because we do not require a lawyer at the transaction to represent the buyer, where apparently in New York they do. And quite frankly, although I am 

a member of the Bar myself, I am rather sympathetic to that idea, 

that it would not be a bad idea, to have somebody knowledgeable 

in the law or financial transactions to protect the consumer. 

I do not think all of the notices that we write or everything we 

do is going to really give people protection. And as a matter of fact, 

sometimes I believe they think we are part of the problem. 

Mr. BACHUS. Would the gentleman—the last thing about Wells 

Fargo, you know, interestingly enough, you know, Wells Fargo told 

my staff and myself that they always require escrowing, just I 

mean one of the things we’re talking about, escrowing. In fact they 

say that loans that aren’t escrowed are bad for the lender, bad for 

the borrower. And that the percentage of those that default, it is 

one indication you can look and see, it is an indication of default. 

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That is why the legislation that I introduced actually, it has 

mandatory escrowing in subprime loans. Not, you know, the prime 

loans but subprime. 

Mr. KANJORSKI. I have other questions, Mr. Chairman, but I 

have exceeded my time. 

The CHAIRMAN. I thank the panel. This has been a hearing that 

has been very useful for me on a number of points and we are 

going to hear some more, because I think we have a lot of general 

agreement here and a recognition that a number of the specifics 

can be adjusted one way or another. 

So this panel is dismissed with our appreciation and we will, 

with our appreciation for their patience, hear from the last panel. 

The gentleman from Alabama. 

Mr. BACHUS. Mr. Chairman, I ask unanimous consent to enter 

into the record a statement on H.R. 3915 by the American Financial Services Association. 

The CHAIRMAN. Without objection, it will be made a part of the 

record. 

The CHAIRMAN. Let’s leave quickly, people. You can all be nice 

to each other outside. We have to get to dinner. 

All right, we will begin the last panel with my deep thanks. 

We will begin with Mr. Bradley Rock, who is the chairman, president, and chief executive officer of the Bank of Smithtown. He is 

testifying on behalf of the American Bankers Association and 

America’s Community Bankers. 

STATEMENT OF BRADLEY ROCK, CHAIRMAN, PRESIDENT, AND 

CHIEF EXECUTIVE OFFICER, BANK OF SMITHTOWN, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION AND 

AMERICA’S COMMUNITY BANKERS 

Mr. ROCK. Thank you, Mr. Chairman. 

Let me start by thanking you and your staff for consulting us on 

aspects of this proposal. While we still have concerns, which I will 

address in my testimony, we appreciate that some of our concerns 

have been addressed in this initial draft and we look forward to 

continuing to work with you as this legislation moves forward. 

There is no question that many homeowners are struggling to 

meet their monthly mortgage payments. As home values continue 

to fall and adjustable rate subprime mortgages are reset, the situation is not likely to improve in the near future. 

The trouble in the mortgage markets is of great concern to the 

banking industry. Many banks have existed for decades. And some, 

like my bank, have existed for almost 100 years. We know that we 

must be part of the solution and we are pleased to work with you 

to bring mortgage lending back into balance. 

Many banks have already taken actions to help borrowers who 

are in danger of defaulting. The ABA, ACB, lenders, and others 

have formed the HOPE NOW Alliance dedicated to helping people 

stay in their homes. 

A guiding principle for all of us should be steadfast adherence to 

high ethical standards, whether you are a banker, mortgage banker, mortgage broker, Realtor, appraiser, developer, investor or anyone involved in the real estate business and homeownership, high 

ethical standards should be the norm, not the exception. 

97

The damage caused by unscrupulous sales practices has hurt us 

all. I hold all of my employees to high standards and the bank regulators make certain that I do. 

There are several additional principles that should guide any legislation on mortgage markets. First, sound underwriting standards 

that are based on the borrower’s ability to repay are needed in 

every mortgage loan. Embracing the ability to repay concept as the 

new legislation does is essential to protect consumers and assure 

market stability. 

However, we are concerned that the bill includes very subjective 

criteria, such as offering mortgage loan products that are, quote, 

appropriate to the consumer. Such a vague concept will likely lead 

to litigation, driving up costs for both lenders and consumers. 

While imposing a duty of care requirement is reasonable, it must 

be based on objective standards that are centered on the ability to 

repay the loan. 

Second, consistent standards are needed particularly to bring 

nonbank mortgage originators up to the standards applied to bank 

originators. Independent mortgage brokers are not subject to all 

the consumer protection laws and regulations with which banks 

must comply. And more importantly, a regulatory system does not 

exist to examine them for compliance even with those laws such as 

RESPA which do apply to them. 

The bill seeks to address this inconsistency by requiring all mortgage originators to be licensed and registered. While we understand the principle here, we are concerned about the regulatory 

burden this will add to banks which already meet high regulatory 

and examination standards. It would be unfair to saddle these institutions, which generally had nothing to do with the current 

problems, with more burdens. Doing so would inevitably impede all 

types of lending to our communities. 

Moreover, without supervision of nonbank originators, licensing 

will not be effective and may, in fact, give customers the impression that there is an appropriate level of oversight when there is 

not. 

We appreciate the opportunity to share our views on this legislation and we look forward to working with you and this committee 

to find workable solutions. Thank you. 

[The prepared statement of Mr. Rock can be found on page 270 

of the appendix.] 

The CHAIRMAN. The next witness is a frequent witness and 

attendee at our events here, Mr. Pfotenhauer, who is the senior 

vice president for government affairs and public policy of the Mortgage Bankers Association. 

STATEMENT OF KURT PFOTENHAUER, SENIOR VICE PRESIDENT FOR GOVERNMENT AFFAIRS AND PUBLIC POLICY, 

MORTGAGE BANKERS ASSOCIATION 

Mr. PFOTENHAUER. Thank you, Mr. Chairman. 

On behalf of our 3,000 member companies, thank you for making 

us a part of this process. I would like to start by giving some credit 

where it’s due, Mr. Chairman. As per your word, the process that 

brought us to the introduction of your bill has been deliberative 

and open. 

98

As the markets have become more and more volatile, you and 

your colleagues and your staff have stayed focused. You have 

placed policy making ahead of scoring political points. Your staff 

are knowledgeable and professional. Thank you. Your approach is 

refreshing and it keeps us focused. 

I would like to add one other thing in the general category of 

compliment. This bill is well thought out and if enacted, it will be 

extraordinarily consequential. That comment does not, of course, 

signal agreement. But it is intended to recognize the thought and 

the effort that went into this ambitious proposal and to concede up 

front that your hard work, justifiably gives you some insulation 

from the common industry charge that your bill is fraught with the 

danger of unintended consequence. 

Indeed, I rather suspect that you intend much of the consequence 

that would result from this bill. Which begs the question, is your 

approach the right approach? 

Members of the committee, if they do not understand, need to 

understand that if H.R. 3915 becomes law, some people will be 

locked out of the mortgage market, many of whom would have been 

successful homeowners. Lowering HOEPA triggers, establishing 

the ability to repay and the net tangible benefit tests and eliminating some products from the market will have this effect. The 

question for this committee is whether the protections this bill provides are worth that price. 

Eighty-five percent of subprime borrowers are paying their mortgages on time today. It is an open question how many of these 5.3 

million homeowners would even qualify for a loan under the proposed regulatory construct. 

The alternative to eliminating borrowers from the market is to 

prepare them for the market. In that respect, we urge the chairman to tackle the lack of transparency in the origination space. 

Streamlining the mortgage process and improving disclosures are 

essential to helping borrowers help themselves. 

I would like to flag two additional areas of significant concern in 

my remaining time. First, there is what I would call a soft suitability standard in evidence in several sections of the bill. For example, section 103 dealing with steering asks the regulators to, 

quote, promote the interest of the consumer in obtaining the best 

terms for a mortgage. 

While this is guidance to the regulators and not a direct requirement for lenders, we believe that the regulators will take this guidance and either attempt to define best product for a borrower or 

force lenders to do so, an impossible task. 

We understand that your goal is to assist consumers in identifying the best loan product for themselves. With your permission, 

we will work with your staff to rephrase these areas of concern in 

a way that preserves your intent while stopping short of encouraging a suitability standard by regulation. 

Finally, let me state clearly that the mortgage bankers association supports legislation to establish a consumer protection standard in the mortgage market for any number of reasons, one of 

which is because the patchwork quilt of State and local predatory 

lending laws is an impediment to the smooth and efficient operation of a national mortgage market. 

99

We believe that any bill must include broad preemptions that 

give borrowers a single consumer protection standard and give 

lenders the certainty of a single standard to live up to. 

This bill, as currently drafted, is not preemptive. As the committee already knows, this prevents MBA from offering our support. Despite this disagreement, we would like to continue to work 

with you in a constructive way to improve this bill. And my written 

testimony suggests a number of fixes we believe will make this bill 

a better product. 

Thank you. 

[The prepared statement of Mr. Pfotenhauer can be found on 

page 253 of the appendix.] 

The CHAIRMAN. Next, returning to the committee again to share 

his wisdom with us, Mr. Marc Lackritz, president and chief executive officer of the Securities Industry and Financial Markets Association. 

Mr. Lackritz. 

STATEMENT OF MARC E. LACKRITZ, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION 

Mr. LACKRITZ. Thank you, Mr. Chairman. First of all, let me 

commend and thank your staff for a fair and participatory process 

in the development of this legislation. I think you and the committee have tried to stay true to a simple principle, namely that 

a borrower should not get a loan that he or she cannot afford and 

from which he or she does not benefit. Moreover, a borrower should 

be able to get out of any loan that breeches this simple standard. 

