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37–416 PDF 2007

FORECLOSURE, PREDATORY MORTGAGE AND

PAYDAY LENDING IN AMERICA’S CITIES

HEARING

BEFORE THE

SUBCOMMITTEE ON DOMESTIC POLICY

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MARCH 21, 2007

Serial No. 110–22

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.oversight.house.gov

(II)

COMMITTEE ON OVERSISGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

TOM LANTOS, California

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

——— ———

PHIL SCHILIRO, Chief of Staff

PHIL BARNETT, Staff Director

EARLEY GREEN, Chief Clerk

DAVID MARIN, Minority Staff Director

SUBCOMMITTEE ON DOMESTIC POLICY

DENNIS J. KUCINICH, Ohio, Chairman

TOM LANTOS, California

ELIJAH E. CUMMINGS, Maryland

DIANE E. WATSON, California

CHRISTOPHER S. MURPHY, Connecticut

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

BRIAN HIGGINS, New York

BRUCE L. BRALEY, Iowa

DARRELL E. ISSA, California

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

CHRIS CANNON, Utah

BRIAN P. BILBRAY, California

JARON R. BOURKE, Staff Director

(III)

C O N T E N T S

Page

Hearing held on March 21, 2007 ............................................................................ 1

Statement of:

Bradford, Calvin, National Training and Information Center, Chicago,

IL; and Michael T. Maloney, Department of Economics, Clemson, South

Carolina ......................................................................................................... 263

Bradford, Calvin ........................................................................................ 263

Maloney, Michael T. .................................................................................. 287

Fitzgibbon, Thomas, Jr., MB Financial Bank, Rosemount, IL ..................... 210

Fox, Jean Ann, Consumer Federation of America, Washington, DC; Rita

L. Haynes, CEO, Faith Community United Credit Union, Cleveland,

OH; Ed Jacob, Northside Community Federal Credit Union, Chicago,

IL; David Rothstein, Policy Matters Ohio, Cleveland, OH; Fran Grossman, Shorebank Corp., Chicago, IL; Jim McCarthy, president, Miami

Fair Housing, Dayton, OH ........................................................................... 155

Fox, Jean Ann ............................................................................................ 0155

Grossman, Fran ......................................................................................... 245

Haynes, Rita L. .......................................................................................... 200

Jacob, Ed .................................................................................................... 204

McCarthy, Jim ........................................................................................... 177

Rothstein, David ........................................................................................ 216

Rokakis, James, Cuyahoga County treasurer, Cleveland, OH; Inez

Killingsworth, president, East Side Organizing Project, Cleveland, OH;

Bill Rinehart, vice president and chief risk officer, Ocwen Financial

Corp., West Palm Beach, FL; Josh Nassar, vice president, Center for

Responsible Lending, Washington, DC; Dan Immergluck, Georgia Institute of Technology, Atlanta, GA; and Harry Dinham, president, National Association of Mortgage Brokers, McLean, VA ............................... 14

Dinham, Harry .......................................................................................... 85

Immergluck, Dan ....................................................................................... 67

Killingsworth, Inez .................................................................................... 22

Nassar, Josh .............................................................................................. 40

Rinehart, Bill ............................................................................................. 32

Rokakis, James .......................................................................................... 14

Letters, statements, etc., submitted for the record by:

Bradford, Calvin, National Training and Information Center, Chicago,

IL, prepared statement of ............................................................................ 266

Braley, Hon. Bruce L., a Representative in Congress from the State

of Iowa, prepared statement of .................................................................... 313

Cummings, Hon. Elijah E., a Representative in Congress from the State

of Maryland, prepared statement of ............................................................ 9

Dinham, Harry, president, National Association of Mortgage Brokers,

McLean, VA, prepared statement of ............................................................ 87

Fitzgibbon, Thomas, Jr., MB Financial Bank, Rosemount, IL, prepared

statement of ................................................................................................... 211

Fox, Jean Ann, Consumer Federation of America, Washington, DC, prepared statement of ........................................................................................ 158

Grossman, Fran, Shorebank Corp., Chicago, IL, prepared statement of ..... 250

Haynes, Rita L., CEO, Faith Community United Credit Union, Cleveland,

OH, prepared statement of ........................................................................... 202

Immergluck, Dan, Georgia Institute of Technology, Atlanta, GA, prepared

statement of ................................................................................................... 69

Jacob, Ed, Northside Community Federal Credit Union, Chicago, IL,

prepared statement of ................................................................................... 206

Page

IV

Letters, statements, etc., submitted for the record by—Continued

Killingsworth, Inez, president, East Side Organizing Project, Cleveland,

OH, prepared statement of ........................................................................... 24

Kucinich, Hon. Dennis J., a Representative in Congress from the State

of Ohio:

Information cocerning Policy Matters Ohio ............................................ 131

Urban Revitalization Agreement ............................................................. 309

Maloney, Michael T., Department of Economics, Clemson, South Carolina,

prepared statement of ................................................................................... 289

McCarthy, Jim, president, Miami Fair Housing, Dayton, OH, prepared

statement of ................................................................................................... 180

Nassar, Josh, vice president, Center for Responsible Lending, Washington, DC, prepared statement of ................................................................... 42

Rinehart, Bill, vice president and chief risk officer, Ocwen Financial

Corp., West Palm Beach, FL, prepared statement of ................................ 34

Rokakis, James, Cuyahoga County treasurer, Cleveland, OH, prepared

statement of ................................................................................................... 17

Rothstein, David, Policy Matters Ohio, Cleveland, OH, prepared statement of ........................................................................................................... 219

(1)

FORECLOSURE, PREDATORY MORTGAGE AND

PAYDAY LENDING IN AMERICA’S CITIES

WEDNESDAY, MARCH 21, 2007

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON DOMESTIC POLICY, COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 3 p.m. in room

2154, Rayburn House Office Building, Hon. Dennis J. Kucinich

(chairman of the subcommittee) presiding.

Present: Representatives Kucinich, Cummings, Watson, Davis of

Illinois, Tierney, and Issa.

Also present: Representative Turner.

Staff present: Jaron Bourke, staff director; Jean Gosa, clerk;

Nidia Salazar, staff assistant; Natalie Laber, press secretary, Office

of Congressman Dennis J. Kucinich; Alissa Bonner, professional

staff member, Information Policy Subcommittee; Leneal Scott, information systems manager; Erin Holloway, Office of Congressman

Dennis J. Kucinich; Cate Veith, Office of Congressman Dennis J.

Kucinich; Jay O’Callaghan and Kristina Husar, minority professional staff members; John Cuaderes, minority senior investigator

and policy advisor; and Benjamin Chance, minority clerk.

Mr. KUCINICH. The Subcommittee on Domestic Policy of the Committee on Oversight and Government Reform will now come to

order.

I first want to begin by thanking all of you for being here and

to let you know that we have spent the last hour in a series of

votes, and when there is action and votes on the floor that is our

first responsibility. So I am sorry that we are starting an hour late,

but I am very grateful for the presence of each and every one of

the witnesses here.

Today’s hearing will examine the subprime mortgage industry

and the problem of foreclosure, payday lending industry, and the

enforcement of the Community Reinvestment Act. The hearing will

also examine alternatives to foreclosure and to payday lending.

Now, without objection the Chair and the ranking minority member will have 5 minutes to make opening statements, followed by

opening statements not to exceed 3 minutes by any other Member

who seeks recognition.

Without objection, the Members and witnesses may have 5 legislative days to submit a written statement or extraneous materials

for the record.

Without objection, the subcommittee is going to recognize and

welcome Mr. Turner, who is a member of the full committee, to sit

2

for the purposes of hearing and questioning witnesses’ testimony

during the subcommittee’s series of hearings on the state of urban

America.

Again, I bid you good afternoon and welcome. This Subcommittee

on Domestic Policy of the Committee on Oversight and Government

Reform will come to order for its first meeting. This is the first

hearing of the subcommittee, and it is also the first hearing in a

series of hearings on the state of urban America. This series intends to take a closer look at American cities, their progress, their

problems, and their future. This series is important, not only for

the problems it seeks to rectify, but also because I think the last

time the U.S. Government took a comprehensive look at American

cities was nearly 40 years ago when the Kerner Commission concluded ‘‘Our Nation is moving toward two societies, one black, one

white, separate and unequal.’’ Today’s hearing will examine the

subprime mortgage industry and the problem of foreclosure, the

payday lending industry, and the enforcement of the Community

Reinvestment Act. The hearing will also examine alternatives to

foreclosure and to payday lending.

Next Thursday, March 29th, we will look at urban economic development strategies, and particularly whether taxpayer-financed

stadiums and large convention centers fulfill the economic promises

made about them. In the coming weeks we will also take a look at

the retail and grocery store industries, as well as access to health

care in the heart of urban America.

Today we are examining the impact of foreclosures, predatory

mortgage, and payday lending in America’s cities against the backdrop of a series plunge in the stock market last week. On March

13th the Dow Jones Industrials dropped more than 240 points, its

second biggest drop in nearly 4 years, primarily due to the

subprime mortgage industry. All three major stock indexes dropped

by about 2 percent. The stock market erased $406 billion in wealth.

By the end of the week nervous creditors forced New Century Financial Corp., the Nation’s second-largest subprime mortgage lender, to stop making new loans.

As the stock market recovers from a bruising week and the anxiety about what is to come, major American cities are bracing themselves. The Center for Responsible Lending projects that one out of

five subprime mortgages originated during the past 2 years will

end in foreclosure. These foreclosures will cost homeowners as

much as $164 billion. The exact cost it will have on urban America

is unknown.

I wonder if any of us in Government has a proper understanding

of the dimensions of the forthcoming foreclosure crisis and the impact it will have on American cities. It will be severe, it will be prolonged, and it will be very serious.

Today’s hearing is meant to examine what has brought us here.

What are the motivations and practices of the lending industry

that brought them to the verge of a financial crisis and brought

American cities to the edge of downfall?

For the record, I have invited leading trade associations for mortgage brokers, payday lenders, and the American Bankers Association to help us answer this question. We thought they were all

going to be with us here. I am disappointed to learn that two out

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of three associations invited reconsidered their participation in the

hearing. Now, Cleveland, my home town, is at the epicenter of this

national problem.

I want to point to some maps here with the help of staff. If you

look at this map you see the sideways line V highlighted in light

green. Let me tell you what that geographical area represents. It

is the area in the city where depository banks made very few prime

loans.

Now this map highlighted in red and orange, look at the same

V and the same place. This geographical area represents where the

highest number of subprime mortgage loans were made during the

same year.

Now, this next map, again, the same V in the same place. Here,

the red dots indicate the number of foreclosures.

These maps tell you there is a clear and self-reinforcing correlation between the low number of prime loans, the high number of

subprime loans, and the high number of foreclosures.

Finally, the final map, again, the familiar sideways lying ‘‘V’’

shape, but here the foreclosures indicated by blue dots are superimposed on the neighborhoods. Red indicates predominately African American neighborhoods. Again, they match.

Lack of access to prime loans, a high frequency of subprime

loans, and a high rate of foreclosures are by no means specific to

any racial group, but this pattern certainly carries a whiff of America’s dark past.

I started my political career as a representative on the Cleveland

City Council. Later I was clerk of courts, and then mayor of the

city of Cleveland. During my tenure as mayor, Cleveland became

the first city to sign a Community Reinvestment Act agreement

pursuant to the then newly enacted Community Reinvestment Act

of 1977. But what has happened to my city in the past decade is

a story that is reflected nationwide.

Consider a recently published report on seven of the Nation’s

largest financial institutions, entitled, Paying More for the American Dream. The report found that CitiGroup, Countrywide,

GMAC, HSBC, J.P. Morgan, Washington Mutual, and Wells Fargo

all originated a substantial volume of both higher-cost subprime

and lower-cost prime loans.

The report also found the following: for these seven lenders, the

percentage of total home purchase loans to African Americans that

were higher cost was six times greater than the percentage of higher-cost home purchase loans to whites. Let me go over that one

more time. These seven lenders, the percentage of total home purchase loans to African Americans that were higher cost was six

times greater than the percentage of higher-cost home purchase

loans to whites. Those percentages were actually 41.1 percent to

6.9 percent.

Next point, the percentage of total home purchase loans to

Latinos that were higher-cost loans was 4.8 times greater than the

percentage of higher-cost home purchase loans to white, 32.8 percent to 6.9 percent.

In each of the cities examined, the seven lenders combined

showed larger African American/white and Latino/white disparities

than those exhibited in the overall lending market.

4

Foreclosure and discrimination in lending practices, these are serious problems for America’s cities, but in almost every major city

there are significant numbers of hard-working Americans who are

working to reverse these problems. Among our distinguished witnesses today are some of those Americans. These are individuals

and organizations who have created viable alternatives to payday

lenders and the foreclosure and subprime mortgages. These alternatives are the link between where we are now, at the brink of a

massive wave of foreclosures, to where we want to be, on the road

to the Nation’s recovery where American families can live in: security physically, emotionally, and financially.

But even with these alternatives, even if these hard-working

Americans worked every second of the day, the tide will not be

turned, because the magnitude of the problem outstrips even the

best of their abilities and efforts. To turn the tide of foreclosures

in America’s cities, leadership at the Federal Government level is

necessary.

Today we will have the opportunity to examine what the problem

is and the steps that can be taken before it becomes bigger and beyond our capacity to resolve.

With that, I would like to recognize the distinguished ranking

member of the committee, my friend from California, Mr. Issa, for

his presentation.

Mr. ISSA. Thank you, Mr. Chairman. I couldn’t help, when you

were speaking about being from Cleveland, to want to reach over

and remind you that you not only represent most of my family in

Cleveland, but I was born and raised there, so it was very insightful to look at the map of Cuyahoga County as we went through

this. I appreciate the fact that today we have a number of experts

from our hometown—not the town I represent, but our hometown.

Mr. Chairman, I want to thank you again not just for holding

this hearing but for allowing Congressman Michael Turner to sit

in and participate. For those who don’t know, I am sandwiched between two large city mayors from Ohio, and particularly Congressman Turner, who is recently a two-term mayor of Dayton before

coming here and who has, since he arrived, concentrated on areas

of urban America.

Today’s hearing is twofold, though. Today’s hearing not only

deals with the crisis, if we will, of subprime loans, but it is also

dealing with something that affects my Congressional District, payday lending. Payday lending is a major and constant problem for

the U.S. military. With over 44,000 Marines and Navy corpsmen

who operate from Camp Pendleton within my District, we are constantly dealing with bailouts coming through the USA, the Naval

Relief, and so on to try to deal with Marines and Sailors who get

behind by utilizing payday programs. These programs have an incredibly high rate, and if not for congressional action would have

been completely unchecked. But we may need to do more.

Today I look forward to hearing on both of these subjects, one

which is in the news every day and one which is on Camp Pendleton and around military bases every day, including in my District.

I will put the rest in for the record and yield back.

Mr. KUCINICH. I thank Mr. Issa for his participation and also

note that we both share a strong interest in each other’s commuVerDate 11-MAY-2000 11:45 Nov 28, 2007 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 C:\DOCS\37416.TXT HGOVREF1 PsN: HGOVREF1
5

nities. I am always grateful for the knowledge that you have about

our hometown, so thank you.

Mr. ISSA. My brother is always calling to tell me, too, he’s your

constituent.

Mr. KUCINICH. Well, thank you very much.

I would now like to yield to the gentleman from Chicago, Congressman Davis, for a statement.

Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman.

First of all I want to thank you and the ranking member for

holding this hearing. I am so pleased and delighted that it is taking place today because it was 30 years ago that the Community

Reinvestment Act was born in my District, pushed by an organization called the Organization for a Better Austin, of which a woman

named Gail Sincata was the leader, and I was, indeed, a member

of that organization. I am very pleased to associate myself with

Gail’s name and with the tremendous work that she did.

Chicago helped to lead the effort that heightened the obligation

of the financial industry to reinvest in their communities. I am, indeed, disappointed that decades worth of efforts are threatened

now by the suspect practices of various institutions. This hearing

offers a wonderful opportunity to shine light on the problem and

discuss specific potential solutions to support our citizens.

The issue of predatory lending is a serious problem throughout

the country and, indeed, in Chicago. In 2003–2004 the number of

foreclosures in Chicago failed, for the first time in over a decade,

particularly on high-cost loans that had been regulated by the city

and State after, I might add, a tremendous amount of community

pressure.

Many of the communities in my District are communities where,

if economically other neighborhoods sneeze, they get pneumonia.

Unfortunately, due to the predatory lending practices of various institutions, the rate of foreclosure on subprime loans is 19.2 percent.

This is up 37 percent from approximately 5 years ago. In the North

Londale community, foreclosures are up 247 percent since 1993, in

West Garfield Park they are up 256 percent, and in the Near West

Side they have gone up 440 percent—all of which are in the Congressional District which I represent.

These foreclosures have dramatic effects on the surrounding communities. Foreclosures are associated with increases in abandoned

properties and decreased property values. Indeed, for every one

abandoned home, I understand that the property value of a surrounding home is devalued by $30,000. These effects are particularly harmful to those with the fewest assets. They see the equity

that they have worked so hard to put into their homes shrivel up,

and they often lack the resources to offset this negative spiral.

Although the number of foreclosures in Chicago increased in both

white and non-white neighborhoods, the vast majority of foreclosures on non-Federal Housing Administration loans were in

neighborhoods in which 80 percent or more of the citizens were minority. In fact, data from the NCRC shows that African American

borrowers in the Chicago area were 2.5 times more likely than

whites to receive a subprime loan in 2005, with Latino borrowers

being 1.82 times more likely to receive a subprime loan.

6

These practices have made some obviously wealthy and others

obviously poor. Obviously, today provides an opportunity—and I

want to add my thanks to all of those who have come to witness,

not only for your presence but also for your patience.

Mr. Chairman, I would ask permission to submit for the record

documents from the National Community Reinvestment Coalition

and the National Training and Information Center that describe

some of the problems with banking services and foreclosures in the

Chicago area.

Mr. KUCINICH. Without objection, so ordered.

I thank the gentleman from Chicago, and now would like to recognize for the purpose of his statement our colleague from the full

committee, Congressman Turner, who is a former mayor of the city

of Dayton, OH. Congressman, thank you very much.

Mr. TURNER. Mr. Chairman, I want to thank you for holding this

important hearing. Your background as both a mayor and a leading

advocate for individuals is very important for this process. You are

taking up issues of urban and economic development but also

issues that are important to families and individuals, and in that

you can make a difference, so thank you very much for that.

I also would like to thank you and Ranking Member Issa for including me in this hearing. I appreciate being included. As you

know, I served as the chairman of the Federalism and Census Subcommittee in the last Congress, and we had taken up urban issues

that included CDBG, the public housing issues, historic preservation, and brownfields. I am very appreciative of the fact that the

chairman and I are working together on the issue of brownfields.

It helps to be able to make a difference to neighborhoods that are

plagued by abandoned factory sites and environmental conditions.

Today we have before us the incredibly important issue of home

foreclosures, predatory lending, payday lending practices. The latest figures from the Mortgage Bankers Association show that home

foreclosures are a record high. You can certainly see that both, Mr.

Chairman, in what you are experiencing in Cleveland, Cuyahoga

County, and what we are experiencing in Montgomery County and

in Dayton. These record foreclosures are linked to the mortgage

lending practices in the subprime market.

Rising interest rates and weak home prices have made it increasingly difficult for borrowers, especially those that took out

subprime loans to meet their obligations. Owning and maintaining

a home is a challenge, even under the best of financial circumstances. Owning a home when money is tight or non-existent

is virtually impossible. I believe that home ownership is a privilege

that everyone should enjoy, but we must not allow for the dream

of home ownership to be shattered because of questionable and less

than honest mortgage practices that can steal individuals’ futures.

Mr. Chairman, I would like to recognize one of our witnesses,

Mr. Jim McCarthy, who is the president of the Miami Valley Fair

Housing Center of Dayton, OH.

Thank you, Jim.

Jim is going to tell us about how his organization works to combat predatory lending, and I urge the members of this subcommittee to listen closely to his testimony, especially as it relates to how

we might be able to address predatory lending at the local level.

7

His organization has taken an effort to educate homeowners and

to also assist those who have gotten into trouble.

Mr. Chairman, one other thing I would like to add is that, as I

served as mayor and as we were facing the issue of predatory lending and we would see the individual crises and the price that this

would have for homeowners, my community continued to wonder

how the financial markets could sustain these types of losses that

would be inevitable, because even though individual’s lives were

being impacted, actual capital was being lost in the market that cumulative one would expect would have an impact. Today we are

now seeing the results of that as the headlines are beginning to

show concerns in the financial markets over these practices having

happened that have impacted industry lives.

So, Mr. Chairman, I thank you for holding this hearing.

Mr. KUCINICH. I thank the gentleman from Ohio.

Mr. Cummings from Maryland will speak next. Thank you, Mr.

Cummings.

Mr. CUMMINGS. Thank you very much, Mr. Chairman. I cannot

even begin to thank you enough for holding this hearing today.

Mr. Chairman, as I go into my statement, I hope that these hearings will yield some results. I think that so often we hold hearings—and I have said this on other committees that I sit on—but

when it comes to results sometimes something happens and we

don’t get there. I have looked at some of the testimony here today

and I know that a lot of the people here will talk about things that

they are trying to do to prevent foreclosures and things that stem

from predatory lending and trying to address to whole payday loan

situation. We in Baltimore have done quite a bit in those areas,

too.

So I appreciate your efforts to examine the challenges facing

America’s cities, and I think the timely issue of predatory lending

is an excellent place to start.

News reports surrounding the recent subprime mortgage industry’s crisis have shone a national spotlight on a problem that was

already known to those of us familiar with our cities. Low and

moderate-income communities are being targeted by lenders whose

singular concern is making money at the expense of others. For example, subprime loans trapped individuals with poor credit by offering a low introductory interest rate that is followed by dramatic

rate increase. This year, mortgage payments on 41 percent of all

subprime loans will increase. Additionally, these loans frequently

have an interest-only, no principal balloon structure and prepayment penalties. These practices discourage borrowers from paying

down their debt and create a series of scenarios that could easily

spiral out of control.

To be sure, roughly one in five subprime loans go into foreclosure

at least once. This is bad news for individual borrowers, and it is

bad news for entire communities, as well. Foreclosures have a domino effect in the community. They depress nearby property values,

leading to additional foreclosures. This cycle has devastated far too

many low and moderate-income communities in America’s cities.

I am disappointed that the problem had to affect the stock market before it really garnered the national attention that it deserved,

8

but I appreciate the opportunity to investigate the larger issue of

predatory lending with this one high-profile example as a backdrop.

Today we will also look into the practice of payday lending,

which targets low and moderate-income individuals who are

strapped for cash. Payday loans offer short-term loans payable in

full after 30 days or less with interest and a fee. The typical payday loan borrower is not as financially unstable as you might expect. He or she is likely to have steady employment, a relationship

with a bank, and the ability to transfer funds electronically.

As I close, unfortunately the same circumstances that caused the

borrower to seek a payday loan in the first place are likely to prevent him or her from paying it off within the allotted time. For this

reason, borrowers become trapped in a long-term debt making high

interest-only payments. Payday loans can include interest rates

higher than 300 percent.

I am seriously concerned that companies are profiting by trapping vulnerable low and moderate-income individuals in cycles of

debt.

In 1997 Congress passed the Community Reinvestment Act to

prevent this injustice. I am interested to learn what we can do to

better protect our low and moderate-income communities, and I appreciate the chairman’s attention to this critical issue.

As I close again, Mr. Chairman, there is one interest thing. I

don’t know whether it happens in Cleveland, but in my community—I live in the inner city of Baltimore—you can go miles and

not find a bank in the African American community and poor communities. So I am hoping that we will look into these matters and

go beyond the hearing, Mr. Chairman, and try to come up with

some results.

