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FORECLOSURES AT THE FRONT STEP OF THE

FEDERAL RESERVE BANK OF CLEVELAND

HEARING

BEFORE THE

SUBCOMMITTEE ON DOMESTIC POLICY

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MAY 21, 2007

Serial No. 110–36

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

JIM JORDAN, Ohio

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 May 21, 2007 ............................................................................... 1

Statement of:

Anderson, Barbara, treasurer, Empowering & Strengthening Ohio’s People ................................................................................................................... 28

Braunstein, Sandra, Director, Division of Consumer and Community Affairs, Federal Reserve System ..................................................................... 55

Bromley, Charles, adjunct faculty, Levin College of Urban Affairs ............. 38

Engel, Kathleen, professor, Marshall School of Law ..................................... 190

McCarty-Collins, Marianne, senior vice president, Insight Bank ................ 215

Pianka, Raymond, judge, Cleveland Municipal Housing Court ................... 90

Pollock, Alex, resident fellow, American Enterprise Institute ...................... 196

Rokakis, James, treasurer of Cuyahoga County ............................................ 17

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

Anderson, Barbara, treasurer, Empowering & Strengthening Ohio’s People, prepared statement of ........................................................................... 30

Braunstein, Sandra, Director, Division of Consumer and Community Affairs, Federal Reserve System, prepared statement of .............................. 57

Bromley, Charles, adjunct faculty, Levin College of Urban Affairs, prepared statement of ........................................................................................ 41

Engel, Kathleen, professor, Marshall School of Law, prepared statement

of ..................................................................................................................... 192

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

of Ohio:

Followup questions and responses .................................................................. 86

Prepared statement of ...................................................................................... 5

McCarty-Collins, Marianne, senior vice president, Insight Bank, prepared

statement of ................................................................................................... 217

Pianka, Raymond, judge, Cleveland Municipal Housing Court, prepared

statement of ................................................................................................... 93

Pollock, Alex, resident fellow, American Enterprise Institute, prepared

statement of ................................................................................................... 198

Rokakis, James, treasurer of Cuyahoga County, prepared statement of .... 20

(1)

FORECLOSURES AT THE FRONT STEP OF THE

FEDERAL RESERVE BANK OF CLEVELAND

MONDAY, MAY 21, 2007

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON DOMESTIC POLICY, COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, Cleveland, OH.

The subcommittee met, pursuant to notice, at 10:30 a.m., at the

Carl B. Stokes Federal Court House, 801 West Superior Avenue,

Cleveland, OH, Hon. Dennis J. Kucinich (chairman of the subcommittee) presiding.

Present: Representatives Kucinich and Issa.

Staff present from the Subcommittee on Domestic Policy: Jean

Gosa, clerk; and Jaron R. Bourke, staff director.

Present from the Office of Mr. Kucinich: Joseph Benny, district

director; Marty Gelfand, JD, staff counsel; Marian Carey, MBA,

deputy district director; Patricia Vecchio, MSN, Steve Inchak,

MSSA, Luis Gomez, Laurie Rokakis, MSW, Christine Miles, Betty

Rodes, and Lynn Vittardi, congressional staff; and Lisa Casini,

scheduler.

Mr. KUCINICH. The committee will come to order.

Good morning. I’m Dennis Kucinich, chairman of the Subcommittee on Domestic Policy of the Committee on Oversight and Government Reform, and with me today is the ranking member of the

committee, Mr. Issa. Mr. Issa, by the way, is a native Clevelander,

and it’s particularly meaningful to have him here today to join in

co-chairing this committee. I want to say that we would be joined

by Congresswoman Stephanie Tubbs Jones, but, unfortunately,

Congresswoman Jones’ father passed away. The funeral is today.

My wife and I just returned from the wake, and Congresswoman

Tubbs Jones has a representative here, I believe, or will have a

representative from her office here, and she is, therefore, represented. I just want to make that a matter on the record.

I also want to say, before I begin, that we’re very pleased to have

had the cooperation of the chief judge of the Federal court here

from the Northeastern Ohio District, Judge Carr, and creating the

opportunity for us to have these facilities. So, I just want to express the gratitude of the committee for Judge Carr making available what is a beautiful hearing room.

And in addition to that, for me it’s an honor to be here in a building that is named after someone who was a very dear friend of

mine, and someone who gave outstanding service to this committee

on so many different levels, legislative, executive and judicial,

Judge Carl Stokes. The memory of Carl Stokes, a very powerful

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force in this community and this country, and to be in a Federal

court house that’s named after him is certainly an honor. Today’s

hearing is going to examine the subprime mortgage industry and

the problem of foreclosure, the pay day lending industry and the

enforcement of the Community Reinvestment Act. The hearing will

also examine alternatives to foreclosures and to pay day 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 Members

who may join us. Without objection, Members and witnesses may

have 5 legislative days to submit a written statement or extraneous

materials for the record.

Our first panel today, which we’ll get to in a minute, but I want

to acknowledge their presence, includes Charles Bromley, an adjunct faculty member of the Levin College of Urban Affairs. Jim

Rokakis, the treasurer of Cuyahoga County and Barbara Anderson,

as a member of the Eastside Organizing Project.

Yesterday my wife and I and Councilman Santiago and other

members of the community went throughout a neighborhood on the

southeast side around our Lady of Lourdes Parish, and we went up

and down streets, and what we saw was something that really is

heartbreaking because there was street after street, row after row

of boarded up houses. Many of them representing the shattering of

a dream. Many people bought these homes with the full intention

of being able to meet the mortgages but ended up in conditions and

payments that were onerous and lost the house.

And, of course, the community has lost an opportunity for productive citizens to participate in not just home ownership, but participate in this process of community.

It turns out that Cleveland is at the epicenter of the Nation’s

foreclosure problem. Major American cities are bracing themselves

for a wave of foreclosures. The Center for Responsible Lending

projects that one out of every five subprime mortgages that originated during the past 2 years will end in foreclosure. These foreclosures will cost homeowners as much as $164 billion, the exact

cost of urban America is unknown.

And when you look at this map that we’ve prepared, and

Gelfand, our chief counsel, will have the opportunity to, perhaps,

demonstrate it, you will see a sideways V that is highlighted in

light green. Let me tell you what the geographical area represents.

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

prime loans. And if you look at the next map highlighted in reds

and oranges, if you look at the same V in the same place, this geographical area represents where the highest number of subprime

mortgage loans were made during the same year. And if you look

at the following map, again, the same V pattern and the same

place, here the red dots indicate the number of foreclosures.

These maps tell you there is a clear and self-enforcing correlation

between the low number of prime loans, the high number of

subprime loans and the high number of foreclosures.

Now, finally, the last map, again, the familiar sideways line V

shape. For here, the foreclosures indicated by blue dots are superimposed on the neighborhoods, red, indicates predominantly African American neighborhoods, again, a perfect match. Lack of access

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to prime loans, high frequency of subprime loans and a high rate

of foreclosures, are by no means specific to any racial group, but

the pattern certainly carries a whiff of America’s dark past.

Now, how did our city get to this point? The Domestic Policy

Subcommittee initiated an examination of the predatory mortgage

and subprime lending industries and the Federal regulators overseeing the Nation’s banking industry. As part of that effort, we

held a hearing on March 21, 2007, in which we heard from Leading

Consumer on academic and industry representatives. The very next

day the Domestic Policy Subcommittee wrote a letter to the Cleveland Fed in reference to the proposed merger of Huntington Bank

and Sky Financial.

We asked the Cleveland Fed to extend the public comment period

and to hold a public hearing. And the public hearing—and in view

of the—to hold a hearing in view of the lack of the depository lending and the explosion of subprime lending and foreclosures. The

Fed wrote back a letter, and I believe we have it here, and their

response was, no, they will not extend the public comment period,

and, no, they would not give a commitment to holding a public

hearing. They only said that they would consider doing so.

Now, I have wondered how serious—and without objection, I

would like to submit this letter for the record. I wondered how serious is the consideration given to holding public hearings. According

to one of our witnesses today, the last time the Cleveland Fed held

a public hearing in a bank merger case was nearing 30 years ago.

I will say at the outset that this hearing will not delve into the

details of the Huntington/Sky merger because it is a pending matter before the Fed. And I ask that members of the subcommittee

understand that we shall not influence any particular outcome of

the proposed merger, nor will we pursue any questioning about it,

or the Fed to hold a public hearing itself.

The matter could be fully discussed by all stakeholders. However,

unless the Cleveland Fed holds a public hearing, that conversation

will not take place as is beyond the scope of today’s congressional

hearing. The purpose of today’s hearing is to examine the situation

facing Cleveland, specifically Cleveland, but Ohio generally, and to

hear from the chief regulator of banking mergers in this region,

Cleveland Fed. Ohio leads the Nation in the rate of foreclosures.

Ohio’s foreclosure rate, 3.3 percent, is about three times the national rate and has the second highest percentage of loans and serious delinquencies according to the Mortgage Bankers Association.

Cuyahoga County, which includes Cleveland, had 11,000 foreclosures in 2005, more than tripled the number a decade ago and

13,610 foreclosures in 2006.

Subprime lending is associated with significantly higher levels of

foreclosure than prime lending. Foreclosure rates are 20 to 30

times greater than subprime loans. This finding is reflected in

Cleveland’s experience with a rapid growth in the subprime lending

market in the rising number of the foreclosures.

In Cleveland, in 1995, the local depositories were about 60 percent of the market share of mortgages. By 2005 that number

dropped to 20 percent. The Federal Reserve of Cleveland oversees

the Fourth Federal Reserve District, which comprises Ohio, Kentucky and northern West Virginia and western Pennsylvania. It is

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one of 12 regional reserve banks that, in conjunction with the

Board of Governors in Washington, DC, make up the Federal Reserve System.

The Fed has the primary responsibility of supervising and regulating the activities of State and local banks and bank holding companies. In the case of an acquisition, the Fed is required to take

into account the likely effects of acquisition on competition, the

convenience and needs of the communities to be served, the financial and managerial resources and future prospects of the companies and banks involved, and the effectiveness of the companies’

policies to combat money laundering.

I think one question, the maps I referred to a moment ago, raises

this: How well have the convenience and the needs of the communities been served over the last 30 years, especially in the last 10

years as the predatory lending and foreclosure problems have exploded? I think one of the few questions raised by the magnitude

of the foreclosure crisis in Ohio includes: What was the Cleveland

Fed doing to lessen the problem? What enforcement tools were the

Cleveland Fed advocating for? Was the Cleveland Fed acting proportionately with the foreclosure problem? What recognition did

the Cleveland Fed show that it had a foreclosure crisis at its front

step? Did the Fed adequately use its considerable power to curve

an industry that preyed upon borrowers, distort the market and

reeked havoc not just on borrowers but on their neighborhoods, cities and regions. I hope that we may begin to get answers to that

and other questions today.

At this point I would like to—at this point I would like to recognize the ranking member of the committee, Darrel Issa of California. I want to thank Mr. Issa for being with me this morning as

we conduct this hearing. The chair recognizes Mr. Issa.

[The prepared statement of Hon. Dennis J. Kucinich follows:]

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Mr. ISSA. Thank you for holding this very important hearing as

a followup to what we’ve already done in Washington.

I am fortunate to serve. This is the second go-around. In the last

Congress we did a lot of hearings that we did together on a bipartisan basis and are continuing to. And I hope that everyone here

today understands that’s a spirit in which we come here, that when

you look at the numbers, you look at Cuyahoga County, OH as a

whole versus the Nation.

There’s clearly a problem in this region, and understanding the

problem of this region before it spreads or to discover whether it

will spread to other parts of the country, will certainly, for me, be

part of the focus here today. As the chairman very much said, we’re

not here to discuss a pending merger, but I think we will be listening appropriately to some of the concerns that Chairman Kucinich

raised about competition. I, for one, come from California now, even

though I’m a native of Cleveland. As a result, I come from an area

that has almost the reverse of what’s going on here in Ohio. Unemployment is at a historic low. Home prices have risen more than

double on the average in California in the same period in which

they were pretty flat here in Ohio.

As a result, if you had a subprime loan and still have one in

California, but you didn’t refinance, you probably have 50 percent

plus equity in your home in California. Well, here you may have

exactly the same equity that you originally bought your house with.

So, there are things that are different. Certainly, I believe that

we’re going to look at that today.

We’re going to look at whether the Fed exercised what it could

exercise under the HOEPA, the Home Ownership Protection Act,

which as I understand and we’ll hear more today, gives authority,

but limited enforcement, and that’s something, perhaps, that we’ll

see and hear more when the Fed has their chance.

I must admit, I took a little nostalgic tour of Cleveland, Cleveland Heights, Shaker, the whole east side yesterday, and perhaps

because I haven’t been here much longer than the chairman, I saw

the part of the cup that was half full. I saw the areas of Hough

and going up Chester and Carnegie. I saw brand new homes where

I remember only, to be honest, ancient homes that were boarded

up. I still saw some boarded up homes.

But I see the promise for Ohio if, in fact, we can keep home ownership alive. I think the chairman and I will work together in

Washington to take what we learn here today and make sure that,

at a minimum, Congress is doing what it can to continue promoting

home ownership.

I also think that we’re going to have to look beyond banks, and

beyond banks, the regulatory authority of banks. As a Californian,

where California has the right, as Ohio has the right to regulate

mortgage brokers, I believe that both States have done, at best, a

limited job of doing so.

As I’m sure the chairman and those testifying today will agree,

mortgage brokers are the people that actually talk the consumer

into making that loan. It is very seldom, if ever, a federally regulated bank.

As Members of Congress, we, in fact, zealously guard our oversight ability, and I believe today is just a splendid example of good

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oversight, coming out here and looking beyond what we would normally see in Washington and with constituents to have an opportunity to see that Washington is not all about Washington.