We agree that the system works best when we can keep families 

in their homes. 

Home mortgage credit has been more widely available at a lower 

cost because of securitization and the secondary mortgage market. 

By linking mortgage borrowers to the capital markets, the secondary markets enable lenders to provide more credit at a lower 

price than they otherwise could. Today, nearly 70 percent of American households own their own homes. And the beauty of our housing finance system has been its continued ability to innovate and 

develop new techniques to best reach and serve all the different 

market participants. 

Occasionally, some of these techniques do not work as well as 

they are intended. But the abuses that have occurred are in a 

small segment of the lending market and the market has already 

adjusted. 

We urge the committee to bear in mind that there are limits to 

the liability that loan purchasers will accept before deciding to invest elsewhere, especially due to increasing global capital flows. 

We are concerned that the details of several provisions of the bill 

as introduced, H.R. 3915, could reduce funding from the secondary 

mortgage market and cut off mortgage credit for worthy subprime 

borrowers. We would like to work with you on addressing these 

issues within the scope of what we feel is a workable product in 

titles I and II. 

First, the size of the safe harbor. Our first concern relates to the 

safe harbor provisions for creditors and assignees that apply to 

100

qualified safe harbor mortgages. Given the current state of the 

mortgage-backed securities credit market, we are concerned that 

only those loans qualifying for the safe harbor may be made. We 

understand that the theory underlying the bill is that the market 

will eventually price the non-safe harbor loans. But if that happens, we wonder how long it will take and what impact that will 

have on the economy. 

Secondly, the securitizer or assignee safe harbor. Although we 

don’t think that liability for the secondary market for actions of 

brokers or originators is appropriate, we do recognize and appreciate that the bill limits the exposure of the secondary market investors and trusts. The bill also limits the damages of the 

securitizer or the trust has should the worst case scenario arise. 

We believe the bill should ensure that the cure remedy is made 

preferable to recision. 

Third, the statute of limitations, Mr. Chairman. The scope of application in section 204 should be reduced. The language effectively 

allows almost a perpetual application, because it is the later of 6 

years or foreclosure acceleration or the mere default by a borrower 

of 60 days or more. 

The bill relies on existing Truth in Lending Law treatment as 

the foundation for the remainder of the recision remedy. As such, 

for consistency sake, the statute of limitations for this section 

should be 3 years, as under existing TILA section 125. 

In preemption and national standards, Mr. Chairman, our largest concern is the lack of Federal preemption of State laws. We acknowledge that the proposal tries to balance the interests of borrowers and lenders on this point. Nevertheless, we believe that the 

approach established by this bill should be a single national standard which is not subject to 50 variations flowing from State legislation. 

And finally, the role of the Federal Reserve and the concern with 

regulators. We have an overarching concern with the lack of a role 

for the Federal Reserve in the rulemaking process. The Fed has important expertise with securitization and the secondary markets, as 

well as the administration of HOEPA. We believe the Fed should 

share rulemaking authority with the other regulators in the bill. 

Thank you very much, Mr. Chairman, for the opportunity to 

raise these concerns with you. We look forward to working with 

you and the committee to craft legislation that protects homeowners while ensuring a vigorous home finance system. 

Thank you. 

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

236 of the appendix.] 

The CHAIRMAN. Next, Mr. Marc Savitt, who is the president of 

the Mortgage Center, and president-elect of the National Association of Mortgage Brokers. We appreciate the cooperation that we 

have had from the mortgage brokers that we have worked on legislation that will in fact probably have more of an impact on them 

given the current status of the law than anybody else. And we appreciate the spirit with which we have been able to work together. 

Mr. Savitt. 

101

STATEMENT OF MARC SAVITT, PRESIDENT, THE MORTGAGE 

CENTER, AND PRESIDENT-ELECT, THE NATIONAL ASSOCIATION OF MORTGAGE BROKERS 

Mr. SAVITT. Thank you, Mr. Chairman. 

Good afternoon, Chairman Frank, Ranking Member Bachus, and 

members of the committee. I am Marc Savitt, president-elect of the 

National Association of Mortgage Brokers. Thank you for the opportunity to testify here today. 

Like most of my fellow NAM members, I am a small business 

owner, living in the same community where I work. The mortgage 

landscape is much different than when I first started in this business 25-plus years ago. Today, we have a deconstructed market, 

origination, funding, selling, servicing and securitizing can occur 

separately or all can fall under one entity or be connected through 

affiliated business arrangements. 

This is why we are especially pleased by the all originator approach taken by Chairman Frank and Representatives Miller and 

Watt in H.R. 3915 and Ranking Member Bachus in H.R. 3012. 

We commend this committee for leadership on realizing that consumer protection should relate to function rather than entity structure. All consumers deserve the same level of information and protection regardless of where they go for a home loan. 

For over 5 years, NAM has been pushing to raise the bar for 

entry to the mortgage profession by establishing uniform minimum 

standards for education, testing, criminal background checks, and 

by urging creation of a national registry for all mortgage originators. There are some who will push for carveouts, but doing so will 

dilute consumer protection and deny the market reality that all 

mortgage originators perform essentially the same function. 

We sincerely hope that this committee holds steadfast to the alloriginator construct it has advanced in H.R. 3915. Our greatest 

concern with this bill, however, lies with the practical implications 

and unintended consequences of the anti-steering provision. We 

support disconnecting compensation from the origination of loan 

products or programs, but we are concerned that current language 

could be interpreted as banning indirect compensation for brokers. 

Such a measure would destroy small business brokers in this country and hurt the consumers they serve. 

As the only origination channel that makes full disclosure of the 

YSP on both the good faith estimate and again on the closing statement, our indirect compensation has come under intense scrutiny. 

Meanwhile, our originator competitors earn the same type of indirect compensation without disclosure and seemingly without disclosure and seemingly without criticism. We should not preserve the 

disclosure inequity created by HUD in 1992. It confuses consumers 

and hurts the natural order of competition. 

We do not believe it is the committee’s intent to legislatively pick 

winners or losers or further disadvantage small business in the 

mortgage industry. We look forward to continuing to work closely 

with the committee to clarify the intent and impact of this provision. 

We thank Chairman Frank and Ranking Member Bachus for requesting a GAO study on the causes of foreclosures. This recently 

released report confirms that problems in the mortgage market 

102

today cannot be traced to a single source. Everyone participated 

and no one single participant is to blame. 

We also have grave concerns on Title III of H.R. 3915. The language essentially prevents all but the perfect borrower from being 

able to obtain affordable financing. We find this unfortunate, as a 

key objective of many fair lending laws is to expand access to 

homeownership for low- to moderate-income and minority home 

buyers. The supply of funds is now very tight. A de facto Federal 

usury ceiling will tighten the market even further, denying funding 

to underserved markets. Tempered responses and proposals are 

critical in the market that is already prone to overreaction. 

Although not specifically addressed in H.R. 3915, we commend 

Representatives Kanjorski and Chairman Frank and others for proposing the Escrow, Appraisal and Mortgage Servicing Improvements Act. NAM supports this effort in this bill. 

In crafting proposals, we must remember that the mortgage industry is a business and that the market participants compete. 

NAM looks forward to continuing to work with this committee as 

well as respective regulators on accomplishing solutions that are effective in helping consumers without hurting small business. 

Thank you, and I’m happy to answer any questions. 

[The prepared statement of Mr. Savitt can be found on page 281 

of the appendix.] 

The CHAIRMAN. Thank you, Mr. Savitt. 

Finally, Mr. Don Lampe from Womble Carlyle Sandridge and 

Rice. Mr. Lampe. 

STATEMENT OF DONALD C. LAMPE, WOMBLE, CARLYLE, 

SANDRIDGE AND RICE, PLLC 

Mr. LAMPE. Mr. Chairman, thank you for the opportunity to be 

here today. And I will be brief, because it has been a long day and 

everyone here has been very attentive. 

I have been involved on behalf of industry trade organizations, 

mortgage lenders and others, either as a legal consultant or registered lobbyist in the enactment of many State mortgage laws, recently including laws in Georgia, Kentucky, Tennessee, Oklahoma, 

New Mexico, Ohio, Rhode Island, Minnesota, North Carolina, and 

Montgomery County, Maryland. 

Because much of the legislation, and I’m speaking of course of 

H.R. 3915 that the committee is considering today, is based on residential mortgage lending laws in North Carolina, I hope to be able 

to respond to the committee’s questions regarding our experiences 

in North Carolina. And, in this regard, North Carolinians are 

proud of the leadership, thought, and passion that Congressman 

Melvin Watt and Congressman Brad Miller of this committee have 

brought to the issue of predatory mortgage lending. 

As a legislative body, you are faced with tough policy choices as 

to what you should do about what is being described as the mortgage mess, the subprime meltdown and the foreclosure crisis. As 

you know, Americans are looking to Congress to lead the country 

on a safe path through the mine field that is residential mortgage 

finance today. 

In the brief time that I do have, I would like to make three 

points that in my view bear additional attention by this committee 

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as it considers the legislation. These points are built around a central theme. First and foremost, it is critically important that any 

legislation achieve the appropriate balance between providing 

strong and effective consumer protections while preserving access 

for consumers to fairly priced, nondiscriminatory, lawful, and appropriate mortgage credit. 