[The prepared statement of Hon. Elijah E. Cummings follows:]

9

10

11

12

Mr. KUCINICH. I thank the gentleman from Maryland.

The gentleman from Massachusetts, Mr. Tierney.

Mr. TIERNEY. Thank you, Mr. Chairman. I add my comments to

the others in thanking you for having this important hearing, and

thank all of the witnesses for their testimony, both the written testimony, as well as what you will give verbally here today. This is

proposed to be a long hearing, and I know some of us have to

apologize in advance for being in and out of the room for other commitments, but it doesn’t mean that we haven’t had an opportunity

to read thoroughly what has been provided by this panel, as well

as the next panels, and appreciate it.

In my District, in Essex County I note on the chart here from

1998 to 2001, that period up to 2006 has seen an increase in foreclosures of 289.1 percent. It is a huge issue in my community, as

well as others on the panel that have spoken here. I look forward

to your proposed solutions, because I think we have identified the

problem pretty well. I am looking forward to hearing your comments on how we might be of assistance to people to stop this from

snowballing out of control worse than it has now.

Again, thank you, Mr. Chairman, for attending to this matter.

Mr. KUCINICH. I thank the gentleman from Massachusetts.

If there are no other additional statements, this subcommittee

will now receive testimony from the witnesses before us today.

I would like to begin by introducing our first panel.

From my left, Mr. Jim Rokakis. Jim Rokakis took office as Cuyahoga County treasurer—that is in Cleveland, OH—in March 1997,

after serving for over 19 years on the Cleveland City Council. Mr.

Rokakis has brought sweeping reform to the treasurer’s office. He

overhauled the Cuyahoga County’s property tax collection system

and significantly improved Cuyahoga County’s investment function.

Mr. Rokakis revolutionized the way Ohio counties collect delinquent property taxes by working successful to pass Ohio House Bill

371 that allows county treasurers in Ohio’s largest counties to sell

their property tax liens to private entities. Mr. Rokakis spearheaded House Bill 294, which streamlines the foreclosure process

for abandoned properties, and was instrumental in creating Cuyahoga County’s don’t borrow trouble foreclosure prevention program.

Mr. Rokakis developed nationally recognized link deposit loan programs that have helped revitalize the county’s housing stock and

reduced urban sprawl. Additionally, he worked to pass Ohio House

Bill 293 that allows senior citizens to defer property tax payments.

Our new Governor and former colleague Ted Strickland has appointed Mr. Rokakis to Ohio’s recently formed Task Force on Foreclosures in Ohio.

The next witness will be Ms. Inez Killingsworth, who is the

president of the East Side Organizing project, as well as co-chairperson of the National People’s Action, which is a coalition of hundreds of grassroots organizations. She is a national leader in the

fight for reform of the Federal Housing Administration, predatory

lending, and advocating neighborhood safety. The East Side Organizing Project was founded in 1993 to create organized leadership

around issues that impact neighborhood life in Cleveland. ESOP

works with community residents, schools, businesses, churches,

and other neighborhood institutions to identify issues and take acVerDate 11-MAY-2000 11:45 Nov 28, 2007 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 C:\DOCS\37416.TXT HGOVREF1 PsN: HGOVREF1
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tions that create safe, economically strong, and stable communities

for our residents. Decisions about strategy and organizational direction are made by ESOP members. Since 1998, much of ESOP’s

work has focused on predatory lending, divestment of capital, and

quality loan services for low income and minority communities, and

the foreclosure explosion in Cuyahoga County and the city of Cleveland. ESOP’s aggressive approach toward predatory lending has

been nationally recognized for its effectiveness in fighting loan industry abuses and setting up better loan services in low income

communities.

We will hear from Mr. William Rinehart, who has served as vice

president and chief risk officer of Ocwen since April 1999, where

he is responsible for internal audit, information security, quality

assurance, Sarbanes-Oxley compliance, credit policy and administration, community relations, regulatory compliance, and Six

Sigma. He joined Ocwen in 1998 as director of Credit Policy. Ocwen

Financial Corp. formed in 1988 as a public company—it is on the

New York Stock Exchange—headquartered in West Palm Beach.

Ocwen derives the majority of its revenues from the servicing of

residential mortgage loans for third party institutional investors.

Ocwen currently services approximately 480,000 mortgage loans

with unpaid principal totaling $55 billion.

The next witness will be Mr. Josh Nassar, vice president of Federal affairs for the Center for Responsible Lending [CRL]. CRL is

a nonprofit, nonpartisan research and policy organization that promotes responsible lending practices and access to fair terms of

credit for low wealth families. CRL is dedicated to protecting home

ownership and family wealth by working to eliminate abusive financial practices. CRL has conducted or commissioned landmark

studies on predatory lending practices and impact of State laws

that protect borrowers. CRL has also supported State efforts to

combat predatory lending and worked for regulatory changes to require responsible practices among lenders nationwide.

The next witness is Professor Dan Immergluck. Professor

Immergluck teaches courses, including real estate finance, housing

policy, research methods at Georgia Technology. He has also taught

courses in policy analysis, urbanization, and nonprofits and public

policy. He conducts research on real estate and housing markets,

economic development, community development, community reinvestment, fair housing, and urban and regional planning and policy. Professor Immergluck previously taught at Grand Valley State

University in Grand Rapids, MI, and was for almost a decade a

senior researcher with the Woodstock Institute in Chicago, which

is a nonprofit research organization focused on community and economic development. At the institute he served as the primary deputy to the president, authored dozens of reports, advised Federal,

State, and local government, as well as nonprofit agencies. The professor has also worked as an economic development planner for an

industrial development organization in Cleveland and for the State

of Ohio. His most recent book, Credit to the Community, examines

the history of lending discrimination and red-lining, fair lending

policy, and the Community Reinvestment Act.

Finally, Mr. Harry Dinham, president of the National Association

of Mortgage Brokers, has served in leadership roles for both the

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Texas Association of Mortgage Brokers and the National Association of Mortgage Brokers. Established in 1973, the National NAMB

is the only national trade organization representing the mortgage

broker industry. Fifty State affiliates, more than 27,000 members,

the NAMB promotes the industry through programs and services

such as education, professional certification, and government affairs representation.

I want to thank each and every one of the witnesses for appearing before the subcommittee today.

It is the policy of the Committee on Oversight and Government

Reform to swear in all witnesses before they testify.

[Witnesses sworn.]

Mr. KUCINICH. The record will reflect that the witnesses answered in the affirmative.

I will ask that each of the witnesses, beginning with Mr.

Rokakis, now give a brief summary of their testimony, and to keep

this summary within 5 minutes duration. I want you to bear in

mind that the complete written statement that you present will be

included in the hearing record.

Mr. Rokakis, you are our first witness. I welcome you as not simply as the distinguished treasurer of Cuyahoga County, but as

someone who I have served with in public life for decades. You

have been an exemplary public servant and you honor us with your

work and your presence. Thank you very much for being here.

Please proceed.

STATEMENTS OF JAMES ROKAKIS, CUYAHOGA COUNTY

TREASURER, CLEVELAND, OH; INEZ KILLINGSWORTH,

PRESIDENT, EAST SIDE ORGANIZING PROJECT, CLEVELAND,

OH; BILL RINEHART, VICE PRESIDENT AND CHIEF RISK OFFICER, OCWEN FINANCIAL CORP., WEST PALM BEACH, FL;

JOSH NASSAR, VICE PRESIDENT, CENTER FOR RESPONSIBLE LENDING, WASHINGTON, DC; DAN IMMERGLUCK,

GEORGIA INSTITUTE OF TECHNOLOGY, ATLANTA, GA; AND

HARRY DINHAM, PRESIDENT, NATIONAL ASSOCIATION OF

MORTGAGE BROKERS, MCLEAN, VA

STATEMENT OF JAMES ROKAKIS

Mr. ROKAKIS. Thank you, Mr. Chairman. Thank you, Chairman

Kucinich and Ranking Member Issa, for allowing me to speak

today on the topic of subprime lending and the harm that it has

caused to so many communities all over America, particularly communities in Ohio. The damage to the Buckeye State has been enormous, but, sadly, the news of the past few months convinces me

that the worst is yet to come.

My name is Jim Rokakis. I am the county treasurer for Cuyahoga County, OH, a county of over 1.3 million people that includes

Cleveland and 59 suburban communities.

For at least the past 7 years, urban leaders in cities like Cleveland, Dayton, Toledo, and other older, more mature cities throughout America have been decrying the explosion in foreclosure filings

in their communities. They have complained of abandonment, of

property flipping, and of a lending industry that we thought was

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behaving so irresponsibly we were convinced that some day a segment of that industry, the subprime sector, would implode.

We complained of no document loans and of adjustable rate mortgages that would reset at a rate higher, that would be well beyond

the means of the borrower. We complained of borrowers known as

NINJAS, no income no jobs no assets, who were often buying multiple properties, very often with no down payments. We complained

of fraud on an unprecedented scale that involved buyers, sellers,

brokers, bankers, and appraisers.

Mr. Chairman and members of the committee, these tactics have

devastated Cleveland and its neighborhoods. The most obvious example, Chairman Kucinich, is a neighborhood in Cleveland that

you once represented, known as Slavic Village, where 900 homes

have been abandoned in just the past several years.

We pleaded for help at the State level, but we were no match for

the lobbying team assembled by the mortgage brokers, the bankers,

and financial services industries that have come to view

securitization and the use of collateralized debt obligations as a

foolproof way to finance mortgages in this country, not just for people with good credit but for people with bad credit or no credit at

all.

You have heard this before, but it bears worth repeating. The

American dream of home ownership has become, for the hundreds

of thousands of Americans who have been foreclosed or who are

being foreclosed or who will be foreclosed this year, for those Americans it has become a nightmare. For older, struggling American

cities like Cleveland this promise of the American dream has become a nightmare, burdening these communities with vacant properties and maintenance costs these cities cannot afford.

For the millions of Americans who live next to one of these properties or on a street with a vacant home or many vacant homes,

who have witnessed a precipitous decline in the value of the most

valuable asset, their home, this foreclosure disaster has become a

nightmare for them, too.

Last March we began a foreclosure prevention program in our

county that asked our residents who were facing foreclosure to call

211-hotline where operators referred them to foreclosure counseling

specialists. The director of that program, Mark Wiseman, is seated

behind me. I am proud to say we saved approximately 600 homeowners from foreclosure during that period, but I am sobered by

the fact that for every mortgage we saved, 20 more foreclosures are

filed with our clerk of courts. We have gone from 3,500 private

mortgage foreclosures in 1995 to 7,500 private mortgage foreclosures in 2000, to over 13,000 in 2006, with no end in sight.

These increases coincide perfectly with the growth of the subprime

lending industry.

What are we asking for this Congress to do? Don’t fall for the argument that some on Wall Street are starting to voice, that this is

a market problem that the market will correct, that the market is

already doing so by tightening credit standards. Mr. Chairman, we

have already talked about it, but I have read various reports that

estimate anywhere from 1.4 to 2.4 million mortgages will go into

default. The losses suffered as a result of these defaults will run

into the hundreds of billions of dollars. On a daily basis we read

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reports of mortgage banks that are filing bankruptcy or are facing

bankruptcy. Does anybody really believe this is all caused by a little hiccough in the market, one that we should trust the market

to correct?

There are two areas where this Congress can be of great help.

Certain loan products must be abolished and loan officers must be

held to fiduciary duty. No document loans have no place in the

home mortgage industry. These loans, which are unapologetically

referred to as liar’s loans among brokers, are an invitation to fraud

and should be outlawed. If your borrower can’t prove beyond doubt

what their income is, why are you lending them money in the first

place?

As far as loan officers are concerned, Mr. Chairman, the loan officer knows with a considerable degree of certainty whether the

borrower he is working with will be able to repay that loan, yet

they reject the notion that they should be required to have that

borrower’s best financial interest at heart when driving the decisionmaking. This is the most important financial decision these

borrowers will ever make, and it is critical that these mortgage

brokers be held to the highest fiduciary standards.

There has been talk in this Congress of a suitability standard.

Does the borrower have the income to make a monthly loan payment, not only next month’s payment but the payment when the

loan rate resets? Selling somebody a loan they don’t need or can’t

afford should cost that mortgage broker his or her license.

When the industry testifies before this panel, please ask yourself

one question: why are we here to address what has become a national crisis? They will blame the foreclosure disasters on a slow

economy and rising unemployment, on rogue brokers and bankers

who have misbehaved.

I am going to tell you we have enough laws and regulations. We

just need to do a better job of enforcing the ones we have. Ask

them if lax or non-existent underwriting standards haven’t played

a role in this disaster, or if high fees and bonuses totaling billions

of dollars to brokers who are ordered to write mortgages with higher interest rates and excessive fees haven’t contributed to this foreclosure tsunami.

Mr. Chairman, you will never be able to put a dollar amount on

the heartbreak, the pain, and the distress caused to these families.

Never. Please reject the argument that if Congress reigns in the

abuses of the subprime industry, that it will dry up credit for the

millions of Americans with less than perfect credit.

There is unquestionably a place for subprime lending in this

country. Subprime loans can provide opportunity for people to own

a home who might not otherwise have that chance. But, Mr. Chairman and members of the committee, to say that you must accept

these abusive practices as part of the solution, well, that is just

plain wrong.

Thank you for this opportunity.

[The prepared statement of Mr. Rokakis follows:]

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Mr. KUCINICH. Thank you very much, Mr. Rokakis.

Now the Chair will recognize Inez Killingsworth, the president of

East Side Organizing Project. Thank you very much, Ms.

Killingsworth. You may proceed.

STATEMENT OF INEZ KILLINGSWORTH

Ms. KILLINGSWORTH. Thank you, Mr. Chairman, and to the subcommittee. I am especially honored today to tell you that I was beside Gail Sincata, known as the mother of CRA, during the fight

over a decade ago on CRA, that law that allowed banks and confined banks that they must be accountable to all people. When Gail

passed, I kind of stepped up to the plate, not to fill Gail’s shoes,

but to challenge people to get the crooks. I am national co-chairperson of the National People’s Action. Again, I would like to thank

you for convening this meeting and allowing ESOP to be a part of

this.

What I like to call is the Perfect Storm of how it happened. I live

in a community that has been destroyed by all levels of government, with the exception of our county treasurer, who you just

heard from today. Without question, cities in Cleveland were ripe

for the picking. The steel industry was leaving. The secondary industries went belly up. And we continue to have what I call a brain

drain. Indeed, the banking industry would like you to believe that

they pulled out of Cleveland because of the economy. Well, I would

like to say that is not true. They pulled out because they could get

more money in the subprime with their subprime affiliates than

they could with their regular loans. They did not pull out. That

was no mistake. They did not do what they were supposed to do

in terms of the CRA.

Consider National City Bank, whose headquarters is in Cleveland. Until very recently, National City owned First Federal Finance. I encourage you to read the Plain Dealer article of March

15, 2007 where National City Bank has put $50 million in reserve

because it foolishly invested in First Franklin Financial, but now

has to foot the bill for that company’s abusive practices as they are

stuck with all of those loans.

National City is not alone. Consider Key Bank, who also learned

the parting of their ways when they decided to sell their subprime

affiliate, Champion Mortgage, late last year. Had National City

Bank, Key Bank, and other banks not chosen to cut their lending

practices in the low and moderate-income communities over the

last 10 years, we would not be here today. We would have better

service in our community. Of course, had the banking regulators

did their job, also, we would not be here.

I live in the Union Miles community. I have lived in there for

more than 30 years. I remember when we had banks in our neighborhood, but one by one they all disappeared. The subprime industry will tell you that they acted based on the economics of supply

and demand. That is probably one of the things that I kind of agree

with them on, but the fact is, as the banks abandoned low and

moderate-income neighborhoods, the subprime industry moved in,

and moved in fast.

For example, in 2002 Argent Mortgage Co., the wholesale lending

arm of ACC Holding, which also owns Ameriquest Mortgage, had

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no presence in the city of Cleveland, but since 2003, however, despite only offering a subprime loan product, they have been the

largest lender in the Cleveland area. I guess you can figure out

why.

I would suggest to you that Argent’s surge in Cleveland is the

result of years of local banks turning their banks on low and moderate income.

I would like to spend a minute and give you some sense of how

devastating this has been in Cleveland. Ohio foreclosure rate is

three times the national average, and the highest in all of the

States. This data says that 12 out of 13 largest Ohio counties indicate that 2003 foreclosure filings increased by an estimate of 25

percent over 2005 in the year of 2005. Despite representing less

than 5 outstanding mortgages, subprime loans account for 70 percent of all the foreclosures.

In the Cleveland community where I live, I remember going past

houses that were very vital, having barbecue meals in the back

yard. This one particular lady, Mrs. McCoy—I bring her name up

because she was very dear to me, and she was always talking

about the subprime lender and how they were taking advantage of

our neighborhood. Well, today Mrs. McCoy is no longer with us, but

before she passed on she lost her home.

ESOP has a model that we work with in terms of our hot spot

cards and how we approach that in terms of trying to help people

to save their home and not be homeless. We worked along with National People’s Action NTIC a few years ago, to get an agreement

with CitiFinancial. CitiFinancial, as you know, is a part of the

CitiGroup, the largest bank in the world. CitiFinancial acquired

the associates a few years ago, and we were going after them because in our community we were hearing complaints of people

about their loans.

We finally got an agreement with CitiFinancial after years of

wrangling over what it was. We developed out of that agreement

what we call our hot spot card. Our hot spot card allows us to gather information that we may be able to use to help people to refinance or get a forbearance or even a resolution to that loan. That

is one of the things that has gone national with ESOP is our hot

spot cards, and we work very closely with the county.

We also have an agreement with Select Portfolio, better known

as Fairbanks. We also have an agreement with Ocwen. Mr. Rinehart is to my left here today to talk about how we work together

to save people’s homes in Cleveland.

I could go on and on and on, but I see my time is up. I thank

you very much.

[The prepared statement of Ms. Killingsworth follows:]

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Mr. KUCINICH. I want to note that all witnesses’ testimony will

be included in the record. If you would like to confine your remarks

to 5 minutes I can assure you that the record of the committee will

reflect your full remarks, but I can understand, in reading the full

text of all of your presentations, and notably Ms. Killingsworth and

Mr. Rokakis who have just testified, you know, it is good for us to

hear this, and I am so grateful that you are here to make the presentation.

I want to note that we have been joined by Mr. Murphy of Connecticut and Ms. Watson of California. Thank you for being here.

The next witness, Mr. Rinehart. Mr. Rinehart is vice president

and chief risk officer of the Ocwen Financial Corp. Thank you for

being here. Please proceed.

STATEMENT OF WILLIAM RINEHART

Mr. RINEHART. Thank you, Mr. Kucinich, Ranking Member Issa,

and members of the committee, for giving me and Ocwen Financial

Corp. the opportunity to share our thoughts with you today.

We—and I mean that in the broadest sense to include the mortgage industry, Congress, regulators, consumer advocates, and State

officials—have two issues to address. The first is what changes are

needed to ensure that all participants in the origination of

subprime mortgages act responsibly. The second, what do we do to

assist borrowers who are already facing difficulty.

Insofar as Ocwen is a loan servicer and not an originator or

broker, my remarks today will focus primarily on the second point;

that is, what Ocwen is doing to help our servicing customers who

are currently having trouble repaying their loans to stay in their

homes.

As I indicated in my written statement provided to you, foreclosure is a lose/lose/lose proposition for the homeowner, for Ocwen

as servicer, and for the investor who owns the loan. Foreclosure

should be pursued only when all other options have failed.

Regardless of the type of loan the borrower has or how it was underwritten, subprime borrowers often have little financial cushion

to withstand any financial shocks. Any change in their income level

through job loss, reduction in hours, death or disability of a wage

earner, or unexpected expenses. A leaky roof, broken hot water

heater or furnace, new transmission for their car, or medical expenses can cause an immediate crisis for these homeowners.

Borrowers already facing difficulty in repaying their mortgage

who are then impacted by an interest rate increase because they

have an adjustable rate mortgage have a high likelihood of experiencing financial default. Because foreclosure is a bad economic

proposition for all parties, Ocwen has worked hard to develop processes to help defaulting customers find alternatives to foreclosure.

Ocwen is proud of our industry-leading loss mitigation programs

that avoid foreclosure for more than 80 percent of our customers

who become 90 days or more past due. In the small percentage of

cases that do go to foreclosure, the primary root cause is our inability to open a line of communication with our customer.

Despite our repeated attempts to reach out to our customers

through telephone calls and letters, some customers, due to shame,

fear, and a lack of knowledge, tune us out. We also make available

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to borrowers an instructional DVD that explains the various solutions available to them. If the committee would like a copy, I would

be happy to provide one.

Mr. KUCINICH. We would.

Mr. RINEHART. OK.

Mr. KUCINICH. Thank you.

Mr. RINEHART. But, again, if the customer won’t talk to us, we

can’t help them.

To close the communication gap, Ocwen has partnered with nonprofit housing advocacy groups, including the National Training

and Information Center in Chicago and their affiliate, the East

Side Organizing Project in Cleveland, to reach out to Ocwen customers to try to find alternatives to foreclosure. We provide lists of

our customers who we have been unable to contact to these housing

advocacy groups. Receiving contact from a local trusted community

group such as ESOP may spur the Ocwen customer to make a call

and take that critical first step to avoiding foreclosure.

Through these partnerships, we have helped many Ocwen customers stay in their homes. Substantial changes in how subprime

mortgages are granted have already occurred, and more are likely

to occur. These changes have resulted from market factors—that is,

investors and investment banks are requiring product and underwriting changes—and from recent regulatory guidance. These

changes will reduce the number of new borrowers finding themselves in trouble only months after receiving their loan. These

changes, however, will make it more difficult for borrowers already

in a loan to fix their current problems.

Ocwen and other servicers, groups like NTIC and ESOP, investors, and investment banks must work together to help these

homeowners already facing difficulties.

Thank you.

[The prepared statement Mr. Rinehart follows:]

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Mr. KUCINICH. I thank the gentleman.

We will next hear from Josh Nassar, who is with the Center for

Responsible Lending.

Please proceed.

STATEMENT OF JOSH NASSAR

Mr. NASSAR. Thank you, Chairman Kucinich, Ranking Member

Issa, and members of the committee for having this important

hearing today, and thank you for inviting me to testify on this important topic.

As has been mentioned, we estimate that, of the subprime mortgages made in the past 2 years, 20 percent will fail, not just enter

foreclosure, but the person will actually lose their home. The impact on urban communities is absolutely profound. Keep in mind

that over half of African American homeowners have subprime

mortgages and 40 percent of Latino homeowners.

When looking at the practices in the subprime industry, it really

should come as no surprise that we are seeing such high rates of

foreclosures. The dominant loan product in the subprime market

that most homeowners in subprime market have is called a 2/28 or

a 3/27 hybrid ARM. That simply means that for the first 2 or 3

years the person has a fixed-rate loan. Then it enters an adjustable

period.

But here’s the problem: these loans have a built-in payment shock of at least 30 percent, meaning that if you have a $2,000

monthly payment, it is going to jump to $2,600, at least. Generally

these loans are only underwritten. The lender is only providing a

loan based on the person’s ability to afford the loan for the fixed

rate period, not for the adjustment period, so it really shouldn’t

come as a surprise that we are seeing these problems.

The other thing is that many times, as has been mentioned, people are receiving no-doc and low doc note loans, which make it extremely difficult for someone to actually afford the cost of the loan

and generally costs more money.

Lenders also frequently do not escrow for taxes and insurance,

meaning that a person has a major bill due in addition to the payment shock. And most subprime homeowners have a prepayment

penalty. Over 70 percent of subprime homeowners have prepayment penalties on their loans. Less than 5 percent of prime borrowers have prepayment penalties. This means that most homeowners

have a terrible choice. They get hit with the prepayment penalty,

or they have to pay the adjusted rate. It is a lose/lose situation.