My hope today is that we cannot only get to the root of many of

the problems that plague the subprime industry nationally, but

that we can effectively differentiate what’s going on nationally from

regional and local problems. This is particularly important because,

we as Federal regulators, have limited authority, but we can grant

additional authority to ourselves as we see fit. But often the thing

we need to do most is to say, what are we doing? Are we doing

enough. Should we do more? And if the answer is, we are doing

enough, then the next question is are the State and local areas empowered to do enough?

Is it clear that, for example, mortgage brokers are the responsibility of the States, and if, in fact, they are untruthful or predatory in their lending practices, no amount of enforcement directly

from the Fed is going to have the same effect as the State attorney

general and the State legislature.

So, Mr. Chairman, I want to once again thank you for holding

this important hearing. I think I’ve contrasted a little bit of what

I’m hoping to see here today, but I think at the end of the day it’s

what we both want to see that’s going to make us effective when

we return to Washington, and I yield back.

Mr. KUCINICH. I thank the gentleman from California. Without

objection, the members of this committee will have 5 legislative

days to submit a written statement or extraneous materials for the

record. Without objection, the members of the Ohio Delegation who

have the desire to submit a written statement or extraneous materials for the record, will be able to do so.

Without objection, the public officials who are here today who

will not be testifying, but, nevertheless, represent constituencies

such as a Councilman Brancatelli, Councilman Santiago and others, will be able to submit written statements and extraneous materials. And the community groups, including those from Slavic Village who were able to walk with us yesterday and from North East

Side Community, will be able to submit written statements and

provide extraneous materials for the record, Mr. Issa.

OK. So, at this point we are now going to be hearing from the

witnesses, and I want to start by introducing our first panel. I’ll

begin by introducing Mr. Rokakis. Now, Mr. Rokakis took office as

the Cuyahoga County treasurer in March 1997 after serving for

over 19 years on the Cleveland City Council, and I had the honor

in serving with Mr. Rokakis.

Mr. Rokakis brought sweeping reform to the treasurer’s office.

He spearheaded House Bill 294, which streamlines foreclosure

process for abandoned properties. He was instrumental in creating

Cuyahoga County’s Don’t Borrow Trouble Prevention Foreclosure

Program.

Mr. Rokakis developed nationally recognized link deposit loan

programs to help revitalize the county’s housing stock.

Additionally working past Ohio House Bill 293, that allowed senior citizens to defer property tax payments.

Governor Ted Strickland has appointed Mr. Rokakis to Ohio’s recently formed task force on foreclosures in Ohio. And I just wanted

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said, Mr. Issa, that Mr. Rokakis has really been an important leader on this issue, and we’re very grateful for his presence here

today.

Ms. Barbara Anderson is the treasurer of the Predatory Lending

Action Committee of ESOP, Empowering and Strengthening Ohio’s

People. ESOP was founded in 1993 to create organized leadership

around issues that impact neighborhood life in Cleveland. Ms. Anderson is a long-time community leader in Cleveland’s Slavic Village.

And, finally, the last witness of our first panel will be Mr.

Charles Bromley, who is an adjunct faculty member at the Levin

College of Urban Affairs. He is a Presidential scholar in the

SAGES Program at Case Western Reserve University and chair of

the Ohio Fair Lending Coalition. He’s led the first organizations to

document the relationship between foreclosures and predatory

lending and unfair lending practices and their impact on Greater

Cleveland neighborhoods.

I want to thank the witnesses for appearing before the subcommittee. It is the policy of the committee on Oversight and Government Reform to swear in all witnesses before they testify. I’m

going to ask that the witnesses rise and raise your right hands.

[Witnesses sworn.]

Mr. KUCINICH. Thank you. Let the record reflect that the witnesses answered in the affirmative.

Now, I’m going to ask each of the witnesses to now give a brief

statement, a brief summary of their testimony and to keep this

summary under 5 minutes in duration.

I want you to bear in mind that your complete written statement

will be included in the hearing record. I’d like to begin and have

the chair recognize Mr. Rokakis, the treasurer of Cuyahoga County. Welcome. Please proceed.

STATEMENT OF JAMES ROKAKIS, TREASURER OF CUYAHOGA

COUNTY

Mr. ROKAKIS. Thank you, Chairman Kucinich. And Congressman

Issa, welcome home. Our baseball team is better than it was when

you left, but I’m afraid to say that our football team may be worse.

Mr. ISSA. But we got rid of Modell, didn’t we?

Mr. ROKAKIS. Thank you, Mr. Chairman and members of this

committee for allowing me the opportunity to speak here today.

The crisis of foreclosures and the meltdown in the subprime lending market has dominated the news the past 6 months, but is a

problem we have been struggling within northeast Ohio and Cleveland, in particular, since the mid 1990’s when our foreclosure rate

took off here. From a low of 3,500 private mortgage foreclosures in

1995, our foreclosure rate climbed steadily in the 90’s to over 7,000

foreclosures filed by 2000. Undoubtedly, a weak economy played a

role in the doubling of the foreclosure rate, but other forces were

at work. The development of the secondary mortgage market and

great access to capital markets had created an insatiable demand

for mortgages and an increase in reckless lending practices, local

governments struggling to deal when this explosion cried out for

help.

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In March 2001, my office co-hosted, along with CSU School of

Urban Affairs, a conference at the Cleveland Federal Reserve Bank

on the topic of foreclosures. In 2002, three Ohio cities, Cleveland,

Toledo and Dayton, passed anti-predatory lending ordinances in an

attempt to fill the void created by an oblivious State government

and a Federal reserve that failed to recognize the crisis. These local

laws were preempted by State laws passed by the Ohio Legislature

within 60 days of their package.

An especially bold industry became even greedier and more reckless, and our foreclosure rate continued to climb to over 13,000 private mortgage foreclosures filed last year. And sadly we predict,

based on first-quarter filings in 2007, to over 16,000 foreclosures

this year, the equivalent of foreclosing on every owner-occupied

unit in the cities of Garfield Heights, Middleburg Heights and

Olmsted Falls.

The Federal Reserve Bank has the authority under the Truth in

Lending Act and the Home Ownership Protection Act to ban all of

the practices that have fed this mortgage craze and led to this foreclosure frenzy. They can ban no-document loans, but have not.

They can ban loans that are not fully indexed to a borrower’s income, but have not.

They can ban the practice known as risk layering where borrowers with the weakest credit are offered multiple gimmicks to qualify them for a loan, but they have not. They can require that all

subprime loans provide for the escrow of taxes and insurance in

their payments, but they do not.

They continue to hide behind the need to protect the subprime

industry, but this argument fails to recognize that almost 90 percent of subprime loans are financed and nearly all of those are adjustable rate mortgages that will, with a considerable degree of certainty, double the payment within 5 years and cost that borrower

their home. I am stunned at the number of elderly homeowners

who have refinanced their homes late in life, stripping their equity

out of the property and saddling them with a debt level they cannot afford.

In 1983, the average 65-year-old homeowner had $11,000 in debt

on their primary residence. By 2004, that number had climbed to

47,000. Yesterday’s New York Times had an article that zeroed in

on unscrupulous telemarketers, people who focus their efforts on

the elderly and target them for products they don’t need and can

ill afford.

This practice has been going on in the mortgage refinance business for years. We see evidence of it on people who have been refinanced and promised that their property taxes were part of their

monthly payment, only to find out they had been lied to, and they

found their names in the newspaper because they had failed to pay

their property taxes.

Last week, Federal Reserve Chairman Ben Bernanke, spoke to

an audience in Chicago on the topic of the subprime mortgage market. He spoke of a foreclosure and/or delinquency rates of more

than 60 days as approaching 11 percent in the subprime market.

I wish that were the case in Cleveland.

In January, Larry Litton, CEO of Litton Loan Servicing, shared

his Cleveland numbers with me, 11.41 percent already foreclosed

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in their portfolio, 16 percent in foreclosure for a total of 27.41 percent. If you add their loans that were 30 days late, which were another 18.5 percent, a stunning 46 percent of their loans in Cleveland were underwater or sinking fast, 46 percent. Let me read from

Chairman Bernanke’s conclusion in Chicago last week: ‘‘Markets

can overshoot, but ultimately, market forces also work to rein in

excesses. For some, the self-correcting pull back may seem too late

and too severe, but I believe the long-run markets are better than

regulators at allocating credit. We must be careful not to express

responsible lending or eliminate refinancing opportunities for

subprime borrowers.’’

In the mid 1970’s, New York City was facing a bankruptcy and

looked to the Federal Government for a bailout. Gerald Ford was

President and said no. New York Daily News headline read, ‘‘Ford

to NYC: Drop dead.’’ The position of the Fed on this issue, their

failure to regulate their unwillingness to recognize the severity of

this crisis should elicit a new headline: Fed to Cleveland: Drop

dead. Fed to Dayton, Toledo, Detroit, Buffalo, Cincinnati: Drop

dead.

Members of this committee, I don’t believe the Federal Reserve

Bank will take the measures they need to take. Frankly, you could

argue it’s too late. Congress must act on the various measures

under consideration in the house and Cincinnati to rein in the excesses of the mortgage industry, because the market has proven

itself to be greedy and unreliable in protecting the assets of its investors and willing to destroy cities like Cleveland. Act now.

[The prepared statement of Mr. Rokakis follows:]

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

Next we’re going to hear from Ms. Barbara Anderson. You may

proceed.

STATEMENT OF BARBARA ANDERSON, TREASURER,

EMPOWERING & STRENGTHENING OHIO’S PEOPLE

Ms. ANDERSON. Thank you, Mr. Chairman, and certainly, thank

you, Mr. Issa, and members and representatives of this committee.

Good morning, my name is Barbara Anderson, and I appear before you today as the treasurer and member of the Predatory Lending Action Committee of the Empowering and Strengthening Ohio’s

People [ESOP]. ESOP was formerly known as the East Side Organizing Project.

ESOP is a community organization whose roots are in the southeast side of Cleveland, OH, but whose growth has been fueled by

abusive lending and now includes the entire northeast Ohio region,

as ESOP’s work is widely recognized and requested.

I also serve as the treasurer of the Empowerment Center of

Greater Cleveland, president of the Bring Back the 70’s Street

Club. I’m the past president of Community Assessment and Treatment Services and serve on the boards of the Ohio State University

Extension Program, Vision Advocacy Council of MetroHealth Center for Community Health and Co-chair of MetroHealth Center for

Community Health and Co-chair of the Slavic Village Development

Abandoned and Vacant Housing Committee.

I could give you documentation regarding the devastating impact

of predatory lending and foreclosure, however, that’s included in

my full statement. I’m a survivor of personal predatory lending in

the past. I am yet a victim of predatory lending as is my entire

neighborhood.

I have lived at 3435 East 76th Street for over 25 years. That address is in the Slavic Village neighborhood. That is today widely

seen as the epicenter of the foreclosure crisis facing Cleveland and

the Nation.

I want to thank you, Mr. Kucinich, for holding this hearing as

the city of Cleveland is now experiencing a crisis as a result of

years of neglect by local banks and regulators. Without question,

cities like Cleveland were ripe for the picking. The steel industry

was leaving, their secondary industries went belly up and we continue to have brain drain. While these facts are staggering, what

I see in my neighborhood is even more tragic.

There are ten houses on my street. Five of them are currently

vacant, and in most cases are owned by a lender who made an abusive loan that the homeowner could not afford. My street is not unusual. You can walk up and down virtually any street in my neighborhood, as you did yesterday, Mr. Kucinich, and you will find a

similar situation.

In our street club’s targeted area, which includes the streets from

East 70th to East 78th, south to Edna Avenue and north of Morgan, there are over 100 vacant, abandoned or condemned homes.

Obviously, this scenery has reduced the value of my own home.

While that is devastating by itself, what is most devastating is that

I cannot allow my grandchildren to play outside because of squatVerDate 11-MAY-2000 11:20 Feb 25, 2008 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 C:\DOCS\40152.TXT HGOVREF1 PsN: HGOVREF1
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ters, usually high on drugs, are now occupying some of those

houses as they sit wide open.

Today organizations like ESOP are fighting an uphill battle to

clean up these costly measures. We have written agreements with

about a dozen lenders and services that allow us to serve as the

middle person between the homeowner and lender in order to help

negotiate a workout to their problem loan.

This year ESOP is projected to assist about several hundred families get out of foreclosure. While we are proud of our efforts, Cuyahoga is expected to see upwards of 15,000 foreclosures in 2001.

While some of these foreclosures are due to unforeseen, economic

hardships, the vast majority are the results of abusive lending. I

take this personally. Irresponsible lenders preying on unsophisticated borrowers is a match made in financial hell. It is the residents that are left behind that must shoulder the burden of the potential health, crime and nuisance of these properties.

Once left vacant, they become an eyesore. No one comes to clean

or to maintain the property. It is simply left alone and continues

its almost certain decline. The banks and the lobbiests will tell you

that the problem is a lack of financial education on the part of the

consumer. While, actually, it’s a lack of accountability by the lender

and greed to increase revenue on the backs of those that can least

afford and have very few options.

ESOP sees this hearing as an important first step to changing

the job description of the regulators, and I wish to conclude by

thanking you again, Congressman Kucinich, for your leadership on

this issue and would be happy to take any questions.

[The prepared statement of Ms. Anderson follows:]

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Mr. KUCINICH. Thank you very much for your testimony, Ms. Anderson. Mr. Bromley.

STATEMENT OF CHARLES BROMLEY, ADJUNCT FACULTY,

LEVIN COLLEGE OF URBAN AFFAIRS

Mr. BROMLEY. My name is Charles Bromley. I’ve had an extensive, professional career including advocacy, research, and organizing on the issue of fair lending, and I’m presently serving as adjunct faculty at the Levin College of Urban Affairs, and I hope to

contribute to the knowledge and academic role of regarding urban

diversity and creating learning opportunities for those of us who

seek a stronger and more vital community. Several weeks ago, the

Ohio Fair Lending Coalition brought a challenge regarding the

merger of the Huntington and Sky Banks, both Ohio lenders. The

community awaits a response to challenge the Federal Reserve

Bank, with a significant physical presence in Cleveland, housed on

two city blocks in the heart of Cleveland’s financial district is reviewing the challenge. The Federal Reserve Bank, is a formidable

national historic landmark with an impressive pink and sienna

marble facade within its hollowed walls has a 100-ton vault door,

the largest in the world, which protects the massive bank vault.

