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48–864 PDF 2009

MORTGAGE LENDING REFORM: A 

COMPREHENSIVE REVIEW OF THE 

AMERICAN MORTGAGE SYSTEM 

HEARING 

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

MARCH 11, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–11 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

LUIS V. GUTIERREZ, Illinois, Chairman 

CAROLYN B. MALONEY, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

DENNIS MOORE, Kansas 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

AL GREEN, Texas 

WM. LACY CLAY, Missouri 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

GREGORY W. MEEKS, New York 

BILL FOSTER, Illinois 

ED PERLMUTTER, Colorado 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JEB HENSARLING, Texas 

J. GRESHAM BARRETT, South Carolina 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

WALTER B. JONES, JR., North Carolina 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

KEVIN McCARTHY, California 

KENNY MARCHANT, Texas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

March 11, 2009 ................................................................................................. 1 

Appendix: 

March 11, 2009 ................................................................................................. 69 

WITNESSES 

WEDNESDAY, MARCH 11, 2009 

Amorin, Jim, President, Appraisal Institute ......................................................... 52 

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

behalf of the Conference of State Bank Supervisors ......................................... 7 

Aponte, Graciela, Legislative Analyst, Wealth-Building Policy Project, National Council of La Raza (NCLR) ...................................................................... 36 

Berenbaum, David, Executive Vice President, National Community Reinvestment Coalition ...................................................................................................... 29 

Braunstein, Sandra F., Director, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System ................................ 5 

Gordon, Julia, Senior Policy Counsel, Center for Responsible Lending .............. 31 

Jones, Stephanie, Executive Director, National Urban League Policy Institute 34 

Kittle, David G., Chairman, Mortgage Bankers Association (MBA) ................... 47 

Lampe, Donald C., Partner, Womble Carlyle Sandridge & Rice, PLLC ............. 37 

McMillan, Charles, President, National Association of Realtors (NAR) ............. 51 

Middleton, Michael, President and CEO, Community Bank of Tri-County, 

on behalf of the American Bankers Association ................................................ 46 

Platt, Laurence E., Partner, K&L Gates, on behalf of the Securities Industry 

and Financial Markets Association and the American Securitization Forum 56 

Robson, Joe R., Chairman of the Board, National Association of Home Builders .......................................................................................................................... 54 

Saunders, Margot, Counsel, National Consumer Law Center ............................. 32 

Savitt, Marc S., President, National Association of Mortgage Brokers 

(NAMB) ................................................................................................................. 49 

APPENDIX 

Prepared statements: 

Amorin, Jim ...................................................................................................... 70 

Antonakes, Steven L. ....................................................................................... 85 

Aponte, Graciela ............................................................................................... 117 

Berenbaum, David ............................................................................................ 124 

Braunstein, Sandra F. ...................................................................................... 149 

Gordon, Julia .................................................................................................... 162 

Kittle, David G. ................................................................................................. 183 

Lampe, Donald C. ............................................................................................. 186 

McMillan, Charles ............................................................................................ 193 

Middleton, Michael ........................................................................................... 203 

Platt, Laurence E. ............................................................................................ 212 

Robson, Joe R. ................................................................................................... 218 

Saunders, Margot ............................................................................................. 228 

Savitt, Marc S. .................................................................................................. 246 

Page

VI 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Gutierrez, Hon. Luis: 

Written statement of New York Attorney General Andrew Cuomo ............. 264 

Cleaver, Hon. Emanuel: 

Letter from Sidney L. Willens, Attorney at Law, dated March 4, 2009 ...... 265 

(1) 

MORTGAGE LENDING REFORM: A 

COMPREHENSIVE REVIEW OF THE 

AMERICAN MORTGAGE SYSTEM 

Wednesday, March 11, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:33 p.m., in room 

2128, Rayburn House Office Building, Hon. Luis V. Gutierrez 

[chairman of the subcommittee] presiding. 

Members present: Representatives Gutierrez, Maloney, Watt, 

Sherman, Moore of Kansas, Waters, McCarthy of New York, Green, 

Clay, Miller of North Carolina, Scott, Cleaver, Ellison, Wilson, Foster, Minnick; Hensarling, Castle, Capito, Neugebauer, McHenry, 

Marchant, Lee, Paulsen, and Lance. 

Also present: Representative Donnelly. 

Chairman GUTIERREZ. This hearing of the Subcommittee on Financial Institutions and Consumer Credit will come to order. Good 

afternoon, and thanks to all of the witnesses for agreeing to appear 

before the subcommittee today. 

Today’s hearing will examine the current state of the U.S. mortgage system with an eye toward comprehensive mortgage lending 

reform legislation that the Financial Services Committee is expected to take up later this month. 

The subcommittee has asked our witnesses to recommend 

changes to H.R. 3915, the Mortgage Reform and Anti-Predatory 

Lending Act of 2007, from the 110th Congress. H.R. 3915, which 

was passed by the Financial Services Committee and approved by 

the House of Representatives in November 2007 will be used as the 

starting point for today, for this year’s mortgage lending reform. 