They are between a rock and a hard place.

Another thing that should be taken into account is that many

people in the subprime market actually qualify for prime loans. It

has been estimated by Freddie Mac that at least 20 percent of people in the subprime market who receive subprime loans could qualify for a prime loan, and the reason why is because there is massive steering going on in the subprime industry.

We have shown in our research, which I attached to the testimony, that African American and Latino homeowners are 30 percent more likely to have a subprime loan, even when they have the

same credit score as their white counterparts. So it is not just

about credit risk. There is a lot more going on here.

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So what should be done? That is the natural question. Well, first

of all Congress should pass a comprehensive anti-predatory lending

law that not only holds lenders and brokers accountable but also

allows States and localities to add additional protections down the

road.

We should also have a return to sound underwriting where a person is qualified for a loan not just for the initial period but also

when the loan adjusts upward. Without that, it is going to be ineffective.

In addition, brokers really need to have more duties, a fiduciary

duty to homeowners. Over 70 percent of subprime loans are made

by mortgage brokers, and so if we are going to attack this problem

we have to deal with the role of mortgage brokers who have a financial incentive to put people in a higher rate loan than what

they qualify for through the payment of yield spread premiums.

In addition, the Federal regulators, bank regulators, have proposed new guidance which calls on institutions to underwrite loans

to the adjusted rate. We hope that those regulations are, in fact,

finalized, and then the Federal reserve makes sure that it is applied to the entire market, not just to national banks and to federally regulated banking institutions.

And we encourage lenders and servicers to reach out to homeowners now to try to avoid what we will perceive is a much bigger

problem as far as people entering foreclosures.

Finally, we call on the GSEs to play an increased role. Recently

Freddie Mac announced that they were going to require from the

loans they buy that lenders are actually going to underwrite to the

adjusted rate, to after the teaser rate. Fannie Mae, unfortunately,

has not followed their lead and has not taken the same action. We

would hope that Fannie Mae would take the same action.

The impact of these issues on communities and wealth, it is difficult to overstate. I would just say to keep in mind that African

American and Latino households have only 17 percent of the

wealth of white households, so the impact and abuses in subprime

industry are just absolutely devastating.

Thank you. I would be happy to answer your questions.

[The prepared statement of Mr. Nassar follows:]

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Mr. KUCINICH. I thank the gentleman.

Next we will hear from Dan Immergluck, Ph.D, associate professor, City and Regional Planning Program, Georgia Tech. Thank

you.

STATEMENT OF DAN IMMERGLUCK

Mr. IMMERGLUCK. Good afternoon and thank you, Chairman

Kucinich, and members of the subcommittee.

It is clear to me that the subprime mortgage market and some

parts of the prime market are in many respects fundamentally dysfunctional. We have had a flood of poorly structured mortgage credit, much of it which works to the detriment of the borrower and to

the benefit of brokers, lenders, and some investors. The phenomenon is distorting housing markets and harming neighborhoods and

communities.

One major problem which is being amplified nationally now as

housing appreciation stalls in many more places is that subprime

foreclosure rates are routinely running at more than 10 to 15 times

those of prime mortgages. In some localities this is more than 30

times difference. The greatest increases in foreclosures in the late

1990’s were generally confined to central city neighborhoods with

high proportions of lower income and minority residents. These

areas continue to be hit very hard, but now, as the subprime industry has grown so much in recent years, its appetite for pushing

product to a wider and increasingly suburban market has swelled

and foreclosures are now following.

In the five-county Atlanta market, for example, really a region

that hasn’t suffered from weak economy of any kind, foreclosures

increased over 180 percent from 2000 to 2006, and the county with

the highest rate of increase was Gwinnett County, a predominantly

middle-income suburban county.

Overly aggressive lending, especially in the subprime market,

hurts housings by encouraging speculation, driving up property values to unsustainable levels, and creating essentially bubble neighborhoods. Faculty at the Wharton Business School recently found

that aggressive adjustable rate lending pushes up neighborhood

housing values at first and then pushes them down much farther

when the inevitable market decline occurs.

Property appreciation that is built upon financing gimmicks and

short-term teaser rates is not real, sustainable appreciation, and in

the long run discourages the smooth functioning of housing markets and neighborhood economies. Many neighborhoods subject to

high levels of aggressive lending end up suffering from high foreclosure rates, which my own research has shown depressed values

of surrounding properties.

So the true complete cost of foreclosures are borne more by the

borrowers and the communities in which they live than by the

lenders and investors supplying the credit. Cities, counties, and

school districts lose tax revenue and have to control the abandoned

properties that fall out.

Therefore, irresponsible, overly aggressive lending hurts neighborhoods and neighbors who had no role in the credit decision.

Even if one does not believe it is the Government’s role to protect

vulnerable homeowners—and I should add that I do believe that it

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is—it is hard to argue there is no role for Government in regulating practices and products that harm entire communities. Given

that some cities have not experienced, at least until recently, the

high levels of foreclosures that cities like Cleveland, Detroit, Baltimore, and Atlanta have, and the fact that many of these markets

are now cooling, we can be very sure that the foreclosure problems

will be getting far worse at a national level before they get better.

Some have portrayed the increases in subprime and exotic mortgages as merely responding to demand as housing prices have risen

in some markets. However, when such products allow buyers to

stretch much farther, farther than they should, they can become as

much a cause as an effect of higher home prices.

I would like to mention just a few quick policy recommendations.

First, regulators and Congress should issue regulations that return the mortgage market to a predominant reliance on an ability

to pay rationale in all underwriting. Congress, the Federal Reserve,

and other regulators should do whatever is necessary to extend

such regulations to State-regulated mortgage lenders and not just

depository institutions.

Second, there is an urgent need for making all actors in the

mortgage supply chain accountable for their role in the mortgage

process. Liability for reckless lending needs to follow from the

broker to the lender to the investor. Nothing will create more accurate information and reduced fraud better than exposing investors

to the downside risk of providing capital to irresponsible lenders.

Third, Federal preemption of stronger State laws is not an appropriate quid pro quo for better Federal regulation. The research

shows that mortgage markets are not significantly impeded by different State regulatory regimes. We have had different regimes in

foreclosure for many years, and I haven’t seen a significant problem. Federal law should be strengthened to provide a structurally

sound floor of basic mortgage regulation, not one based solely on

a confusing battle of dozens of disclosure documents.

Thank you.

[The prepared statement of Mr. Immergluck follows:]

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Mr. KUCINICH. Thank you very much.

We will now hear from Harry Dinham, who is the NAMB president, National Association of Mortgage Brokers.

Thank you, sir. Welcome. Please proceed.

STATEMENT OF HARRY DINHAM

Mr. DINHAM. Good afternoon, Chairman Kucinich and members

of the subcommittee. I am Harry Dinham, president of the National Association of Mortgage Brokers. NAMB is committed to preserving the vitality of our cities and the dream of homeownership.

We commend this committee for holding this hearing.

NAMB is the only trade association devoted to representing the

mortgage broker industry. We speak on behalf of more than 25,000

members in all 50 States and the District of Columbia. Mortgage

brokers must comply with a number of State and Federal laws and

regulations. We are subject to the oversight of not only State agencies, but also HUD, the FTC, and, to a certain extent, the Federal

Reserve Board.

First let me say that it is a tragedy for any family to lose their

home. No one disputes this. Foreclosure hurts not only the family

but the neighborhood and surrounding communities. As small business brokers, we live, eat, shop, and raise our families in these

communities. When consumers’ property values decline, our property values decline. When consumers’ neighborhoods become unstable and prone to violence, our neighborhoods become unstable and

prone to violence. More than any other channel, brokers live by the

motto: once a customer, a customer for life.

What happens in our neighborhoods and in our communities

hurts all of us. Mortgage brokers do care. We believe that everyone

from Wall Street to mortgage originators has a role to play when

a consumer is in trouble and facing foreclosure.

At the same time, we must remember that today America enjoys

an all-time record rate of homeownership, almost 70 percent. The

challenge we face now is how do we help people avoid foreclosure

while at the same time ensure they have continued access to credit.

We realize that a number of recent reports have focused on the

rise in home foreclosures. The truth is we can only speculate on the

causes responsible for any rise in home foreclosures. There are a

number of possible factors: bankruptcy reform, minimum wage

gains, credit card debt, decreased savings rate, decreasing home

values, second homes, fraud, illness, and other life events, to name

just a few. Do not rush to judgment before we have all the facts.

We understand that Congress is calling for a GAO study on the

causes of foreclosure. We expect the study to take into account a

number of possible economic and non-economic factors such as

product pricing, seasonal and market changes. We should examine

the conclusions before implementing any policy decisions that could

unfairly curtail access to credit.

In 2002, our President challenged the industry to increase minority homeownership by 5.5 million families by 2010. Mortgage originators, realtors, lenders, underwriters, and the mortgage

securitizers and investors on Wall Street responded and helped

families in urban America own homes. With this said, all of us—

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industry, government, and consumers—have a role in helping these

families stay in their homes.

Let me close with a brief summary of what NAMB is doing to

help families achieve and maintain responsible homeownership.

We continue to advocate for affordable housing, including FHA

reform, and have pushed for increased mortgage participation in

the program. We must make FHA a real choice for nonprime customers. We support authorizing VA to provide reverse mortgages

and expand access to credit, especially for elderly veterans.

Since 2002, NAMB is the only trade association that has advocated for education, criminal background checks, and increased professional standards for all mortgage originators, not just mortgage

brokers.

We have prepared and submitted a revised HUD statement, good

faith estimate, to help provide comparison shopping.

Our Code of Ethics and best business practices prohibit placing

pressure on or being pressured by other professionals, and we propose the development of a loan specific payment disclosure to be

given to consumers at the shopping stage and again at funding.

This will help consumers avoid payment shock.

Thank you for the opportunity to appear before you today. I am

happy to answer any questions.

[The prepared statement of Mr. Dinham follows:]

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Mr. KUCINICH. Thank you very much, Mr. Dinham.

We are now going to go to questions for the witnesses. The round

of questions will be proceeding under the 5-minute rule, and I will

ask the first set of questions and then recognize the Members after

I complete my questioning.

To Mr. Rokakis, one of the things that you made clear in your

testimony and what was made clear in testimony of a number of

individuals here is that foreclosure is, in and of itself, a significant

contributor to stress on a city. Do you feel that you and all the

forces you can marshall are keeping up with the demand for foreclosure prevention services?

Mr. ROKAKIS. Mr. Chairman, Congressman Kucinich, members of

the committee, no, we are not. I don’t like to admit this. We really

are losing. As I said, for every mortgage we are able to save, 20

more are filed. There is an effort underway at the State level, but

we really need help at this level. We can respond quickly at a local

level, but the reality is our resources are limited. We have tried to

partner with local banks, local financial institutions. Some joined

in our efforts, some did not.

So we are doing the best we can, but this really is a problem that

goes far beyond the power of the Cuyahoga County government.

Really, we needed help at the State level. We have not really gotten it. You know, there has been a raging battle in State government over some legislation that was passed and then repealed. Ultimately, I think the best help can come from the Federal level and

it can come from this Congress.

Mr. KUCINICH. So you have done so much work on mortgage foreclosure prevention. What do you think the consequence will be for

Cleveland, for example, and Ohio and the Nation if the supply of

foreclosure prevention help does not keep up with the demand?

Mr. ROKAKIS. Well, we already know that it has been devastating

to neighborhoods. As we said, some entire neighborhoods have

emptied out. Cuyahoga County has lost 50,000 people in the past

5 years. I think that a significant percentage of that loss is attributable to these practices and these houses going vacant.

I think that beyond that we really need other tools. I know the

industry would bristle at this, but whether you want to call it a

moratorium or a forbearance period, we know that many of these

ARM resets—which, by the way, are known by some in the industry as explosive ARMs—we know that many of these ARM resets

are going to push people over the edge, and the industry needs to

really consider whether they want these resets to go forward, given

the fact that so many of these people will go into foreclosure, or,

if they are not better, entering into a cooling off period or a forbearance period. I know they don’t like the word moratorium.

They are better off having somebody in that home making a payment that individual can afford than watching one additional property enter the foreclosure and sheriff’s list.

Mr. KUCINICH. Thank you, Mr. Rokakis.

Ms. Killingsworth, I noted your statement and I heard the comments of my colleague, Mr. Cummings, how he said that you can

go for miles and not see a bank. What are your opinions about why

this absence of banks, particularly in inner cities, has occurred?

Why do you think that has happened?

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Ms. KILLINGSWORTH. Mr. Chairman, I think, and in fact I believe

that the reason my community is like I like to say debanked, because the banks wanted to find a way around CRA and they found

it, as I like to call it, back door redlining by having financial institutions that they could use to avoid doing a prime loan to the individual and go to the subprime factor. They found it profitable

there. That is why I believe that they left.

Mr. KUCINICH. And this debanking, as you call it, what are the

practical implications for people in the neighborhoods when they

don’t have a bank to go to?

Ms. KILLINGSWORTH. When people don’t have a bank to go to—

and in my community banks are not known to be very friendly, so

they turn to the payday lenders that you heard about today, and

the payday lenders are going up all over the city. They are almost

on every corner. I just recently heard that you can count more payday lending institutions in our community than you can count

McDonald’s, Wendy’s, or Burger Kings put together. So the lack of

banks causes people to look for other alternatives to cash their

checks or to pay their utilities, so they go to the payday lender to

get that exotic loan.

Mr. KUCINICH. Just one last question. It is my understanding the

last time the Federal Reserve Bank of Cleveland held a public

hearing to consider a proposed bank merger affecting Cleveland

was 30 years ago. In your experience, what does that say about the

robustness, if you can call it that, of Federal regulation, and what

would you say about how regulators are doing their job, seeing the

conditions that are existing right now in your neighborhood?

Ms. KILLINGSWORTH. I think the regulators need to do a better

job of monitoring what banks do. They don’t do that, because if

they were doing that I believe that we would not see as many payday loans. We wouldn’t see all these financial institutions that are

up there. The regulators are allowing the banks to use something

other than what they should be using as a measuring stick for how

they perform in the community. They go around that by developing

community development banks, and they invest their resources in

those development banks, thereby allowing them to get credit for

CRA.

Mr. KUCINICH. I thank the gentlelady.

Now let’s go to Mr. Turner. Do you want to participate?

Mr. TURNER. Sure.

Mr. KUCINICH. Thank you, Mr. Turner.

Mr. TURNER. Thank you, Mr. Chairman. I apologize that I am

popping in and out. Luckily, in the room we have your continued

testimony, so I am able to hear the comments. I greatly appreciate

both the dedication that each of you have to this issue, but also

your ability to communicate how this relates to the average American, how it relates to their neighborhood, how this relates to what

we look at even as the most basic issue of fairness.

As I have heard your discussions of neighborhoods and the impacts on individuals—Ms. Killingsworth, you were talking about a

home that you had been at that ultimately had been lost to predatory lending—one of the things that I do think that gets lost is it

is not just the individuals that in predatory lending have their

homes at risk, but it really is the whole neighborhood. When you

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live next to a house that becomes abandoned, it takes down the

neighborhood, it takes down your housing value, it is a blighting

influence, it attracts crime and other impacts. As you have a whole

neighborhood where this happens, you have then the repetition of

this occurring as housing values begin to drop because of the incidence of blighting, of abandoned houses. Their resale goes down,

resulting in even more capital being lost for those individuals that

are in a foreclosure situation.

Then the resulting abandonment of these properties represents a

title block on future redevelopment. Once a house becomes abandoned, has been through sheriff’s sale, if no one has purchased it,

the number of liens that are there, the tax liens that are there, the

community, the city, the neighborhood, even those interested to

bring the capital in to reinvest in that abandoned property have

difficulty in doing the transaction because it is not readily available

on the market. There are so many impediments that are in the way

to clean it up. It has, in fact, left behind not only just a broken

family and a broken, abandoned house; it has left behind a title

problem so that future investors cannot resurrect this building and

it begins to decay further.

I was wondering if each of you might speak of, in that context,

those that aren’t even subject to predatory lending but are the

neighbors. Even those that are not subject to predatory lenders,

let’s say I live next to a house and I have not been a victim of predatory lending but my neighbor has, what is the impact on me?

Mr. ROKAKIS. Mr. Chairman and Congressman Turner, in my

role as county treasurer I serve on something called Board of Revision. It is a three-member board comprised of an auditor, a member of the County Commission, and my office. I chair the committee. I have been asking my board members, this is a year, because

of reappraisals, that tens of thousands of filings are occurring

where people are arguing or contesting the value of their property.

At least at this point one of three people who are applying for property tax appeals in Cuyahoga County are citing the fact they live

next to or on a street with abandoned properties. I can tell you,

knowing what I know and knowing of the work of Professor

Immergluck and others, knowing what I know I would be hard

pressed to not consider that request for reduced property value because both what I have read and both what I see, talking to realtors, I know the property is worthless because it is next to.

Can you imagine, Congressman, if you are on a street state 7,

8, 9, 10 of these homes, as we have in some communities in Cleveland?

Mr. TURNER. It would translate, also, that the impact of that, I

mean, the reason why they are going to you to ask for lowered values is so that they can pay lower taxes.

Mr. ROKAKIS. Absolutely.

Mr. TURNER. And what that does to the community then of the

lower revenues.

Mr. ROKAKIS. Well, it obviously lowers the revenue base, and because of the way something called 920 works, which you know in

Ohio, it increases property values within that category—I am talking about residential—so when people vote for higher taxes, they

would like to see those taxes eventually come down over time, but

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it doesn’t work. In fact, in cases where property values decrease on

a really substantial basis, there can be an increase in property

taxes for those people who are left. It is kind of an arcane, complex

topic, but it is significant and it is devastating, especially to schools

that rely upon this funding.

Mr. TURNER. Others who want to comment on that topic?

Mr. IMMERGLUCK. I think the literature is pretty clear that there

is a big impact. Congressman Davis talked about the $30,000.

There are also effects on crime that have been associated, as you

suggested. That is not just kind of anecdotal; that has been shown

in the literature that vacant houses to increase neighborhood crime

levels. Foreclosures related to vacant houses increase neighborhood

crime levels. It is also true that in lower-income neighborhoods the

effect on property values is actually greater for a foreclosure than

in a middle-or upper-income neighborhood.

Mr. TURNER. Mr. Chairman, I just want to say that, throughout

the country, as people are faced with this, not only those who have

been victims but those we were just talking about that live next

to houses that have been impacted, they want to know whether or

not anybody cares with what they are living with and what they

are facing. I appreciate, Mr. Chairman, you being one of those individuals that cares enough to have this hearing to bring to light the

challenge.

Mr. KUCINICH. Thank you, Mr. Turner. I think that is a very important point that you just made, because, indeed, the entire community is affected.

Thank you, again. Mr. Davis of Chicago, you may proceed with

your questioning.

Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman.

Ms. Killingsworth, you mentioned the failure of different levels

of government to do something about the problem and the issues.

Could you think of something that, say, a local government or a

State government or perhaps the Federal Government, where

would you put the pressure point as being in terms of ability to impact the situation?

Ms. KILLINGSWORTH. Congressman Davis, I would put the impact

on the State level, because that is what we try to do. We try to

work on the State level with our Governor. Their response to us

was we need to study it. We were saying to them, while you are

studying we are dying. Our neighborhood is becoming a ghost town.

One of the things that you said, maybe, well, why don’t you get out.

You can’t get out because you can’t sell the property because the

devalue. The property keeps decreasing.

So I think from a State level, the States should to more to regulate the subprime lenders, and in particular the brokers. In Cleveland that I didn’t get to in my written statement, Argent, part of

Ameriquest, didn’t have a presence in the city of Cleveland in 2002,

but in 2003 they had 1,600 loans. Of those 1,600 loans, in 2004 half

of them were on default, in foreclosure. So if the State of Ohio was

regulating those brokers in a proper manner, I think that is one

of the things that could happen.

As I mentioned, the only relief that we had was through our

county treasurer and the efforts that he put.

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Mr. DAVIS OF ILLINOIS. Thank you very much. Mr. Nassar, I was

going to ask you if you felt that there was a great deal of potential

for the industry, for example, to regulate itself and incorporate

some best practices without the intervention of government.

Mr. NASSAR. Well, unfortunately, I think the track record shows

the best practices have had really minimal effect in the fact that

the dominant subprime loans have these enormous payment

shocks. This has been known for some time.

To the question of who has responded and done a good job, I

would say that States have led the way, including North Carolina,

in combatting predatory lending, but when Congress passed HOPE

in the mid 1990’s it gave the Federal Reserve the authority to regulate the entire mortgage industry when it comes to abusive practices for all lenders. They have never used that authority. They

have never used that authority. So there is no question that the

Federal Reserve could do a lot more.

Mr. DAVIS OF ILLINOIS. Professor Immergluck, I have been so accustomed to calling you Dan, because we have interacted so much

when you were at the Woodstock Institute and we pestered you all

the time, and this is perhaps a great opportunity for me to just express some serious appreciation for all of the help that you have

given to me personally over the years as we have called you for information for studies, for direction, and approaches, and you escaped us and went to Georgia.

What do you see the role of the Federal Government trying to seriously impact now the situations that we have described?

Mr. IMMERGLUCK. It is a big question. I definitely would agree

with Mr. Nassar that the Federal Reserve can do a lot more. They

made a few moves in 2001, only on refinanced loans and only on

kind of high-cost refinanced loans, and that takes up such a small

part of the market it has had very minimal effect, although it did

have some effect, so it proves that the Federal Government can do

something.

The action on refinances I think actually shifted a lot of

subprime activity into the home purchase market, because they

were totally unregulated there.

I think the Federal Reserve can do a lot more by using that other

authority to work on home purchase and all types of refinance

loans and home equity loans.

I also think that, although some States have done a good job, the

Federal Government at least has to get out of the way and quit

preempting States when they do take action. To me that has been

just a travesty of Federal policy for Federal regulators to allow

banks to export regulations from easy States into States that want

to do something to protect their consumers.

Finally, I think, yes, Congress can do something to bring back

the discipline in the industry. I think securitization has just really

taken the industry out of regulatory control.

One other thing. We have a dual regulatory market. Most

subprime lenders are not essentially regulated by the Federal Government and we don’t have the capacity at the State level to regulate them.

Mr. DAVIS OF ILLINOIS. Thank you also very much. And thank

you, Mr. Chairman.

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Mr. KUCINICH. You know, Mr. Davis, what is interesting, from

what Professor Immergluck said, is the lack of regulation of

subprimes. When we see that hedge funds are included as one of

the principal capital formations now and we know that they are not

regulated, so this is an area that we are starting to move into that

raises questions about the Government’s responsibility for the regulation of capital and for massive movement of that. So I appreciate Professor bringing that up, and thank you, Mr. Davis.

We will ask Congresswoman Watson to participate. Thank you

very much for being here. You may proceed with your round of

questioning.

Ms. WATSON. I appreciate that. Almost a decade ago the

subprime market lending business exploded in America, increasing

the availability of credit to portions of the population that do not

qualify for loans based on their credit and income and saving profiles. I look at a chart that was compiled by the Center for Responsible Lending and it appears that my District in Los Angeles—and

I guess it covers Long Beach and Glendale in California—Riverside, San Bernadino County, has the highest rate of foreclosures.

Now, that is very disturbing. These areas that I just pointed out,

certain areas in my District, the 33rd District, certain areas of

Long Beach, certain areas of Riverside and San Bernadino County,

are now minority neighborhoods. Most of the minorities in those

neighborhoods are African Americans.