The three points are as follows. And, Mr. Chairman, in accordance with your opening statements, I offer these comments constructively to you and to Congressman Watt, who is also a sponsor 

of this bill and to the committee. 

The first point is, as you have heard today, this legislation applies across the board to all residential mortgage loans. While there 

may be agreement that unfair mortgage lending practices, particularly when coupled with higher priced or risk layered consumer 

mortgage products cannot be condoned and should be legislated out 

of existence, it is far less clear that all borrowers of any loan secured by their dwelling need or want additional across-the-board 

legal and regulatory restrictions. 

My second point is that it appears that the design of the statute, 

particularly as to liability, is designed to mitigate legal risk to loan 

originators and loan purchasers. This approach assumes that 

avoidance of litigation risk, rather than prudent yet flexible lending 

standards, is what should drive market conduct. Responsible compliance-oriented lenders, the likes of which we would like to see 

more of in the market, find litigation to be an anathema and have 

no desire to build compliance policies and procedures simply on 

choices that minimize damages in lawsuits. 

My final point is that we observe in the bill and again, trying to 

comment constructively here, that the bill ironically in pointing 

away from flexibility and innovation in the mortgage market, because we think this over-aggressive innovation got us into this 

mess, the legislation may actually be at odds with accepted mandates of fair lending and nondiscrimination in mortgage lending. 

At one time in our history, too many lenders knowingly discriminated based on suitability of particular home mortgage borrowers, 

using factors that at the time seemed, ‘‘reasonable,’’ and ‘‘in good 

faith.’’ Today, such rationalizations in the name of discussion are 

totally unacceptable. Yet the legislation appears to mandate credit 

determinations based on a list of factors that must be considered 

to the detriment of other factors that could actually benefit a particular borrower. 

In closing, I make one closing comment, and it does appear, even 

though we have not had much time to study the bill, that I believe 

it would make sense for this committee and the Congress to consider whether consumers and lenders alike are better off and better 

served by the relative simplicity and uniformity of central, unifying 

Federal standards in any comprehensive mortgage lending law reform. 

Again, thank you for having me here today and I am happy to 

answer any questions. 

[The prepared statement of Mr. Lampe can be found on page 241 

of the appendix.] 

The CHAIRMAN. Thank you. 

104

Let me just begin, and this process has been useful. Mr. Lackritz, 

the statute of limitations issue that you raised, our colleague from 

Kansas, Mr. Moore, and I talked about that on the floor. And I 

think he made the point, obviously, he has had discussion, I think 

he makes a very good point, and that is an example of something 

that I think we will be able to accommodate and tighten up on the 

statute of limitations. Obviously, uncertainty is a problem. 

There are other areas in terms of the standard, again, I think we 

have an agreement on the goal about what kind of loans you don’t 

want. We will work on it. 

I do have to say on preemption, people have said we must have 

a uniform Federal standard. Do we have one today? Do we have 

a uniform Federal standard governing lending? 

Mr. Lampe, you say we don’t. Does anybody think we have one 

today? Why didn’t you ask us for one last year? 

Mr. PFOTENHAUER. We did. 

The CHAIRMAN. What, for a uniform Federal standard? In what 

form? 

Mr. PFOTENHAUER. We were strong supporters of Mr. Kanjorski’s 

bill, Ney-Kanjorski, which put forward a uniform consumer credit 

standard. We have been asking the committee for this standard for 

6 years. 

The CHAIRMAN. And it would be—and I will say I had not seen 

that one in particular. I mean, we have State banks run by State 

bank regulators. I am trying to understand what a uniform standard means. 

Does that mean that if we put in a Federal standard, that the 

State bank regulators would then have to administer that Federal 

standard? They would have no flexibility to deviate from that? I am 

talking now about State-chartered banks. 

Mr. ROCK. Yes, I think they would have to. That exists currently 

with respect to other Federal standards are administered by State 

bank regulators. 

The CHAIRMAN. So what you would like to see is a uniform set 

of standards for mortgages that would apply to every State and the 

State bankers—I guess the question is why? Now here is the issue 

for me. With regard to the securitizer liability, I think there is an 

argument for uniformity because you have one national market. 

And it would be conceptually possible to require a uniform standard from which there was no deviation as part of the securitizer liability package, namely the safe harbor. 

But what is the harm done if in other areas the State decides 

that it is going to enforce stricter standards? What is the public 

policy argument against that? It wouldn’t affect the safe harbor, it 

wouldn’t affect securitizer liability. What is the public policy argument that says no State should be allowed to impose a stricter 

standard? 

I say that because, as we talk here, I think there is a great deal 

of uncertainty. We have said no one can be dogmatic. We are going 

to define what is suitable and what isn’t suitable. Why should 

there not be for the States and their residential property mortgages, as long as it doesn’t affect the securitizers’ liability, why 

shouldn’t they have some flexibility? What is the harm that is done 

there? 

105

Mr. ROCK. Well, I think you make a good point. I think it would 

be an overstatement to say that unless we have a uniform Federal 

standard, you know, that will destroy the secondary market. I 

think that would be a gross overstatement. We would prefer a uniform standard because we think that that will promote a very liquid secondary market. 

The CHAIRMAN. Let me say this, Mr. Rock. I want to separate 

them. 

To the extent that it impacts directly on the secondary market, 

I agree. I do think there is an argument for uniformity there. So 

I would say yes, for the safe harbor definition, there ought to be 

uniformity. 

But over and above that, if a State says, and here are the standards we are going to put into the mortgages, I don’t see what Federal imperative says they shouldn’t do that. 

Mr. ROCK. I think to the extent that you have greater deviation 

from a uniform standard, we risk some damage to the secondary 

market. To the extent we have deviation from that. I don’t say that 

it instantly— 

The CHAIRMAN. How does that hurt the secondary market? Here 

is the deal. For purposes of qualifying for the safe harbor, theoretically, there would be a uniform standard. But not involving the 

safe harbor, just the States could say you can’t make these—Statechartered banks can’t make mortgages that don’t meet these standards. How does that hurt the secondary market? 

Mr. ROCK. This would be the impediment. I call to find— 

The CHAIRMAN. How does that hurt the secondary market? 

Mr. ROCK. This is the way. I call to buy a mortgage-backed security. They quote the rate. The yield is pretty high. I say, I want 

to know what the collateral is underlying that. They tell me it is 

a group of mortgages in the State of Michigan. I may or may not 

know what the standards are in Michigan. I may inquire and find 

out they are different from New York. That may— 

The CHAIRMAN. They would be higher. But we would only allow 

them to be higher. So I don’t understand how that would make you 

less likely to buy it. We are talking about higher. We are not talking about letting the States go lower. 

Anyone else? 

Mr. PFOTENHAUER. You could have a liability associated with it 

that would— 

The CHAIRMAN. What is the liability? What do you mean? 

Mr. PFOTENHAUER. Whatever a State came up with. There is certainly going to be an additional compliance cost associated with— 

The CHAIRMAN. Yes, if you want to do business in my State, you 

have to comply with my laws. That is not a great evoker of sympathy. 

Mr. PFOTENHAUER. We are doing it today. It is changing. We will 

do it more this next year if we don’t pass a bill in Congress, because States are acting. But it is driving up the costs of loans. 

The CHAIRMAN. Well, that is a distinction States can make. And 

the States can say—and I think, again, we are going to compromise 

at the standard. Everybody—there seems to be broad agreement 

that we should set a standard of what loans should be made and 

what shouldn’t be made. 

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I don’t understand why we have to, approximating that standard, 

which we have to do, then have to say, and no State can deviate 

from that, no State can decide it wants more protection. 

Whatever happens to federalism in that situation? Mr. Lackritz? 

Mr. LACKRITZ. No, I think the distinction you started to draw is 

a worthwhile distinction between the secondary market and the 

origination piece. And I think it is terribly important, as you were 

pointing out, in the secondary market, to have uniform standards 

because you have interlinked global financial capital markets basically. 

From the standpoint of origination, it seems to me you can provide more flexibility as long as there is— 

The CHAIRMAN. Right, and from the standpoint of worrying about 

buying it, it presumably has a higher standard not a lower one, so 

it shouldn’t make you all that worried. 

My time has expired. 

The gentlewoman from Ohio. 

Ms. PRYCE. Thank you, Mr. Chairman. This has been a very long 

day, but a very productive one. And I appreciate the witnesses 

being so patient and we didn’t have that many votes, but by the 

same token, they did interrupt our first panel twice. 

So I want to go on a completely different tangent. Because as I 

sat here today, and I listened back in the office, it occurred to me, 

you know, we hear all these figures, 34 percent of homeowners 

have no idea what kind of mortgage they have, according to some 

polls. And is there a place, as we examine what to put in this bill, 

for a financial literacy component, something similar to you have 

to go to school to give haircuts, you have to go to school to adopt 

a pet, you have to go to school to buy a gun in some States. You 

know, you have to be prepared. 

This is the biggest financial decision most families make in the 

course of any of their lifetimes, and I don’t think that most people 

are prepared. I think that is part of what has happened. And so 

how do we do this? 

You know, Ranking Member Bachus’s bill has a suggested statement of mortgage facts that have to be on the front page, and then 

it says at the bottom, do not sign unless you understand this. Now 

that maybe is a good first step. But it is just one of hundreds of 

pages that somebody is supposed to understand before they sign. 

And how can we, how can you, how can the originators or how 

can the industry help America reach a level of literacy that they 

need in order to complete these complicated transactions? And you 

know, you can lead a horse to water, but you can’t make him drink. 