Cleveland is fortunate to have one of the regional Federal Reserve Banks. Unfortunately, the political presence of the Federal

Reserve Bank has not matched its physical presence in tackling the

persistent problems of discrimination and lending, and the most recent crisis is predatory lending that has affected every community

in Cuyahoga County. The rich history of the Federal Reserve Bank

and the Renaissance architecture remind life-long Clevelanders of

one of its many jewels.

In 1973, having graduated from the Levin College of Urban Affairs with a masters degree and working with the Cleveland

Heights Community Congress, I embarked on a community research project with the League of Women Voters Community. We

documented, by hand, and tracked and compared disparate lending

patterns that exist between the city of Lakewood and the city of

Cleveland Heights.

Our research findings were substantial, and we submitted our

study results to the Senate Banking Committee chaired by William

Proxmire. Other researchers and community-minded individuals

submitted similar study results, which led to the passage of the

Home Mortgage Disclosure Act of 1975 and ultimately the Community Reinvestment Act of 1977.

The Ohio Fair Lending Coalition filed the action against Huntington/Sky Bank’s merger and many colleagues said to us, why

bother? The Federal Reserve Bank will do anything for the community. We reminded them that following the passage of the 14th

amendment after the Civil War, it took our country until 1954, in

the Brown decision, to recognize the importance of the equal protection clause. Similar issues and obstacles presented themselves

relative to the Home Mortgage Disclosure Act and the Community

Reinvestment Act. Now, these acts represent important tools for

our communities and cannot be dismissed as unimportant.

HMDA data that was once transparent has been transformed

into an online nightmare that no individual citizen can easily comVerDate 11-MAY-2000 11:20 Feb 25, 2008 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 C:\DOCS\40152.TXT HGOVREF1 PsN: HGOVREF1
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prehend. It’s imperative that the Federal Reserve Bank make this

data transparent and easily available to community groups who

would use this data.

The Federal Reserve Bank has only conducted one study in 1992,

conducted by the Federal Reserve Bank of Boston, to examine the

relationship between race and credit scores. It is time for the Federal Reserve Bank of Cleveland to undertake such a study and determine what role race plays in the declination of prime credit.

They have the resources, the knowledge and data to carry this out

expeditiously.

It has been over 30 years since the Federal Reserve Bank held

a public hearing in Cleveland. The wealth-robbing activities of

lenders has exacerbated predatory lending problems in communities, not only in historically underserved city neighborhoods, but

in encroaching first-ring suburbs, which leaves a trail of impoverishment and debt.

During the years since the last public hearing, Greater Cleveland

has been devastated by high-cost loans and predatory lending. At

each hearing on proposed legislation to curb the effects of predatory

loans at the State level, and the multitudes of meetings that occurred in Greater Cleveland, the important leadership of the Federal Reserve Bank has been missing.

The President of the Federal Reserve Bank of Cleveland has

been absent from all public discourse on this issue. At the hearings

on anti-predatory lending law in Columbus, OH, at the countless

summits on predatory lending, and the numerous meetings leading

up to creation of the Cuyahoga County Foreclosure Prevention Program, the highest office of the Federal Reserve Bank was absent.

It is significant that in the 2006 Annual Report, the current president of the Federal Reserve Bank of Cleveland highlighted the immense cost that concentrated poverty has placed on this community.

There is little doubt that predatory lending has put at risk billions of dollars of real estate for Greater Clevelanders.

For more than a decade many civil rights advocates pressed for

changes in lending practices that would have been an antidote to

the explosion of predatory lending. The Metropolitan Strategy

Group, a nonprofit which I led, documented this and presented this

information.

A proposed statement on subprime lending. For the last decade,

the Federal Reserve Bank in Cleveland has not been at home. The

private dining rooms of the Federal Reserve Bank have been filled

with lenders while the community has been outside, looking in, trying to determine if someone will open the door to hear from those

among us who have been devastated in the community. The litany

of abuse is well documented.

First and foremost, there must be a discussion of no document

loans or liar loans. The Federal Reserve Bank regulators had a

moral and legal responsibility to stop this behavior the second that

these indiscretions were documented, along with other loan products that damage communities, and they should not have waited

until, ‘‘a crisis in mortgage markets.’’ It’s well known that the Federal Reserve Bank holds the highest regard for its examiners who

review safety and soundness.

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These values are represented for all to see with two larger-thanlife statues, one entitled Security and the other entitled Integrity.

Sculpted in New York City, they guard the main entrance of the

Federal Reserve Bank on East 6th and Superior. These statues are

a symbol of trust that the community instills in the Federal Reserve Bank.

One commentator, Eddy Ross, said recently in the Dayton Daily

News, these agencies, bank regulatory agencies, have enormous

power, direct and indirect, over the financial services market. They

could set the tone. By aggressively and creatively pushing lending

institutions to offer credit in lower and middle-income communities—including by enforcing the Community Redevelopment

Act—they could have given consumers a reasonable alternative to

the predators by beefing up the Home Mortgage Disclosure Act,

regulators, could have given policymakers and police agencies realtime data about who was making predatory loans and where and

what actions could be taken.

It’s time to revive an honest debate about these issues as the

Greater Cleveland community attempts to resurrect its housing

market and its financial institutions. The mighty facade of the Federal Reserve Bank needs to be matched with a new political will

to take on difficult issues related to disinvestment and predatory

lending in Cuyahoga County. It’s time to knock on the door and

find out that somebody is home and that public hearings will occur.

Thirty years is too long to wait. It is now time to act.

William Proxmire was fond of saying about lenders, he said, the

former chairman said, I asked myself how is it that so many neighborhoods are continuing to fail while so many lending institutions

are continuing to pass. I hope that we can move ahead and have

a hearing in Cleveland and get the truth out about lending.

[The prepared statement of Mr. Bromley follows:]

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Mr. KUCINICH. Thank you very much, Mr. Bromley. We’ll be

moving quickly to questions of the first panel. For those who have

just joined us, the definition of terms is very important here. We’re

talking about prime loans. We’re talking about the standard loan

given to a borrower with a good to excellent credit rating.

Subprime loans are higher interest rates often with financial penalties and are made for people who are often deemed to be higher

risk.

Also, there’s evidence that this committee is looking at that African Americans are more likely to have subprime loans even if their

financial information would justify a prime loan. These loans are

often made by affiliates of banks specializing in subprime loans,

and there are frequently abusive practices associated with these

loans and including at the appraisal level or no-document loans. I

just want to make sure that as we proceed here, that everyone understands the terms of the discussion.

Let’s begin with questions of the first panel. Would Mr. Issa like

to ask the questions first.

Mr. ISSA. I’d be glad to.

Mr. KUCINICH. Thank you. Please go ahead.

Mr. ISSA. Thank you, Mr. Chairman. This is sort of—when you

see bipartisan, this is a great example of it.

Well, you covered a lot, and I appreciate you doing it. Ms. Anderson, you’ve been nationally—your organization has been nationally

recognized for intervening in the process in order to renegotiate or

to save failing loans. Could you tell us, in a sense, how many loans

that you discover are savable through intervention out of the total?

In other words, we look at the failed rate in Cleveland, which

you’ve helped reduce, but when we’re looking at intervention—and

to be honest, grants and funding for organizations to help with people who have gotten over their head, what percentage can you say

in your experience?

Ms. ANDERSON. Well, let me answer a couple ways. First of all,

it’s been very successful, and one of the reasons has been because

of the relationship that develops after the partnership is made.

ESOP has been able to, as I’ve said before, go into partnerships

with the ones that we deal with such as a Litton, such as an Aquin

[phonetic]. Because of that partnership and the relationship, they

are more willing to negotiate or to help, not just predatory loans,

but also hardship loans. And, so, yes, well over 70 percent are able

to be negotiated, some kind of negotiation where it is possible to

save.

Mr. ISSA. And you brought up a good point that I’d like to followup on. Because of Cleveland’s economy, when you break those

down, can you give us a feeling for how many, that you may recall,

is the direct result of predatory lending and how many you would

say are hardship? People have lost their jobs or they’ve lost a goodpaying job, and now one or both members are working for less.

Ms. ANDERSON. I would say that the impact of losing jobs has

had a devastating effect, which you well know. And if you’re already in a predatory loan, even that predatory loan that you may

have been able to afford while you had that good job by making

other sacrifices, that once you get into a predatory loan and lose

your job, then it becomes even more complicated.

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There is—depending on the lender, there is a higher amount

with some lenders, maybe even of 50 percent, 60 percent, are hardship loans. While some lenders, 80 and 90 percent of them are

predatory lending.

Mr. ISSA. It pretty much depends on how aggressive the broker

was that sold the packages?

Ms. ANDERSON. Yes, it does.

Mr. ISSA. Mr. Bromley, HB185, which has now been signed into

law, how much of an effect do you believe it will have in the future,

stemming future incidents the way we’re seeing here?

Mr. BROMLEY. Well, I think all laws—I mean, it’s like the Community Reinvestment Act. It depends upon how well it’s enforced,

how effectively, how comprehensively. You know, we have a State

law here to prevent, you know, predatory activity. And I have

found over the years that when you put a law in a book, you better

be sure that you’re going to enforce the law and make sure that

it occurs.

We have had some wonderful things, and we documented early

on in this crisis that 70 percent of the people going in foreclosures

had problems with predatory characteristics in their mortgages. It

was well known, well documented. There are an abundance of laws.

I mean, it’s a question of enforcing those laws and speaking out in

a way that makes sure that these laws are effectively enforced

throughout the community.

Mr. ISSA. I guess I’ll switch to one of the authors of the bill. I

was interested because HB185, if enforced, Mr. Rokakis, I assume

you believe will dramatically reduce this.

Mr. ROKAKIS. It will. As you know though, 185 is the lame duck

session between the election of the new Governor and the end of

that term was, in my opinion, gutted by 117. But the damage provision was limited so substantially, that I really feel it took away

from the enforceability of the strength that 185 might have had.

Certainly, putting fiduciary duties on brokers and licensing, all

very important, but what was so unsettling to us is that 117, we

really feel gutted it, and, of course, it’s in limbo now because there

was that period of time this Governor vetoed this. It was a 10-day

layover. They’ve sued it for the Ohio Supreme Court. So, it’s unclear as to what 185’s standards are, though the attorney general

is going forward as if it’s in full effect.

Mr. ISSA. And the followup, and sometimes we call this the

punch, assuming that 185, if left ungutted and implemented, would

have really changed the lay of the land going forward, particularly

as to enforcement of mortgage brokers, lending policies, criminal

sanctions and so on, assuming that’s all true, then when we’re

weighing—I’ll just be a second, Mr. Chairman. Thank you.

If we’re weighing the Fed, who will be up here next, and what

we expect them to do, and Ohio’s effective or ineffective, but belief

that they can respond, they can regulate as Federal officers,

wouldn’t it be reasonable to say that you should send 185 back

through, put the teeth in it, enforce it and clean up the act unique

to Ohio’s problems so that you will not be in a catchall of what

works in California being what you get told to do here in Ohio,

which, by the way, as now a Californian, I know won’t work. The

regulatory needs are undoubtedly different here in Ohio. I don’t beVerDate 11-MAY-2000 11:20 Feb 25, 2008 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 C:\DOCS\40152.TXT HGOVREF1 PsN: HGOVREF1
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lieve you have walk-away loans. In California you can walk away

from your mortgage, not go bankrupt and no one chases you. We

have non-recourse loans.

And so as an Ohioan moved to California, I’ll close and say, in

a sense, isn’t it the important thing to come out of this hearing,

that if Ohio can’t make 185 a proper enforcement reality, that your

legislation needs to pick it back up, put teeth in it and bring it

back through if Ohio’s going to have a custom solution for themselves?

Mr. ROKAKIS. I agree. I think we have to partner in this. And as

you know, one of the comments made by Chairman Bernanke was

that unfortunately this is a patchwork quilt. So, we can’t do this

alone. Clearly, we can’t expect the Fed to do all of this.

But, unfortunately, and I hate to be such a cynic, I’ve spent

many an afternoon traveling to the Ohio Legislature.

The power of the mortgage broker industry, the power of the

mortgage bankers, the appraisers, the people that are all integral

parts of this not so pleasant situation have incredible power at that

legislature, and I’ve watched them—and time after time—2002 is

a good example. Cleveland, Dayton and Toledo said nobody is going

to help us. We’ll do it on our own. You know, within 60 days they

preempted those three cities, they promised action, 11 meetings, 63

witnesses, no action came until 2006 only because it was an election year, then they started to gut it 3 months later. Forgive me

for being a cynic, but I’ve spent too much time in Columbus.

Mr. ISSA. Thank you, Mr. Chairman.

Mr. KUCINICH. Thank you very much, Mr. Issa, my colleague

from California. This discussion that you’re having with Mr.

Rokakis, since we do have a member of the legislature in the audience, State Representative Foley, and if there’s any other members

of the legislature in the audience, I would ask that you let the staff

know, because this is certainly a discussion that is relative to your

level.

We’ve also been joined by Congresswoman Tubbs Jones’ representative, Mr. Taylor. Would you stand and be recognized. Let

Congresswoman Tubbs Jones know that she has our love and support at this time. We know that she would be here except for this

tragedy in her family. So, thank you, Michael Taylor, for being able

to represent Congresswoman Tubbs Jones. And, finally, I want to

acknowledge the presence of another mayor that’s in the room,

Mayor Thomas O’Grady, of North Olmsted.