I am very disturbed that the unfair practices, these detrimental

practices, kind of center in on neighborhoods that are poor and minority with aging homes. They lend this money at high rates knowing the credit backgrounds of these people.

This goes to Mr. Nassar. Can you explain what you found when

you put this chart together? Can you give us some idea of why they

locate and target these communities? What did you find?

Mr. NASSAR. Sure. Yes, well, a few things. One is that we used

economic forecasting from Moody’s and others to talk about assumptions about what has already been going on as far as foreclosures and the mortgage market but what will happen. What we

have seen is that really the explosion of these unsustainable loans

with huge built-in payment shocks, which become the dominant

loan in the subprime market, have had a devastating impact. It

doesn’t need to be that way. Subprime homeowners make great

homeowners, and there is no need for loans to be made in this way.

The other thing I would just like to point out is that, when looking for solutions here, disclosures will not solve this problem. Anyone who has been through closing knows about the kind of paperwork you have to go through, and the thought and the suggestion

that one little line about what could happen to your mortgage will

actually stop these abusive practices is not credible. Disclosures

will not work here.

The other thing is that we do know something about the type of

loan and whether someone is likely to enter foreclosure. Based on

loans made in 2000 and based on our research, if someone has a

prepayment penalty, which most subprime homeowners have, they

are 52 percent more likely to enter foreclosure. If someone is an

ARM, they are 72 percent more likely to enter foreclosure. That is

keeping other factors constant.

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So the quality and the type of loan does, in fact, have a huge impact here, and the impact on family wealth is just difficult to overstate.

Ms. WATSON. Our committee, Mr. Chairman, if I may, is focusing

on domestic policy. I think this is one of our first hearings, because

this is a scourge in my District but it is only in certain parts of

my District. If you know the Los Angeles area, I have Hollywood

and I have places where the land value is at the top of the chart,

but when you go south in my District it is just the reverse, so I

am quite concerned about this.

I was very impressed with Mr. Rokakis’ testimony and Ms.

Killingsworth’s testimony, because we are facing that problem, too.

Let me ask Mr. Immergluck what would you suggest that we do

at the Federal level that might assist these neighborhoods that are

collapsing, being abandoned, and really producing very little to the

economy because there are very few people that stay behind once

they lose their homes. What would you suggest that we can do here

at the Federal level?

Mr. IMMERGLUCK. The first thing I would suggest, which is to be,

I understand, the subject of a later panel, is tell regulators to enforce the Community Reinvestment Act again. I think since the

late 1990’s but especially in the last——

Ms. WATSON. Let me just interrupt you.

Mr. IMMERGLUCK. Sure.

Ms. WATSON. Are you saying it is an enforcement issue?

Mr. IMMERGLUCK. I am not saying it is only enforcement issue.

I am saying the first thing that could be done that I think was

done in the late 1980’s and early 1990’s is enforce the Community

Reinvestment Act and the fair lending laws under the Fair Housing Act.

We saw a large increase in financing for minority homeownership and small business lending and lots of other good things from

about 1989 to 1996, 1997, because of a couple of things. One, the

savings and loan bailout, which improved CRA and HMDA, made

CRA regulations public, made HMDA—Home Mortgage Disclosure

Act—include race and gender, and made CRA evaluations public.

That really boosted the impact of CRA. CRA has not been effectively enforced since the late 1990’s.

Ms. WATSON. That is very good to know. I think we can use that

information, Mr. Chairman, to maybe fashion some language that

would enforce what we already have on the books.

Mr. KUCINICH. If the gentlelady would yield?

Ms. WATSON. Yes.

Mr. KUCINICH. I would respond that this committee, the Subcommittee on Domestic Policy, is going to be the vehicle to not only

gather information about what is happening with the economy of

cities, but to propose specific legislative remedies to respond. That

response to what Mr. Cummings raised at the onset of the hearing,

response to what Mr. Davis has commented on based on his long

history of involvement on these issues at a community level, going

back to Gail Sincata, who I also had the chance to work with many

years ago, and response to your concern that, you know, it is one

thing to get this information. You know, it is another thing to recommend a path of action to do something about it.

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Mr. Rokakis and Ms. Killingsworth, who are really on the front

lines of dealing with this on a regular, daily basis, your coming

here matters greatly, and all the others who have dedicated their

careers to this. Your coming here matters greatly, because we are

going to take this information and put it together with some solid

legislative recommendations and present it to the Congress, so

thank you.

Mr. Cummings, did you have any additional questions?

Mr. CUMMINGS. Yes, I do.

Mr. KUCINICH. Wait. Excuse me, I moved too quickly here. Did

you have any final questions, Ms. Watson?

Ms. WATSON. I yield back the balance of my time, Mr. Chairman.

Mr. KUCINICH. I want to thank the gentlelady from California for

bringing up that central issue of what do we do.

Mr. Cummings.

Mr. CUMMINGS. Yes, Mr. Chairman, I just have one or two questions.

I can’t remember who said it, but somebody talked about how

these loans are given, and they qualify them for the first few years

and then it balloons, and then they are not qualified actually for

the balloon. To me there is something awfully wrong about that,

because it seems like a setup for failure. It is blatant. Then I hear

my good friend, Mr. Dinham. I listened to what you said, but it

seems as if one of the things that is so hard, Mr. Chairman, to deal

with is when you have things that are controlled by money and

money is the incentive for doing them, it is hard to get a hold of

your hands around it and try to stop it.

In my former life as a practicing lawyer, and I saw what my clients went through to qualify for loans, then I hear stuff like this,

how do you get to that? I know the opposite, then you hear on the

other hand the mortgage industry saying people are not going to

be able to get loans, but yet still I think it was you who said that

it becomes a nightmare. I guess in the end what happens is the

person would have been far better off if they had never even gotten

the house.

As I have said many times, we have one life to live. This is no

dress rehearsal. This is the life. Well, we just destroyed just about

somebody’s life for maybe 20 years if they ever get back to a point

where they can even buy a house.

The reason why I say it is hard to get your hands around something when it is motivated by money is because I think coming up

with the strategies to deal with it are going to be hard because you

are going to have so much opposition going in another direction.

One of you also said something that I found very interesting. You

said that it is beginning to spread to neighborhoods. There was a

time when these issues were just in the African American community where, you know, no big deal. Now it is spreading beyond

those communities, and, sadly, it is sad, but in a way it may allow

folks to have more umph when more communities begin to join in,

and then these other communities that you all talked about, the

ones where they are the adjacent communities who are finding that

their property values are being affected, and maybe, just maybe,

we will have enough power with all of this going forward to do

something about it.

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But what I fear is that I don’t want to be sitting here saying

these same things 5, 10 years from now, because you know what

that means? That means that a whole lot of people have lost their

houses. And we don’t think about the children in these situations.

The children have seen their mothers and fathers excited about a

dream, walk in the house, excited, and the next thing you know

they see that dream plummet. I don’t know what effect. I know it

has a detrimental effect on them in the moment, but it also has an

effect of it puts a damper on any dreaming that they might do. I

don’t even know how you put a value on that.

So I just think that is why I was so glad, Mr. Chairman, that

you did this. I am just amazed at how this thing has a rippling effect. We see in Baltimore where, when we have the foreclosures,

you know, folks come in like vultures, so the next thing you know

neighborhoods are changing, and a lot of the very people who gave

their blood, their sweat, their tears for 30 years or so, stayed in the

city when they didn’t have to, and now they find they have nowhere to go.

Anybody want to comment? I still have a minute or two on my

time?

Mr. ROKAKIS. Mr. Chairman, as you know, I came to city government back in the late 1970’s, and we dealt with redlining issues.

I will tell you this has a far more negative impact on urban neighborhoods than redlining. I never thought I would say I miss the

days of redlining. Too much credit is far worse, and it has emptied

these neighborhoods out far faster. In a very strange way, redlining

locked people into place. This has opened the doors and basically

emptied entire neighborhoods out past the point—and I have said

it before—there is a tipping point. There is a point at which urban

communities like Cleveland and Baltimore and Dayton can no

longer afford the cost associated with trying to bring a neighborhood back. You hate to tell the person living in that community it

is beyond our means, but it is happening, and the tipping point has

been reached in neighborhoods all over this country. This process,

as I have said, has helped to accelerate it in a way that I never

thought I would see possible.

Mr. CUMMINGS. What is the easiest thing you all think we can

do? I know you all mentioned recommendations, but what is the

easiest thing? We need to start with those things first. This place

is a hard place to get stuff done.

Mr. NASSAR. I don’t know about easy as far as the political reality, but as far as talking about what is just sound practice, that

is bring back decent underwriting, where basically a person is

qualified to afford the payment increase, where they don’t have to

refinance, at best, or foreclose once the adjustment hits. That is

just straightforward.

But it is also important to point out that steering has a huge role

here. You have a situation where so many people who receive

subprime loans should be getting prime loans, and most of the

subprime market is still a refinance market, and so that should be

kept in mind. A lot of people already have equity, then they are

losing that equity. That is just another point I want to raise.

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Mr. CUMMINGS. Who does all the steering? The broker? I mean,

is it several people down the line and all of them get a little piece

of the change?

Mr. NASSAR. Yes. I mean, the broker has a financial incentive to

put someone in a higher-priced loan than what they qualify for. It

is just plain and simple, and they get paid at closing. Those are

just the facts. I am not smirching particular brokers.

Mr. CUMMINGS. I understand.

Mr. NASSAR. But those are the financial incentives.

Mr. CUMMINGS. I see the chairman looking at me. I have a yellow

light, so I will stop.

Mr. KUCINICH. That is fine. You may proceed. We will give you

a few extra minutes.

Mr. CUMMINGS. No.

Mr. KUCINICH. Short clock.

Mr. CUMMINGS. No, I am fine. But I want to thank you all very

much. We are going to do everything that we can, and we do appreciate you for being here.

Thank you, Mr. Chairman.

Mr. KUCINICH. Actually, when we started these hearings and

came up with the idea for this hearing, Mr. Cummings and Mr.

Davis and other members of the committee thought that this was

so critical to proceed, based on their own experience. This is what

we are talking about. So I thank Mr. Cummings for his participation.

What I would like to do is followup on a question that you asked.

We are calling votes, but we are going to get in a few more questions. We are going to proceed until the end of this panel, or 10

minutes.

I am going to ask a question, and I am going to go down the line,

starting with Mr. Rokakis. This picks up on a question that Mr.

Cummings raised. To what do you attribute the explosion of predatory mortgage loans, just in a very short answer. If you can say it

in two words, that would be great.

Mr. ROKAKIS. How about unbridled greed.

Mr. KUCINICH. That is two words. OK.

Ms. KILLINGSWORTH. He stole my comment. Greed.

Mr. KUCINICH. Mr. Rinehart.

Mr. RINEHART. I have to agree.

Mr. KUCINICH. Mr. Nassar.

Mr. NASSAR. Lenders and brokers have managed ways to avoid

the repercussions and risks for bad loans and they have placed it

all on the homeowners, and there is a real breakdown in the market.

Mr. KUCINICH. All right. Mr. Immergluck.

Mr. IMMERGLUCK. Yes. De-localization of risk, the spreading of

risk to too many parties on the mortgage supply side.

Mr. KUCINICH. And Mr. Dinham?

Mr. DINHAM. I guess my opinion is a little different. I think it

is because of the effort to try to bring homeownership to more people at this point is the reason you have seen the subprime industry

become so large at this point, because there is only so many people

that you can deal with.

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I think, to answer your question, if we were to go back to the

days of the 1970’s and 1980’s where we only had fixed-rate loans,

you would understand the fact that every time you raise the interest rate by a quarter percent you take a certain part of the market

out who cannot qualify for those loans after that point. This has

been an effort overall to bring homeownership or give people the

chance to do that. That is where we are on this issue.

Mr. KUCINICH. It is important that we hear your perspective.

Mr. DINHAM. Yes, sir.

Mr. KUCINICH. One of the things that I am interested in, and

maybe you could give your perspective on this, in Cuyahoga County, OH, foreclosures topped 1,000 a month in 2006, and they are

on a pace to top 1,200 a month in 2007. What would you say are

the major causes of this epidemic?

Mr. DINHAM. That is the reason we asked for an independent

Government study. We don’t know the causes at this point, but I

can tell you the traditional causes of foreclosure have always been

job loss, economy, and health and divorce is No. 3.

Mr. KUCINICH. Let me ask you this.

Mr. DINHAM. Yes, sir.

Mr. KUCINICH. Would you agree for the committee that some of

the foreclosure epidemic is the result of borrowers being allowed

into loans that they cannot afford?

Mr. DINHAM. Well, at this point, without some kind of definition

or some kind of evidence to that fact, it is hard for me to make that

claim. I mean, I cannot make that claim that is part of the problem. That is the claim of a lot of people on this panel, but I don’t

know that for sure.

Mr. KUCINICH. But we are seeing a rising level of defaults, rising

level of foreclosures.

Mr. DINHAM. Yes, sir, but we don’t——

Mr. KUCINICH. Does that tell you anything?

Mr. DINHAM. That tells me that there is a problem out there, but

it doesn’t tell me what the problem is.

Mr. KUCINICH. But you are saying that you really can’t say that

this is the result of borrowers being allowed in loans they can’t afford?

Mr. DINHAM. What I can say is that there are some borrowers

that may have a problem because of that, but I can’t say the majority of your problem is caused by bad products.

Mr. KUCINICH. Again, I need your perspective. Let’s take Argent,

for example.

Mr. DINHAM. OK.

Mr. KUCINICH. They are the top lender in Cleveland for the last

3 years. Every single loan underwritten by Argent is originated by

an independent mortgage broker. Now, this is strictly broker-run

business.

Mr. DINHAM. Right.

Mr. KUCINICH. Now, would you agree that Argent’s independent

mortgage brokers are the only people from the lender’s side of the

table that actually meet the borrower?

Mr. DINHAM. Yes, sir.

Mr. KUCINICH. Are the parties most likely to know if the borrower can afford the loan?

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Mr. DINHAM. No, sir. I would say that Argent is the person that

is most likely to know, because they do all the underwriting. The

mortgage broker gets them into the house, gets them into their

shop and processes the paper and sends it to Argent to be underwritten. Argent would be the one making the final decision.

Mr. KUCINICH. Well, isn’t the independent mortgage broker the

one who sells the loan?

Mr. DINHAM. The independent mortgage broker does get them in

there and gives them options, gives them options on what they

want at that point, and then the customer, the consumer makes

the choice of which loan product they want to go with.

Mr. KUCINICH. What I would like to do is we now have a requirement for a recess. If the panel would be so kind as to wait for a

third round of questioning, myself and other members are certainly

going to return, and I would ask if we could pick up at this point

because, again, I want to tell you that we are grateful for the presence of everyone here, and, Mr. Dinham, you are giving us a

chance for a perspective that we often do not hear.

Mr. DINHAM. OK.

Mr. KUCINICH. So we are going to recess until 5:30, and we will

come back at 5:30 with the question. I want to thank you. We will

see you at 5:30.

[Recess.]

Mr. KUCINICH. The hearing will come to order.

When we recessed we were talking to Mr. Dinham, and I would

like to continue.

Mr. Dinham, you said that you don’t know why so many of the

loans originated by independent mortgage brokers go to foreclosure.

Now, does anybody on the panel know? Mr. Rokakis, do you know?

Mr. ROKAKIS. Mr. Chairman, there was a study done by a group

called Policy Matters Ohio on foreclosures. They have actually done

a few of them. They have been tracking foreclosures in Ohio. They

went out and surveyed all 88 county sheriffs in the State of Ohio.

Especially in smaller counties, nobody knows better the cause of a

foreclosure than the county sheriff. Now, it may not be an issue in

Montgomery, where sheriffs are far removed from the process.

They have bailiffs and other people implementing the foreclosure,

the eviction actions. But of the sheriffs they interviewed in Ohio,

the overwhelming majority of sheriffs said that they thought the

cause, or they observed that the cause of the foreclosures in the

counties in Ohio were predatory loans. It was not illness, it was not

job loss, it was not divorce, it was subprime and predatory lending,

and it is in the Policy Matters Ohio study, which we will make

available to the committee.

Mr. KUCINICH. Without objection, I would like staff to contact

Mr. Rokakis’ office and get the Policy Matters study and have it

included in the record of this hearing, without objection.

[The information referred to follows:]

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Mr. KUCINICH. Well, Mr. Dinham, let’s go back to the question

just before the recess. Would you agree that Argent’s independent

mortgage brokers, who are the only people from the lender’s side

of the table to actually meet the borrower, the parties most likely

to know if the borrower can afford the loan, the independent mortgage brokers, do they know if the borrower can or can’t afford the

loan?

Mr. DINHAM. Would I agree to that? The only thing I am going

to agree to on that is they do not make the ultimate decision on

whether the loan is approved or not.

Mr. KUCINICH. Do you know anything about that process, how it

is approved?

Mr. DINHAM. I know exactly how the process works. The customer comes in, you take an application from the customer, you get

all the information and documentation you have to do, and then

you submit that information to the lender for approval, underwriting approval, and then they send it back normally with some additional conditions or they can’t make a decision right off the bat,

and then you send those additional conditions in and they give you

what I always call a firm commitment that says they are willing

to make that loan.

Mr. KUCINICH. So you are saying the independent mortgage brokers don’t make a decision?

Mr. DINHAM. I am saying they do not make the decision on

whether the loan is approved.

Mr. KUCINICH. So they are like salesmen?

Mr. DINHAM. But it goes deeper than that.

Mr. KUCINICH. Yes.

Mr. DINHAM. The people that have put these products out are the

people on Wall Street. Wall Street is the one that has these products out here. Argent really is passing these products along to Wall

Street, and the people at Wall Street are the people making the

rules on what the rules are to get that loan approved.

Mr. KUCINICH. So these subprime loans which are very risky for

those that are engaging in them, you are saying that you have to

follow the system——

Mr. DINHAM. Yes.

Mr. KUCINICH [continuing]. From the borrower to the agent,

independent broker——

Mr. DINHAM. Right.

Mr. KUCINICH [continuing]. To the company?

Mr. DINHAM. Right.

Mr. KUCINICH. And then you have to go back to Wall Street?

Mr. DINHAM. Yes, because Wall Street is where it all starts, and

we all know that Wall Street is not used to losing money on things,

so they are making money on what is going on at this point, and

they still are. So even while the consumer is suffering maybe because of some of these foreclosures they are doing on this, they are

still not losing their money at that point, and that is part of the

reason that you are seeing these lenders, mortgage bankers, whatever you want to call them, closing their doors today, is because

Wall Street is coming back to them telling them they need to repurchase these loans.

But the mortgage broker is not out there——

150

Mr. KUCINICH. At a higher rate of interest?

Mr. DINHAM. At a higher interest rate?

Mr. KUCINICH. They need to repurchase the loans?

Mr. DINHAM. No, they just buy them back. In other words, what

happens is they put them in a pool, they go up there, and they are

part of a million dollar pool.

Mr. KUCINICH. Would you say there is any fraud that is involved

here in origination so you have so many bad loans? Is there incompetence or something else? What do you think it is?

Mr. DINHAM. Well, I think I have testified that I don’t know

what it is at this point that is causing the problems in Cuyahoga

County. I don’t know.

Mr. KUCINICH. In 2005 the No. 1 lender of foreclosed properties

up for sheriff’s auction in Cleveland was Argent. I am talking about

Argent because I know what is happening in Cleveland. So in Ohio

it takes about 18 months to 2 years for a foreclosure to go to sheriff’s sale. Argent only entered the market in 2003. This means that

a lot of Argent’s loans immediately went to foreclosure. They were

bad loans the day they were written, and independent mortgage

brokers wrote every one of them. So how could you explain that?

Mr. DINHAM. I can’t explain that particular question, but I will

tell you, if you are having loans that are defaulting in the first

month, 90 days, or 6 months, there is fraud involved in the deal

or poor underwriting. That is the only reason.

I don’t disagree with what you are saying. I cannot tell you what

the exact reason is it is going on and how——

Mr. KUCINICH. Is there a permanent record of the identity of

independent mortgage brokers on each loan that he or she originates?

Mr. DINHAM. Not in Texas. No, sir, I don’t believe. I don’t know

what the rules are in Ohio.

Mr. KUCINICH. Do these independent mortgage brokers’ name or

address even appear on the loan?

Mr. DINHAM. Yes, sir.

Mr. KUCINICH. Now, how can a borrower and a lender or the investor, if a loan has been pulled, with thousands of other mortgages securitized and held by a large investor, how can they know

whose bad judgment resulted in a bad loan?

Mr. DINHAM. That is a very hard question to answer, because the

person that made the rules were the people on Wall Street, which

were given to the people that purchased it from the broker. That

was Argent in this case you are talking about. So Argent is the one

that made the decision to make that loan.

Mr. KUCINICH. You know, staff just pointed out something that

I think is worth mentioning, and that is that stock brokers, for example, have a fiduciary responsibility.

Mr. DINHAM. Yes.

Mr. KUCINICH. Trustees for estates have a fiduciary responsibility. Professional financial advisors have a fiduciary responsibility.

Guardians have a fiduciary responsibility. Do you think if independent mortgage brokers had some kind of a fiduciary responsibility here this could tighten this up a little bit?

Mr. DINHAM. No, sir.

Mr. KUCINICH. Why not?

151

Mr. DINHAM. Because I think it is awfully hard for a mortgage

broker, as an independent contractor dealing with several lenders,

to have a fiduciary responsibility or a responsibility because they

are under contract with lenders also at this point, so it is hard to

serve two masters. In other words, in Texas we are required to tell

the borrower at the time of application what our relationship is

going to be to the borrower. They are told at the very beginning

that we are not agents of the borrower at this point. I don’t think

that is going to solve your problem by making everybody a fiduciary. And if you do that, then you need to add everybody, all mortgage originators, not just brokers. You add the whole group in

there.

Mr. KUCINICH. I mean, that seems like a good recommendation.

Mr. DINHAM. Because we are for all mortgage originators being

licensed. We are for all of them having background checks. We are

for all of them having education, continuing education, including

the banks at this point. so we would really like to see that.

Mr. KUCINICH. Given that, as you put it, that borrowers or that

brokers do not have a fiduciary responsibility at this point, do you

think that borrowers should be able to trust brokers to bring them

the best loan?

Mr. DINHAM. Well, the facts speak for themselves. Depending on

who you talk to, they say that we do over 50 percent of the business on a regular basis. Do you think that the consumers would

continue to come back to us if—in other words, we have to live on

referrals. In other words, you don’t go out and solicit new business

every time, so you are living on referrals at this point. I really

think that without those we wouldn’t be doing as much business

as we are. So the consumer believes that we are giving him a good

deal.

Mr. KUCINICH. But do they have a choice, though? Do these consumers have a choice?

Mr. DINHAM. Sure they have a choice. That is one of the things

we really like to see them do is to shop. That is one of the problems. They mentioned steering on here before.

Mr. KUCINICH. Yes.

Mr. DINHAM. Steering people into a particular loan? The fact of

that is if they had gone out and shopped at two or three different

places, they couldn’t have been steered into anything.

Mr. KUCINICH. OK, but let me ask you this: do consumers have

a choice, let’s say, that vary in price, or does the broker present the

consumer with one loan which the broker tells the consumer is the

best for him? How does the broker——

Mr. DINHAM. I can’t speak for every broker. I can tell you what

I do. I normally give them three choices of what they would like

to do. What normally will happen is you will have somebody call

you up on the phone and say would you send me a good faith estimate with your cost on a particular loan product.

Mr. KUCINICH. Is a fee a percentage of a loan?

Mr. DINHAM. Sir?

Mr. KUCINICH. Is the fee——

Mr. DINHAM. Yes, sir.

Mr. KUCINICH [continuing]. Based on a percentage of the value

of the loan?

152

Mr. DINHAM. Right. Yes, sir.