And caveat emptor and all that good stuff. But have you given that 

any thought and is there a way that we can help America get to 

where they need to be? 

Any and all of you can jump right in here. 

Mr. ROCK. Well, Congresswoman, we fully support anything that 

can be done to increase financial literacy. In fact, last week, the 

American Bankers Association conducted what we call Get Smart 

about Credit Day. We had more than 3,000 bankers across the 

country trying to help people with these very issues. 

Having said that, that we support them and that we are open to 

any other ideas, I think that it would be very difficult to mandate 

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something in advance of being—you know, your analogy to, say, 

getting a gun license or something, to mandate it, to say you must 

have ‘‘X’’ education or go through a course before you can get a 

home mortgage, I think that might put more burden on the consumer than the consumers might like. 

Ms. PRYCE. Well, they might not like it, but maybe they need it. 

Go ahead, Mr. Lackritz. 

Mr. LACKRITZ. First of all, you have identified a terribly important issue and one that, I know, we care a great deal about and 

have worked on for a long time, not just in the home finance area, 

but broadly speaking with respect to economic literacy and financial literacy. 

We clearly don’t want to license home buyers. 

Ms. PRYCE. No, and I agree with that. 

Mr. LACKRITZ. And we clearly don’t want to license investors. 

So what we do is we look, in the regulatory structure, what we 

try and do is we try and regulate the middle people, the intermediaries, basically, because they are the ones who are interfacing 

with the customers and the other side of the markets. 

And it works more effectively with educated consumers. Obviously, the better educated the consumers are, the better the whole 

system works. It’s a win/win for everyone. 

We have a program in the schools to educate kids about the capital markets and the stock market and it is wildly successful. Now, 

whether or not that translates over time into greater financial literacy, I am not sure. But I think those kinds of efforts in the 

schools, requiring economic or financial literacy will go a long way 

toward helping us educate consumers, because they are bearing 

much more responsibility for their own financial future. 

Ms. PRYCE. But it is a piecemeal, kind of everybody jumps in and 

has their own little program. And it is not, you know, uniform. I 

don’t know that it is getting us where we need. We have been talking about it. 

Kurt? 

Mr. PFOTENHAUER. You know, there is a demand for this. We 

had 1.6 million hits on our Web site last month alone, 

homeloanlearningcenter.com. People want to know what goes into 

a home loan. 

There is also an element of the market that will teach people. If 

we can streamline the mortgage process and people go through it 

and they actually compare one product to another, and get other 

lenders to teach them what the guy next door isn’t telling them or 

what a better deal is or what a good deal is, and you do that a little 

bit, people learn a lot and you get better results. 

Finally, you can look at the schools, and I know that is beyond 

the purview of this committee. 

Ms. PRYCE. What about just putting the terms of the loan on the 

monthly statement? You know? Some people just don’t even know 

what they are. Would that be burdensome or would that be bad in 

any way to re-inform the consumer each month, you know, what 

the term is, when it is due? Are there prepayment penalties? Those 

type of things. You know, a lot of people, obviously 34 percent, 

don’t even know. 

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Mr. SAVITT. Congresswoman, one thing that we can do is clearer 

disclosure. There should be not only clearer disclosure, simpler disclosure and uniform disclosure. This will make it easier for the consumer to understand exactly what program they are getting into, 

what type of loan they are getting into. 

The problem we have today is, depending upon who the originator is that you get your loan from, there are different types of 

disclosure. 

As far as financial literacy goes, I agree with this gentleman 

here, that financial literacy should start in the schools. In the 

school district where my children go, there is financial literacy. 

Ms. PRYCE. Well, but that is beyond our purview. And it should, 

but it isn’t happening. Americans aren’t educated to the extent 

they can. 

Does anybody object to requiring the loan terms on the monthly 

statement? Is that— 

Mr. ROCK. I think it would depend upon the level of detail required. I mean, a lot of those loan statements currently do include 

the things that you have just listed. 

Ms. PRYCE. I have four and none of them do. 

Mr. ROCK. Well— 

Ms. PRYCE. And so I just— 

Mr. ROCK. Ours do and many that I have seen from others do. 

But I think it would depend upon the level of detail. 

Would it be onerous not to have maybe the four or five things 

that you have mentioned. But if it went beyond that, it could perhaps be onerous. 

Ms. PRYCE. Well, my time has expired. And thank you. This is 

a very, very broad bill and we only touched on a very small part 

of it. 

So, thank you, Mr. Chairman. 

Mr. KANJORSKI. [presiding] The Chair recognizes himself. 

I ask unanimous consent that the written statement of Maureen 

McGrath on behalf of the National Advocacy Against Mortgage 

Servicing Fraud be admitted into the record. 

Is there any objection? 

Hearing none, it is so ordered. 

I want to compliment everybody, particularly this panel for waiting around as long as you did to get here. We appreciate it. 

If I had to say anything, having gone through this frightful experience in the past, as you all know, I wanted to thank and compliment the chairman and two of my colleagues that put a lot of 

effort in to get this far. 

There are a few elements in my estimation that are important, 

one, that I am particularly interested in finding some way of getting a standard, a national standard that we can rely upon. I think 

it is important. 

And coming from the other angle of what Mr. Frank asked about, 

first of all when we went into the issue a number of years ago, we 

found that there were a multiplicity of municipalities that had exercised their right under their individual State laws to pass mortgage rules and regulations. These rules and regulations now require the securitizers to have counsel go back and examine every 

municipal code to see whether or not they had enacted something 

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that affected the value of that mortgage or whether the mortgage 

complied with the local ordinance or statute, which I think is ludicrous. 

Two, the lack of uniformity drove—I think it was New Jersey 

and Georgia—the subprime market to almost collapse, because 

they were just excluded from securitization. Why bother to mess 

with them if they are too expensive and too difficult to deal with? 

I think that is where the North Carolina statute came from. It 

finally found the ground on which people felt comfortable in dealing. 

On the other hand, feel that there is another side to that. And 

then when you look at the law of mortgaging, I was just telling my 

good friend, Maxine, here, if I were a banker, I would not write a 

mortgage in California if my life depended on it. Because as I understand the law, as compared to Pennsylvania, if you are dissatisfied with your mortgage and your property, all you have to do is 

hand in your keys and whoever gave you the mortgage gets the 

property and you are excluded. 

Now, that does not happen in Pennsylvania. In Pennsylvania, 

the property is just a partial support asset for the mortgage. You 

actually have to have a personal judgment note with all your assets 

supporting the property. So, as a result, when you look at Pennsylvania borrowers, the property, or the real estate is the last asset 

that they will put at risk, because to escape it is practically impossible. It follows you to the grave. 

On the other hand, in California, when there is a collapse of the 

price of the market, people look across the street and see a house 

selling for $100,000 or $200,000 less than they have on their mortgage, they are apt to say, ‘‘Well, I will get out of this, turn my 

mortgage in and go and buy the house across the street and I have 

just made $200,000.’’ I see that happening in many States in the 

Union. 

I think what it boils down to is, is securitization good? Particularly, is it a useful tool in subprime areas? And I have mixed feelings on it. I will tell you some of them. 

I think we, the Government, both the Executive and the Legislative Branches, are to a large extent responsible for what is going 

on today. We encouraged, I remember, this magic formula—70 percent. We had to get homeownership of over 70 percent. 

Quite frankly, there are a lot of people who are not sufficiently 

trained or financially literate enough to become owners of property. 

And I will give you an example. I held hearings in Pennsylvania, 

and some residents from New York came in and bought homes in 

the Pocono Mountains of Pennsylvania. And the one lady at the 

hearing said, ‘‘Well, I am incensed. After I bought my home, the 

refrigerator broke 18 months after I bought it, and I called the Realtor and asked, what are you going to do about replacing this refrigerator?’’ And he said, ‘‘Nothing, lady.’’ And she said, ‘‘Well, 

that’s just wrong; it’s his responsibility to replace that refrigerator.’’ 

And, you know, it is understandable, I guess. If that is what—

she just did not realize she was in ownership as opposed to tenancy. I think that is an unfortunate reflection of what we are dealing with. 

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But when you are in that margin of the market, the last 2, 3, 

or 4 percent of homeownership, they should not be denied homes, 

but we have a greater responsibility to make sure these people are 

not abused or misused. They are certainly subject to a lot of abuses 

out there, and we have seen so many of them. 

Then I think of some of our testimony earlier. If I have to condemn anything in this system, there are probably 8 or 10 steps 

from the person who originally attracts a buyer for a piece of property, either a Realtor or the owner of that property, and then going 

through the financing operation until at the bottom some investor 

buys that bond that is securitized by that mortgage. 

If you think about it today, nobody along that line, eight or nine 

people, have any skin in the game. Everybody makes a profit if 

they sell a higher cost mortgage, if they sell something overpriced, 

a bad appraisal, all kinds of things, they all gain more. But nobody 

has any skin in the game to lose anything until you get to the last 

guy on the totem pole, the investor. And even he gets skin for the 

last time. He did not buy a bond; some money manager bought it 

and got a commission on sticking him with something that said it 

is a triple A when it was junk. 

And now suddenly, all over the world, these people are looking 

at us here in the States and saying, ‘‘How can you trust these people?’’ And that is the question. What we do in this bill and as we 

correct the subprime and the whole operation of securitization, I 

really believe is a matter of faith in the United States of America. 