I’d like to move on to questions, and I’d like to go to this question

of public hearing, Mr. Bromley, that you raised. What’s your understanding of the purpose of holding public hearings? And, generally

speaking, I’m not talking about a specific case now with respect to

merger reviews.

Mr. BROMLEY. Well, it’s an opportunity. The Community Reinvestment Act has a mechanism that allows the public to comment

on a proposed merger of lenders, and the public hearing is part of

that process where the public, meaning individuals, community

groups such as Barbara’s, can comment on the impact of a merger

on a community.

Mr. KUCINICH. And when was the last time a hearing was held

by the Cleveland Fed.

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Mr. BROMLEY. 30 years ago.

Mr. KUCINICH. How would you explain that 30 years have passed

without a public hearing.

Mr. BROMLEY. I think that this Federal Reserve Bank decided

after one hearing that they were never going to have another hearing in Greater Cleveland, that it was unfortunate, and that the

weight, as Jim has indicated, the weight of the lenders weighed in

and said we are not going to have any more public exposure to

these kind of issues. And the result has been 30 years of silence

in the public square, and the public square needs to have a vigorous dialog in the Democratic institution.

Mr. KUCINICH. Mr. Rokakis, you quoted from Chairman

Bernanke, and, of course, you’re aware that last week he promised

that the Fed is going to do all, ‘‘We’ll do all we can to prevent fraud

and abusive lending and to ensure that lenders employ sound underwriting practices.’’

Now, preventing a reoccurrence of the problem is very important,

but what efforts should be made and what role will the Fed play

in solving the problem of foreclosures for existing homeowners.

Mr. ROKAKIS. Mr. Chairman, I also read their statements urging

banks and mortgage companies throughout the company to cooperate in workout efforts. I’m a part of the Governor’s task force that’s

putting together a State-wide network to help try to work through

this foreclosure morass. As you know, September of this year and

next year we’re going to see an explosion of these subprime ARMS

resetting, about $20 billion worth in this State. So, we’re going to

see more foreclosures than we’ve already seen, which is hard to believe.

But I think what’s important is that we must find a way, the

Fed, the Congress, we have to bring these lenders to the table

early. They say they want to work out these loans, and I know they

have with ESOP and we have a foreclosure effort here, but until,

as an industry, they set up practices that offer uniform solutions,

it’s going to be a one by one by one by one hand-to-hand combat

on renegotiating millions of mortgages.

Mr. KUCINICH. Well, since you’re on the Governor’s task force, of

course, you know the stock market has taken a notice of the rising

in cost in subprime loans has helped to reduce the amount of capital available for future predatory lending.

Of all the conferences and guidance from the Fed, can you point

to anything that the Fed has done to prevent the bad loans from

being made? Are you aware of any?

Mr. ROKAKIS. No. Other than the statement of those last week

urging the banks to cooperate on workout efforts, but it was nothing more than an invitation to do so.

Mr. KUCINICH. Mr. Bromley, are you aware of any of this.

Mr. BROMLEY. I’m not aware of any, and at this level of the crisis—that’s the point about the Cleveland Fed. The Cleveland Fed

is very aware of what’s been going on in Ohio and specifically here

in Greater Cleveland. I think they have played a very important

role in lifting this issue up.

Mr. KUCINICH. Thank you. I’d like to ask Ms. Anderson, because

you’re working at the community level, tell this committee about

the impact of people in the neighborhood where you have all these

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homes boarded up—and you’re still living there and you have a

home there.

Ms. ANDERSON. That’s right.

Mr. KUCINICH. I talked to some people yesterday, but I’d like you

to tell the committee, how does this affect people. People put time

and effort into their property to try to keep it up, and, all of a sudden, a house gets boarded on the street.

Ms. ANDERSON. It’s not just devastating to just the people who

live there, but especially to the children. I mean, you play with

these people, you work with people, you talk with people. They become your neighbors, and then, all of a sudden, in the middle of

the night they’re gone, and several days later the house is boarded

up, trash is sitting outside and it’s not as though it’s moved. This

is your window every day, is that you go out to see these vacant,

abandoned, boarded-off homes that just devastates the entire community. It’s heart breaking. It’s an uphill battle.

We have had many community groups go door to door to try to

make a difference with our painting on the houses, as you saw yesterday, Mr. Kucinich. We have people there now who are cleaning

up the property, who are sweeping. We have people from Habitat

who volunteered their time today who are doing that. It is a neverending battle. You can only clean up so much. It’s like trying to

clean up America and all you have is a staff of four.

Mr. KUCINICH. I want to thank the members of the panel, and

just ask my colleague, Mr. Issa, when we look at California, and

your having an understanding of both Cleveland and California, is

it possible that it’s only working in California because the housing

level right now, and that might also be related to the lending practices and also—you know, yesterday over on, I think, it was

Blanche Avenue I saw a house that was appraised for like $68,000,

and there’s no way that this house was worth that much.

Now, it’s boarded up, but when it was first bought, it was

$68,000. And I’m wondering, you know, when you have an economic decline that’s undercut, does that have an impact.

And could it be that there’s a housing level in California that’s

not here?.

Mr. ISSA. Mr. Chairman, you’re exactly right. Actually, if anything, we probably have more predatory loans in California because

you buy a house, you pay $300,000 for a starter home in some California communities, and 2 years later you take another $100,000,

$150,000 out in a second because the appreciation has been that

great. A typical capital investment in 2000 in California doubled by

2005, doubled.

So—and when you start with a base of $2, $3, $4, $500,000 on

what we as Clevelanders would call a middle class home, and $190

to $200 for that base housing, just for what we would call affordable housing, and then it doubles. What happens is the mischief

that these mortgage brokers—and they sprung up out of nowhere

unregulated in California—were able to do was amazing. The only

thing keeping California going is, first of all, you can sell your

house and get out today because they still appreciated it, and, two,

to be quite candid, we have an incredibly low unemployment rate

in most of California that is holding it up. It’s not that we don’t

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have some cracks in the subprime mortgage programs. It’s just that

it’s so much smaller because we have full employment.

Mr. KUCINICH. And I suppose it’s fair to say that, you know, God

forbid that there was an economic decline in California, but if there

was an economic decline, you would probably see some problems.

Mr. ISSA. The financial landslide, when you’re looking at homes

that cost so much more, will ripple throughout the country. It’s one

of the reasons that your hearing here is so important, is as does

Cleveland, maybe not so goes the rest of the country. But if what

we see here, because of a doubling or so of a historically low unemployment were to happen in California, the default rate would be

in the hundreds of billions of dollars, and it clearly would have an

effect on the national economy.

Mr. KUCINICH. See, I think that having Congressman Issa here

is so important because we’re looking at kind of the parentheses of

this matter. You know, Cleveland, with a tremendous wave of foreclosures, State of Ohio, with the economic decline, California with

a housing bubble, crisis rising, it’s really great that we can do this

together.

We want to thank the first panel for testifying. Any additional

statements that you have or information by the unanimous consent

of the committee is able to be submitted to the record. Thank you

for being here, and we’re now going to move to the second panel,

Ms. Sandra Braunstein, who is the Director of the Division of Consumer and Community Affairs for the Federal Reserve. I want to

thank her for being here.

Ms. Braunstein, good morning.

Ms. BRAUNSTEIN. Thank you.

Mr. KUCINICH. I want to thank you very much for being here. I

want to introduce, to those who are in attendance, Ms. Sandra

Braunstein. She is the Director of the Division of Consumer and

Community Affairs at the Board of Governors of the Federal Reserve System. She supervises the board’s Community Reinvestment

Act Examination Program and coordinates the development of policy recommendations relating to consumer protection including the

Community Reinvestment Act. She also plays a significant role in

analysis and merger and acquisition applications. She was appointed in March 2004 and joined the Federal Reserve Board in

1987.

Ms. Braunstein, it is the policy of the Committee on Oversight

and Government Reform to swear in all witnesses before they testify, and I would ask you at this moment to rise and to raise your

right hand.

[Witness sworn.]

Mr. KUCINICH. Thank you, witness. Let the record reflect that

the witness answered in the affirmative.

Now, as panel 1, I’m going to ask Ms. Braunstein to give an oral

summary of her testimony, to keep this summary under 5 minutes

in duration, and I want you to bear in mind that your written

statement will be included in the hearing record. So, at this point,

the floor is yours, and I want to welcome you to this subcommittee

hearing.

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STATEMENT OF SANDRA BRAUNSTEIN, DIRECTOR, DIVISION

OF CONSUMER AND COMMUNITY AFFAIRS, FEDERAL RESERVE SYSTEM

Ms. BRAUNSTEIN. Thank you. Chairman Kucinich, Ranking Member Issa, I appreciate this opportunity to appear in Cleveland to address a number of issues that are of interest to you and your constituents. My written testimony describes the Federal Reserve System’s role in evaluating the bank’s performance under the Community Reinvestment Act, how the Federal Reserve analyzes applications from banking organizations proposing mergers or acquisition

and discusses a number of matters relating to subprime mortgage

lending.

I would now like to make a few major points on these issues. As

you may know, the Federal Reserve has supervisory authority for

State-chartered banks that are members of the Federal Reserve

System. These institutions total approximately 900 banks and represent 12.4 percent of total domestic assets of all U.S. banks and

thrift. In Ohio, the Federal Reserve has supervisory authority, including conducting examinations for CRA for 33 banks comprising

of only 6 percent of banking assets in Ohio.

The Federal Reserve also has responsibility for expansion applications for State-member banks and banking financial holding companies. During our analysis, we review the competitive effects of

the proposal in the relevant markets, the financial and managerial

resources and future prospects of the bank holding company, and

its banking subsidiaries, the convenience and needs of the communities affected. The public is notified when applications are filed

and interested parties may comment on any of the statutory factors.

Promoting the availability of credit through the banking system

and protecting consumers are important roles for the Federal Reserve. In regards to these objectives, I will address the subprime

mortgage lending. The subprime market has grown dramatically

over the past decade. In 1994, subprime loans accounted for fewer

than 5 percent of mortgage originations, but by 2006 about 20 percent of new mortgage loans were subprime.

While the expansion of the subprime mortgage market over the

last decade has increased access to credit, the market has more recently seen increased delinquencies and foreclosures. The board is

troubled by these performance issues and understands the significance of the matter to regional markets, communities and families.

The board believes that mortgage market problems need to be

addressed in a matter that curves unfair and abusive practices

while preserving incentives for responsible subprime lenders.

Accordingly, it is important that any actions we take are well

calibrated and do not have the unintended consequences. We want

to encourage, not limit, mortgage lending to qualified borrowers our

responsible lenders.

I will briefly touch on several means we have used and are using

to address subprime lending issues. First, over the past several

years the Federal Reserve System has monitored development in

the subprime lending industry and has taken steps to address

emerging problems. In response to weaknesses in underwriting and

risk management at the institutions we supervise, we have issued

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guidance in concert with other Federal banking agencies. This includes the recent proposed guidance on subprime lending.

Second, in 2001 the board revised the HOEPA rule in response

to renewed concerns about predatory lending. In this rulemaking,

the board utilized its authority to prohibit unfair and deceptive

practices for high-cost loans. For example, the board issued rules

that prohibit a HOEPA lender from refinancing one of its own

loans with another HOEPA loan, or flipping, within the first year

unless the new loan is within the borrower’s interest. At the same

time the board revised the rules implementing the Home Mortgage

Disclosure Act to better track developments in the higher-priced

market.

The board is currently conducting a major review of Regulation

Z, which implements the Truth in Lending Act of which HOEPA

is a part. The board held four public hearings in 2006 on home equity lending and mortgage markets. On June 14th the board will

hold a fifth public hearing focussed on how the board might use its

rulemaking authority to curve abusive lending practices in the

home mortgage market, including the subprime sector.

Third, the board is actively engaging representatives from the

mortgage lending, servicing and capitalization arena as well as

from borrower and community support organizations to learn about

opportunities for borrower intervention and foreclosure mitigation.

And, fourth, collaborations to further community development.

Consumer and financial education have long been a part of the

Federal Reserve System’s approach to facilitate solutions to matters that may be most effectively addressed in a local or regional

level. In my written testimony, I discuss some of the efforts of the

Federal Bank of Cleveland in this regard.

The impact of mortgage delinquency and foreclosure on consumers and communities is of great concern to the Federal Reserve,

and we have worked to respond to the issue in both the national

and regional levels. We will continue to pursue opportunities to

help borrowers and to preserve the access to responsible lending.

[The prepared statement of Ms. Braunstein follows:]

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Mr. KUCINICH. I want to thank you, Ms. Braunstein, for being

here to represent the Fed.

Now, in your testimony you cite two public hearings. In your prepared testimony you cite two public hearings involving Ohio banks

in the last 10 years. Now, for the record, will you state which Federal Reserve Bank convened those hearings?

Ms. BRAUNSTEIN. Those hearings—actually, public hearings are

convened by the board, and that’s one of the things that I wanted

to correct a bit. There are a number of items you discussed in the

first panel where the actual decisionmaking is in Washington as a

board, not in the local Federal Reserve Bank.

Mr. KUCINICH. Weren’t those hearings held by the Federal Reserve Bank that came out of Chicago.

Ms. BRAUNSTEIN. Those hearings were held in Chicago, yes.

Mr. KUCINICH. Thank you. Now, for the record, will you state the

last time the Cleveland Fed held a public hearing on——

Ms. BRAUNSTEIN. The last time we held a public hearing in

Cleveland, it was in 1981.

Mr. KUCINICH. Would the staff correct the record? Is it not 1979

or 1981? OK. Our information shows 1979.

So, if you could provide this committee with information on the

year, we would appreciate it.

Now, can you explain, in any event, why so much time has

passed without another public hearing?

Ms. BRAUNSTEIN. Well, first of all, we make decisions, the board

makes decisions on public hearings, and there have been—since

1990, there have been 13 public meetings related to applications.