Mr. KUCINICH. So if the value of the loan is a function of appraised property, what efforts do independent brokers make to

make sure that an appraiser has made a correct appraisal, rather

than an inflated price to justify a loan?

Mr. DINHAM. That is another function of underwriting. Underwriters make the determination based on the comparables and the

information provided on the appraisal whether the appraisal is accurate. If they don’t like it, they also have the option to go out and

get an independent application at that time. So the underwriter is

the actual person that makes those decisions.

Mr. KUCINICH. Have you ever heard of any brokers who would

choose appraisers who would inflate house values?

Mr. DINHAM. Only if they wanted to commit fraud.

Mr. KUCINICH. Does it happen?

Mr. DINHAM. Yes, it does. I am sure it does, because there have

been court cases where it has happened. But I will say this, too,

that any industry has some bad actors in it, and at least these are

being caught. In fact, in Texas we are working on a fraud bill

which will go a little further to stop these things.

Mr. KUCINICH. How long have you been doing this?

Mr. DINHAM. Since 1967.

Mr. KUCINICH. Let me ask you something. I imagine after a

while you know the business so well that you can go and you can

be talking to someone and kind of guess if they are going to be able

to make this financial deal happen. Have you ever had a case

where you told someone I can’t do this, I can’t loan you the money?

Mr. DINHAM. Yes, I have.

Mr. KUCINICH. What are the circumstances under which that

happens?

Mr. DINHAM. Well, they don’t qualify for the loan. They don’t

meet the guidelines at that point. In other words, you turn them

down if they don’t qualify.

Mr. KUCINICH. How do you suppose, then, if that is the way——

Mr. DINHAM. It is a lot easier today than it used to be. There was

a time before the invention of the automated underwriting system

where I could just take an application and tell you whether somebody would be approved or not at that point.

Mr. KUCINICH. Right.

Mr. DINHAM. Today, with automated underwriting, you don’t

dare do that because we have computers out there that are making

some of the decisions, and after those decisions are made you have

to get the requirements along with that and send them to the investor for the final approval.

Mr. KUCINICH. Do mortgage brokers write no-doc loans?

Mr. DINHAM. I am sure they do. Yes, sir.

Mr. KUCINICH. OK. Again, you are very helpful in describing how

it works, and I think that as we work to develop some alternatives

and some legislative remedies, I think it will be very important to

hear from the mortgage brokers to make sure that, as you put it,

everyone ought to be covered.

Mr. DINHAM. That is correct.

153

Mr. KUCINICH. If someone is going to try to put some guidelines

into law, then it ought to be expanded so that you are not the only

one that is covered.

Mr. DINHAM. That is correct.

Mr. KUCINICH. Because, as you pointed out, this goes all the way

to Wall Street.

Mr. DINHAM. Yes it does.

Mr. KUCINICH. It is very important for you to be here to say that.

Mr. Turner, do you have any questions you want to ask?

Mr. TURNER. Not at this time.

Mr. KUCINICH. We are going to go to that second panel momentarily.

Mr. Davis, do you have any questions you want to ask?

Mr. DAVIS OF ILLINOIS. Mr. Chairman, I have no further questions.

Mr. KUCINICH. I want to thank all of you for participating in

what has been one of the most comprehensive discussions we have

had on this subject of foreclosures, subprime loans, the industry,

how this all fits together. Each one of you has made a contribution

to this discussion, and your very presence here and your testimony

will enable this committee to make recommendations to the Congress about the direction that we can take to remedy some of the

abuses that are present. I want to thank each of you for your participation.

The first panel has now been completed, and we will ask the second panel to prepare to testify.

Thank you.

At the request of Congressman Turner, we have added Mr.

McCarthy to the panel. Welcome.

I would like to thank all of the members of the second panel for

coming forward. This next panel concerns payday lending and alternatives to payday loans.

Before we begin, I would like to ask that we watch a video, a

short video, about one woman’s experience with payday lenders and

how she broke the cycle with the help of an alternative created by

one of our witnesses.

[Videotape presentation.]

Mr. KUCINICH. Thank you very much.

I would like to take the liberty of further introducing a member

of the panel who was part of this solution, and that was Mr. Ed

Jacob, who is the manager of the Northside Community Federal

Credit Union, a 33-year-old community development credit union

with assets of $8 million. The credit union is a certified CDFI. It

has a low income service designation from the National Credit

Union Administration.

Northside offers checking and savings accounts, ATM cards,

small consumer loans, Visa credit cards, new and used auto loans,

as well as home equity and home mortgage loans. It provides an

alternative to the payday and predatory lenders who take advantage of low income people to its 4,000 members. Prior to leading

the credit union, Mr. Jacob was a vice president of the Community

Reinvestment Department for Bank One Corp. and its predecessor

banks, First Chicago and First Chicago NBD, where he was responsible for Illinois programs.

154

Rita Haynes is joining us. Rita Haynes is the CEO of the Faith

Community United Credit Union in Cleveland, OH, and chairwoman of the Board of National Federation of Community Development Credit Unions. Faith is a community development credit

union established in 1952. Ms. Haynes also served as the chairwoman of the National Federation of Credit Unions. Faith is based

on the faith and vision of the members of the Mt. Sinai Baptist

Church. Ms. Haynes is a recipient of the Peak Career Lifetime

Achievement Award of the African American Credit Union Coalition. Welcome.

David Rothstein is a researcher at Policy Matters Ohio. Mr.

Rothstein researches tax, wage, and consumer policy, including the

earned income tax credit, the living wage, and predatory lending.

Policy Matters Ohio is a nonprofit policy research organization

founded in January 2000, to broaden the debate about economic

policy in Ohio. Policy Matters Ohio provides analyses focused on

issues pertaining to low and middle-income workers in Ohio. It

makes its findings accessible to the public, the media, and to policymakers.

Ms. Fran Grossman is the executive vice president of ShoreBank

Corp. ShoreBank is a community development and environmental

bank serving Chicago, Cleveland, and Detroit. Established in 1973,

ShoreBank has been a pioneer of economic equity. ShoreBank was

created to demonstrate that a regulated bank could be instrumental in revitalizing the communities being avoided by other financial

institutions based on racial and economic discrimination. In 2000,

ShoreBank expanded its focus to include environmental issues, believing that communities cannot achieve true prosperity without

also attaining environmental well-being.

Jean Ann Fox serves as a director of consumer protection for the

Consumer Federation of America and leads the organization’s efforts to assure that the privacy rights of American consumers are

protected, whether it is in the traditional or the electronic marketplace. She has extensive experience in representing consumer interests in privacy-related policy issues.

The Consumer Federation of America [CFA], is an advocacy, research, education, and service organization. As a matter of fact, I

believe my good friend, Senator Metzenbaum, has had a long association with the Consumer Federation of America. The CFA has

provided consumers a voice in decisions that affect their lives. The

CFA’s professional staff gathers facts, analyzes issues, and disseminates information to the public, policymakers, and the rest of the

consumer movement.

I want to thank all of you for being here. Also, I am going to introduce Mr. McCarthy, who is part of this panel.

Mr. Jim McCarthy is the president and CEO of the Miami Valley

Fair Housing Project, which seeks to eliminate housing discrimination. In furthering this goal, the Miami Valley Fair Housing Project

engages in activities designed to encourage fair housing practices

through educational efforts, assists persons who believe they may

have been victims of housing discrimination, identifies barriers to

fair housing in order to help counteract and eliminate discriminatory housing practices, works with elected and governmental officials to protect and improve fair housing laws, and takes all approVerDate 11-MAY-2000 11:45 Nov 28, 2007 Jkt 000000 PO 00000 Frm 00158 Fmt 6633 Sfmt 6633 C:\DOCS\37416.TXT HGOVREF1 PsN: HGOVREF1
155

priate actions necessary to ensure that fair housing laws are properly and fairly enforced through the Miami Valley. Mr. McCarthy

is one of the architects of the Predatory Lending Solutions Project,

a project that addresses the epidemic problem of predatory mortgage lending in Montgomery County, OH.

Thank you to all members of the panel.

Mr. TURNER. Mr. Chairman, if I might, I just want to thank you.

As you know, Mr. McCarthy was on your third panel, and I appreciate you putting him on the second. His topic is not payday lending, but is predatory lending. They are an organization that has

been instrumental in trying to address both education on predatory

lending and assist those who have been victims, so thank you for

including him.

Mr. KUCINICH. And also, in deference to Mr. Turner, Mr. Turner

wants very much to be here while the gentleman who he has

worked with testifies, so in deference to my colleague what I am

going to do is just announce the order of speakers. All of this will

go into the record. I just want to facilitate Mr. Turner’s schedule

here. Jean Ann Fox will go first, then Mr. McCarthy, Ms. Haynes,

Mr. Jacob, Mr. Rothstein, and Ms. Grossman. That will be the

order.

Mr. TURNER. Thank you.

Mr. KUCINICH. OK. Thank you.

As with panel one, I am going to ask that all the witnesses rise

and raise your right hands.

[Witnesses sworn.]

Mr. KUCINICH. Thank you. Let the record reflect that all of the

witnesses answered in the affirmative.

As with panel one, I am going to ask that each witness give an

oral summary of his or her testimony and to try to keep the summary within our 5-minute time period. I want you to bear in mind

that your complete written statement will be included in the hearing record.

Let’s start with Jean Ann Fox. Again, thank you. Please proceed.

STATEMENTS OF JEAN ANN FOX, CONSUMER FEDERATION OF

AMERICA, WASHINGTON, DC; RITA L. HAYNES, CEO, FAITH

COMMUNITY UNITED CREDIT UNION, CLEVELAND, OH; ED

JACOB, NORTHSIDE COMMUNITY FEDERAL CREDIT UNION,

CHICAGO, IL; DAVID ROTHSTEIN, POLICY MATTERS OHIO,

CLEVELAND, OH; FRAN GROSSMAN, SHOREBANK CORP., CHICAGO, IL; JIM MCCARTHY, PRESIDENT, MIAMI FAIR HOUSING, DAYTON, OH

STATEMENT OF JEAN ANN FOX

Ms. FOX. Thank you, Chairman Kucinich and members of the

committee. I represent Consumer Federation of America, but I am

also testifying today on behalf of Consumers Union, publisher of

Consumer Reports, and the National Consumer Law Centers on behalf of their low income clients.

I have worked on studying the high cost small loan market now

for my 10-year career at CFA, and we have published numerous

studies and reports about payday lending. I can assure you that

this is a national predatory lending problem for consumers. Payday

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lending is legal in 39 of the 50 States, and it is a $5 billion cost

to American consumers for about $28 billion worth of very small

loans every year. This is based on a study done by the Center for

Responsible Lending, which sets a more conservative figure on this

industry than industry investment advisors do.

Academics tell us about 5 percent of the population uses payday

loans which are made through about 25,000 storefront outlets

around the country and are available online, as well.

These are small cash loans that you take out by writing a personal check on your own bank account or signing over electronic access to your bank account for the amount you want to borrow. It

tends to be $300, $500, certainly less than $1,000.

The cost of the loans is expressed by the industry as dollars per

hundred, so they will say they charge $15 per $100 or $20 of $25

or $30. The annual percentage rate for a 2-week loan runs at 390

percent and up. These are balloon payment loans. They are due in

full on your next payday or the check that you wrote and left behind with the lender will be deposited in the bank. It is likely to

bounce, because a family that can’t make it to payday without borrowing a few hundred dollars at 400 percent interest is hard

pressed to have enough money in the bank to cover the check on

payday, and then the payday lender will charge you a bounced

check fee, as well as your bank, each time that transaction is presented.

These loans are made without asking the kinds of questions that

let you determine ability to repay. Just as you heard with the

mortgage issue, payday loans are made without pulling a credit report, without asking who else you owe or how much you owe. All

you have to have is an open bank account, a source of income, and

a form of ID. Every payday loan is based on a prospective bad

check, so these loans put bank account ownership at risk. And they

function as the modern day equivalent of wage assignments, and

that form of lending was ruled years ago by the Federal Trade

Commission as an unfair trade practice. Our modern equivalent

today is you write a check on your account that you expect to have

covered by the deposit of your next pay check in order to repay the

loan.

We view these loans as predatory. As we have mentioned, they

are made without regard to the leader of pay. They are exorbitantly expensive. They are too big to be repaid in one balloon payment. A $500 cap is typical for State payday loan laws, and the average customer makes about $24,000 a year, so these are low to

moderate-income borrowers.

So if you are borrowing $500 plus the $75 to $150 finance charge

that has to be repaid on your next payday, if you are in that average income range you are agreeing to pay 75 percent of your takehome pay to keep that check from bouncing to get that loan paid.

Not very many middle class people pay a lot more than the minimum payment on their credit card, but we expect payday loan borrowers to pay it all back on their next payday.

If this is an electronically processed loan, we have heard testimony that the debt is presented over and over, each time triggering

a bounced check fee. There was testimony before the Senate BankVerDate 11-MAY-2000 11:45 Nov 28, 2007 Jkt 000000 PO 00000 Frm 00160 Fmt 6633 Sfmt 6633 C:\DOCS\37416.TXT HGOVREF1 PsN: HGOVREF1
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ing Committee last fall of a service member whose Internet lender

bounced electronic payday loan 11 times in 1 day.

Given these loan terms and the lack of underwriting, it is no surprise that these loans create a debt trap for cash-strapped families.

This data on what is going on in this industry comes from regulators. The Colorado Attorney General’s office has been collecting

data for years from loan applications. They tell us that 60 percent

of the borrowers come from the lowest three income brackets, that

they make around $25,000 a year. Other States have even lower

incomes. These are minority borrowers, as well.

A North Carolina academic study found that African American

consumers are twice as likely to use them. A study in Texas of

145,000 customers showed that, although African American consumers make up 11 percent of the adult population in Texas, 33

percent of the payday loan borrowers are African American consumers. As Representative Issa pointed out, they cluster around

military bases. They also cluster in minority neighborhoods and

low to moderate-income high traffic commercial areas.

The proof of the debt trap is that the average borrower has 8 to

13 loans per year. These are not one-time emergency loans when

your car breaks down. This is perpetual debt.

We think that Congress needs to step in here, because the States

have failed to protect consumers. We would urge you to enact legislation to prohibit basing loans on a personal check written on a federally insured depository account or mandatory electronic access to

the account, and to amend the Electronic Funds Transfer Act to extend the prohibition against conditioning credit on electronic payment to the single payment loan. Lenders can’t make you pay it

back electronically if it is a periodic payment loan. We need the

same protection for the single payment loans.

And, of course, we need for you to close once and for all the renta-bank tactic that has been used in the past by lenders to evade

State law by partnering with a bank. It has been stopped by the

bank regulatory agencies for now, but we need to have that as a

matter of law.

I would be glad to answer any questions. Thank you.

[The prepared statement of Ms. Fox follows:]

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Mr. KUCINICH. Thank you very much for your testimony.

Mr. McCarthy.

STATEMENT OF JIM MCCARTHY

Mr. MCCARTHY. Thank you.

Mr. Chairman, Congressman Turner, and members of the subcommittee, I appreciate this opportunity to discuss the subprime

lending problem as faced by borrowers and ways in which the cities

are affected by the rise in foreclosures.

My name is Jim McCarthy and I am president and CEO of the

Miami Valley Fair Housing Center. I also currently serve as the

Chair of the Board of Directors of the National Fair Housing Alliance, which is based here in Washington, DC, and is a consortium

of more than 200 private, nonprofit fair housing organizations,

State and local civil rights agencies, and individuals from throughout the country.

Since 2001, my agency has been implementing the Predatory

Lending Solutions Project in Montgomery County, OH. Through

the PLS Project, we assist residents of Montgomery County by providing outreach and education on the dangers of predatory mortgage lending and providing intervention and rescue services to the

victims of predatory mortgage lending.

Fair housing enforcement is the most important fair housing

issue facing our Nation; however, there is no strong commitment

by the Federal Government to enforce the fair housing laws that

we have. Fair lending, which is covered by the Fair Housing Act,

is a key part of ensuring equal housing opportunity in our communities.

While the subprime lending market offers credit to high-risk borrowers at higher interest rates and fees, some lenders have capitalized on this extension of credit by steering vulnerable individuals,

often on the basis of the borrower’s race, ethnicity, age, or gender,

to take loans whose terms they cannot possibly repay, and thus are

not suitable to the borrower.

This practice of predatory lending is a serious fair housing concern. Our work suggests that homeowners were targeted by

subprime lenders because they had significant equity in their

homes, and their credit needs have been ignored by depository

lending institutions. So the same neighborhoods that have been

subjected to years of homeowner insurance redlining and mortgage

lending redlining have now also been targeted as vineyards ripe for

harvesting of the hard-earned equity in their homes.

This is having a devastating effect on our cities and our counties.

In the past 6 years, the number of mortgage foreclosure filings in

Montgomery County has more than doubled. In 2006, we had in excess of 5,075 mortgage foreclosure filings, which accounted for approximately 50 percent of all of the civil actions filed in Montgomery County Common Pleas Court.

Fair housing and consumer advocates have been sounding warnings regarding Ohio’s subprime lending and foreclosure problems

for years. In Ohio, foreclosed-upon homes often sit vacant for

months or years, and once they are abandoned by their homeowners they become a huge cost to society.

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The costs of abandonment are enormous. Even one or two abandoned properties force neighbors to tolerate eyesores that attract

crime, arson, vermin, and dumping. Derelict buildings present safety and fire hazards, reduce property values, and degrade community quality of life. But perhaps most importantly it erodes the tax

base and it inhibits the municipalities from providing basic services

that we all expect, like police, fire, and schools.

Since the launch of our project, the need for our services has far

exceeded our capacity to provide the services with the limited resources available. For those clients that we are able to assist, given

our resources, we have been exceedingly successful in keeping them

in their homes and getting them into appropriate loan products.

I would like to share with you just a few of those real quickly.

In one case we had a caucasian American married couple with

adult children who were living outside of the home. When they

came to us, their original loan amount was for $144,500. The value

of their home, according to the Montgomery County auditor, was

$97,470. Their interest rate on their original loan was 10 percent.

We negotiated a short payoff to the offending lender for $89,600

and secured refinancing for the clients on a loan amount of $92,600

at a 6.375 fixed interest rate for 30 years. What is important to

know is that in order to accomplish that it took us 113.5 staff

hours.

One more example is an African American single female with

three children who we assisted. Her original loan amount was

$80,992.80, with an 11.051 percent interest rate and a monthly

payment of $796.84. Her monthly payment did not include escrow

or taxes and insurance. We negotiated a short payoff with the offending lender and secured refinancing for the client on a loan

amount of $53,300, which is what the house was valued at, with

a 6.5 percent interest rate fixed for 30 years and a monthly payment of $336.89, which included an escrow for her insurance and

taxes. The staff time required to resolve this case was 124.5 hours.

As the work of our project clearly demonstrates, when consumers

have effective advocates who are armed with the appropriate time

and resources, intervention that keeps the homeowners in their

homes and paying their mortgages is possible. Our clients are not

deadbeat mortgage borrowers. They are hard-working individuals

and families who are chasing the American dream of homeownership as it has been marketed by some of the largest and most

wealthy residential mortgage lenders and brokers in the United

States.

No matter what regulatory or legislative steps are taken to address the problem of predatory mortgage lending and its subsequent foreclosures, there absolutely must be resources designated

to provide for legal and advocacy assistance to those individuals

and families who have already fallen victim to some of the most

pernicious practices ever seen in the residential lending market.

There is one other thing I wanted to say about legal representation, and that is our legal aid society can’t help these folks. These

are not folks who qualify at 100 percent of poverty, 200 percent of

poverty, or 300 percent of poverty. These are folks who own their

home, usually outright, and are working people who are just trying

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to improve their standard of living and make sure they have something to pass on to their children.

Legal Services Corp. is a great function, but they can’t help these

folks because of the constraints on who they are able to assist.

I would like to end by saying there are a couple of recommendations that Congress should implement and/or oversee. Congress

should allocate at least $26 million to HUD’s fair housing initiatives program in order to increase the education and enforcement

efforts on the part of local fair housing organizations. Fair housing

organizations, when properly funded, can serve as the infrastructure through which a lot of this could be addressed.

Congress should support and pass anti-predatory lending legislation that contains the following provisions: effective rights and

remedies, prohibitions against steering, a suitability standard, designating high cost as including all the loan fees, no Federal preemption, and an advanced disclosure of all the costs and fees.

Congress needs to create a rescue fund to help people who have

received discriminatory loans, predatory loans, or loans that were

not suitable for their situations to convert those problematic loans

into appropriate loan products.

And Congress should require Federal Government agencies, including HUD, the Department of Justice, and the Federal Trade

Commission to undertake more aggressive, effective, and expansive

fair lending enforcement activities. These agencies should consult

with experts in fair housing enforcement and the organizations

who provide it so that the Federal examination and enforcement

programs best reflect the practices and state-of-the-art investigation techniques and litigation strategies that are being realized in

private lawsuits that are being brought by fair housing agencies.

Thanks again for the opportunity. I am ready for any questions.

[The prepared statement of Mr. McCarthy follows:]

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Mr. KUCINICH. Thank you very much.

Ms. Haynes.

STATEMENT OF RITA HAYNES

Ms. HAYNES. Thank you, Mr. Chairman and to the committee.

My name is Rita Haynes, and I am the manager/CEO of Faith

Community United Credit Union in Cleveland, OH, and I am past

chair of the National Federation of Community Development Credit

Unions.

Faith Community Development Credit Union, popularly known

as Faith, is a community development credit union with 6,000

members and approximately $10 million in assets. We are a certified CDFI, chartered in the State of Ohio to serve anyone who

lives, worships, or works in Cuyahoga County.

In the credit union’s 55 years of operation, Faith has been in the

forefront of creating and implementing financial products and programs that assist lower-income residents in building wealth. One

of our more successful products is the Faith-developed Grace loan.

The Grace loan is an alternative to the predatory payday loan initiated in 1999 to combat the flow of our membership to predatory

payday lenders who moved into our area when most banks vacated

the inner city.

In our research, we found that our members needed a product

that was fast, simple, and a convenient way to obtain cash when

an emergency arose. We named our product the Grace loan because

it is based on unmerited favor, and therefore no credit report was

required.

The payday lenders require a pay stub and a post-dated check.

We disagree with this. In our financial literacy training, we have

taught against using an instrument that was basically no good.

Since our electronic records detailed the information that we received from the member’s application, no check is required for the

Grace loan. This shortens the time and simplifies the process.

The Grace loan requires that a resident have a share account of

at least $50 and an electronic deposit to their transactions or savings account for 3 months before they can apply for a Grace loan.

Whereas the payday lenders charge an application fee of $17.50

to $22 per hundred, we charge a flat $15 application fee for up to

$500, which must be paid in advance. By not financing the application fee, the member receives the full amount that they borrowed.

After explaining to them that they are saving $72.50 to $95.00

in fees, we get their commitment to save at least $10 with the repayment of their loan, that they must leave in a savings account

for at least a year. The Grace loan must be repaid in full with a

17 percent interest rate, which averages around $7 for 30 days on

a $500 loan. Payments can be paid in one or four payments within

a month, depending on their pay cycle.

We will allow up to 12 loans a year, but we try to wean them

off of this product by lowering the amount they get monthly or

skipping a month to only use this product when it is truly an emergency.

After a year of positive history, members can apply for a regular

loan at a lower interest rate or an amazing Grace line of credit,

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which requires less paperwork. The member’s credit history is reported to the credit bureau in either case. In 2006 we made 2,023 Grace loans totaling $697,755, and we only charged off seven loans totaling $1,922.53.

Here is what some of our members have said about our program:

‘‘I have saved money without even using checks, and I have also

improved my credit history with Faith.’’

‘‘When it came to repairing my car to get to work, I had no choice

but to borrow before payday. I am so glad the Grace loan was

available.’’