There is an implied judgment around this world that if we allow 

securities to be securitized and sold worldwide, somebody is looking 

over the fact that these are not boiler room hot potatoes that have 

no value. And we failed to do that. We failed to do it here, gentlemen, your institutions fail, the regulators that were here before 

you, they fail. All of that fault we have endured. What do we do 

about it? 

I would hope that your testimony today will help Chairman 

Frank find some of these important basic areas toward achieving 

a national standard. I think that is important. I think if we are 

going to have a continuation and the use of securitization in mortgaging in this country and indeed some day around the world, we 

are going to have to find a better way, more transparency, more security, less abusiveness in the system. 

I want to thank you for your testimony. I had a few questions 

but I do not have the time to ask them at this point. I just had 

to blow off my steam. I have been listening to you up to this point. 

The CHAIRMAN. The gentleman from Louisiana. 

Mr. BAKER. Mr. Savitt, I’m an old real estate guy, emphasis on 

old, and I know you mortgage guys well. So you’re going to have 

to help me understand what’s going on here. Let’s zero in on DTI 

and how that calculation works, and going to a mortgage broker’s 

web page, I left here a minute ago when Mr. Sherman was talking 

because it triggered something and I had to go look it up to make 

sure I was right. Typical, conventional loan criteria for a DTI uses 

the 28:36 ratio, where 28 percent, typically of gross income, is allocated to house note and principal. Is that still the case? 

Mr. SAVITT. That’s the standard rule, but you have to remember 

that every situation is different. 

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Mr. BAKER. That’s okay. Let me keep going, because I’m on a 

roll. 

Mr. SAVITT. Yes, okay. 

Mr. BAKER. The second part of it, the 36 part, goes to the cost 

associated with operation of the household as car payment, credit 

card, child support, any of the obligations that typically go with a 

mortgage. 

Mr. SAVITT. It includes not only your monthly payment, but 

again your new mortgage payment as well. That’s all included in 

the DTI. 

Mr. BAKER. So when they’re doing this calculation, I’m using now for members a $42,000 annual salary, a gross of $3,500 monthly. 

The calculation they came to was that $980 can be applied directly 

to principal and interest, and $1,260 can be applied to recurring 

housing expense for a gross expenditure of $2,240 out of a gross income of $3,500. You have to assume 15 percent is a minimum, 

State and Federal tax load; so when you crack it back down on a 

conventional loan, you have a household with about $3,000 max 

coming in a month with an ability to have $2,240 in total obligations. 

I took that number and worked it through to get what percent 

of gross income that actually turns out to be. A typical, conventional loan at the max is about 64 percent debt to income ratio. 

What was really interesting was I went to my old FHA friends, and 

they have a $2,941 rule, FAS forward, that’s $2,450 a month, 

which is a 70 percent debt to income ratio. 

My observation here is is we adopt the underlying bill without 

some modification. FHA loans are outside the safe harbor. Now, 

that’s problematic. That has to have a real market consequence to 

people, because when I apply the numbers in the bill to the same 

set of circumstances, that $1,750 a month, housing and housing related expense. 

So I merely wanted to bring this up. And, is there anything I’m 

missing, Mr. Savitt, in that descriptive analysis of how markets 

function today? Are the FHA numbers basically still on target because programs change? 

Mr. SAVITT. They are still on target, but again, you know, even 

though that is a high debt to income ratio, it depends upon the borrower’s financial circumstances. 

Mr. BAKER. Right. They may have $200,000 in the bank from a 

prior home sale. They may have an investment portfolio. They may 

be a Federal employee with a TSP account with several hundred 

thousand dollars. 

Mr. SAVITT. Right, there are several compensating factors. 

Mr. BAKER. They may have paid a note for 22 years and never 

missed a monthly payment. They may have a sick uncle who has 

a bunch of money and they know they’re going to come into good 

fortune here. I mean, there are all sorts of reasons to look at each 

individual’s borrower’s assets and determine whether in this 

unique set of circumstances, he was appropriately placed in a financial obligation which he can meet the terms over the long haul. 

I think the rub has been that perhaps that due diligence didn’t 

always take place in every case, and I didn’t bring them with me. 

I should have, but I went to some of the Web pages talking about 

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‘‘no-doc’’ loans, where they take pride in announcing they don’t 

verify your income. Now, that to me has gotten outside the bounds 

of propriety, and we really need to deal with that. But I think we 

need to be very careful as we go forward in drafting this proposal 

as to the real market consequences to borrowers who otherwise 

have access to credit now, who will not, if we adopt the provisions 

of the bill as it is currently proposed. 

Do you agree, Mr. Savitt? 

Mr. SAVITT. Absolutely. 

Mr. BAKER. Thank you. You’re a great witness. 

I yield back. 

The CHAIRMAN. The gentlewoman from California. 

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

It’s been a long day and I thank you for not only holding this 

hearing but for the way that you have entertained all of the members who have participated and the patience that you have exhibited in trying to help us gain information about how to do the best 

possible job in dealing with not only the problem that we are confronted with today for the future, but also predatory lending. 

To the panel that’s before us, you have a lot at stake here. You 

have a lot at stake here because we are discussing banning yield 

spread premiums. We are discussing no-doc loans, pre-payment 

penalties, teaser rates, securitized liability, on and on and on. I 

want to get right to the part of the bill that basically bans yield 

spread premiums, and I would like to start with—is it Mr. Rock? 

I can’t see from here. 

Mr. ROCK. Yes, yes. 

Ms. WATERS. I don’t know if it was you who started to talk about 

how perhaps this is not the right thing to do, that you would be 

placed at great disadvantage. And I want to know is that because 

you think that the requirements that we place on the banks for 

their employees would not match the requirements that we place 

on you relative to, number one, their need to be licensed, and number two, how they are paid or not paid for their loan originations? 

Mr. ROCK. No. I did not make any of those remarks that you’re 

referring to, but just to comment on yield spread premiums, in 

most circumstances that I am familiar with where they’re used, I 

think it’s a bad practice. 

Ms. WATERS. I’m sorry. He just reminded me that I’m really 

speaking to the brokers and not the bankers on this. So who would 

like to respond to that? Mr.— 

Mr. SAVITT. Savitt. 

Ms. WATERS. Okay. 

Mr. SAVITT. That’s me. 

[Laughter] 

Ms. WATERS. All right, Mr. Savitt. 

Mr. SAVITT. Congresswoman, first of all, I think there’s a great 

misconception about yield spread premiums. Yield spread premiums, and I’ve been a broker for over 25 years, yield spread premiums are a very useful tool in helping its consumer, a borrower, 

get into a property with less money up front, less money for closing 

costs, less money for down payment. And our brokers have been accused of using yield spread premiums as an incentive to make more 

money, and I think what people are failing to recognize is every 

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time you raise your yield spread premium, you’re raising your interest rate. 

If you raise your interest rate too high, you’re not going to get 

that transaction. Somebody else, another originator, will get that 

transaction. And the fact that brokers do, depending on who you 

talk to, anywhere between 50 and 70 percent of all the residential 

loans in this country, that tells you that brokers are not doing that. 

You may have some originators, not just brokers. But you may 

have some originators, possibly abusing back-end fees, whether its 

a YSP or, of course, the lenders all get service release fees. We disclose this incidentally. Nobody else in the market discloses it. 

We’ve been required by HUD since 1992 to disclose yield spread 

premiums on the good faith estimate, and also on the HUD 1 settlement statement. 

So I’m sure you understand how frustrating it is for us with all 

of the news accounts that have come out over the past several 

months that brokers must disclose all of their fees up front. There’s 

no mention about lenders doing this, and it’s kind of ironic, because 

brokers are the only ones who disclose their fees. 

Ms. WATERS. So, if lenders had to disclose, would that make you 

feel better? 

Mr. SAVITT. If lenders had to disclose, it would make it more 

transparent to the consumer. There would be less confusion. There 

are a couple of FTC studies that came out and said because brokers 

are the only channeled distribution that disclose yield spread premiums, the consumer is often confused into picking the more expensive transaction. He looks over the broker, lists the yield spread 

premium on the good faith estimate. He thinks that as an extra 

charge. The consumer thinks it’s an extra charge when in fact it’s 

not. 

When the FTC conducted their study, I forget how many people 

they actually had involved in the testing, but in most cases they 

purposely made the lender good-faith estimate more expensive 

than the broker good-faith estimate, but consumers more often 

than not picked the broker good-faith estimate as the more expensive deal because they were confused by the chart. 

Ms. WATERS. Okay, well, let me just say this. And I’ve been one 

of the supporters wanting to ban it, and I’m still not sure why we 

shouldn’t ban the yield spread premiums. I hear what you’re saying, but you haven’t made the case why yield spread premiums 

allow you to assist the borrower more with the borrower paying 

less money. I don’t get it. 

Mr. SAVITT. Well, Congresswoman, I have a rate-sheet here from 

the West Virginia Housing Development Fund. That’s one of the 

States I’m licensed in. This is a first-time home-buyer bond program. West Virginia, as Congresswoman Capito mentioned before, 

has the highest rate of homeownership in the country. They also 

have one of the lowest foreclosure rates in this country. We’re 

ranked number 47th in a country in which we’re all very proud of. 

Of course, even one foreclosure is one too many. But this is a government agency paying their lenders and brokers either a YSP or 

an SRP because they understand that this helps consumers become 

homeowners. 

114

Today, consumers have very little savings. They have very little 

money to get into a house. So by being able to use or take the benefits of a yield spread premium, it helps them become homeowners 

with less up-front in cost for their down payment in closing cost. 