Mr. KUCINICH. Not in the Cleveland area, though, right.

Ms. BRAUNSTEIN. Not in the Cleveland area. There’s been two in

the Cleveland area, the one you keep referring to in 1979 and one

in 1981. There have been—when we decide to hold a public meeting on an application, the reason we do that is because we cannot

get sufficient information to make a decision on a case without

holding the public meeting.

Every application has a public comment process, and it’s not unusual for us to receive hundreds of comments.

Mr. KUCINICH. In other words, if you feel you have sufficient information, you don’t hold a public hearing.

Ms. BRAUNSTEIN. Correct. That is correct.

Mr. KUCINICH. So, all of these other mergers have taken place

over the past 25 or so years, 27 to 30 years. You just didn’t need

the extra information; is that what your position is.

Ms. BRAUNSTEIN. We did not feel we needed—in order to get

what information we needed to make a decision, it was not necessary to hold a public meeting.

Mr. KUCINICH. Now, we’ve been hearing that important data

maintained by the Fed pursuant to the Home Mortgage Disclosure

Act is not easily useable even by skilled researchers. Is the Fed

aware of the difficulties experienced by users of the Home Mortgage Disclosure Act data, and when can we expect the Fed to include the usability of this data.

Ms. BRAUNSTEIN. I know that the people who are in charge of the

HMDA data work with consumers and community groups all the

time to try to help them with this data. If there are specific probVerDate 11-MAY-2000 11:20 Feb 25, 2008 Jkt 000000 PO 00000 Frm 00083 Fmt 6633 Sfmt 6633 C:\DOCS\40152.TXT HGOVREF1 PsN: HGOVREF1
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lems associated with that, we would like to know about them, and

we will see what we can do to address them. I’m not aware of specific problems.

Mr. KUCINICH. Will you explain how such a high percentage of

banks are receiving passing Community Reinvestment Act rates,

maybe 97, 99 percent at the same time that one out of every five

subprime mortgages originated in the past 2 years will end up in

foreclosure? How can that happen.

Ms. BRAUNSTEIN. Well, first of all, over 50 percent of the

subprime mortgages that are made, and even higher in Ohio, it’s

in the 60 percent range, are made by independent mortgage companies that are not federally regulated and, therefore, not subject to

CRA, so that is one part of it.

Mr. KUCINICH. Have you——

Ms. BRAUNSTEIN. And I know for the banks—I can only speak to

the banks that we supervise. We have, as I mentioned, 33 banks,

and in 2005 HMDA data our State-member banks made 17 highcost loans. So, they are not engaged in subprime lending.

Mr. KUCINICH. Now, we know that there are financial institutions who have created secondary products in the subprime markets, correct.

Ms. BRAUNSTEIN. Yes.

Mr. KUCINICH. So, if these financial institutions, you know, with

whom you have oversight create those products, what stops the Fed

from being able to monitor the creations of these financial institutions? Why would you not be able to do that.

Ms. BRAUNSTEIN. Well, it’s likely that the secondary market

products may be created at the cooperate holding company level,

and our responsibilities with regard to that are to make sure that

those companies are safe and sound, and that is what we do.

Mr. KUCINICH. You don’t look at their practices. You don’t look

at whether they’re——

Ms. BRAUNSTEIN. Well, an affiliate of a holding company would

not be subject to CRA, just the deposit. CRA applies to depository

institutions only. And those are State-member banks, and, as I

said, our State-member banks are not——

Mr. KUCINICH. Here’s what I don’t get. You at the Fed, you’ve

just told me that you don’t need to have these community hearings

as long as you get sufficient information. That’s on one hand. On

the other hand, you see an avalanche of defaults in the subprime

housing market.

Are you aware that’s happening? Are you aware of the level of

defaults?

Ms. BRAUNSTEIN. We certainly are, and we’re taking, as I mentioned, a number of steps to address that. Those—our applications

process is somewhat separate and apart from what we’re doing in

terms of foreclosures.

Mr. KUCINICH. Are you helpless to do anything about this avalanche of defaults? Because, see, here’s the problem that I have—

and, Mr. Issa, this is something that motivates the cause of this

hearing. We have people in the community who are really screaming out, crying out for help in getting recognition of the problem.

If the Fed won’t hold hearings—and on the other hand you say,

well, we have sufficient information. We don’t have to hold a hearVerDate 11-MAY-2000 11:20 Feb 25, 2008 Jkt 000000 PO 00000 Frm 00084 Fmt 6633 Sfmt 6633 C:\DOCS\40152.TXT HGOVREF1 PsN: HGOVREF1
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ings. If you do not take responsibility for monitoring the activities

of the subprime one way or another and you don’t hear from the

people, you will not hear from the people because you say you have

sufficient information, then how in the world, other than a hearing

like this, would you ever get an opportunity? Will the people ever

get an opportunity to be heard in neighborhoods that are falling

apart because of this avalanche of foreclosures? Can you help us

with that?

Ms. BRAUNSTEIN. We are monitoring the circumstances of foreclosures around the country, and we have taken several steps in

that regard. We have issued guidance on non-traditional mortgages. We have issued guidance on subprime lending. We have

issued guidance to lenders in terms of doing workouts. We are

heavily engaged in meeting with people both in consumer groups

and industry people to talk about the problems that exist and how

workouts can be done and how people can keep their homes. We

are heavily engaged in a number of activities.

And here locally the Federal Reserve Bank of Cleveland is heavily engaged in the community. They held a foreclosure summit in

2005 and 2006 on a local basis, and they’re working in partnership

with a lot of local community organizations on foreclosure mitigation and education projects.

So, we are heavily involved in activities around foreclosure, and

it is a huge concern for us. We are doing what we can.

We are examining our rulemaking to see if we can do something

under HOEPA. We have already held four public hearings on this

matter, and we are holding a fifth one on June 14th in Washington, as I said, in particular to focus on unfair and deceptive borrowing.

Mr. KUCINICH. And are you also looking at these deceptive and

sharp lending practices in the subprime mortgage industry so that

neighborhoods, such as in Cleveland, OH, are not going to be

crushed by these unfair practices? Are you looking at that.

Ms. BRAUNSTEIN. Yes. We definitely are looking at that, but the

one thing that we all have to keep in mind is that we can write

rules that can address some of these practices, but we are not the

enforcement agency for most of the lenders. In fact, we have very

little subprime lenders under our direct enforcement. That is done

by other regulators.

Mr. KUCINICH. I want to go to Mr. Issa after this question. One

of our witnesses today remarked that one of the failings of the

Community Reinvestment Act is this, and this is a quote. If a bank

purchases predatory loans, it may be fulfilling its obligation under

the lending test. Similarly, a bank that purchases securities backed

by predatory loans may be able to claim credit under the investment test. In other words, the quality of a loan is not considered

in the Community Reinvestment Act examination. Only where the

loan was made large banks can own subprime lending affiliates to

make predatory loans in low-income minority areas, and the bank

can get rewarded under the Community Reinvestment Act.

And in connection with the statement that you just made, how

long is the Fed going to allow this twisting of the intent of the

Community Reinvestment Act, and when is the Fed going to issue

new regulations denying Community Reinvestment Act credits for

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financing predatory loans and lenders? I would appreciate your answer.

Ms. BRAUNSTEIN. If we know that a bank is making loans that

are predatory in nature, there will not be Community Reinvestment Act credit for those, and, in fact, we would look further into

that.

Mr. KUCINICH. Mr. Issa, thank you very much.

Mr. ISSA. Thank, Mr. Chairman. I think you’ve gotten us off to

a good start. I want to sort of stay on that same line.

Let me characterize a little bit of what I’m hearing. Basically,

you’re damned if you do and you’re damned if you don’t. If you, in

fact, have to make these loans, but if you make these loans and

they’re high risk and they default, then it’s your fault. And in your

case, if I understand, Ms. Braunstein, that banks are not doing it

directly. They’re doing it by impact. As you said, there were only

17 loans made by banks in a direct relationship.

But to the extent that we are holding both of these, I want to

followup on something the previous panel, Ms. Anderson, said

when a home is boarded up and the neighborhood goes down and

there are one after another, these homes are owned by banks, and

the bank is getting zero on them.

So, I’m trying to understand, because you oversee banks, this is

a huge hit to the banks who own these portfolios of non-performing

purchases of portfolio, and, in fact, can’t even liquidate the underlying assets in some cases. So, on that $68,000 home that wasn’t

worth $68,000, they get a goose egg, isn’t that, right?

Ms. BRAUNSTEIN. Yes. That would be—absolutely. I mean in our

safety and sound examinations, if banks have large portfolios of

loans that are defaulted, that is certainly going to impact them.

Mr. ISSA. The earlier panel, one of the things I didn’t followup

with them, but it stuck in my mind, is that the vast majority of

defaults are refies. So, it’s not the original mortgage on the home,

but, in fact, a refinancing. Is that your understanding also?

Ms. BRAUNSTEIN. I think it’s more than half. My—I think my

statistics are not quite what the panel had before.

What we’ve heard in Ohio, I think from the HMDA data, it’s

more like 60 percent are revised versus about 40 percent are purchase money in Ohio.

Mr. ISSA. So, I’m trying to understand this specifically for Ohio

because, as you know, my heart is here even though my car is out

in California. Now, it just works that way, everyone has to have

cars in California.

I find this interesting because if, in fact, you make these loans

and then you have refies, then that means there was money taken

out. Where did the money go?

In other words, you had a performing loan and a loan that, when

we’re looking back, went to being predatory, to use the term. I

don’t like the term because the truth is some of these are high risk

and some may be predatory, but when they went from being purchase money to being recollateralized as a second, is probably when

these things tipped over. At least 60 percent of them might have

tipped over being what the consumer couldn’t afford.

But my question to you is, where did the money go? Where does

typically that money go when they take it out? Does it go into the

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stock market? Does it go into other areas or is it a result of consumer debt and other signs that when we look at the Fed chairman’s role, he often speaks on.

Ms. BRAUNSTEIN. I don’t have statistics on that, but my guess

would be that often times people are venerable and put into a position of refinancing because they have other obligations.

Mr. ISSA. So——

Ms. BRAUNSTEIN. I doubt that people are doing this to invest in

the stock market. It would be my gut feelings. I think it’s more

likely that they have other debts that they’re trying to pay off.

Mr. ISSA. So, the 60 percent would be people who are in trouble,

and in a sense it’s predatory, but it’s predatory on both sides.

They’re slipping in toward bankruptcy. A refy lets them get some

cooling off space for making a whole bunch of credit card loans,

but, ultimately, they slip right back into it.

Where would we get an understanding of that? Because obviously, you know, earlier they talked about liar’s loans. I’ve always

had a problem with calling liar’s loans predatory because I’m saying, wait a second. If you lie to get a loan, then who’s the victim

when it goes into default? I’ve always felt that a liar’s loan was sort

of over here with, wait a second, if you lie to get a loan, and then

eventually you’re out of a house, and I’ve got a house that is upside

down, and if I were a banker, I’m wondering who’s the victim here,

and I think the bank is the victim in the case of liar’s loans.

Ms. BRAUNSTEIN. Those can go two ways. I will tell you one of

the ways we can get information about questions you’ve asked are

the four hearings that we held last year in 2006. And one of the

things that we heard over and over again anecdotally was that the

stated income loans—they can go two ways. It could be that a borrower will overinflate their income. Yeah. They don’t have to document their income.

It’s also where the broker or the lender may put the wrong number in, and so in that case a borrower would be a victim. And we

have heard anecdotally a lot of stories about the case where the

borrower did not even realize the number that the lender was putting into the application.

Mr. ISSA. I know it may be a lot of work, but to the extent that

you can, would you provide this committee with information you’ve

gotten from those hearings that you think would be appropriate for

our continued followup and also from your public comments? Because as I understand, your public comments in a sense are open

forum hearings. You can take 200, 300, 400 comments, where in a

hearing like this today as we can all see, you’re only going to get

a few people into a speech into an hour or 2-hour period.

Ms. BRAUNSTEIN. Absolutely. For each of the four hearings, as

well as the fifth one on June 14th, there is a public comment process attached to that where we encourage people to write us and tell

us comments on the issues.

Mr. ISSA. Now, I’m going to close out with one that is near and

dear to my heart. When I came to Congress, I came to one of my

other committees, the Judiciary Committee, and we worked on

bankruptcy reform my first, second and third term, and, finally, got

it passed. And I think all of us know that anything that’s that hard

to get passed, you didn’t get it all in.

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When it comes to how the Fed—and I realize you probably won’t

be able to give us a full answer today, but I would appreciate a

supplement from your board and others that may be able to comment. In bankruptcy reform we really didn’t deal, if you will, with

home ownership. In California, we call them cram downs. When, in

fact, in a bankruptcy it is determined that a mortgage is not payable, the authority of the bankruptcy judge to view that and to

view, for example, that a predatory event occurred, an event occurred that may have led to the inability to pay, etc., we didn’t deal

with that. We sort of left the case law where it was to a great extent.

Well, at the same time we may be individual if they have the

ability to pay for future revenues. So, when we looked at specifically, bankruptcy, if a bankruptcy event occurs, can you give us

your comments on things that maybe we should pick up legislatively that may empower the courts who ultimately, if they give

debt relief and someone comes out of a bankruptcy still owning

their home but at a different mortgage rate, etc., it tips the balance

as to your institutions, could you give us whatever followup comments you feel are appropriate because I believe in light of a lot

of what we’re seeing here, that we may be looking on the other

comment at a bankruptcy reform affecting what happens to somebody that’s been a victim of predatory lending?

Ms. BRAUNSTEIN. We’ll have to get back to you on that because,

frankly, I’m not prepared to discuss that at this point in time.

Mr. ISSA. I understand. Thank you, Mr. Chairman. I yield back.