‘‘It was worth using my Grace line of credit when I ran short to pay my mortgage on time, avoiding the $55 late charge and damaging my credit.’’

I thank this committee for this opportunity to testify, and I

would be happy to answer any questions that you might have.

[The prepared statement of Ms. Haynes follows:]

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Mr. KUCINICH. Thank you very much. I would like to say that we

are in the middle of another vote. We are going to recess until 7.

I would appreciate it if you can remain.

Is there any witness here who has to catch a plane right now?

Sir, what time is your flight?

Mr. JACOB. It is at 7:55.

Mr. KUCINICH. I am going to ask Mr. Jacob, why don’t you testify

right now? Why don’t you testify, and then you can go. I am going

to ask Mr. Jacob if he could testify briefly, and I am going to invite

the gentleman from the other panel to come forward and we will

swear you in. This has been an extraordinarily long day. Some of

you came in around noon. I don’t want you to miss your flight, so

let’s see if we can all accommodate each other here, and then I will

dash. Congressman Davis, I will be shortly behind you.

If you could proceed, Mr. Jacob, and if you could keep your testimony a little bit limited we will get it on the record. We will put

your full statement in.

STATEMENT OF ED JACOB

Mr. JACOB. Thank you, Chairman.

Chairman Kucinich, members of the subcommittee, I appreciate

the opportunity to testify today. You will hear from others about

the payday lending industry. I would like to focus in on our product, our payday alternative loan [PAL].

We developed this loan in mid-2002, and we did that as a result

of the story that you saw in the video with one of our members.

We received support for this product from the National Credit

Union Administration. They were very supportive, both on the regulatory and examination side, and also from the CDFI fund of the

U.S. Department of Treasury.

We structured our loan as a $500 loan, 16.5 percent, payable

over 6 months. The reason we structured it as a term loan is, as

Congressman Cummings noted earlier, the payday lending industry really structures their loan in a way to encourage rollovers, in

a way that is really not able to be repaid in 2 weeks or in 1 month.

The goal is to bring new members into the credit union.

We have made over 4,200 of these loans over the last few years, totaling over $2 million. To date we have had to charge off about

$140,000, or about 6 percent of these loans, and our 60-day delinquencies are about 5 percent. While this is higher than the rest of

our portfolio, it is manageable for us and sustainable in that way.

There are other financial institutions that are offering alternatives to payday loans, to which I say the more the merrier. I

don’t want to corner this market. The more banks, the more credit

unions that are involved in this, certainly the better, including

Southside Community Federal Credit Union in Congressman Davis’

District is offering an alternative product.

We have learned three lessons from our work in this area. First,

in general, the product is not used for one-time emergencies. You

will often hear the stories from the payday lenders about somebody’s car breaking down and they need to fix their car to get to

work. Our experience is that these are people who are living paycheck-to-paycheck, week-to-week, really in some cases living a

week-before-paycheck-to-week-before-paycheck. That is why the

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traditional payday loan is so destructive. There is no way for them

to get out of that cycle of debt, and so they continue to roll it over.

The second thing that we have learned is an issue of profitability. We structure this product to be sustainable, not a profitable

product but a sustainable product, and we have gotten to the case

where that is the case for us now. One way to certainly increase

the sustainability is to reduce the transaction cost, and there are

banks that are larger than I am and credit unions that are larger

than I am that can use technology and other ways to cut the transaction cost.

The second thing is to view profitability on a relationship basis.

The individual who comes in and joins the credit union to take out

a payday alternative loan will later be with us when they need an

auto loan or when they need the mortgage loan, and we need to

view profitability on a longer timeframe than just that one initial

loan.

So far we have made over 150 loans totaling over $600,000 to

what we call PAL graduates, people who started out with a payday

alternative loan and graduated to larger loans with us.

I don’t want to be the cheapest payday lender. That is not why

I am in business. In some ways the most important difference between the work we do and Ms. Haynes does and a payday lender

is that we want to move people out of these products. We don’t

want them stuck in an endless cycle of debt with us, and that is

the important thing.

You saw the story of the woman who is a member of ours who paid $3,000 to borrow $3,000. Every dollar that she paid to a payday lender is a dollar that was drained from our community. For

the 4,200 payday alternative loans we have funded so far, our

members have saved over $3 million compared to traditional payday loans. I am a small $8 million credit union sitting on the north side of the city of Chicago, and I have saved my community $3 million. If

I can do that from my 2,500 square foot location on the north side,

think what other larger banks with better technology, better

knowledge, better expertise can do. I encourage other traditional financial institutions, good financial institutions to get into this marketplace.

Thank you very much.

[The prepared statement of Mr. Jacob follows:]

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Mr. KUCINICH. Thank you very much, Mr. Jacob. Your full statement will be in the record, as well as a transcript of the video. We

are very grateful. If you wish to leave right now so you can get

your flight, you certainly have permission of the Chair.

I want to ask Mr. FitzGibbon to come forward.

[Witness sworn.]

Mr. KUCINICH. Let the record reflect that the witness answered

in the affirmative. You may proceed.

STATEMENT OF THOMAS FITZGIBBON, JR., MB FINANCIAL

BANK, ROSEMOUNT, IL

Mr. FITZGIBBON. Thank you very much.

Just a quick briefing. I am the executive vice president of a commercial bank that is traded on the NASDAQ Stock Exchange. We

are an $8.3 billion bank. But my love is in community development. I head up the Community Development Corp. for the bank

and am very active in community development activities, including

being chairman of the NHS of Chicago and several other nonprofit

organizations.

With that as a background, with my testimony in writing in

place here, you asked about and Congressman Davis asked about

resolutions. I think there are some things.

I served for 3 years on the Consumer Advisory Council to the

Board of Governors to the Federal Reserve during the time up until

2004, when they were exploring ways in which they could change,

amend the rules for CRA. Out of that came a lot of controversy

with the OTS going off on its own to come up with its own rules,

and several other controversial things that went on for years after

that.

The real challenge here is that we have a dual financial system

here. We have financial feed, if you will, in this country, with the

wholesale or limited purposes banks that are allowed to do certain

things that suck deposits out of markets where those deposits are

needed by the regulated depositories to put into work in our communities. That needs to be changed. We need to work on that.

That discussion and debate went on for 3 years while I was

there, and no real resolution came out of it. We need to get back

to that CAC and tell them they need to come back with some more

look at that wholesale unlimited purpose charter that is out there.

I have not seen one single community development investment or

deal that has been done by ING Direct in Chicago while we hear

the sucking sound of deposits going out of that market.

[The prepared statement of Mr. FitzGibbon follows:]

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Mr. KUCINICH. What I would like to do is to ask staff if you

would be in touch with the witness so that we can get these observations, Mr. FitzGibbon, because it is very valuable to hear that because of the position you are holding in the industry.

I would like to say this. I must leave immediately to get to vote.

Mr. FITZGIBBON. No problem.

Mr. KUCINICH. There are votes on the floor. I am going to declare

the committee in recess until 7:05, at which time we will continue

with the testimony. I am very grateful.

Mr. FITZGIBBON. That is OK. Let me ask one more thing. The Alternative Mortgage Instrument Parity Act, you need to look at that.

That is another instrument and a congressional act that in the

1970’s, which supersedes State law and allowed these alternative

mortgage instruments to be done. That is another way in which

you can deal with it. OK?

Mr. KUCINICH. Thank you very much. We are in recess until

about 7:05. Thank you.

[Recess.]

Mr. KUCINICH. The committee will resume.

We will pick up with Mr. Rothstein. I want to thank all the witnesses for their patience in remaining through these series of votes

and say that after this panel and a period of questioning we will

go to the other representatives who are here. Thank you so much

for participating in this discussion and being willing to wait

through this very long day here.

Mr. Rothstein, please proceed.

STATEMENT OF DAVID ROTHSTEIN

Mr. ROTHSTEIN. Thank you.

Chairman Kucinich, distinguished members of the subcommittee,

thank you very much for the opportunity to appear before you

today. I am David Rothstein, a researcher with Policy Matters

Ohio. We are a nonprofit, nonpartisan organization that provides

research on economic issues that matter to low and moderate income working families in Ohio.

We appreciate your invitation today to discuss our recent research on payday lending in Ohio. The economic situation for many

of Ohio’s workers is very difficult. Policy Matters research has

shown that Ohio wages have been stagnant, employment has not

recovered from the last recession, and those who do work are often

without health care or retirement benefits.

This troubling economic climate is worsened by predatory lending from companies who sell loans to working families at egregious

rates, often 391 percent for a 2-week payday loan.

In a recent report, Policy Matters found that payday lending locations in Ohio had increased dramatically from 107 in 1996 to

1,562 in 2006. For those 11 years, there was a 1,400 percent increase in lending locations across Ohio. What’s more, our analysis

found that, while payday lenders were concentrated in mostly

urban areas in 1996 in the early part of our study, by 2006 they

were in urban, suburban, and rural neighborhoods, alike.

Mr. KUCINICH. If I could interrupt your testimony just for a

minute, you know, one of the things that you have in your prepared executive summary, which I think is worth everyone in this

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room hearing, is that Ohio has more payday lending locations than

McDonald’s, Burger King, and Wendy’s restaurants combined.

Mr. ROTHSTEIN. That is correct, sir.

Mr. KUCINICH. That is an image worth recalling. Please continue.

Mr. ROTHSTEIN. Sure. I suppose I can take that sentence out of

my testimony then.

Mr. KUCINICH. Actually, it bears repeating. Go ahead.

Mr. ROTHSTEIN. The report, Trapped in Debt, maps the growth

of lending locations from a small number of scattered locations in

1996 to 86 of Ohio’s 88 counties in 2006. That means that there

were only two counties in Ohio without payday lenders.

Large urban counties had the most payday lenders in absolute

terms, but less-populated counties had a greater number of lenders

per capita.

Our report found that, as Chairman Kucinich stated, they are so

common throughout Ohio that by 2006 there were more payday

lending locations than McDonald’s, Burger King, and Wendy’s restaurants combined.

The sheer volume of payday lenders in Ohio is problematic because of the weak regulation of the industry. Ohio has a maximum

limit of $800 per loan, with a maximum allotted charge of $15 for

every $100 borrowed. As the Center for Responsible Lending estimates, most borrowers are repeat borrowers, taking out loans between 7 and 14 times per year.

In Ohio, borrowers cannot roll over their loans but can do backto-back transactions, where after a 24-hour cooling off period they

can take out a loan to repay the previous loan.

Payday lending affects various demographic groups. Our analysis, surprisingly, found little relationship between lending locations

and areas of low and moderate-income housing where African

American census tracks.

A recent study found that lenders who cultivate more repeat

business from existing customers will fare better financially than

those who do not. I am going to repeat that. A recent study found

that lenders who cultivate more repeat business from existing customers will fare better financially than those who do not, so they

have an incentive to get repeat borrowers.

In the business of payday lending, all workers in Ohio and other

States are potential clients, regardless of race, income, or living

area.

Lenders in Ohio are mostly chains or franchises. The two most

common locations are Advance America and Cashland Financial

Services, with more than 100 locations each. In fact, the top 10

lending companies in Ohio account for more than 55 percent of all

payday lenders in Ohio. One lender in Ohio, Buckeye Check Cashing, receives substantial financing in grants and loans from the

State of Ohio to expand operations in Ohio.

The lending industry in Ohio is extremely volatile, as well, with

lending locations opening and closing frequently within a given

year. For instance, in 2005 a total of 113 payday lending locations

closed, but 357 new locations opened. That same year, 12 locations

opened and then subsequently closed in that year.

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A $500 loan in Ohio can carry an origination fee of $50 and in- terest charges of $25, for an effective APR of, again, 391 percent

for the 2-week loan.

Borrowers face an even more difficult situation when the loan

comes due because their economic situation is often the same or

worse than before, meaning they either need another loan to repay

the first loan or they default on the post-dated check. Thus, the

cycle of borrowing keeps borrowers trapped in a constant state of

debt.

In our report we recommend the protections extended to service

members and veterans in the Talent-Nelson Amendment be extended to all working families. Capping lending rates at 36 percent,

while still a high effective APR compared to other loans and forms

of borrowing, is a vast improvement over loans made in the 300

percent range.

Additionally, credit unions and banks should be offering competitive, fair, and responsible loan products to working families in their

communities. We have heard testimony from people at this table

who are doing just that.

Fair and responsible lending is an economic and social benefit to

the entire community. Members of Congress can play a pivotal role

in implementing these policy recommendations, which again benefit the entire community.

Mr. Chairman, distinguished members of the subcommittee, we

thank you again for the opportunity to present our findings on the

dangerous expansion of payday lending in Ohio. We strongly believe these policy recommendations will lead to a better economic

situation for everyone involved. We look forward to working with

the subcommittee and to Members of Congress on issues of payday

lending and other economic issues.

I look forward to any questions you may have. Thank you.

[The prepared statement of Mr. Rothstein follows:]

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Mr. KUCINICH. And thank you, Mr. Rothstein. I appreciate the

exceptional and thorough report which Policy Matters has submitted to this committee.

Now we will hear from Ms. Grossman. Thank you very much for

being here.

STATEMENT OF FRAN GROSSMAN

Mr. GROSSMAN. Thank you. I am Fran Grossman. I am an executive vice president at ShoreBank. I am a grandmother, and actually

I did miss my flight, so my grandchildren——

Mr. KUCINICH. Did you say something about it?

Mr. GROSSMAN. I missed my flight.

Mr. KUCINICH. But when I asked does anyone here have a

flight——

Mr. GROSSMAN. No, no. There was no way I was going to make

it.

Mr. KUCINICH. I just wanted to make sure I didn’t——

Mr. GROSSMAN. When I was going like this, that is what I was

doing.

Mr. KUCINICH. I am sensitive to people missing flights, so when

I asked witnesses to raise their hand——

Mr. GROSSMAN. You were wonderful. I just wanted credit for

staying.

Mr. KUCINICH. Well, thank you.

Mr. GROSSMAN. I wasn’t subtle enough.

Mr. KUCINICH. The Chair will duly credit the gentlelady from

ShoreBank here. Thank you for being here.

Mr. GROSSMAN. I started out as I taught school as a librarian,

as a social worker. I worked at Continental Bank and Bank of

America running small business real estate lending, starting the

CDC, raising capital for ShoreBank. I wound up at ShoreBank. I

also got my start with Gail Sincata. I care a lot about the subject.

I would like to use, though, my 5 minutes to give you a glimpse

of the payday lending industry from our vantage in Chicago. I am

sorry that Congressman Davis is not here, but I will send it to him,

and we speak, anyway.

What I am going to posit is a way that community development

banks like ShoreBank can help meet the complicated needs of our

customers and members of our neighborhoods who use payday

loans.

As I said on the phone when we talked about this with your terrific staff person, there are no easy answers. There are no silver

bullets. I think I am not going to go into the horrors of payday

lending. I think you have heard enough from others. What has happened in Illinois—and Ms. Fox has this in her prepared testimony—is we have developed regulations that have changed but not

eliminated payday lending. These guys are smart, and every time

you make a new rule they are going to figure it out, because there

is a lot of money involved. As we always say, nature abhors a vacuum, and they do find the loopholes.

A number of things have taken place in Illinois, including an industry-wide cap limiting payday loan principal to 25 percent of

somebody’s income, only 345 days of continual indebtedness before

a mandatory debt recovery period, special protection which I think

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we are all interested in for military personnel, including a limit on

wage garnishments. And we do have a Statewide reporting system

and we do have fines. It is not perfect, but it is a start and it is

an acknowledgement.

But it is also important to remember that payday lending fits

into a broader set of businesses that provide alternative financial

services, and usually they all charge high rates for basic services

such as check cashing, bill paying, and the like. ShoreBank is a $2 billion mainstream financial institution that

is also a community development bank. We have 39,000 checking

accounts. Our largest service area is the Chicago area. We also

have branches in Cleveland. We did $7 million in single family

mortgages in Cleveland last year. We have lost market share because we have a fixed rate product, which means that none of the

fancy stuff. We underwrite them ourselves. What you see is what

you get.

But the consumer is bombarded with probably over 300 types of

mortgage products today. When you were mayor of Cleveland, everyone you knew got a mortgage at a bank. Now everyone you

know doesn’t get a mortgage at a bank.

I think what Tommy FitzGibbon was talking about was very interesting. We also have a 600,000 deposit from the Cuyahoga County Link Deposit Program, and we are going to talk about doing

more business, but that is not in my speech. Our communities have a median income of just over $30,000. We

offer a wide range of products, from loans to rehab mortgage loans

for walk-up rental apartment buildings. These are affordable rental

apartment buildings and they are not subsidized. This is not FHA.

This is not section 8. Well, it could be. It is not section 8 project

based. It is not low income housing tax credits. These are Ma and

Pa developers who buy a building. We help them get a rehab mortgage, and they charge micro-market rents.

We make loans to small businesses. We do a lot of lending to

churches and nonprofits, as well as we do many kinds of accounts

for individual customers.

We are a community development bank and we meet the strict

criteria as a community development bank, which means that we

have to make 60 percent of our loans in low and moderate-income

communities. But, interestingly enough, there are only 52 community development banks nationwide. Some of you may know that

the community development financial institution is a part of Treasury, and it certifies banks, credit unions, venture funds, and nonprofit loan funds. They do the 60 percent.

Our banks are located in many of the same areas where payday

lenders, check cashers, money transmission shops, and those are

the remittance shops, and pawn shops—don’t forget about pawn

shops. There is a whole array of people out there who are in what

we would call the quick cash business.

Payday loan customers care about their customers and they are

often customers of our banks and banks like ours. They care because they are a constant source of income.

We provide many services that these same customers want, and

remember that people who use paydays have to have a checking account, so we do share many of our customers, but we cannot,

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though we know, we cannot provide for these small, unsecured

credit, these loans of $500 to $1,000 with no credit, no unsecured.

We cannot make them at this point. We don’t have the ability.

There are some programs, and the reasons are some have to do

with issues of pricing and prudent risk management. Others have

to do with the banking culture and regulatory system. And still

others with all of our full understanding of how to effectively and

responsibly meet the needs of many community residents.

The consultants who work with retail banks tell us that, in order

for a checking account to be profitable—and that means that it

would earn $136 a year for the bank—it has to have approximately

$2,000 in it and only one NSF. Now, you can make a lot of money

off of NSF, but that is an equally ugly way to make a living, so

that is why I use that number.

I think community bankers and community development bankers

can help. We are intensely local and truly relationship focused. We

are small organizations with limited resources, as well as limited

resources for error. We are regulated.

Some CDFI banks have been able to engage in some alternative

developments to payday loans; however, we have not as a group or

individually cracked the code that enables us to not only do more,

but ideally to move residents of our communities and all of our customers away from paydays into savings accounts and things that

really are building assets. And we have certainly not figured out

how to do it profitably.

What I also want to make sure, that we don’t wind up having

programs that are not sustainable over the long haul, are simply

a reaction to political and public pressure, and/or are charitable

act, because those are not going to be sustainable.

Community development banks could be well positioned to meet

the particular needs of these customers. Not only are we relationship driven, we are embedded in the community. We know our

Congresspeople. We know our church leaders. they know us. This

is our turf and our neighborhoods. Decisions are made locally. You

have access to the highest people in the institutions. You call up

and you want the president or the chairman of the board and you

get him because he is there, or her. You want to know where a

credit decision is being made? It is being made there. It is not

being made in a far-away State. It is not only formatted lending.

But there are things that we would need as community development banks to do more.

Actually, before that let me give you two examples of what the

Central Bank of Kansas does, which is not really an antidote to

payday lending but is an attempt to try and get customers of theirs

into what they would call savings and we would call savings. They

offer a certificate of deposit loan that they feel competes with payday lending products. The customer takes out a loan and immediately receives a certificate of deposit which serves as collateral

for the loan, and when the borrower pays the loan back they have

established credit and now are bankable.

There is a wonderful bank in Milwaukee, Legacy Bank—actually,

it was started by women—and they connect checking account customers with bad credit to financial management classes, and they

are able to borrow an emergency loan from the organization that

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sets it and the bank gets paid back. Legacy’s whole focus is on

making low income customers good, solid, profitable customers.

One of the problems with the CDFI banks is that the CDFI

banks have to declare, in order to be certified by the Treasury, that

you are mission oriented, which means that most community bankers who really do all this are not going to say that. They see themselves as bankers and profit people. The fact that 60 percent of

their loans and everything they actually do fits into what we would

call a CDFI doesn’t matter.

One of the reasons then we have over 7,000 community banks

nationwide, and it is interesting to note that only 8 percent of those

certified are banks, 67 percent are nonprofit loan funds, 19 percent

are credit unions, 3 percent are venture loan funds, and another

3 percent are depository holding companies.

The CDFI fund has been helpful with the grant programs to

banks, as well as helping many banks get established in areas that

would not otherwise be banks. ShoreBank had a community development bank in Cleveland which is now a branch of our bank.

But other things that would be helpful are CDFI banks should

receive favorable consideration for receiving Government deposits

and loan participations. This came out quite clearly when we

talked to people in the Katrina area. What they really needed was

not deposits but they needed loans. They had a lot of money, but

there was no way to help those banks in an organized fashion,

whereas you could have identified them as CDFI banks, certified

them, and taken a class of those who passed the 60 percent test.

We need to deal with loan loss reserves if we are going to expect

and task community development financial institutes, banks, to

support these specialized lending programs.

We need encouragement from bank regulators, the others as well

as the FDIC, in the form of examiners who understand and support

banks’ roles in providing alternatives to payday loans.

The easy money is for financial education. I guess I pray that we

don’t wind up recommending financial education. Of course it is

needed, but everybody would like to send you to a class instead of

really doing the hard thing.

Regulating away payday lending will not eliminate the unique financial needs of individuals with low assets and poor credit, needs

that high-interest, short-term check cashers offer easily, and it is

at a cost, and people do know that. They just can’t deal with it because they need the money or we do live in a society of wants.

Wherever you go, if you can’t afford the plasma TV I will help you

get one. If you can’t afford the house, I will help you get one. If

you want a new fur coat, I will help you get one. Whatever it is,

we live in that kind of world and we have to acknowledge that.

What must be part of a regulatory package to limit payday lending are incentives to help mainstream financial institutions and

credit unions. Community development banks are mainstream, and

they do offer products to these customers and they need to be

tasked to offer more.

Bottom line: it is not easy. There are no simple answers. It will

take the will of Government to encourage, incentivize, because

money does talk. If these banks are able to achieve profitability

through loans, deposits, and other ways that the government helps,

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through the regulators, everyone has to be involved. We do not

want to look back a few years from now and see another mess like

we now have with some of the subprime lenders and the institutions that funded them.

A way was figured out because we all promoted homeownership.

Homeownership was going to be the answer to everything. We

wanted minorities to own homes. We wanted poor people to have

homes. Whether it was the Democrats, the Republicans, the Governors, the States, we all believed in homeownership. Now we have

a pretty mess and a lot of people who thought that they were getting the American dream and now realize that it was a sham. We

can’t do that on quick loans. We have to figure out how to look at

the source. We understand the problem.

[The prepared statement of Ms. Grossman follows:]

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Mr. KUCINICH. Thank you very much for your testimony, Ms.

Grossman.

I am going to now go into the questions for the second panel. I

would like to ask Mr. Davis if he would like to start, or if you want

me to start.

Mr. DAVIS OF ILLINOIS. You can go ahead.

Mr. KUCINICH. OK. To Ms. Haynes, thank you again for being

here and thank you for the work that Faith Community United

Credit Union does for people.

Ms. HAYNES. Thank you, Mr. Chairman.

Mr. KUCINICH. One of the things that is important to realize, I

think, about the payday lending industry is that payday loans are

made only to people who, one, are employed and, two, have checking accounts. Customers are working people, have a relationship

with the bank.