And as I mentioned before, lenders get the exact same thing, but 

they do not have the requirement to disclose. 

Mr. ROCK. I would just point out with respect to that point that 

the brokers—an essential difference is that the brokers—hold 

themselves out as representing the buyer, whereas, the lender does 

not hold themselves out that way. 

Mr. PFOTENHAUER. In addition, there’s a very different set of 

market disciplines on someone who works for a commission versus 

someone who lends their own money, and that’s the key difference 

between. 

The CHAIRMAN. Would the gentlewoman yield to me? 

Ms. WATERS. Yes, I yield to you. 

The CHAIRMAN. Sir, how does that help the consumer? How does 

paying a yield spread premium help the consumer? I guess I don’t 

fully understand that. 

Mr. SAVITT. First of all, Mr. Chairman, when a consumer calls 

shopping around for an interest rate, what they ask for is a zero 

point rate, whether it’s a broker or a lender. That’s what they ask 

for. So we receive a yield spread premium for that rate as a lender 

would receive a SRP. 

The CHAIRMAN. Well, then a yield spread premium—am I wrong 

that we’re talking about your compensation? Who pays you the 

yield spread premium? 

Mr. SAVITT. The lender. 

The CHAIRMAN. The lender does? 

Mr. SAVITT. Correct. 

The CHAIRMAN. And what do you do to earn a yield spread premium from the lender? 

Mr. SAVITT. We originated the loan, we processed the loan. We 

prepared the loan. 

The CHAIRMAN. Yes, but that’s basically. When does the premium 

come in? 

Mr. SAVITT. The premium is the difference between the wholesale 

and the retail rate. 

The CHAIRMAN. So that the higher the case, what’s the relationship between what the lender charges the consumer and the yield 

spread premium? 

Mr. SAVITT. I don’t understand your question. 

The CHAIRMAN. Is there a relationship between the yield spread 

premium and the rate the lender charges a consumer? 

Mr. SAVITT. There is, just the same as in an SRP. 

The CHAIRMAN. Well the higher the rate the lender charges, the 

higher the yield spread premium? 

Mr. SAVITT. The higher the rate, the higher the yield spread. 

The CHAIRMAN. And explain to me how that helps the consumer. 

Mr. SAVITT. I’m sorry? 

The CHAIRMAN. Explain to me how that helps the consumer. 

Mr. SAVITT. Because consumers all want for the most part zero 

points loans, so if you take a lender and you take a broker, and 

let’s say the interest rate for a 30-year fixed is 61⁄2 percent, they’re 

115

both making the same amount on that loan. They’re both being 

paid for that loan. 

When a lender originates a loan, and it’s not just brokers that 

broker loans. When any originator— 

The CHAIRMAN. I’m lost. You lost me. 

Tell me how it helps me as a consumer if the person who I’m 

dealing with is going to make more money if I pay a higher interest 

rate? 

Mr. SAVITT. Less up-front money; it’s less money out of their 

pocket. 

Ms. WATERS. How? 

Mr. SAVITT. And in some cases, it may pay for their closing cost. 

The CHAIRMAN. Well, that’s always the case, that the higher interest rate is always off-setting lower closing costs and lower up 

front? Is that always the case? That’s a simple question. I’m skeptical of that. I’m skeptical that there’s always that relationship. 

Mr. SAVITT. Well, the consumer has the choice of paying points 

too if they want to pay the origination fee. 

The CHAIRMAN. I know, but that’s not the question. 

Is it never the case that everything else being equal, the higher 

the interest rate I’m charged the more money the yield spread premium will be? 

Mr. SAVITT. On any YSP or SRP, yes. 

The CHAIRMAN. Okay. I don’t see how that helps me. I mean, if 

everything else is being equal, say you can say points. 

Mr. SAVITT. Mr. Chairman, I can’t stress enough, it does help 

consumers. 

The CHAIRMAN. How? If everything else being equal the higher 

the interest rate, the higher the yield spread premium, how am I 

helped? 

Mr. SAVITT. Because it’s still a competitive rate that regardless 

of who the originator is, it’s still a competitive interest rate. And 

the benefit is— 

The CHAIRMAN. No, you’re missing my point. You say it’s competitive, but it would have been lower. It does not give the broker 

an incentive to find me a loan with a higher interest rate? 

Mr. SAVITT. No. It doesn’t, because the consumer always has a 

choice. We put options in front of the consumers. They always pick 

what’s best for them. 

The CHAIRMAN. And it does not incentivize the broker at all? 

Mr. SAVITT. No. It’s not. It’s something that benefits the consumer, and, again, we have a State housing agency that oversees 

it. 

The CHAIRMAN. Well, the fact that a government agency does 

something does not always immunize it, you know, from the 

charge. I assume you would agree with that. 

Well, I’ve taken too much time. 

Mr. SAVITT. Can I say one more thing? 

The CHAIRMAN. Quickly. This is the gentlewoman’s time. 

Ms. WATERS. Let me just say, because I know that you want to 

move on, that you have not made the case. And this is not what 

we understand as we have dealt with this issue. And so I’m looking 

for ways to really understand whether or not the consumer is disadvantaged, whether or not there is steering that would cause the 

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originator to be able to make more money based on the higher 

priced product, and you are not helping us very much. 

Mr. SAVITT. Congresswoman, I think there’s a misconception. 

You’re talking about the anti-steering provision in the bill. 

We’re talking about two different things here. We’re talking 

about YSP as indirect compensation and we’re talking about receiving extra compensation for steering somebody into a loan that has 

no benefit for them. 

The National Association of Mortgage Brokers agrees with what 

you have in the bill as far as banning additional compensation, but 

we want to make sure that it is not being construed as our normal 

indirect compensation. This is something that is an additional 

amount of money, because if it’s a zero point loan—and this is the 

easiest way I could describe this—if it’s a zero point loan, regardless of who the originator is, whether it is a mortgage broker, a 

bank, a mortgage banker-lender, whoever it happens to be, everybody gets money on the back end of that loan, if it is a zero point 

loan. 

That’s where they receive their compensation, indirect compensation. 

Ms. WATERS. Well, let me just say that under Section 103 our 

anti-steering section provides that no mortgage originator can receive and no person can pay any incentive compensation, including 

yield spread premiums that is based on or varies with the terms 

of a mortgage loan. 

Mr. SAVITT. But that should not be construed as indirect compensation for a broker. We’re talking about in that provision, we’re 

talking about additional compensation for steering somebody to a 

certain type of loan. That’s not what we’re talking about. When 

brokers are trying to protect the yield spread premium, it is indirect compensation. It does definitely provide a benefit to the consumer, just like a lender receives a service release premium for 

doing the exact same loan. The only difference is we disclose that. 

The consumer has full disclosure at the time of application and also 

at the time of closing. 

The CHAIRMAN. The gentleman from Texas. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

As a conservative, I typically prefer non-legislation to legislation, 

however, in this particular situation I think that it’s the exception 

and not the rule and that some legislation is in order. 

I think I’ve heard some hopeful comments from the chairman 

that perhaps his bill is a work in progress. I understand that much 

of this legislation appears to be prescriptive, dealing and trying to 

ensure that we don’t replicate the situation that we see today. Having said that, I continue to be concerned that we’re not out of this 

forest yet. 

If we take a snapshot of where we are, it’s alarming. I’m not sure 

we’d quite call it a crisis, but when I see $600 billion in adjustable 

rate subprime mortgages due to readjust in the next 2 years, I’m 

certainly convinced we’re not out of the forest. And so I guess my 

concern here is if we pass this bill in its current form, as many 

folks attempt to refinance over the next couple of years, what exactly is going to happen to liquidity in both our primary and our 

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secondary markets. And I think that Mr. Lampe saw some testimony there where you commented on this phenomenon. 

Mr. LAMPE. Yes, Congressman, I think when you strip away 

some of the legalities of this and you look at the presumptions that 

could provide a rebuttal to it and the safe harbor, and so on, I 

think the message of this bill is don’t make a loan unless it is a 

qualified mortgage or a qualified safe harbor mortgage, because the 

secondary market will not want to absorb it. 

And so, the other aspect of this, which I don’t think this is controversial, if you lower the high cost home loan triggers as has 

been done in provisions of this law, then any loans that are above 

those triggers won’t be made. So, I think the bill on its face and 

I think the bill’s intent was to restrict loans outside of these safe 

harbors or above these thresholds from being made. And then the 

only question is how big a piece of the market is that? 

Mr. HENSARLING. Now that is a good question. Does anybody else 

on the panel wish to comment how much a piece is left out there 

for all these people trying to refinance? Any takers? Mr. Lackritz? 

Mr. LACKRITZ. Yes, Congressman. I think we just don’t know that 

yet. Clearly, the design of a safe harbor acts as a magnet for underwriting mortgages and the issue of how many non-safe harbor 

mortgages will get written eventually. Markets react over time to 

external and exogenous events, and so markets will obviously react 

here. It’s just a question of how long that will take, and whether 

or not the variety and the availability of the credit will continue 

to be as expansive as it has been. Clearly, it’s going to restrict. In 

the short run it’s going to narrow the availability of credit in those 

particular areas. 

Mr. HENSARLING. Mr. Pfotenhauer? 

Mr. PFOTENHAUER. Just to give you one, I’m sorry. It’s not a definitive answer, but just to give you a little bit of scope in what we 

are dealing with and I would agree that we can’t quite define the 

issue today or the impact, but there were, according to HMDA 

data, there were 10 million loans made in 2006. 3.9 million of those 

are basically subprime, all-day loans. 