We will be limiting opening statements to 10 minutes per side, 

but, without objection, all members’ opening statements will be 

made a part of the record. 

I yield myself 5 minutes. 

The last time this committee addressed legislation to restrict 

predatory mortgage lending was in November 2007. The world has 

changed dramatically since then. Mortgage delinquencies and foreclosures are now at record levels. 

Since late 2007, my home City of Chicago has seen a 37 percent 

increase in new foreclosures, and in 2000 alone, Chicago saw 

2 

20,000 new foreclosure filings. Some of the areas in Chicago have 

seen more than a 300 percent increase in foreclosures since 2006. 

Not unrelated, our communities are suffering from the highest 

unemployment rate since 1982, and those who do have jobs are experiencing falling real wages. Tumbling home prices have destroyed much of the wealth stored in what is often a family’s only 

real investment, their home. 

How did we get here? Some have tried to pin the housing crisis 

on fair lending laws and regulations, but such arguments downplay 

or even ignore the role that derivative instruments played in the 

current crisis by exponentially compounding the mortgage losses. 

We do know that, in many cases, greedy, unscrupulous, and 

sometimes illegal subprime mortgage lending practices significantly 

contributed to the problem. These lending practices, combined with 

microeconomic/macroeconomic factors that only exacerbated this 

greed, have combined to create the perfect economic storm that 

now threatens our communities and our economy as a whole. 

Cheap credit, derived from overseas foreign currency reserves, 

encouraged many in the banking and finance industry to disregard 

their normally prudent lending standards and finance poorly underwritten and often predatory mortgages. These subprime mortgages were then securitized into mortgage-backed securities and 

the corresponding credit default swaps that have caused the crisis 

that our world economy has been dealing with since last March. 

While changes in the system and other aspects of the mortgage 

finance process must and will be addressed, this hearing will focus 

primarily on how to create fair and prudent mortgage origination 

standards to prevent this tragic cycle from ever happening again. 

I have called the subcommittee hearing today to return our attention to comprehensive mortgage lending reform. In the 110th 

Congress, this committee and the House passed H.R. 3915. This 

bill was not signed into law, denying many of our most vulnerable 

communities the protection they needed from predatory mortgage 

lending. Now the fight has turned into one of keeping working families in their homes and out of foreclosure or bankruptcy court. 

But it is important that we act with a sense of urgency to pass 

comprehensive mortgage lending reform that will keep us from repeating the mistakes of the housing boom and bust of the last few 

years. 

I look forward to hearing from our witnesses, and to a spirited 

debate on these issues. 

I yield the ranking member, Mr. Hensarling, 5 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman, and thank you for 

calling this important hearing. I mean, clearly, we still have many 

of our fellow citizens who are suffering in this economy, who are 

struggling to pay their mortgages, struggling to fill up their gas 

tanks, struggling to send their kids to college, and have a high 

level of anxiety about the future of their jobs. 

So, number one, it is a very topical issue for us to discuss. It’s 

one, as we well know, in which this subcommittee and this committee have been quite active. 

I recall some words that our President shared with us during the 

State of the Union address, and were somewhat reflected in the 

chairman’s statement. 

3 

Our President said, ‘‘It is only by understanding how we arrived 

at this moment that we will be able to lift ourselves out of this predicament.’’ And I agree with our President. 

As we’re looking down the road to future and further mortgage 

market reforms, we must understand how we entered into this economic turmoil in the first place. I believe there are a number of 

causes. 

I think with the hindsight of 20/20, the easy money policies of 

the Federal Reserve exacerbated a housing bubble that otherwise 

could not exist without them. 

Mortgage fraud ran rampant for a decade, on the lenders’ side 

and on the borrowers’ side as well. 

But we also have to take a clear look at government policies, no 

matter how noble the intent, that ultimately attempted to incent, 

cajole, or mandate financial institutions to lend money to people to 

buy homes who ultimately could not afford to keep those homes. 

Again, I know the intent was noble, but the effect has been devastating. 

One need only look at the Community Reinvestment Act. Again, 

very noble in intent, designed to deal with a very serious problem 

of red-lining at the time, but ultimately, it helped put the Federal 

Government seal of approval not so much on helping raise the economic opportunities of the borrower, but instead, bringing down 

the lending standards of the lender. 

We certainly know the infamous role that was played in the government-sanctioned duopoly of Fannie Mae and Freddie Mac. For 

years and years and years, Chairman Greenspan, the former 

Chairman of the Federal Reserve, came before this committee and 

said that there was huge systemic risk, and unfortunately, this 

committee did not act; previous Congresses did not act. 

And again, they were given an affordable housing mission, I’m 

sure a most noble intent, but it led to essentially having an offbudget HUD where people were incented to lower their lending 

standards, Fannie and Freddie securitized this, and what might 

have been a localized problem in one segment of the economy was 

spread throughout, not only the national economy, but the global 

economy, as well, and we have to take a very serious look at those 

particular policies. 

So as we embark upon this quest again, to look at successful 

mortgage lending reform, I believe I have several ideas of what 

successful mortgage lending reform ought to look like. 