Ms. HAYNES. Right.

Mr. KUCINICH. Nonetheless, they go to payday lenders and not

to their banks. Why do you think that is? Why don’t they go to the

bank?

Ms. HAYNES. The payday lenders make them feel wanted, which

banks don’t. They are quick. At times when they get off work, they

are open and available. They are even open on Sundays. They are

on every corner. That is why people go to them rather than to a

bank, and sometimes to a credit union that has hours that don’t

always apply to what they need.

Mr. KUCINICH. Since you offer a competing product to payday

lenders, what is most important to the borrower? Is it the cost of

the loan, the speed with which they get the loan, the location, accessibility? What do you feel are the factors?

Ms. HAYNES. I think the simplicity to make it quick and easy and

convenient for them. And the cost is not the primary thing that

they are looking at. They need the money. They need it then, and

they want the solution to this problem right then.

Mr. KUCINICH. I am sure you have given this some thought in

terms of loans. In your opinion, the payday lenders, they are charging these high fees and these big interest rates. Do you think that

is necessary for them to do that, to charge such high interest rates

and big fees to make these kind of loans?

Ms. HAYNES. No, I definitely do not. I think that those rates are

unnecessary for them to charge; however, they are taking a niche

that banks and credit unions should be filling, and they are simply

over-charging people for the service that they are giving them. But

the people in a depressed market need the funds so bad that they

will pay whatever, and then they get trapped into that. And it is

very difficult for a credit union like us to get them out of that habit

of getting the money immediately and using those post-dated

checks.

Mr. KUCINICH. Right. What, if anything, about the Federal or

State governments do you think that could be done to change the

laws to protect people you describe as being trapped?

Ms. HAYNES. Well, I think laws should be made to regulate them

just as credit unions are regulated. We are regulated as to how

much interest we can charge and all of that. I think there should

be regulation to regulate those payday outfits, as I call them.

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Mr. KUCINICH. And the people who use the payday outfits, you

talk about being trapped. What do you think is the biggest trap

they get into, just in your experience with people who use that

model? What is the trap? What is going on in their minds when

they are using it?

Ms. HAYNES. The only thing going on in their minds is they need

the money, they need it right then, and they are not looking down

the road to having credit. They don’t ask them things that we

would ask in a credit union about building credit, saving for the

future, those kinds of things. They see them as being friendly because they don’t ask the most meager questions about what are you

doing, how are you going to send your children off to college if you

don’t have a good credit rating or savings account. So in the credit

unions we try to build that into pulling them or weaning them, as

we call it, from the payday lenders.

Mr. KUCINICH. You know, it would be interesting to do some historical research, because I remember in growing up in the inner

city that there were always people out there on the corner you

could borrow money from.

Ms. HAYNES. Right.

Mr. KUCINICH. But they would charge you a lot of money to loan

you money.

Ms. HAYNES. Yes.

Mr. KUCINICH. And these people were sometimes called loan

sharks.

Ms. HAYNES. Yes.

Mr. KUCINICH. And there was a point at which if you charged a

certain percentage it was made illegal.

Ms. HAYNES. Yes, that is true.

Mr. KUCINICH. And we are in a situation today where there is

a lack of regulation here. You know, when you look at annualized

percentage rates, it would be interesting to see if that in any way

falls into the same kind of category, because these percentage rates

are so high that it does raise questions about matters of fairness

and simple justice.

Thank you very much.

Ms. HAYNES. Thank you.

Mr. KUCINICH. I have a minute left just to ask a question of Mr.

Rothstein, and then I will come back to you.

You noted in your testimony that one payday lender, Buckeye

Check Cashing, receiving taxpayer financed grants and loans from

the State of Ohio to finance their operation. As a matter of fact,

I made a note on the chart there. Can you tell us more about this?

How did that happen?

Mr. ROTHSTEIN. Sure. Thank you for the question, Chairman

Kucinich. What happened is they received several loans and

grants. The first is they received $100,000 business development

grant through the Ohio Department of Development which was approved by the Ohio Controlling Board.

Mr. KUCINICH. What was the interest rate?

Mr. ROTHSTEIN. I don’t actually know that offhand.

Mr. KUCINICH. It would be good to find that out, wouldn’t it?

Mr. ROTHSTEIN. That is a good question. I don’t know it offhand,

though.

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Mr. KUCINICH. I am sure it wasn’t 391 percent.

Mr. ROTHSTEIN. The vote from the Controlling Board was six to

one, with only one member dissenting saying that he doesn’t think

that public dollars should go to financing this type of business.

They also received a 60 percent, 9-year job creation tax credit in

2004 from paying the corporate franchise tax in Ohio.

The city of Dublin, which, for those of you who aren’t familiar

with Ohio, is a very wealthy, affluent suburb located right near Columbus, offered them a 25 percent, 5-year payroll performance incentive and a $150,000 relocation grant. I should note that they declined a $7 million Ohio enterprise

bond fund loan as specifically citing Federal tax reasons.

Those are list of credits that I have noted for them.

Mr. KUCINICH. OK. I would like to come back to you, but at this

point I would like to yield time to my friend and colleague, Mr.

Davis.

Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman.

First of all let me again thank you for the patience and the fact

that you are still here. I mean, that is an indication to me that we

are what we call in the community real troopers, you know, that

you are actually people who care a great deal about what you are

doing, what we are talking about, and seriously seeking solutions

or direction or something that is going to help alleviate the problem.

But, Ms. Grossman, you indicated that people are really looking

for money. I mean, they are not looking for financial education, and

yet, as I listen to the discussion, it appears to me that a great deal

of what they actually need is education.

Mr. GROSSMAN. Maybe I wasn’t clear. It is not that people do not

need financial education and that financial literacy is important,

but it becomes like homeownership. It becomes the large banks, the

large institutions, the large insurance companies. It is an easy fix.

Of course, it is a part of it, but if we stop at financial literacy and

we put it in the high schools and we put it in after school and we

put it here and we don’t do anything else, we will not have solved

anywhere near.

One of the issues I guess I am looking for is trying to figure out.

We know there is a terrible problem. We might be able, through

regulatory issues and legislation, to begin to control the rate, but

the problem will still exist, and that is why I began to talk about

the CDFIs and community development banks. We have to begin

to think about ways to acknowledge the need, provide education,

but also help people so that they can go and borrow money, that

they can develop credit, because if we stop this we will go back to

loan sharks, we will go back to contract buyers. I mean, you and

I remember the contract buyers leagues. I mean, these people are

always going to be with us.

Mr. DAVIS OF ILLINOIS. It is kind of like my father would say:

pray for a good harvest, but keep on hoeing. I mean, that is, provide alternatives at the moment, while at the same time try and

wean people away.

Mr. GROSSMAN. Yes.

Mr. DAVIS OF ILLINOIS. I mean, I was thinking of I used to work

in health care, and how we would see a brand new health center

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down the street, and there were more people going to the Medicaid

mill up on the corner. When we would ask them why, they would

come back and say they really know what we want, and they give

us the pills that we like or they give us the pills that we ask for.

So it seems like a combination of both things.

Let me ask, we talk about usury. We talk about the high fees.

Would we be treading on sacred ground if we were to regulate

those entities and say you can only charge 10 percent?

Mr. GROSSMAN. That is what leaders are for.

Mr. DAVIS OF ILLINOIS. Or 12 percent.

Mr. GROSSMAN. That is what leaders are for. Of course it is sacred ground to somebody, but that is what leadership is about.

That is why some of us, including you, are still here, because it is

wrong and we know it is wrong and we have to not only stop it

but we have to move on and think of other ways.

Ms. FOX. There are 11 States that still have their usury and

small loan laws that apply to small loan companies. You would violate criminal law in New Jersey if you charge more than 30 percent

APR, and 25 percent in New York. In Georgia it is a RICO violation to do payday lending at over 60 percent APR. North Carolina

tried it and found it was such a debt trap that they reimposed their

36 percent small loan rate cap if payday lenders want to get a regular small loan license.

Congress said the way to protect military borrowers was to cap

interest rates at 36 percent, including all of the extra fees, and to

prohibit check holding and electronic access to the bank account.

We are starting to move back to thinking about how to protect

borrowers in this market, and there are States that still do it

through rate caps.

On your question about loan sharks, a paper in Salt Lake City

did a big story that talked about payday lenders and title lenders,

rate lenders, and what we call loan sharks today were charging.

That was less.

Mr. DAVIS OF ILLINOIS. Finally, is there anything that would,

from a market vantage point—for example, if we were to talk about

a national cap, are there things that are taking place in one market that would suggest that there is something or some reason why

the rate couldn’t be the same in New York as it is in Illinois as

it is in Indiana as it is in Texas as it is in Missouri?

Ms. FOX. Traditionally, the small loan industry has been regulated at the State level, and interest rate caps have been a function

of State law. The Federal Government does cap credit unions at 18

percent APR for federally chartered credit unions.

Mr. DAVIS OF ILLINOIS. So it would just be new territory.

Ms. FOX. It would.

Mr. DAVIS OF ILLINOIS. Or new ground that was being looked at.

Ms. FOX. For civilian. Congress last year enacted a national rate

cap for loans to the military at 36 percent APR. A lot of folks said

wow, that is really high, and we said well, it is a lot less than 390

percent for a payday loan or 300 percent for a car title loan or, you

know, a couple hundred percent for refund anticipation loan, or

other forms of high-cost credit.

But the other thing we really need you to do besides looking at

the cost is to take the features of payday loans off the table that

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trap people in repeat borrowing, and that is their ability to get you

to write them a check when they know you do not have money in

the bank, and hopes that on your payday you will. That is an unsafe banking practice, and that is something that Congress could

do.

Mr. DAVIS OF ILLINOIS. Thank you very much. And thank you,

Mr. Chairman.

Mr. KUCINICH. Thank you, Mr. Davis.

Mr. Cummings.

Mr. CUMMINGS. Just one question.

Mr. KUCINICH. Take your time.

Mr. CUMMINGS. The credit unions have always seemed to provide

services and have been able to target populations that the bank

seems to skip over, and I think the credit unions give people a

sense of ease, as far as getting into them. You know, you have several people on the job and somebody says, Girl, did you join a credit

union? How did you get your car? You say I got it through the credit union. So the next thing you know they feel comfortable.

I am just wondering, I see that some of you are from credit

unions and you may have testified to this, but how can credit

unions help to address these kinds of issues? Is there something

that you all have and are there things that you are able to do that

the banks are not able to do? Do you follow me?

Mr. GROSSMAN. Can I just say I think it is important to know

that you are talking about low income credit unions.

Mr. CUMMINGS. Right.

Mr. GROSSMAN. We are involved on the banking side. You now

have very, very large credit unions who act much more like large

banks, whereas Faith—and I think she can respond much better—

I mean, these are small credit unions, North Side Credit Union,

South Side Credit Union, they are very different than the Credit

Union of New York, which encompasses the whole State.

I just wanted to make sure that we understood the difference between those credit unions.

Mr. CUMMINGS. I have you. I still want to know.

Ms. HAYNES. Yes, Representative Cummings, one of the reasons

that we can’t really compete as a credit union—we are a low income community development credit union, CDFI—we are only $10

million in assets. We cannot compete with payday lenders on every

corner——

Mr. CUMMINGS. Right.

Ms. HAYNES [continuing]. That are open all day, evenings, and

Sundays.

Mr. CUMMINGS. Right.

Ms. HAYNES. So that is why credit unions can’t compete as totally as the payday lenders. And, of course, the transactions are

costly, you know. They are a costly kind of loan to make.

Mr. CUMMINGS. Sure.

Ms. HAYNES. So, consequently, we are regulated and our interest

rate is capped, so theirs needs to be capped.

Mr. CUMMINGS. Yes, ma’am.

Ms. FOX. The bank’s equivalent of a payday loan is the cash advance on a credit card or an overdraft line of credit at 18 percent

APR. The FDIC has proposed guidelines for banks for responsible

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small loan products. We have congratulated the FDIC for taking

the leadership on that. Hopefully those will be issued and they will

be an encouragement to banks to look at the small loan needs of

their own customers in a responsible way.

Credit unions are also looking at ways that they can make small

loans to their members. I understand that at the recent CUNA conference that session was standing room only to talk about how to

compete with payday loans for your own members.

So there is work going on in this area, but that fact isn’t reason

to not address the consumer protection issues. I agree we need both

effective regulation, small loan market, and good alternatives for

consumers. And the third thing that we really need is emergency

savings accounts for people.

We have done some research. We have looked at research. For

families making $25,000 a year, if they have over $500 in emergency savings they are much less likely to take out a payday loan

than a consumer making $25,000 with no savings. The difference

is you are eight times as likely to have a payday loan in your portfolio if you have no emergency savings than you would be if you

have a least $500 in the bank. Savings are really important.

Mr. CUMMINGS. That is interesting you said that, because one of

the things that I talk about quite a bit in my District is what I call

bridges. So often what happens to people is that $500 you just

talked about, if that bridge, that $500 can bridge them from one

thing to another—now, it is only $500, but without it they are

doomed. I think that is where the payday loan folk come in. They

are looking at it from the standpoint, the borrower is looking at it

from the standpoint. Let’s say, for example, I got all of the money

for my daughter’s tuition but I need $500, and so they go to the

payday loan person, get the money knowing that it is going to cost

them a lot, but they look at it from the standpoint that this is the

bridge to get me from one point to the other. I have heard people talk about this kind of stuff. While this $500 is only $500, for that situation it is like a million dollars because

they are looking at it that this is what is going to allow my kid

to be able to afford the tuition to go on to become the doctor, or

whatever.

So I think companies do take advantage of that, and I guess people get hooked on those payday loans, and then it is just rolling

down a hill of ice. So I was just amazed as I listened to the various

testimony that has been presented here, Mr. Chairman. I look at

the neighborhood that I live in. I live in the inner city of Baltimore.

I see people who are paying the highest prices for everything. They

pay the highest prices at the grocery store, because there are no

stores. They do the payday loan thing. They get cabs because they

don’t have a car.

I mean, you go on and on. If they have a car, they pay the highest insurance. It is amazing that people who are poor ever get out

of the hole. And when you go to the grocery store, when I shop in

the grocery store in my neighborhood—and I know Mr. Chairman

is going to have some hearings on grocery stores—I go to the grocery store in my neighborhood, you know, to buy a can of shaving

cream, there may be a 50 cent difference. In my neighborhood it

may cost me $3. I go to a neighborhood about may be 5 miles away

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and it is 50 cents less. They add up and they add up, so people just

go down and down and down.

Then folks say why can’t they ever get up and get on their feet.

And even when it comes time to get their taxes, you have folks saying come to me, I will give you your money right away. Even then

they are finding themselves in difficult circumstances.

That is why I asked the question about the credit unions, because I am trying to figure out, you know, this is a multi-faceted

problem that perhaps needs multi-faceted solutions.

I want to thank you all for staying around here. I know we have

another panel. I just wanted to thank you.

Mr. KUCINICH. And I want to thank Mr. Cummings and Mr.

Davis for staying with us, because we all represent constituencies

which include solid inner city constituents, and our experience is

that people are always broke, and that if they don’t have a job and

they need money they borrow money, they get into debt. People are

maxing out. If they don’t have the kind of traditional paths to credit that some people have, they get into these traps and it becomes

a nightmare. It is absolutely a nightmare, and people never get out

of it. They never get their head above the water. That is why we

are here.

I appreciate Mr. Cummings and Mr. Davis staying with us on

this.

I think that what we will do, there are numerous questions that

we have for the witnesses, and what I would like staff to do is to

followup and submit these questions to the witnesses so that perhaps in some followup discussion with our committee you can give

us some written responses, because you are such valuable resources on this important economic issue for people in the cities.

What I would like to do right now is to thank the second panel

and thank you for the cooperation you have given us and will continue to give us. Good evening.

We will now call those hearty souls who have been here all day

waiting for a chance to testify to the committee. Please come forward. Thank you.

We are, indeed, fortunate to have an outstanding group of witnesses on our third panel. Actually it is a couple at this point. Mr.

FitzGibbon had testified earlier.

I want to welcome Mr. Calvin Bradford. Mr. Bradford is the

president of Calvin Bradford and Associations, a consulting firm

that engages in research, policy evaluation, general consulting, and

expert witness services in the fields of fair housing and community

development. Mr. Bradford is also a board member of the National

Training and Information Center, which was founded in 1973 as a

research and technical support provider to National People’s Action

and other community organizations that first initiated the movement against redlining and disinvestment.

Through issue-based community organizing, NTIC helped spearhead the Community Reinvestment Act. Since its passage, the

NTIC’s efforts on the Community Reinvestment Act have resulted

in over $1.1 trillion to low and moderate-income families across the

United States. NTIC has been involved in more CRA agreements

than any other organization, which is a tremendous testimony to

your work.

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Next we welcome Professor Michael T. Maloney. Professor

Maloney is a professor of economics in the John E. Walker Department of Economics at Clemson. Mr. Maloney received his Ph.D in

economics from Louisiana State University and started at Clemson

in 1974. He has taught at Emory University, as well. He was a

senior financial economist at the U.S. Securities and Exchange

Commission in 1990. Mr. Maloney is an associate editor of the

Journal of Corporate Finance and is widely published on a variety

of topics, including research and development in the drug industry,

nuclear power and nonproliferation, and the complexity of financial

markets.

Welcome, gentlemen. I would ask you if you would stand.

[Witnesses sworn.]

Mr. KUCINICH. The record will show that the witnesses responded in the affirmative.

Mr. Bradford, you may proceed.

STATEMENTS OF CALVIN BRADFORD, NATIONAL TRAINING

AND INFORMATION CENTER, CHICAGO, IL; AND MICHAEL T.

MALONEY, DEPARTMENT OF ECONOMICS, CLEMSON, SOUTH

CAROLINA

STATEMENT OF CALVIN BRADFORD

Mr. BRADFORD. Thank you, Chairman Kucinich and members of

this committee. My name is Calvin Bradford, and I am a board

member representing the National Training and Information Center. I want to convey to this committee NTIC’s assessment of CRA

enforcement after our 35 years of providing training and assistance

to community-based organizations who are responsible for both the

Home Mortgage Disclosure Act and the Community Reinvestment

Act.

We have not forgotten your role, Mr. Chairman. I have a copy

of your agreement from May 1979. And we also point out that we

know, as Congressman Davis pointed out, the CRA in many respects started in his neighborhood with Gail Sincata and the organizing there. In light of your hearings, it is important, I think, to

say that its purpose was to pump prime lending money back into

neighborhoods that at that time in Cleveland and Baltimore and

Chicago and Detroit and other cities were devastated by the predatory abuses of FHA lending. So in some ways we are in a similar

situation today.

Our overall assessment of the Community Reinvestment Act is

that many of the community groups and some lenders deserve outstanding ratings, while the Government regulatory agencies typically deserve substantial noncompliance ratings.

The details of our recommendations are contained in our written

statement. In summary, we find that the CRA needs a formal written fair lending test with a public disclosure, which it doesn’t have,

a requirement that all communities and all service areas be given

a full evaluation. There should be no CRA-free zones, as the regulators now permit. There should be a requirement that all the lending affiliates and subsidiaries of a lender should be included in the

lending test so that lenders can’t, as they can today, pick and

choose which affiliates to use and cherry pick their performance.

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But the CRA regulations, exam process, and examiner training

need to be revised to eliminate grade inflation and ensure accurate

ratings of real performance.

We also recommend some changes in the Home Mortgage Disclosure Act and in the release of CRA and HMDA data to make it

more usable by the public.

I would like to summarize just a few examples that are more

fully defined in our written statement. We provided three examples

of cases where the Federal CRA regulators consistently gave satisfactory and even outstanding ratings to three major regional lenders and found no violations of the fair lending laws, while at the

same time the U.S. Department of Justice under this administration filed race discrimination cases against these very lenders and

claimed blatant racial redlining and violations with the Fair Housing Act, the Equal Credit Opportunity Act, and the CRA by systematically excluding the minority neighborhoods in the metropolitan

areas that these lenders served.

Mid-America in Chicago, Old Kent in Detroit, and Centier in

Gary, IN, are all major metropolitan-wide lenders. All define their

metropolitan service areas in ways to exclude the minority areas,

in some cases excluding the entire central city.

Over many years and several CRA evaluations, the OTS, the

Fed, and the FDIC ignored this blatant form of discrimination and

rewarded these lenders with satisfactory and outstanding evaluations, allowing them to engage in substantial expansions into other

White neighborhoods by granting additional branches and expansions and approvals of mergers.

Then consider finally the case of Flagstar Bank. It was twice

found liable for race discrimination in Federal courts, first in an individual case in Detroit and then in Indianapolis for a nationwide

written policy that set fees explicitly based on race. This case was

so blatant that the court ruled against Flagstar in summary judgment. Yet, the OTS actually raised its rating from satisfactory to

outstanding after this decision. Moreover, this written racial pricing policy was developed and implemented while the OTS was examining Flagstar for compliance. Flagstar literally violated its way

to an outstanding rating.

The Sunflower Community Organization in Wichita, KS, had a

significant concern about lending practices of a Bank of America.

The Wichita MSA has a large African American population, and

the largest Hispanic, Native American, and Asian population in the

entire State of Kansas, yet the Comptroller of the Currency did not

consider Wichita large enough for a full CRA evaluation, so its rating of the Bank of America was based on performance in other

communities. It took years of research and organization and negotiations with the help of NTIC to get the Comptroller to add a more

in-depth evaluation of this one lender in just this one metropolitan

area.

Finally, the recent actions by Countrywide lending illustrate our

concern that lenders will hide behind the protection of banking regulators. In the past, Countrywide has been one of those lenders

that has shown huge disparities in FHA lending that are racially

based. We have submitted with our testimony examples of that for

Baltimore, Washington, Chicago, and Orange County, CA.

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Last fall the Attorney General of New York charged Countrywide

with racial bias in subprime lending. When Elliot Spitzer announced the settlement with Countrywide last November, he lamented that the Federal regulatory agencies were protecting depository institutions by refusing to allow State agencies to investigate

them for fair lending violations. At that time, Countrywide was the

Nation’s largest independent lender, not regulated. But just this

month on March 12th the parent company of Countrywide became

a savings and loan holding company and changed its full regulation

to the Office of Thrift Supervision, clearly the regulator with the

worst fair lending record.

These are the kinds of examples we have come against year after

year in the past 28 years of CRA enforcement.

I would be glad to respond to any questions you may have.

[The prepared statement of Mr. Bradford follows:]

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Mr. KUCINICH. I thank the gentleman.

Professor Maloney, you may proceed. Thank you.

STATEMENT OF MICHAEL MALONEY

Mr. MALONEY. Thank you, Chairman Kucinich, for asking me to

be here today, and honorable members of the committee. It is an

honor to be here. I am going to talk about payday lending, and I

am going to talk about it from a slightly different tack than the

other people on the former panel.

My interest in this topic is 5 or 6 years old and purely academic.

From that perspective, I have done some research that I will report

today.

As you pointed out, I am a professor of economics at Clemson.

I have been on the staff of the Securities and Exchange Commission. But my main love is teaching, and especially graduate students.

At Clemson we are interested in the short-term credit market,

and, in particular, whether consumers are better off having access

to such credit. As part of our research, we have examined payday

lending and its impact on consumers, and our research has found

that payday lending has increased access to short-term credit without harming consumers.

A couple of things that need to be pointed out, I believe, in the

context of the short-term credit industry, the industry, itself, generates more than $95 billion in fees annually. These are not interest charges; these are fees.

Some of those fees may shock you. The fees charged for insuffi- cient funds amount to $30 billion. More than $50 billion is generated by credit card companies for late fees or over-the-limit fees.

So these are fees that are being charged by other credit providers.