Mr. KUCINICH. I want to thank Mr. Issa. You know, in your discussion you raised a couple of questions, and what I’d like to do is

have a very short second round here.

Mr. ISSA. I love second rounds.

Mr. KUCINICH. If we may proceed. Do you think, Ms. Braunstein,

that the guidance the Fed has issued has been adequate to the

magnitude of the predatory lending crisis.

Ms. BRAUNSTEIN. I think that we still—it is too early. First of all,

the non-traditional mortgage guidance has only been in effect for

a few months, and the subprime guidance has not been finalized

yet, so I think it’s too early to make that judgment. However, I will

say that we have seen signs that even without final guidance, the

markets are starting to self-correct in that we hear that underwriting is being tightened.

Ms. BRAUNSTEIN. Well, it took a long time in the sense that there

were a lot of people hurt, but most of the people who are having

problems now received their loans in, some in 2005 and most in

2006.

Mr. KUCINICH. OK.

Ms. BRAUNSTEIN. So, if you look at it that way, it’s not been a

problem for years and years and years.

Mr. KUCINICH. Mr. Rokakis said something when he was testifying. Did you hear his testimony?

Ms. BRAUNSTEIN. Yes, I did.

Mr. KUCINICH. He raised some questions. He said that the Fed

can ban no-document loans, but they have not. Is that true.

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Ms. BRAUNSTEIN. I think what Mr. Rokakis was referring to was

our authority under HOEPA, and that is what we are looking at

at this hearing.

Mr. KUCINICH. Is that true though, that you can ban no-document loans? Is that true.

Ms. BRAUNSTEIN. I guess technically we could, but I do need to

qualify that, that in exercising our authority for unfair and deceptive or banning practices, we are going to have to do some very

careful study to look at the wider effects that we need to be well

calibrated, so that we don’t end up in a situation where we’re restricting or constraining credit.

Mr. KUCINICH. He also said that you can ban loans that are not

fully indexed to a borrower’s income. Is that true.

Ms. BRAUNSTEIN. Again, that would probably fall under—if it

meets the definitions of unfair and deceptive, then that’s another

part of the law that we are doing an analysis of, and so I don’t

know if we could ban that or not.

Mr. KUCINICH. Well, he says that you can ban the practice

known as risk layering where borrowers with the weakest credit

are offered gimmicks to qualify them for loans, but you have not.

Is that true.

Ms. BRAUNSTEIN. Again, we are looking at that, and I am not

sure because in addition to wanting to be careful about how we

calibrate bans or practices, the way the law is written, they need

to meet the definition of unfair and deceptive, and these may not

meet that definition. So, I can’t answer that at this point. These

are things that we are looking at.

Mr. KUCINICH. Well, what I’d like you to do, I mean, in a followup, written answers to these questions. If you can’t answer them

and elaborate right now, I can understand that because there’s a

lot of things that are apparently in flux at the Fed relative to these

questions. But Mr. Rokakis also said that you can require that all

subprime loans provide for escrow taxes and insurance in their

payments, but that you don’t. Is that true.

Ms. BRAUNSTEIN. Same answer as——

[The information referred to follows:]

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Mr. KUCINICH. OK. Well, I think that this is a productive hearing

if we can open up a discussion here with the Fed about the direction that you need to take, because we’re not only looking at the

forensics of this. We’re looking at where we are headed for the future.

Ms. BRAUNSTEIN. And can I say this.

Mr. KUCINICH. Sure.

Ms. BRAUNSTEIN. These were already things we are looking at

under this authority. Some of those things, it may end up are better dealt with through guidance, and we have dealt with those

issues in the subprime guidance that we have now out and that

we’re finalizing. So, there’s a big difference between dealing with

something in guidance and dealing with it in the rule.

Mr. KUCINICH. I understand that, and I also ask you to take note

that while you’re calibrating these things, neighborhoods are falling apart. We really need your help.

And the one final question I have before I go back to Mr. Issa

is this. Again, in your statement about public hearings, which, you

know, there was an aspect of it that I found very troubling, you

said, you know, you could get sufficient information. Mr. Issa pointed out that you solicit comments. That’s good. But you still don’t

have these public hearings for people here in the community. My

question to you is, do you meet with bankers to discuss these

issues?

Ms. BRAUNSTEIN. Are you talking about applications issues.

Mr. KUCINICH. No. I’m talking about the issues that you wouldn’t

hold in a public hearing to talk to people in the community. Do you

have meetings with bankers?

Ms. BRAUNSTEIN. We meet with a wide range of people. We meet

with people from the industry. We meet with bankers. We meet

with community organizations on a regular basis.

Mr. KUCINICH. The obvious reason why I raise that question is,

I mean, people in the community would feel hurt if they felt that

you wouldn’t meet with them, but you would meet with the bankers. And so I just want to appeal to the fairness of this process as

we move forward.

I thank you very much, by the way, for your testimony and now

to Mr. Issa.

Mr. ISSA. Working with the chairman is a great deal of fun, and

I’ve always liked his insight. Once in a while he gets mine and

wonders where it came from. But, you know, the interesting thing

is that I meet with the NRA and I meet with the Brady organization. I don’t hold a public hearing to see all the gunners come in

and anti-gunners come in to tell me what they think. And, perhaps,

I should, but I’ve had some pretty lively town hall meetings, so I

try to stay off of some subjects.

Mr. KUCINICH. Maybe you should have that sign and say that

you will check your guns at the door.

Mr. ISSA. I once had to have SWAT because I did an immigration

reform hearing, and I now do those telephonically.

But I want to close out my questioning for something that I hope

the Fed can take an active role in, and that is modelling the question of the 80 versus the 20. Today in this hearing so far what

we’ve seen is that in the worst case, you’re going to have about 20

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percent of these loans go south, at least, based on all the worst

case problems we’ve seen so far. That means 80 percent of the people who take these high-risk or subprime loans perform under

the—perhaps convert them in time to conforming loans. And I’m

concerned that 80 percent and, perhaps, the others, certainly the

80 percent, might not have gotten a loan, might not have owned

a home.

And so as you’re doing this, I hope that you’re going to be able

to supply this committee and the public with some modelling of the

what if. What if we tighten this up a little? Do 79 percent of the

80 percent still get their homes? Well, a big chunk of the misery

factor goes away or is it one of those things where half the people

who got these loans, and as a result, are enjoying home ownership

around the country, will be denied? And that’s going to be very important to me, that as much as I don’t want to see boarded up

homes, I don’t want to see—quite frankly, I don’t want to see banks

making loans that ultimately lead to defaults.

At the same time, as Members of Congress, the one thing that

we’ve got a very bipartisan basis and President after President has

stated, is home ownership is a big part of what America is all

about. And moving that number up as we’ve done as a society over

the last few years continues to be important, so I’m hoping that

you can give us insight on that. Because as much as we want you

to reduce this pain factor—as a homeowner who was lucky enough

to get a VA loan the first time, I realized I was a bit of a stretch

starting a business here in Cleveland and getting my VA loan with

no qualification necessary other than an honorable discharge.

So, if you would respond to us in writing for that, and obviously

we’re hoping for leadership from the Fed, and I’m happy that you

were able to be here today. We talk about the Federal Reserve

Bank of Cleveland, and it is a noble institution, but I appreciate

the fact that, as I understand, you just came from Washington to

make this happen for us.

Ms. BRAUNSTEIN. Thank you very much, and I agree with you,

Congressman, and that’s what we’re trying to do, is achieve the

right balance, and we would be happy to get to you on that.

Mr. ISSA. Thank you, Mr. Chairman. I yield back.

Mr. KUCINICH. The chair is going to declare a 5-minute recess.

We’ll come back in 5 minutes. We intend to complete this hearing

by 1. I would ask the next panel to stay close. If you’re going to

leave the room, please know that we’re starting again in 5 minutes.

[Recess.]

Mr. KUCINICH. The committee will come to order. The committee

will come to order. If you have any conversations, please take them

outside the room.

I want to make sure that anyone who has participated here signs

the sign-in list so that as the work of this committee continues, we

can keep you posted of any further discussions or hearings on the

subcommittee relative to these questions. We now are about to

begin the third panel.

And I would like to make the following introductions: Judge Raymond Pianka is presiding as administrative judge in the Cleveland

Municipal Housing Courts. A division he has served as such since

his election in 1996.

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Previously, Judge Pianka served on the Cleveland City Council

where he chaired the Community and Economic Development Committee and the legislative committee.

Judge Pianka received his jurist doctorate from Cleveland Marshall College of Law in 1977.

Professor Kathleen Engel is a professor at the Cleveland Marshal

College of Law. Her research focuses on predatory lending, housing

discrimination and the Community Reinvestment Act. She’s published a long list of law review articles on the topic and teaches a

seminar at the law school on predatory lending.

A recent article was entitled, ‘‘Do cities have standing? Redressing the externalities of predatory lending.’’ Professor Engel received

her AB, cum laude from Smith College and her JD, cum laude from

the University of Texas School of Law. Mr. Alex Pollock has been

a resident fellow at the America, Enterprise Institute since 2004 focussing on financial policy issues among other related issues. Previously he has spent 35 years in banking, including 12 years as

president chief executive of the Federal Home Loan Bank of Ohio.

He’s director of the Allied Capital Corp., the Chicago Mercantile

Exchange, the Great Lakes Higher Education Corp., the International Union for Housing Finance and chairman of the Board of

Great Books Foundation.

Ms. Marianne McCarty-Collins is the senior vice president of Insight Bank, past president of both the Columbus and Ohio Mortgage Bankers Association. At the Mortgage Bankers Association,

the National Association for the Industry, she serves on the Board

of Directors and Board of Governors. She’s a former trustee for the

Columbus Board of Realtors, chairs the Government Financing

Subcommittee as former affiliate of the year for the association.

She’s also a former trustee of the building industry of central

Ohio. Ms. McCarty-Collins has served on the Fannie Mae National

Advisory Council in Washington, DC, in 1996 and 1997.

I want to thank this distinguished panel of witnesses for being

here. It is the policy of the Committee on Oversight and Government Reform to swear in all witnesses before they testify. I’m going

to ask you now to rise and to 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 2, I ask that

each witness give an oral summary of his or her testimony, and to

keep in mind that you should keep that summary under 5 minutes

in duration. Your written statement will be included in the hearing

record.

I’d like to start with Judge Pianka. Thank you very much for

being here. Please proceed.

STATEMENT OF RAYMOND PIANKA, JUDGE, CLEVELAND

MUNICIPAL HOUSING COURT

Judge PIANKA. Thank you for the opportunity to be here. The

Cleveland Housing Court has been described by Chief Justice

Moyer as emergency room for housing conditions in Cleveland. We

are a problem solving and therapeutic court.

As judge of the housing court, the sole judge of the housing court,

I observe daily in the cases before me the impact of the banking

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industry and the lack of regulation on it in our homes and our

neighborhoods.

There are nine points briefly. First of all, the lack of regulation

has reduced our neighborhoods to financial wild wests with homeowners left to fend for themselves with an attempt to survive in

those neighborhoods. Cleveland is experiencing a record number of

home mortgage defaults, foreclosures, bankruptcies and failed financial deals. The primary impact of the financial crisis is, of

course, on the property owner. The homeowners, however, are not

the only ones who are suffering as result of the increased number

of defaults and foreclosures.

The collateral damage from this financial decline is felt worse in

our neighborhoods as the committee saw yesterday in its tour of

the Cleveland neighborhood. Each day I see property owners who

were told by banks and mortgage companies to vacate their properties at the commencement of the foreclosure actions leaving the

properties empty and unattended. Their neighborhoods are forced

to live next door to that vacant, boarded property with high grass

and weeds stripped of siding and they contact the court about their

options to combat these living conditions.

These homeowners not only suffer the effects of living next door

to the blight, they suffer financial loss as well as their own properties are devalued as a result. The frustrated city council representatives contact the court, are concerned about the abandoned

property that are magnets for criminal activity, and they produce

a domino effect as poorly maintained properties lead to more poorly

maintained and properties in default. And there are discouraged

community groups who are trying to help but cannot as they attempt to determine who, if anyone, has authority and responsibility

for the properties.

I’ve been with the housing court for over 10 years, and the negative impact of the mortgage defaults, foreclosures, and conduct of

the banking industry upon our neighborhoods has never been

greater than it is today.

Certainly, the banks and other lending institutions have a right

and even an obligation to initiate foreclosure actions when mortgages go unpaid. However, the non-regulation of the industry has

led to a lack of enforcement of basic fiduciary duties of banks and

other lending institutions.

The banks and other lenders must be called on to act responsibly

in both lending and collection processes to minimize the destructive

effect on our neighborhoods. Reduced lending by the regulated

banks has created a vacuum which is being filled by less reputable

lenders. Lending in Cleveland by regulated banks has dropped

sharply since 1995. The refusal of regulated banks to lend in Cleveland has created a vacuum, which is being filled in part by unscrupulous, subprime lenders, perpetrators of mortgage fraud and irresponsible investors.

Each day in court I’m told stories by property owners with little

incomes who have fallen prey to schemes involving purchase of

multiple properties as investment opportunities. The schemes seem

to thrive in the current, unregulated lending atmosphere of Greater

Cleveland. And while there are laws against fraudulent applicaVerDate 11-MAY-2000 11:20 Feb 25, 2008 Jkt 000000 PO 00000 Frm 00095 Fmt 6633 Sfmt 6633 C:\DOCS\40152.TXT HGOVREF1 PsN: HGOVREF1
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tions, waste, false statements of income and deceitful appraisals,

those laws go largely unenforced.

And I’m heartened to see the current efforts to prosecute some

of the perpetrators of these schemes, but the prosecutions are small

in numbers and slow. And because of the time needed to investigate and pursue these cases, it’s unrealistic to view prosecution

as a cure. Reputable lenders must encourage and encourage to occupy their place to lend money to people who purchase homes and

refinance homes in Cleveland. Lenders must be accessible to borrowers and other interested parties and be responsible in their actions toward borrowers. One of the primary problems that we face

in a housing court is our inability to reach someone in the bank

or lending institution who is able and willing to discuss the property with the defaulting property owner or the court. It’s difficult

to find a contact person who can negotiate a deed in lieu of foreclosure or short sale that would transfer that property to a beneficial loaner.