So, that’s the universe; you know, nearly 39 to 40 percent where 

we have a big question mark over whether or not those are actually 

going to get made. And they’re going to be cross-pressured in different ways by this bill going forward. Now, to be fair, there isn’t 

a lot of liquidity in the market today in the private label, subprime 

space. And so we are talking about what happens going forward. 

The market is already disciplined very severely, the players in 

this area, and has yet itself to come up with the mechanisms that 

allow it to go forward. It will. It will figure out a way to make 

these loans again with or without Congress, but how far it goes in 

that and how far it goes in the future is really what this panel is 

debating. 

Mr. HENSARLING. Mr. Pfotenhauer, in speaking of some of your 

concerns with the legislation, I think you used the phrase ‘‘soft 

suitability standards.’’ Could you elaborate on your concerns? 

Mr. PFOTENHAUER. Section 103 and Section 104 contain concepts 

like best loan for a consumer, most appropriate loan for a consumer, and pretty much appear to turn that work over to a regulator. Having had some former regulators on our staff look at that 

118

language, they feel that the language might compel the regulator 

to try to come up with some sort of suitability formula. 

You know, that really gets you down a slippery slope with the 

plaintiff’s bar, because what’s a suitable loan is really something 

that we think should be determined by borrower, not by the lender. 

And if the lender has anything beyond the duty of care, which is 

a reasonable thing to have provided it’s structured correctly, then 

you’re really working in reverse of your intentions on this and potentially shutting down lending to the very people you want to 

help. 

Mr. HENSARLING. Okay. I probably don’t have an option, but I 

think I’ll go ahead and respect the 5-minute rule anyway. 

The CHAIRMAN. I thank the gentleman. 

The gentleman from North Carolina. 

Mr. WATT. I think it was worth sitting here all day just to hear 

Mr. Hensarling say that this is an area that we need to do something in. That’s a radical statement coming from Mr. Hensarling. 

I don’t think I’ve ever heard that phrase come out of his mouth. 

So it was worth sitting here just to hear that. 

I want to go back to the issue that Chairman Frank raised about 

pre-emption, not that I’m expecting to convince anybody on this 

panel, but just to make sure that we have it on the record what 

my position is on that. I really think that’s kind of a smoke screen, 

because to the extent that we set a satisfactory Federal floor standard, if States get substantially out of line with their requirements, 

lenders are going to leave those States. 

Credit is going to be more expensive in those States and those 

States are going to have to come back to a responsible Federal 

standard, whether we called it a preemptive standard or not. 

That’s always been my position. The problem with Federal preemption from my perspective is that we can’t act and our regulators, nor certainly our legislative body doesn’t react quick enough 

to deal with changes that the market is constantly going through; 

and, so, there has to be for those entities that are outside Federal 

regulators, even if Federal regulators could react quick enough or 

if we could react quick enough at the Federal level to change the 

law, which we never would, there will always be somebody out 

there with a new product, a new process, a new something or another that is not regulated if we don’t leave discretion with the 

States to address those concerns. 

So, I mean, I’ve had this discussion with everybody from your industry just come through my office and I’ve said it over and over 

again, but I think for us to spend a lot of time arguing about 

whether we are federally preempting or not, when we set a responsible Federal standard, which I think everybody has kind of agreed 

now the North Carolina standard is if other States get too far away 

from that standard, they’re going to pay a price for it, either in the 

form of higher interest rates or in the form of loss of available 

money to loan in that State. 

So I just don’t think that’s something I’m going to spend a lot 

of time talking about, and I think there are other ways to address 

the concerns about whether we pre-empt or don’t pre-empt or 

whether we partially pre-empt. But clearly we have to leave the 

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ally regulated. And we have to leave the States the ability to react 

when they can react quicker to changes in the market. So those are 

the two things that I want to put down as markers. 

Mr. Rock, you stated and I see you and Mr. Savitt, it’s going to 

be hard to reconcile your views, I think, because you say you need 

supervision of the non-regulated entities you all have supervised 

and you have all of these people out there who are not supervised. 

So how would that look, that kind of supervision to the non-regulated that you testified? And I think that’s the phrase you used. 

Mr. ROCK. Well, banks are highly regulated and highly supervised. I mean, the second half is very important because we are 

being examined all the time to make sure that we are complying 

with the rules and regulations that we must confirm with. I think 

that the segment of the industry, the non-bank segment of the 

originators, should be brought up to that level, and I think that’s 

the way to achieve equality. 

Mr. WATT. Okay, so, if we brought brokers up to that standard, 

Mr. Savitt won’t be all that happy, but you think that would help 

to solve the problem? 

Mr. ROCK. I think it would, given the fact that non-bank originators presently originate, we estimate, approximately 58 percent of 

all home mortgages, and yet, that segment of the industry which 

initiates a majority of the originations is not subject to the kind of 

regulations. 

Mr. WATT. I have to give him equal time, because I know Mr. 

Savitt wants to respond. 

Mr. SAVITT. I think that there are 50 bank supervisors out there 

who would have a difference of opinion with Mr. Rock. Mortgage 

brokers are regulated. We’re regulated in all 50 States. I’ll use myself as an example. I am licensed by two different States. I have 

continuing education requirements. I have surety bond requirements, and I am examined on a regular basis. 

Mr. WATT. I’d feel better about that if the person who testified 

for your industry had been able to tell me who he worked for. I 

asked him, I mean, I’ll go back and show it to you in the record. 

I can’t remember who the guy was. I’m just asking do you represent the borrower or do you represent the lender and I never 

could get an answer out of him. 

Mr. SAVITT. The problem that we have is—well, not a problem—

if somebody comes into a mortgage broker’s office, the individual 

that they meet with for their loan application is regulated by that 

State. 

If that same individual walks across the street to a bank and 

deals with the individual loan officer in that bank, that loan officer 

is not regulated. The bank may be regulated, and, we’ve heard 

things recently in the news that you need to deal with the institution that has the eagle on the outside of the building, because 

they’re FDIC approved. 

That’s fine, but we’re not talking about the lending side, and, on 

the lending side, they don’t go through as much scrutiny as mortgage brokers do. Mortgage brokers are under a magnifying glass. 

As I said, we’re regulated in every State. We are examined in every 

State, and there are proper safeguards to make sure that when 

120

somebody comes into a broker’s office, they are dealing with somebody who is reputable. 

Mr. WATT. Okay, well, my time is up. I just want to be clear that 

if I’m walking into a lender, I at least know that they are not currently being hired to represent my interest. I’m trying to get a loan 

from him. When I walk into a broker’s office, I think 99 percent 

of the people who walk into the broker’s office think that broker is 

working for them. 

Mr. SAVITT. Can I just answer? 

The CHAIRMAN. Quickly. 

Mr. SAVITT. Brokers still have an ethical responsibility and we 

exercise that ethical responsibility every day to our customers. 

That’s why we have the amount of business that we do, because 

we live in the communities. We work with these people; our children go to the same schools. 

Mr. WATT. I yield back, Mr. Chairman. 

The CHAIRMAN. The gentleman from Connecticut. 

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

these hearings. I’m not used to seeing you penned-down for a whole 

day. How are you holding up? 

The CHAIRMAN. Oh, I’m in a pretty bad mood. 

[Laughter] 

Mr. SHAYS. Well, actually, you look like you’re in a bad mood, but 

you’re a good man. 

I want to say that when I view this I feel like there was a noticeable earthquake and then we felt after shocks; and what’s kind of 

looming is this tidal wave. And I asked the first panel when they 

thought that title wave of foreclosures happens and the panel was 

basically saying, you know, it started and that the second and third 

quarter of next year. I’d like to ask each of you when you see the 

bulk of foreclosures coming to the marketplace, if we just start 

right down the line. 

Mr. ROCK. Well, I would agree with much of what was said before. I think a lot of the rate resetting is one of the causes in some 

of these situations. I think a lot of the rate resetting has begun 

now. 

Mr. SHAYS. I’ll ask you by cause. I just want to know what happens first. 

Mr. ROCK. Now, and I would expect it to continue through next 

year. 

Mr. SHAYS. I’ll come back to you though. 

Mr. ROCK. Yes, sir. 

Mr. PFOTENHAUER. We at the Mortgage Banker’s Association 

think that we will work through this and start to turn around by 

the third quarter of 2008. 

Mr. SHAYS. But will it be bigger before it gets smaller? 

Mr. PFOTENHAUER. No, actually, we are through the biggest part. 

It’s not going to drop dramatically. It’s going to be somewhat high 

next year as well. 

Mr. SHAYS. So, basically, you think the tidal wave has hit? 

Mr. PFOTENHAUER. Yes. 

Mr. LACKRITZ. We think it’s peaking in this quarter now and that 

it will start to taper off and get better next year. 

Mr. PFOTENHAUER. I would agree it’s leveling off. 

121

Mr. LAMPE. Yes, we’re at the front end of it now and it will continue into the first and second quarter next year. 

Mr. SHAYS. First and second quarter—we were talking about the 

renegotiations of the loans and the explanation to me was that 

since some of these are packaged, that presents a bit of an issue 

in terms of who services the loan. And the question I’m asking is 

would the renegotiation of the loans actively now be something 

that will mitigate the ultimate effect of this? 

Mr. ROCK. It’s such a multi-party relationship. I think that’s very 

difficult. And Mr. Calhoun went through a valiant effort before to 

try to explain some of the difficulties, and I think it’s extremely difficult, Congressman. 