The payday lending industry generates $6 billion in fees.

I think that credit card thing is the one that is kind of shocking,

because you think about somebody that has a credit card and they

are just paying some fairly high interest rate, but where they really get ding’ed is where they don’t make that payment or they go

over the limit.

One of my graduate students had this exact thing happen to her.

I was just shocked by the number.

Some critics of payday lending have proposed limiting interest

rates or eliminating these loans altogether. In fact, the interest

rate cap of 36 percent will end the industry, because they can’t

make any money at 36 percent. They can’t cover their cost. I don’t

think that is the right tack to take.

All forms of legal credit are vast improvements over loan sharks

and wholly unregulated forms of credit that dominated the credit

market prior to the 20th century, and I think that we would return

to that again if people are denied access to legal forms of shortterm credit.

The access to credit is best conducted in the open and competitive market. Although likely to be always relatively high cost,

short-term credit has high cost because of its fixed cost and in the

cost of doing business. Its fees are still competitively determined,

and there is a lot of competition in the industry. Hence, we have

to believe that is the cost of doing business.

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Research by Dr. Donald Morgan at the Federal Reserve Bank of

New York has confirmed previously published research that consumers of payday loans shop for best prices and have benefited

from increased competition.

Another thing to recognize about payday loans is, as Ms. Grossman pointed out, consumers want these loans and they recognize

the value of the loan because of its ease of access. They also enjoy

its convenience in terms of location and its privacy.

As I mentioned before, for many it is a choice of taking out a

payday loan or confronting more expensive alternatives. A 2005

study by Professor Tom Lehman confirms that payday loan fees

offer a cost advantage to consumers over non-sufficient fees at

banks, and are understood by consumers to be that.

But what I really want to talk to you about today is the new research we have done at Clemson.

My position on this payday loan industry has always been that

it could be good or it could be bad. It seemed to me that the questions that should be answered are whether communities are worse

because of payday loans or better off. Are there more homeless people because of payday loans, or are there less homeless people because of payday loans. That is a scientific question, and a scientific

question that I think we have some answers to, though not complete.

We looked at bankruptcies nationwide, State-by-State. We compared bankruptcies State-by-State over the years 1990 to 2004 to

the number of payday stores in each State over that period. What

we found was that, instead of payday loans causing bankruptcies,

payday loans reduced bankruptcies in a statistical test of causality.

We also found, as you might expect, bankruptcies caused payday

loans. When bankruptcies go up, payday loan stores go up, responding to the demands for short-term credit by those consumers.

Now, as I say, a lot more research needs to be done on this topic.

We are pursuing it, and I hope a lot of academics in the marketplace are pursuing it and the answers will come forth.

I think our results on bankruptcy is especially important in the

light of the other issues that were being considered today, particularly important in the light of the focus on mortgages and foreclosures. Having access to emergency cash that is not tied to a

credit rating, home equity, or assets is particularly important for

consumers who are seeking to maintain their homes.

In conclusion, Mr. Chairman, payday lending is one of many options available to consumers of short-term credit. it appears to offer

advantages of convenience, privacy, and cost that make it welfareenhancing to consumers. No data exists to show that payday lending is inherently a poor choice for consumers as a whole, relative

to the other options that they have.

Demand for short-term credit will always exist as long as cash

reserves for consumers are less than the emergency cost they are

likely to face, and efforts to constrain the market forces are more

likely to harm rather than benefit consumers with short-term credit needs.

Thank you.

[The prepared statement of Mr. Maloney follows:]

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Mr. KUCINICH. Thank you very much, Professor Maloney.

I would like to just ask you a question about that study that you

talked about that is being done that shows that the more bankruptcies there are the more payday loans there are.

Mr. MALONEY. Yes. If you just kind of think about it in terms

of time, going through time, as bankruptcies go up in, say, year

one, the number of payday stores will increase in year two.

Mr. KUCINICH. Yes.

Mr. MALONEY. Now, if the number of payday stores increases in

year two, the number of bankruptcies in year three will go down.

That is the kind of sequencing of causality that we are finding.

Mr. KUCINICH. You are not really trying to establish, though,

that payday loans are the answer to holding the limit on bankruptcies, are you?

Mr. MALONEY. What we are finding is that payday loans reduce

the number of bankruptcies, that the ability—to use Mr.

Cummings’ idea, the ability to bridge certain bad events with a

payday loan may make people better off in terms of avoiding bankruptcy.

Now, the effect is very small. I mean, it is not a huge thing. You

wouldn’t expect it to be.

Mr. KUCINICH. What you are saying is that some people will take

out a payday loan, and that may help them avoid bankruptcy, but

you are not trying to establish an axiom here?

Mr. MALONEY. I don’t think that payday loans are going to stop

bankruptcy. No.

Mr. KUCINICH. Right. I just wanted to make sure that, you know,

in some cases—Mr. Bradford, would you like to respond to that?

Mr. BRADFORD. I guess what I would like to say is if you look

at the population, say, that are affected by payday loans, which

tend to be more rental people, people who haven’t had a lot of established credit, as opposed to the predatory lenders we talked

about who are dealing with people who own homes or are in a position to own a home or have credit, you are dealing with different

populations.

To some extent the renter population has less incentive to ever

file bankruptcy anyway because they haven’t got debts to protect

themselves from, other than maybe the payday loans.

Also, I guess I would just say, since my own Ph.D dissertation

was in statistical analysis, that I think you have to be careful in

making assumptions about aggregate sets of relationships without

actually doing time sequence studies that track individual people

over time to see what the sequence of their behavior is. We oftentimes get correlations between events at an aggregate level that

don’t actually represent the actual behavior underneath those, so

I think you would need more study.

Mr. KUCINICH. In fairness, I think Professor Maloney a moment

ago asserted that, you know, maybe in some cases. He wasn’t trying to establish any real, but your point is well taken.

Let me ask you a question, Mr. Bradford. Your testimony discusses the apparent paradox that most banks are passing their

CRA compliance tests while African Americans and Latinos specifically are receiving higher-priced subprime loans. We used to call

that redlining.

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Mr. BRADFORD. Yes.

Mr. KUCINICH. In your opinion, is race still a factor in banking?

Mr. BRADFORD. I think it is a serious factor in banking. Yes. I

think you can see it from these examples. What I am more concerned about is that the existence of race in banking seems to be

something that the Federal regulators just ignore. They don’t take

it into account. It used to be an actual factor in a CRA evaluation

that you had to, as a rating factor, explain how you defined your

area and your area couldn’t have been defined by any discriminatory processes. There is still part of that in the regulation, but

there is no assessment factor any more for that.

Also, for your first part of your question about making subprime

loans, when you look at the way they analyze loans for CRA, they

lump all the loans together. What you really end up with is a situation where subprime lenders who target minority neighborhoods

are going to get outstanding ratings on the lending performance because they have lots of loans in those neighborhoods because the

agencies aren’t taking account of the effect of different types of

loans or whether various types of loans are appropriate.

The same thing happened early on with FHA loans, where they

inundated the east side of Cleveland or the west side of Chicago

with FHA loans. Those banks who did those loans would get very

high ratings because they had high penetration in those markets,

without taking into account whether that led to high foreclosure

rates or whether those loans were unsound.

Mr. KUCINICH. Well, you make a good point, and that is in a followup we really do need to take that into account. We need to take

into account, OK, you are giving these loans, but what is happening, because it could be the height of cynicism for an institution to

say all of a sudden, OK, you want loans, we will give you loans,

but then either the terms are close to usurious or they know full

well that they are going to be putting somebody in a position where

they can’t pay it back anyway.

Mr. BRADFORD. Well, the other thing that they can do under the

present rules is, if you have several loan companies—and that has

become very common with the large banking institutions—you

have several subsidiaries and they specialize in different types of

loans. But it is more likely that the bank, itself, through direct

lending will make CRA loans. So if you just look at the bank’s

loans, they will have a fairly good number of loans in minority and

low and moderate-income neighborhoods. And then if they say they

don’t want their subsidiaries counted, then you get this great CRA

performance, where they might have one of the largest subprime

lenders as a subsidiary, and if you counted them the loan pattern

would look quite different.

Mr. KUCINICH. I think it would be helpful to do a case-by-case

analysis in selected urban areas to be able to demonstrate how that

actually works.

Mr. BRADFORD. Yes.

Mr. KUCINICH. We will discuss that with staff as a followup.

I am going to go to my colleague, Mr. Davis, right now for the

next 5 minutes. We will come back to Mr. Bradford in a second and

closing round.

Thank you.

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Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman.

Mr. Maloney, would you suggest that one could view payday loan

establishments the same way that you would view a convenience

store? I am saying that people are simply willing to pay for the convenience of getting whatever it is that they are looking for whenever it is that they need it or want it, and therefore they just simply pay for it?

Mr. MALONEY. I definitely think that is the truth. I mean, I think

that all of the studies suggest that the consumers are really, really

interested in that convenience, and, as the lady with the Faith

Credit Union pointed out, I mean, consumers of payday loans like

the smiling faces they get when they walk in the store. These

stores charge a lot of money, but they also charge a lot of money

for milk at the Quick Way relative to the grocery store, so you are

getting a similar phenomenon.

Mr. DAVIS OF ILLINOIS. And so would you be suggesting also that

the market sort of dictates the action?

Mr. MALONEY. Yes.

Mr. DAVIS OF ILLINOIS. As well as the behavior of the institution?

Mr. MALONEY. Well, I think I am not exactly sure what you

mean, but——

Mr. DAVIS OF ILLINOIS. Well, what I mean is that whatever the

market will bear, I mean, that is what people charge.

Mr. MALONEY. Well, there is a lot of competition in the industry,

and I believe competition lowers prices to the bare minimum cost,

and my reading of the data is that the profit rates are just not that

high in the industry. If you look at the profit for an average transaction, it is about 2.5 percent. That is about the same as the grocery store industry. If you think about an average transaction of,

say, $300—I think the average for Advance America is about

$340—you look at that average, that $340 would be like a basket

of groceries. The vendor is making about $7 on it, so you have 2.5

percent. It is about the same as a grocery store.

Mr. DAVIS OF ILLINOIS. I would ask either one of you or both of

you and Mr. Bradford, of course, payday loans is a fairly new phenomenon. I am saying I don’t remember any of them when I was

a kid. There may have been some, but I didn’t come in contact with

them or I didn’t hear about them.

Is there any evidence that the advent of these on the scene has

reduced loan sharking, or have you come into contact with any evidence that would suggest that there aren’t as many loan sharks

around, and part of the result may very well be because of the payday loans?

Mr. BRADFORD. I just don’t know. Sorry. It seems very likely, but

I don’t have any data on that.

Mr. DAVIS OF ILLINOIS. I am trying to firm up in my mind the

moral value of these, as well as the economic utility, and you indicated that they might go out of business if there was a cap at a

certain level, and I am trying to see whether or not I think if they

went out of business that wouldn’t be a good thing.

Mr. BRADFORD. Both of us are.

Mr. DAVIS OF ILLINOIS. Yes.

Mr. BRADFORD. I am very interested in that question.

Mr. DAVIS OF ILLINOIS. Yes.

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Mr. BRADFORD. By the way, I have some vague recollection of a

study about Europe, looking at the difference between England and

France, and it was in reference to loan sharking. The evidence

there, and my recollection is very vague on this, but my recollection

is there was some evidence that loan sharking went down. Loan

sharking was negatively related to payday lending. I will get you

a reference on that if you would like it.

Mr. DAVIS OF ILLINOIS. Well, thank you both very much. It has

been a very interesting discussion.

Thank you, Mr. Chairman.

Mr. KUCINICH. Thank you.

Mr. Cummings.

Mr. CUMMINGS. First of all, thank you both for your testimony.

Dr. Maloney, I was very intrigued by almost everything you said.

I just wanted to ask you, I was just reading your written statement, and I guess you read that. Is that what you read from?

Mr. MALONEY. More or less, yes. The first part of my written

statement, yes.

Mr. CUMMINGS. It says ‘‘our research has found that payday

lending has increased access to short-term credit without harming

consumer welfare.’’ What does that mean?

Mr. MALONEY. Well, that was just a summary statement of this

bankruptcy finding that we have.

Mr. CUMMINGS. Yes.

Mr. MALONEY. But, in general, what I think we should be looking

at is consumer welfare measured a whole bunch of different ways,

like crime, domestic abuse, child abuse, homelessness. But the one

thing we have data on right now is bankruptcy, and so what we

have found is that payday lending does not increase bankruptcy

and, in fact, arguably it decreases it.

Mr. CUMMINGS. I am a lawyer, but I never did any of this kind

of stuff you talked about, you doctors, the kind of research you do.

I am just trying to hook up this causal thing, because it seems like

there is a gap here. On the one hand, I am just trying to figure

out how do you go into an area and figure that payday loans have

reduced bankruptcies? I don’t understand how you do that. How is

that done? You just don’t look at the blanket numbers, do you? I

mean, it seems like you have to go a little deeper than that.

Do you follow what I am saying?

Mr. MALONEY. I do. I do, very much so. The whole issue of correlation versus causation is one that plagues all scientific analyses.

But the technique that we used is called the Granger causality

test. It is based on the timing of events. So we look at States across

time and we look at how much did the bankruptcy rate change between time period one and time period two.

Better put, more to the point, we look at how the number of payday stores changed from period one to period two, and then we look

at how the bankruptcies changed from period two to period three,

under the argument that if the payday stores increased in the prior

period, that couldn’t be caused by bankruptcies going up in a later

period, and hence the causation has to run that way.

Mr. CUMMINGS. Professor Bradford said something that I found

very interesting when he talked about so often these payday loan

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folks are based in areas that have a large percentage of renters.

Did you factor that into your research?

Mr. MALONEY. No.

Mr. CUMMINGS. Because you saw that as irrelevant?

Mr. MALONEY. No. I mean, we haven’t collected all the data in

the world. What we did have was we had a lot of control variables

for bankruptcy, and in the literature the one that tends to be the

most important is the number of people that don’t have health insurance. You know, when you get sick, if you don’t have health insurance it is going to put a drain on your financial resources, and

that is a big predictor. Unemployment rate, income, we looked at

those kinds of things. Income would surely pick up rental versus

homeownership as a proxy.

We looked at a lot of that stuff, but, again, this Granger causality thing really takes account of everything that could be going on

to change payday stores back here is in the past, and bankruptcies

in the future can’t be causing the payday stores in the past.

Mr. CUMMINGS. Hang with me, because I have to get these questions in and I am running out of time.

Mr. KUCINICH. You can have whatever time you need.

Mr. CUMMINGS. Thank you.

I guess what I am trying to get at is we have 44 million people

in America, 40 to 44 million without health insurance, and a whole

lot of them are in my neighborhood.

Mr. MALONEY. Yes. Serious concern for you.

Mr. CUMMINGS. That is serious now. You made some statements

here that really do concern me, because I feel like I am putting together a puzzle and there are some pieces missing. When was this

research done?

Mr. MALONEY. It is preliminary. We are still working on it.

Mr. CUMMINGS. So this research isn’t complete?

Mr. MALONEY. No, no. No. Not even close. We will probably have

a research document, a research paper done, submitted to a journal

by the middle of the summer. It is very preliminary research.

Mr. CUMMINGS. I see. So really the information that you are giving us is preliminary. And is it possible or probable that your findings might change when you come to the end of your research?

Mr. MALONEY. It is entirely possible.

Mr. CUMMINGS. All right.

Mr. MALONEY. But I wouldn’t come here and tell you stuff that

I didn’t think was going to be true in the long run. I mean, I am

just a scientist.

Mr. CUMMINGS. I understand that. I understand. I am just trying

to figure out. I believe in research, so I am just trying to figure out

whether this is rolling research or whether this is done research

or what it is.

Mr. MALONEY. Yes.

Mr. CUMMINGS. The thing that I guess I found very interesting

is that you have said that in paragraph four of your statement,

‘‘nevertheless, the number of payday loan offices nationwide has increased from approximately—’’ and this is deep—‘‘from approximately 300 in 1992 to more than 20,000 today.’’ Is that accurate?

Mr. MALONEY. I think so, yes.

Mr. CUMMINGS. What do you mean you think so?

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Mr. MALONEY. Well, I mean, the numbers are——

Mr. CUMMINGS. Where did you get those numbers from? This is

your statement. I am just reading what you gave us.

Mr. MALONEY. I know. I know. It is over 20,000, but the numbers

on that come from various sources. I don’t exactly know what the

number is.

Mr. CUMMINGS. Do you know what the sources are they cited

here?

Mr. MALONEY. Some of the sources are industry sources. The

trade organization, Community Financial Services Association, has

members that are payday, and they report their members, and

then they estimate how many other stores are not members, and

they probably do Yellow Pages counts, but our research on the Yellow Pages counts is that they are not always accurate.

Mr. CUMMINGS. I see. What did you get your doctorate in? I am

just curious.

Mr. MALONEY. Economics.

Mr. CUMMINGS. Economics. I just have a few more questions. I

am going now to the second page of your statement, and you said

about 10 percent—no, let me go back to something else that I found

very interesting. You said in paragraph three on the second page,

‘‘Access to credit is best conducted in the open and competitive

marketplace.’’ This is what I want to know about. ‘‘Although likely

always to be relatively costly due to the risk profile of the borrowers it serves and the fixed cost of delivery and collection, the payday loan industry is increasingly competitive, and fees and profit

margins for providers of payday loans have been reduced in recent

years.’’ I want you to just tell me what you mean by the risk of

the borrowers. What does that refer to, and how does that relate

to your research?

Mr. MALONEY. Well, the riskiness of the borrowers is that they

obviously are not good credit risks or they would have access to

lower-cost credit alternatives. But the fact of the matter is they are

not all that risky in terms of their default. They are risky to the

lender because the lender does not have very much recourse. The

lender can’t do much except not give them another loan, and so

that is really what the riskiness is.

Mr. CUMMINGS. Is this an assumption on your part, or is this

that they are bad credit risks because they use the payday loan

system? Is that an assumption, or is that based on some research?

Have you looked at any credit ratings on these people? Because,

you know, there are a whole lot of people who are the working

poor, and they work hard. Even you, in your statement you talk

about how 10 percent chose payday loans because they were located at a convenient place.

A lot of these people have not even had access to banks. Banks

are not in their neighborhoods. A lot of them, maybe their education, maybe they have limited education and they are trying to

figure out the best way, trying to deal with things the easiest way.

It doesn’t mean that they are necessarily a bad credit risk. As a

matter of fact, many of them are probably paying their rent every

week. Did you take any of that into consideration?

Mr. MALONEY. Let me just go back a step and say what is really

the riskiness of the borrower from the lender’s perspective is that

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the lender does not have much recourse to collecting the debt.

There is no real assets at risk. It is not like a car title loan where

the lender can go repossess the car. So that is a riskiness to the

lender.

Mr. CUMMINGS. OK. Let me just ask you this one last question,

because I want to give the weight of your testimony the weight

that it deserves, and you told me that this is basically what I

would call a rolling piece of research, document, because you said

that it is not complete. Am I right?

Mr. MALONEY. You are right.

Mr. CUMMINGS. And I am just wondering, do you do work for the

payday loan people? Do you do any research for them?

Mr. MALONEY. This study, the payday loan industry has made

grants to Clemson University to fund graduate student research.

Mr. CUMMINGS. All right. Thank you.

Mr. KUCINICH. I thank Mr. Cummings.

I just have a couple of final questions, and I would invite Mr.

Davis and Mr. Cummings, if you can just hang in there for a few

minutes then if you would like to ask any final questions.

I want to go back to Mr. Bradford. Your testimony discusses the

coincidence of a few cases where Federal bank regulators passed

banks for outstanding or satisfactory compliance with the Federal

law preventing redlining and discrimination, while at the same

time the Department of Justice is prosecuting these same banks for

discrimination. How do you explain this coincidence? How can a

bank fulfill the purpose of the CRA, on the one hand, and at the

same time be guilty of discrimination?

Mr. BRADFORD. Well, Mr. Chairman, that is a question I would

sure like to see the regulators have to come up and answer some

time in specific to these cases.

There is an interesting quirk of language that the OTS and the

FDIC used for these same lenders after they were found to violate

these laws. In the CRA reports they usually say ‘‘we found no violations of fair lending,’’ and now they say ‘‘we were not able to find

no violations of fair lending,’’ whatever that means. I mean, even

when someone has been essentially found liable twice in a Federal

court, they can’t bring themselves to say there has been a fair lending violation.

I think that is why we recommend that there has to be a publicly

disclosed fair lending exam as part of this process, because the law

was created to stop discrimination in lending, and if the regulatory

agencies can’t find it when the Justice Department finds it over

and over again and private individuals find it over and over again,

then there is no point in issuing these exams and giving them the

right to branch.

Mr. KUCINICH. You raise a very interesting point, and that is

that if there has been a finding by the Justice Department, why

wouldn’t we amend the law if we need to on CRA to say that has

to be taken into account as to whether or not they are in compliance? Would that——

Mr. BRADFORD. Well, I think as a practical matter, the problem

is, you know, that your regulatory agencies in a certain sense are

competing with each other, because institutions change their charter from one place to another for particular reasons to protect

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themselves, and so in a way the financial regulators have been in

the business of protecting their industry. I think they are also concerned about what liability it creates if they say that they found

a violation of fair lending, because then they are basically exposing

that lender to lawsuits that other people might file.

I think those are issues that they have to face. After all, they

refer cases to the Justice Department when they think there are

violations, and there is no reason why they can’t produce that in

their public reports.

But the examples we gave you couldn’t be more blatant. I mean,

you know, Centier eliminated the entire city of Gary, IN. Old Kent

eliminated the entire city of Detroit, which is the largest African

American city in the United States. In the Chicago market MidAmerica eliminated all the Black neighborhoods. It is the largest

African American home buying market in the United States.

I mean, if you are the largest lender, which they were at 1 year,

in the largest African American market, and you eliminate them,

you certainly expect a regulatory agency to figure that out. I just

think they are so fundamentally incapable of doing exams they

have to start again. They have to rewrite their regulations. They

have to start the exam trainer all over again. They are really going

to have to go back to square one, or all the effort that you and

other people put into this right from the beginning seemed lost.

Mr. KUCINICH. Mr. Davis, Mr. Cummings, do you have anything

else?

[No response.]

Mr. KUCINICH. I want to say to Mr. Bradford, it was interesting

that you produced that document from May 1979, because it was

an institution on, I believe, Kingsman Avenue, which is in the African American community in Cleveland——

Mr. BRADFORD. Right.

Mr. KUCINICH [continuing]. Where we were experiencing that

people were not getting the benefits that they were putting money

into the bank, but the bank wasn’t loaning money back to the community in a way that was equitable, and that was what the CRA

was designed to do to begin with, to make sure there is some relationship between people helping to assure the financial integrity of

an institution, putting their deposits in, and then when they need

help to grow a community, you know, for their homes or whatever

reason, they would be able to have access. CRA was passed to

make that mandatory. That was 1979. Here we are.

I would be happy, by the way, to make sure that is included in

the record.

[The information referred to follows:]

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Mr. KUCINICH. This is the Domestic Policy Subcommittee, which

has held a hearing on foreclosure, predatory mortgage, and payday

lending in America’s cities. We have had 15 witnesses today on

three panels, and we are pleased to have with us, after almost 6

hours of work here, Mr. Davis and Mr. Cummings.

We will continue our inquiry into this economic challenge that is

causing so many people in the inner cities to look for alternative

ways of surviving financially and finding themselves sometimes in

a greater bind than they were before they started.

This committee will stand adjourned. I thank the witnesses and

everyone for participating and hanging in there with us, including

our staff. Thank you.

[Whereupon, at 8:55 p.m., the subcommittee was adjourned.]

[The prepared statement of Hon. Bruce Braley follows:]

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