And this inability to contact the financial institution coupled

with a fact that a number of the banks are avoiding service of process in the—is that my time.

Mr. KUCINICH. Yeah. What I want you to know, Your Honor, is

that you have an extensive statement here that is actually quite

helpful to this committee. Your entire statement will be included

in the record, and I think that you’ll be able to get to some of these

areas in the question and answer period.

Judge PIANKA. Mr. Chairman——

Mr. KUCINICH. But you may wrap it up.

Judge PIANKA. The court every day has to deal with banks who

have failed to file the deeds, trying to help people who are in default get out of the loans, toxic titles where the banks have dropped

foreclosures and have left the liens on the properties, and it is

going to take years for us to dig out from underneath these problems in Cleveland. And I found out today that these are unattended consequences, but they are consequences nonetheless that

we face every year in Cleveland.

[The prepared statement of Judge Pianka follows:]

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Mr. KUCINICH. Thank you, Judge Pianka. And I want to thank

you for the dedicated service that you’ve given in the housing court.

I had the chance to serve with Judge Pianka and you really have

done an outstanding job. Your entire testimony will be included in

the record, and at this point we’ll go to our next witness. Next

we’re going to hear from Professor Engel, a professor from the Marshall School of Law.

STATEMENT OF KATHLEEN ENGEL, PROFESSOR, MARSHALL

SCHOOL OF LAW

Ms. ENGEL. Thank you. I think it’s an honor and a privilege

to——

Mr. KUCINICH. Is your mic on, please?.

Mr. ISSA. Little green light.

Ms. ENGEL. Can you hear me now?

It’s an honor and a privilege to testify today on this critically important issue. My name is Kathleen Engel and together with my

co-author, Patricia McCoy, I’ve been engaged in extensive research

on issues related to predatory lending. I was asked today to briefly

discuss three issues. First, the emergence of predatory lending in

underserved neighborhoods.

Second, the targeting of borrowers of color with abusive loans,

and, last, the role that CRA can play in enabling and curtailing

predatory lending.

I’ll turn first to the growth of abusive lending in low and moderate income neighborhoods. Historically, people with weak or a

blemished credit history were ineligible for credit. The development

of the securitization of home mortgages and the deregulation of

lenders in the 1990’s ushered in a new home-lending market, making credit available for low and moderate-income borrowers.

The same forces led to the appearance of a new breed of unregulated lenders offering an array of subprime loan products. These

lenders market their products in areas with the highest levels of

pent-up demand for loan. That is neighborhoods that have not had

access to credit in the past.

Making credit available to borrowers in these areas is not a bad

thing. The problem is that some of these lenders are making loans

on terms that are, per se, harmful. These loan terms are harmful

not only to the borrowers but to the community as you’ve observed

in Slavic Village.

Too often lenders are making loans knowing that borrowers ultimately will not be able to afford the repayments. We would expect

that banks would enter the subprime loan market and undercut

the abusive lenders with competitive products that don’t contain

abusive terms, thus, driving the worst lenders out of the market.

This has not happened. There are many explanations for why

banks might be reluctant to enter the subprime market directly,

and why banks more generally may choose to leave lower-income

neighborhoods. Those explanations are beyond the scope of my testimony today. What is important is that because banks have little

or no presence in these communities, abusive lenders can proliferate and exploit venerable borrowers.

This leads me to my second point. The marketing of the most

abusive loans are to people of color. There is increasing evidence

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that, on the whole, people of color pay more for mortgage loans

than Whites with similar incomes and credit histories. This is adding insult to injury. For centuries, this country engaged in de jure

discrimination that prevented Blacks and Hispanics from owning

homes.

Laws prohibiting discrimination and programs aimed at increasing home ownership has changed the tide and led to increased

rates of home ownership among people of color. Now, abusive lenders are taking these homeowners’ hard-fought gains in equity.

The impact of lending abuse is not limited to people losing their

homes. When neighborhoods experience decline because of foreclosure and property abandonment, all homeowners, even though

without mortgages, see declines in their property values. Crime

rates increase, cities lose tax revenues and cities find themselves

spending money boarding up houses, money that could be used to

invest in these very fragile neighborhoods. My final point addresses

CRA’s role in predatory lending. This is also the topic of an article

that I have attached to my testimony. The two important questions

on this topic are, does CRA credit incentives for predatory lending

and could CRA serve as a tool to combat predatory lending?

I contend that the answer to both questions is yes. An unintended consequence of CRA is that it permits banks to earn CRA

credit for financing predatory loans. For example, the bank purchases loans, it may be fulfilling its obligations under the lending

test. Similarly, a bank that purchases securities backed by predatory loans may be able to claim credit under the investment test

if the investments fall within CRA guidelines. Banks can also directly finance lenders, predatory lenders, through warehouse lines

of credit and loan guarantees. In thinking about how regulators

can employ CRA to combat predatory lending, the minimum first

step is to increase that lenders are not receiving CRA credits for

financing predatory loans and predatory lenders and sanctioning

banks that are engaging in such activities.

In addition, CRA exams should include bank affiliates and subsidiaries, which are vehicles through which banks can engage in

predatory lending without sanction.

Last, regulators need to actively encourage and reward banks

that develop loan products designed to compete with abusive lenders in underserved neighbors. These loan products should include

vehicles through which borrowers can refinance predatory loans.

CRA is a powerful tool that if employed more aggressively, could

help deter predatory lending and help communities like ours recover by infusing neighborhoods with good credit products.

Thank you again for the opportunity to present this testimony.

[The prepared statement of Ms. Engel follows:]

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Chairman KUCINICH. Thank you very much for your testimony.

And the Chair wishes to acknowledge the presence in the audience

of Federal Judge Polster. Thank you, Your Honor, for being here.

We’re going to move to the next member of the panel, Mr. Pollock

from the American Enterprise Institute. Thank you so much for

being here today.

STATEMENT OF ALEX POLLOCK, RESIDENT FELLOW,

AMERICAN ENTERPRISE INSTITUTE

Mr. POLLOCK. Mr. Chairman and Ranking Member Issa, thank

you very much for the chance to be here. We heard some really interesting discussion of the difference between Ohio and California

a little earlier. I’m trying to, in my testimony, to set all of these

discussions in the national and historical context, the written testimony, which I’ll say a word or two about, covers five issues. The

evolution of the American banking structure, as we begin, that’s

talking about the bank mergers. The context for the subprime

mortgage market, delinquencies in Ohio in particular, the general

topic of information asymmetries and, finally, my proposal for a

one-page mortgage disclosure document, which, I believe, if we

don’t do anything else or even if we do other things, we ought to

do that.

First, American banking structure briefly, in 1970 when I was

new in the banking business, there were about 131⁄2 thousand

banks in the United States. Now, there are about half that many,

so we’ve had a consolidation. But they, at the same time, have

about doubled the amount of banking offices. And relative of the

population, the density, if you want to think about it, that way has

increased by about 60 percent in addition, of course, to building an

amazingly, global network, ATM network and the provision of debit

cards, which are checking accounts in your pockets. So, the banking consolidation on average has been accompanied by much greater convenience and access to the payment systems, the banking

system.

On a subprime mortgage market, let me say we all know that

there was an unsustainable expansion of subprime mortgage credit

along with an unsustainable house price inflation. That’s now been

reversed. We’ve had large financial losses suffered by lenders of investors, layoffs, bankruptcy and subprime lenders. The accelerating

delinquencies and foreclosures we discussed here this morning, the

recession in home building, tightening liquidity, recriminations.

As a student of financial history and one whose lived about close

to four decades of financial history, this strikes me as displaying

the classic patterns of credit overexpansions and ensuing busts. I

will say one point, expansions and busts is emergency housing acts.

We’ve had, since 1974, emergency housing acts, not counting the

one for Katrina, which is an act of nature and not an act of finance.

Subprime mortgages grew from about 21⁄2 percent to 131⁄2 percent of total mortgage loans, but over the last several years interestingly prime loans also increased their share. So, one might ask

how can—these are numbers of the Mortgage Bankers Association

I’m using here. How can the prime loans have the same increase

at the same time as subprime? The answer is subprime basically

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misplaced the government programs, the FHA and VA programs,

which are also non-prime lending programs.

If you look at the sum of subprime and the non-prime government programs at stake, more or less the same. One of the things

that happened, as Ranking Member Issa pointed out, a lot of people experience success. If you took an extremely risky loan, and,

let’s say, 100 percent loan with an adjustable rate, you’ve bought

a house that went up a lot and in the house boom, you experience

success. And it is success always that sets up the boom that sets

up the bust.

The question I wish to pose is, should you be able to take a

chance, as a borrower, if you want to?

Should you be able to take a chance as a lender, and the answer

is, yes, you should, but we need to have a reasonability of what

you’re doing.

On Ohio, just briefly, it’s interesting to me, that if we look at all

the classes of loans in Ohio, Ohio’s serious delinquency rate, which

means loan 90 days in arrears or in foreclosure, are roughly twice

the national averages in all categories. That’s true for prime and

fixed rate loans or prime floating rate loans or FHA loans, and for

subprime fixed rate loans. So, there’s something broader going on

in Ohio as we’ve discussed its economic problems, problems like unemployment rate, low employment growth, which is equally as important as unemployment, and obviously the structural changes

that we’re aware of. I want to say how much I agree with Ranking

Member Issa’s view, that if you buy with the proper income, you

get a loan, and you don’t qualify as a victim. And the liar’s loans,

no-doc loans have a long history of performing poorly in credit.

We’ve just reinvented and rediscovered that history, and it’s a good

example of what economists call information asymmetry—may I

have 30 more seconds, Mr. Chairman?

Mr. KUCINICH. Sure.

Mr. POLLOCK. And my view is that the nature of the loan and

its relationship to the borrower’s income, both for the borrower and

the lender, need to be clearly and easily accelerized in a one-page

form, which I have designed and included in my testimony.

When we have extremely complex disclosures, which we have,

they fail. They fail to deliver any meaningful information to the

borrower in the result of confusion. And as I say, whatever else we

may do, we ought to insure a really simple, clear disclosure to all

borrowers, subprime and prime, which includes their income so

they can really see it, the relationship of the payments on this loan

to their income.

The fully indexed payments on this loan, once the rates reset and

its the relationship to their income, I think if we do that, that’s one

step that will be very good for the country and also for Ohio.

Mr. KUCINICH. I certainly appreciate your testimony.

[The prepared statement of Mr. Pollock follows:]

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Mr. KUCINICH. Ms. McCarty-Collins, please proceed.

STATEMENT OF MARIANNE MCCARTY-COLLINS, SENIOR VICE

PRESIDENT, INSIGHT BANK

Ms. MCCARTY-COLLINS. Thank you, Chairman Kucinich, Ranking

Member Issa and members of the subcommittee. Thank you for the

opportunity to speak about issues that have captured the attention

of this committee and the financial services industry.

I am Marianne McCarty-Collins, senior vice president for Insight

Bank of Columbus and here representing the Mortgage Bankers

Association. I would like to focus my remarks on the Association’s

views on subprime lending and the industry’s efforts to mitigate

the delinquency and foreclosure rates here in Cuyahoga County

and across the Nation.

The Association’s statistics show delinquencies and foreclosures

have risen over the past 6 months, particularly in the subprime

market. In response, regulators have established new standards.

Investors have punished companies that made bad loans, and I’m

here to answer your questions about the effect it is having on consumers.

I believe the delinquency and foreclosure data in MBA’s written

statement is both objective and comprehensive, and I am confident

that it is the most authoritative to date because it includes 86 percent of all outstanding mortgages.

Economics aside, I want to speak as someone with 30 years of

experience in mortgage lending. What I have seen of late troubles

me deeply. Responsible lenders only extend credit to borrowers who

are willing and able to make a mortgage payment. They do not

trick borrowers into loans that are unsuitable, and they do not hold

out something that is only a mirage of the American dream.

I have conducted my professional life according to these standards and have most members of the Mortgage Bankers Association,

yet, bad loans were made. They were not made responsibly or with

the best interest of consumers in mind.

For the most part, those making those poor loans have been punished by Wall Street and restrained by regulators.

And while we must ask what lessons we should learn from these

mistakes, it is equally important for those in positions of authority

to help current homeowners stay in their homes. Working together,

I suggest that we must accomplish three things: Stabilize the

subprime mortgage credit system, provide assistance for homeowners facing foreclosure, and, finally, prevent this from ever occurring again.

First, reaction from Wall Street has been swift. Already nearly

three subprime lenders, three dozen subprime lenders have closed

their doors. As we watch this, we must remind people not to confuse subprime with predatory. And we must reiterate that while

subprime foreclosures are high at 41⁄2 percent, they remain below

their historic peek of nearly 10 percent. Sound perspective and approved regulatory hand will soothe investors, calm editorial writers

and help consumers.

Second, the subprime borrowers who are facing foreclosure, industry and policymakers must partner to help provide options so

that as many as possible are able to remain in their homes.

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Further, we at MBA strongly encourage all borrowers that find

themselves unable to continue making payments, to contact their

lenders immediately. Lenders lose money in foreclosure and have

a strong desire to make any number of arrangements that will

allow a borrower to start making payments again and keep his or

her home.

For those who might not be comfortable calling their lenders,

MBA and many of our members have partnered with

NeighborWorks America and the Home Ownership Preservation

Foundation to provide free mortgage counseling via a toll-free

phone number, 1–888–995-HOPE and a Web site.