Mr. PFOTENHAUER. I think it can be said that servicers who are 

the ones in the front lines of loan modification have incentive and 

have means to modify loans. What’s not clear is how many people 

can be successfully modified into a new loan and thereby stay in 

their home and continue to make payments. It’s hard to put a number around how many there are that actually qualify for that, because the causes of foreclosure and delinquency are so varied. 

Mr. SHAYS. Right, but there is a huge incentive to not have the 

foreclosures. 

Mr. PFOTENHAUER. There’s an enormous incentive not to have a 

foreclosure today. 

Mr. SHAYS. Yes, sir? 

Mr. LACKRITZ. I would agree with that. Obviously, it’s not in anybody’s interest to have increased foreclosures at all. The challenge 

is to find the right balance in there because you have investors. 

You have securitizers. You have originators. You have borrowers 

and you have the taxpayers. And trying to balance that system as 

it’s evolved is a complicated exercise. 

So part of the point of, I think, this hearing, is to urge you to 

be very careful as you go through this. Because obviously, tilting 

the system in one way or the other, will have ramifications to all 

the participants in the system and may have ended up hurting the 

very individuals that you want to help. 

Mr. SHAYS. Thank you. 

Mr. SAVITT. I would agree with that as well. 

Mr. SHAYS. Thank you. 

Mr. LAMPE. I would agree with Mr. Pfotenhauer’s analysis. 

Mr. SHAYS. Mr. Rock, you wanted to make a point. What was the 

point you wanted to make? I interrupted you. 

Mr. ROCK. I was just saying it has a lot to do with rate resetting. 

That was my only point. 

Mr. SHAYS. With regard to a lot of these, you know, we pushed 

all of you to loan to people of color, minorities and so on. And in 

the process we took great pride that we’re seeing these loans being 

made, and, now, we realize that some benefitted and some have 

been hurt badly. 

But is it your view that some of these loans probably will be in 

the best interest for people just simply to walk away from the loan? 

Mr. PFOTENHAUER. Clearly, people are electing to do that today. 

Mr. SHAYS. Yes. 

122

Mr. PFOTENHAUER. There are many people who got into a loan 

for very little money down. They maybe had a piggy-back second 

and now they own a home whose value has gone down. 

Mr. SHAYS. But likely while they may lose their home, they may 

not have lost an investment of any. They may not in fact have lost 

anything because they hardly put anything down. 

Mr. PFOTENHAUER. They may not have lost any net worth. They 

may be greatly inconvenienced, and it may be hurtful to their family to leave. 

Mr. SHAYS. Judging from the morning of my chairman, I’ll just 

close by saying to you, Mr. Savitt, I’ve depended on mortgage brokers for probably ten—refinancing, maybe seven—with two different homes; and, I always felt well served by the individuals who 

have helped me. 

Mr. SAVITT. Mr. Shays, may I say one thing about that? I just 

want to clarify something before to make sure that what I was saying was understood, that we support banning the incentive compensation. I want to make that very clear. But, we don’t want to 

have our ability to earn a living banned. Indirect compensation is 

how mortgage brokers— 

Mr. SHAYS. I think we understand that. 

How are you doing, Mr. Chairman? Are you okay? 

The CHAIRMAN. Yes, one more if you want. 

Mr. SHAYS. Okay. 

The CHAIRMAN. Let me just ask—did you want to say something? 

Ms. WATERS. If I may. 

The CHAIRMAN. Go ahead. 

Ms. WATERS. I wanted to clear up something. I know that Mr. 

Shays on two occasions had talked about the mortgages that are 

made available to minorities and others who perhaps, you know, 

could not afford them. Someone said today that most of the problem was in refinance and that the people who were refinancing had 

bought homes that they could afford. 

It was not where the problem was that the mortgages were so 

much being extended to folks who had nothing, could not afford 

them, maybe not even deserve them. 

Will someone please clear that up? I don’t know who said that. 

Mr. SHAYS. If the gentlelady could just yield. The point I had 

made and I was corrected was that I was making the assumption 

that these subprime loans were for basically new buyers. And it 

was pointed out a lot of these folks were people who already had 

a decent mortgage, but were tempted to get into an unstable mortgage. I think that’s the point. 

The CHAIRMAN. I think Mr. Gruenberg, the Vice Chair of the 

FDIC in fact made that point very strongly, partially corroborated 

by Comptroller Dugan. 

Mr. SHAYS. Yes, and I appreciate you making that point. 

Ms. WATERS. Thank you. 

The CHAIRMAN. I just want to close with a couple of points, and 

I appreciate the constructive suggestion. 

Do any of the members of the panel think that we should in fact 

not bother to legislate at all, that we’re going to do more harm 

than good. Does anyone think that we should just leave the status 

quo? 

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Mr. Lackritz? 

Mr. LACKRITZ. No, Mr. Chairman. I think the point is just to 

urge you to move carefully in this area. 

The CHAIRMAN. As opposed to whether we could move or not. 

Mr. LACKRITZ. No. I don’t mean to make light of that. 

The CHAIRMAN. All right, secondly, I want to make a statement, 

because people have said, well, this is going to restrict credit. Yes. 

Let me ask you this. Do you think that all of the loans that were 

made over the last couple of years in the subprime area should 

have been made? 

Mr. Rock? 

Mr. ROCK. No. 

The CHAIRMAN. Mr. Pfotenhauer? 

Mr. PFOTENHAUER. No, sir. 

The CHAIRMAN. Mr. Lackritz? 

Mr. LACKRITZ. No. 

The CHAIRMAN. Mr. Savitt? 

Mr. SAVITT. No. 

The CHAIRMAN. Mr. Lampe? 

Mr. LAMPE. Okay, so if you all think that there were loans that 

were made that shouldn’t have been made, of course, we’re going 

to restrict credit. 

Now the job is to restrict credit in a somewhat precise way. 

You’re never going to get to perfection; you’re never going to ban 

only bad stuff and leave good stuff. We believe that you can move 

the line closer. You’ve been helpful with us, but please don’t tell 

me that the problems that we’re going to restrict credit and expect 

to be credible, because we need to restrict credit. 

The problem was credit was improvidently granted to a significant number of people on terms or in circumstances in which they 

shouldn’t have gotten it. That’s what’s happened. What we need to 

do is to try to find a way to restrict the wrong kinds of credit. But 

of course it’s going to restrict credit; if it weren’t going to restrict 

credit, then we would sill have the same thing. 

Mr. Savitt, did you want to respond? 

Mr. SAVITT. Mr. Chairman, first I want to congratulate you for 

the contents of this bill and also one part in particular, which is 

the registry for all originators. 

The CHAIRMAN. Yes, we’re going to do that. We’re working with 

the minority on this and we will have that registry. I also think, 

by the way, and this goes to the bank situation, we’re not talking 

about licensing people. We are talking about having—the wording 

may get cleaned up—but we are talking about keeping track of everybody who is doing this. 

Mr. Lackritz, I cut you off before. 

Mr. LACKRITZ. I think the only point I wanted to make, there 

was credit that was obviously and prudently or improvidently 

granted. But I also think at the same time it’s important to take 

a lot of pride in what the committee has done, and the industry has 

done to broaden the circle of homeownership. Don’t ban that. 

The CHAIRMAN. I would also want to know this, and this is my 

more philosophical point, I wish everybody in America earned 

enough money to own a home. I also I wish that I could eat more 

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and not gain weight, and that I didn’t get as tired today, that I had 

more energy than I had 20 years ago. 

One of the mistakes we made, I think, was to equate a decent 

place to live with homeownership. Homeownership is a very good 

thing. It’s good for people. It’s good for the neighborhoods, but it’s 

not the only form of housing. And there will always be millions of 

people in this country who, because of their economic circumstances—leave aside wealthy people who did it by choice—

won’t be able to own a home, particularly in certain areas of the 

country, where the gentleman from Connecticut lives, where I live, 

and where my colleague from Los Angeles lives. 

And we make a mistake if we push people into homeownership 

who shouldn’t be there, and part of that is, and it’s part of the 

agenda of this committee, to create some alternative and decent 

and affordable rental housing, and I think we need to have the 

mix. I would mention one other thing that didn’t get mentioned 

today and it’s very relative to us. One of the things in this bill, 

which I think is most important, is the provision that says that a 

foreclosure does not extinguish a lease. Because of all the people 

we could say, well, the borrowers were imprudent. This one was 

imprudent. 

The tenants were rarely imprudent, and what we have are people who were living in housing and paying their rent on a regular 

basis, and because of a foreclosure, they’ve been hit with evictions. 

Now, we’re going to say going forward that shouldn’t happen. I 

would urge all of you to the extent that you have any control over 

the property, please don’t kick people out just because the landlord 

foreclosed. 

There’s a degree of cruelty that’s not personally oriented that has 

been visited on people. So we are saying that we have in this bill 

that foreclosure does not extinguish a lease. And I think that’s a 

very important point. And please don’t wait until the bill comes to 

act on this. People who are paying their rent, I also must say, from 

the standpoint of the people foreclosing continuing to have a tenant 

makes it a lot less likely that all the pipes are going to wind up 

in China because people are stealing all the copper. And it’s better 

for the neighborhoods too. 

I would just urge people to take that into consideration. I thank 

everybody. This really has been a hearing that has had a very important impact on the specifics of this legislation. 

[Whereupon, at 6:36 p.m., the hearing was adjourned.] 

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