Third, lawmakers, regulators and industry must work to insure

that this situation does not occur in the future. Borrowers are

smart. When given good information, they make good decisions, but

the opposite is also true. An absence of pricing transparency coupled with a daunting and complicated closing process has permitted

certain actors to prey on the unsophisticated. But, frankly, every

person from the subprime to jumbo borrower is susceptible when

even the CEO of Fannie Mae and the Secretary of HUD, by their

own admission, cannot understand all the documents on a mortgage closing. The mortgage market is desperate for a rewrite of the

Nation’s settlement laws and its strong uniform lending standard

to trap predators and bring them to justice.

In conclusion, MBA stands ready to work with members of this

subcommittee as well as the entire Congress to accomplish these

goals. Together we can insure that predatory lenders don’t foreclose

on the American dream. Thank you.

[The prepared statement of Ms. McCarty-Collins follows:]

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Mr. KUCINICH. Thank you very much. I’d like to give—Mr. Issa,

if you would like to go first with the questions.

Mr. ISSA. Thank you, Mr. Chairman. I’m going to ask some hypothetical questions. I think the first couple of panelists have done

us a lot of good.

Ms. McCarty-Collins, have you looked at Mr. Pollock’s one-pager?

Ms. MCCARTY-COLLINS. I have not personally. I’m not sure if the

association has that.

Mr. ISSA. I have, and perhaps you can leave with one today. I

did find it interesting that I, too, have gone through the mortgage

process multiple times and you get to where you’re signing and initialing and signing and initialing so many times. And by the way,

that’s after you did the realtor part of it, which seems to grow by

several pages a year.

And I really do think that one of the things that your association

needs to look at, is you need to look at how to meet all legal requirements that people are putting on you, but also give somebody

something that they can understand that says it very clearly.

But let me ask you the second rhetorical question, and, perhaps,

since we have two Federal judges in the room, you couldn’t have

a better time. If the Federal Government acted to create a tort balance that would say that if a Federal judge found, let’s say, in the

Federal class action or a State, if appropriate, that, in fact, the

portfolio in the hands of whoever had it was tainted by predatory

practices, and that portfolio’s value could represent, if you will, the

liquidated damages, would that change how the oversight would

occur without us passing a separate law, but simply shifting the financial outcome if, in fact, in a court it was found that the, that

it was part of a portfolio that had damaged people through—and

I don’t use the word predatory all the time. I don’t think all

subprime, certainly VA, FHA are not predatory. But assuming for

a moment that there’s a finding in court, would you think that

would change the way that you would evaluate portfolios and the

way that you would be held to deliver them?

Ms. MCCARTY-COLLINS. You’re talking basically assigning liability.

Mr. ISSA. Yes.

Ms. MCCARTY-COLLINS. OK. I think that’s a yes and no answer.

Mr. ISSA. I’ll just take a yes.

Ms. MCCARTY-COLLINS. Well, the only problem with assigning liability is that when the secondary market view that as such a—

what word do I want to use?

Mr. ISSA. I’m going to assume it would be less assigning.

Ms. MCCARTY-COLLINS. And you have to have it. You have to be

able to—you have to have a secondary market for those mortgages.

Mr. ISSA. I totally agree with you that you would have to, but

I just want to followup. You know, when those subprime companies

went out of business, they didn’t go out of business with portfolios

in their hand. They simply closed their doors, sold off their desk.

For the most part, a lot of them had been transactional in nature,

and the fact is somebody else is holding the portfolio.

Ms. MCCARTY-COLLINS. But as a lender and speaking of—when

we’re talking mortgage bankers, we are the lenders. We are not

mortgage brokers. We are not a pass through. So, as the lenders,

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these subprime companies had a duty to the secondary market in

that they had to buy back its mortgages if there was fraud, if there

was predatory problems.

So—and we all have those buy-back agreements in the loans that

we sell in the market. So, what happens is as a result of those buy

backs, this is what has bankrupted most of those companies, not

the fact that they made the subprime or predatory loans, but the

fact that they were found to be predatory and/or fraudulent, and

they had to buy these loans back.

Mr. ISSA. Or close their doors because they had not reserved——

Ms. MCCARTY-COLLINS. They did not have the capital to buy

them back.

Mr. ISSA. So, that was my point in saying that they were transactional in nature. They were doing this, but ultimately without an

underlying separate insurance they were in a position to issue dividends or disperse profits in the good times and then close their

doors in the bad times.

Ms. MCCARTY-COLLINS. That is probably true.

Mr. ISSA. Mr. Pollock, I’ve teed up the question for you. I’m intrigued at the reception you’ve been getting when you’ve said—you

know, because we all grew up with Truth in—well, I’m afraid that’s

us old guys today. I remember when Truth in Lending came out,

and I remember when we tried to simplify the understanding so

that you wouldn’t think you were paying 6 percent when the annual rate ended up being 35 or whatever it compounded to. Why

is it we’re back to that exact same point? How is it that we lost

track of simplicity?

Mr. POLLOCK. Thank you, Congressman. One of the fans of this

who has been helping me, was a staffer on Capitol Hill in Truth

in Lending was——

Mr. ISSA. Even I get the bell, too.

Mr. POLLOCK. And he told me you should call this Truth in Mortgage Lending, and I said, no, because I don’t want to repeat what

happened to Truth in Lending, was you started off with a simple

idea and made it incomprehensible. That’s why I have this insistence on a one page and regular-sized type. That’s the another

thing. I don’t think you should allow little type, which confuses

people.

I’m not suggesting that all of the other stack of things you get

could be taken away or this is just something you get on top, but

for the first time——

Mr. ISSA. This is like the Ditech commercial though, except

you’re putting one more on and not taking one off.

Mr. POLLOCK. That’s it.

Mr. ISSA. OK.

Mr. POLLOCK. Exactly. I believe it’s the first time, I believe, that

in the American mortgage system we’ve ever talked about disclosures that disclose the relationship of you, the borrower, and your

income to the loan, as opposed to telling you a vast detail about

the loan itself and leaving it to you to figure out if you can even

understand that, how it applies to your own personal situation.

Mr. ISSA. OK. I appreciate your indulgence. Professor, I was intrigued by the fact that you’ve studied this both as a subprime and

looking at conforming loans, as we call them, in California. From

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a practical standpoint, and we’ve dealt with this on the earlier

panel, is there sort of the elasticity of demand? If we crank down

and reduce some of these subprime loans, how much are we going

to crank down the opportunity for home ownership? How elastic is

that market, and can we make some reforms? At what point do we

begin to reverse a trend of greater home?

Ms. ENGEL. I think this is a fundamental question in any type

of credit regulation. How do you find that balance between making

good credit available to people who otherwise wouldn’t obtain credit, and how do you also protect people from the worst abuses in the

market?

One of the really nice things that’s happened from a research

standpoint is that over the last 10 years a number of States have

passed anti-predatory lending laws, North Carolina being at the

vanguard and the most well known. And one thing that’s not on

my resume, but it will be shortly is that——

Mr. ISSA. You have an awfully good resume for having something

left off.

Ms. ENGEL. Well, you don’t put things on until you know they’re

going to get published.

Together a group of economists and my co-author, Pat McCoy,

we’ve been looking at every State and local effort to regulate predatory lending, and we have coded all of those laws and looked to see

what impact the laws have had on loan applications, loan rejections

and loan originations. And interestingly in the States with the

strongest laws, the loan applications and originations have gone

up.

And there are many different conclusions you could draw from

this, but one possible explanation is that the really good subprime

borrowers were afraid of taking out loans because they heard about

all the abuses in the market. And when the State stepped in and

said we’re going to regulate the worst abuses, they said, I feel safe

and I feel protected by the State.

It’s hard—you know, I’m not going to say I know that’s the causality, but what I do know is that in the States with the strongest

regulations, we’re seeing stable or increased subprime lending.

And the other point, I think, that’s very important, is this whole

issue of assigning liability. And any regulation or laws that we

have in this country have to be very careful in terms of assigning

liability. We can’t have open-ended assigning liability for punitive

damages.

But if it’s predictable in assigning liability in a liquidated

amount, which many of these State laws have, then we can hold

people to lead to the fire in terms of having a secondary market,

police, as it were, the lenders without drawing on credit.

Mr. ISSA. Mr. Chairman, one thing you have to know in this

business is when to quit on a high note. Thank you. Great answer.

Mr. KUCINICH. I want to say, Mr. Issa, the question that Professor Engel acknowledged in terms of what about home ownership,

how do people who don’t have the best of credit get home ownership? What happens? That’s a key question here. And I think that

one of the areas that this committee may, in our continuing work

may inevitably look at, you know, are their questions relating to

home ownership availability, availability to credit and also the unVerDate 11-MAY-2000 11:20 Feb 25, 2008 Jkt 000000 PO 00000 Frm 00257 Fmt 6633 Sfmt 6633 C:\DOCS\40152.TXT HGOVREF1 PsN: HGOVREF1
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derlying monetary process. There’s a real serious question here

about monitoring policy that seldom gets looked at, and bringing

the Fed into this discussion for the first time enables us to move

into that question.

I want to, again, tell Judge Pianka that I looked at your whole

statement, and it’s quite significant, and I want to ask you, without

significant new regulatory enforcement from the Fed and other

agencies, what do you predict for cities like Cleveland and neighborhoods with significant foreclosure problems?

Judge PIANKA. The prediction by Treasurer Rokakis, that it’s

only going to get worse, I think, is absolutely true.

And, unfortunately, the collateral damage that affects the streets

and the neighborhoods just compounds.

In addition, no more—there has never been greater time in our

history of the city of Cleveland when there have been more properties owned by banks and mortgage companies.

Mr. KUCINICH. You know, Mr. Pollock said something, and, Mr.

Issa, this is something that in your testimony you pointed out that

this phenomenon that has hit low-income areas now, the subprime

mortgage is shifting away from lower-income areas and going into

middle and higher income areas; is that right.

Mr. POLLOCK. I pointed out this interesting study by COHHIO

is the fact that subprime lending is principally a middle and higher-income activity.

Mr. KUCINICH. That jumped out at me because what it says is

that the—it may be that the subprime business has more or less

maxed out in some of these communities, and now we’re seeing all

the boarded up homes.

But then, if you have that core, as we have in Cleveland, which

is already beginning to be hollowed out, and now there’s a shift to

the middle-income and even upper-income areas. It’s possible we

may, absent any kind of new regulatory or legislative authority, we

may see this spread like a cancer. How do you respond to that?

Judge PIANKA. Mr. Chairman, it’s spreading out to inner ring

suburbs and to the outer ring suburbs as well.

Mr. KUCINICH. We have the map here. Did we put the map

away? We saw them. We saw the kind of spread starting to occur.

Judge PIANKA. Unfortunately, what we’ve seen in the urban

areas in Cleveland, many times the financial institution will abandon the property but keep a lien on the property and it becomes

a toxic lien. And that property cannot be transferred, and then the

cities and the neighbors are held hostage to those properties. Every

boarded up property in the city of Cleveland sends a signal that

mortgage amount is greater than what the value of that property

is, and there are thousands of properties.

Mr. KUCINICH. So, judge, you know, can the city make a comeback if you, as a housing court judge, cannot properly transfer title

to the foreclosed houses.

Judge PIANKA. Well, there can’t be progress because they sit

there, and then it has a domino effect on people’s decision whether

they stay in a neighborhood or invest in a neighborhood.

Mr. KUCINICH. Thank you, your Honor.

To Ms. Engel, what specifically should the Fed do to put a stop

to the coincidence of banks receiving credit for their CRA exams for

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predatory loans made by their affiliates who are invested in them

for their portfolios, and how should the Federal bank regulators assess a value on the quality of loans?

Ms. ENGEL. I think that the first thing is that the regulators

need to start taking into account the activities of the affiliates and

the subsidiaries, because by limiting the exams to just the banks,

it is really giving the subsidiaries and the affiliates cart blanche to

engage in wrongdoing without it coming to the attention of the regulators.

The banks can voluntarily have a more expansive CRA exam, but

I don’t think I know of any situations where a bank has said, oh,

yes, please come and look at our subsidiaries and our affiliates. It’s,

you know, not likely that they’re going to do that. So, I think that’s

a key thing.

I think that CRA also could take a stronger position in terms of

what’s getting disclosed in the HMDA data. We need to have credit

score information in the HMDA data. We need information about

fees. It’s just insufficient. Even when the Federal Reserve Bank is

doing its own HMDA analysis, it’s finding itself with its hands tied

in terms of the ability of the data to really generate a meaningful

analysis.

Mr. KUCINICH. Thank you. And I just have one more question for

Ms. McCarty-Collins. For borrowers who contact groups like

NeighborWorks America or other consumer credit counseling

groups, does this effect their credit scores just by making a contact.

Ms. MCCARTY-COLLINS. No. Not by making a contact. And those

agencies work with the lenders to try and work out modifications

and repayment schedules for them. At this point, I would say that

their credit is probably already harmed by the time they call.

The biggest problem that we find is that people that become delinquent on their mortgage are afraid to call their lender, and then

it really becomes too late, and so we’re trying to get some early

intervention for them.

Mr. KUCINICH. I want to thank the members of the panel. This

has been a very good panel and just the testimony that we’ve read

would be the basis for a lengthy hearing in and of itself, but your

testimony will be included in the record and will be available for

review as we continue to move forward with this topic. It’s very

helpful.

I want to thank Chief Judge Carr for making this facility available and all Federal judges for their indulgence for having this

meeting in this building. I want to thank the staff, both of our majority and minority staff, because you made it possible for us to

come together to have this hearing, as well as the court stenographer.

I want to thank all of the public officials who have attended and

whose cooperation we will need as we move forward on the community groups represented here.

256

This has been a hearing of the Domestic Policy Subcommittee of

the Government Oversight and Reform Committee. The topic of the

hearing has been Foreclosure and the Federal Reserve Bank of

Cleveland. I want to thank all of you for attending. This committee

is in adjournment.

[Whereupon, the subcommittee was adjourned.]

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