Number one, we ought to let competitive markets work. We want 

to ensure that the consumer has effective disclosure, not necessarily voluminous disclosure. We need transparency, and we need 

to make sure that we’re working to make markets more competitive, not less competitive, as was done in the case of Fannie and 

Freddie. 

Again, we do not need laws to incent, mandate, or cajole financial 

institutions to loan money to people who otherwise may not be able 

to afford it. We need to ensure that we do not deny an informed 

consumer’s choices that they may need to realize their American 

dream. With full disclosure, let the consumer choose, not the allenlightened Congress. 

4 

And then there is the issue of fairness. We should never forget 

that 95 percent of America rents, owns their home outright, or are 

current in their mortgage. 

Now, there are many people worthy of financial assistance who 

are having mortgage problems, and there are many who aren’t. We 

know that mortgage fraud ran rampant, speculation ran rampant, 

many used their homes as an ATM, many lived beyond their 

means. And when families are struggling to pay their mortgage, 

they shouldn’t be forced to pay their neighbor’s, as well. 

So, Mr. Chairman, I appreciate you calling this hearing. I look 

forward to the testimony of all of our witnesses on three different 

panels, and with that, I yield back the balance of my time. 

Chairman GUTIERREZ. Two minutes for Mr. Castle. 

Mr. CASTLE. I thank the ranking member and the chairman very 

much for this important hearing. 

And I think there is unanimity in this room and in the United 

States at this point that the subprime lending issues and the foreclosures that have arisen from that have contributed to the economic downturn we currently face. 

In this body we have obviously considered proposals to help those 

facing foreclosures, and to restore the housing market, but many 

of us here are equally concerned with looking more precisely at this 

problem, to prevent it from reoccurring. 

To what extent did lenders convince unknowing borrowers to 

enter into mortgage agreements they couldn’t afford; how did borrowers lie or tweak their income to qualify for high-cost loans; how 

prevalent were these practices? These questions may need to be answered before we can craft effective legislative solutions. 

I welcome hearing the testimony of our witnesses, and I’m particularly interested in hearing from Ms. Braunstein, not only because she is from Delaware, but also because she’s an expert on 

consumer financial services issues. 

And I yield back the balance of my time, Mr. Chairman. 

Chairman GUTIERREZ. I thank the gentleman. 

We’ll introduce the panel. Our first panel is—yes? The gentleman 

from Minnesota for 2 minutes. 

Mr. PAULSEN. Thank you, Mr. Chairman, for holding this very 

important hearing today. 

You know, both in this Congress and last year in Congress, this 

committee, I know, has been trying to address some of the many 

problems in the mortgage system that have created great pain now 

for many of our constituents. While I think we need to remedy the 

problems caused by the bad actors, we also need to acknowledge 

the fragile condition of our current credit markets and make sure 

we do no harm with future legislation. 

You know, many certainly can argue and say that the legislation 

that was passed in Congress here over the past few years has 

helped put us into this crisis by pushing the concept of homeownership onto those who financially and inevitably could not sustain 

that concept of homeownership themselves, and so I think we need 

to get ultimately back to the principles of common sense in terms 

of lending principles, so that we have requirements for reasonable 

downpayments, so that the borrowers actually have skin in the 

game themselves, and that we also have traditional gross income 

5 

to payment percentages that can help alleviate some of those 

changes and problems. 

So I thank the witnesses for being here today and I thank you, 

Mr. Chairman, for holding this hearing. 

Chairman GUTIERREZ. I thank the gentleman. 

Our first panel consists of Sandra F. Braunstein, the Director of 

the Division of Consumer and Community Affairs at the Board of 

Governors of the Federal Reserve System; and Steven Antonakes, 

the Commissioner of Banks for the Commonwealth of Massachusetts, who is speaking on behalf of the Conference of State Bank 

Supervisors. 

Please, you’re each recognized for 5 minutes. 

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

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Ms. BRAUNSTEIN. Chairman Gutierrez, Ranking Member Hensarling, and members of the subcommittee, I appreciate this opportunity to discuss the Federal Reserve’s regulatory actions to address mortgage problems and potential legislative responses to 

these issues. 

The Federal Reserve is committed to promoting sustainable 

homeownership through responsible mortgage lending. While the 

expansion of the subprime mortgage market over the past decade 

increased consumers’ access to credit, too many homeowners and 

communities are suffering today because of lax underwriting standards and unfair or deceptive practices that resulted in 

unsustainable loans. 

Last July, the Board issued final rules to establish sweeping new 

regulatory protections for consumers in the residential mortgage 

market. The new rules apply to all mortgage lenders, not just depository institutions. 

The Board’s rules contain four key protections for a newly defined category of higher priced mortgage loans: 

First, lenders are prohibited from making any higher priced 

mortgage loan without regard to the borrower’s ability to repay the 

obligation from income and assets other than the home. 

Second, lenders are prohibited from making stated income loans 

and are required to verify the income and assets they rely upon to 

determine the borrower’s repayment ability. 

Third, the final rules ban prepayment penalties in cases where 

the borrower faces payment shock. 

And fourth, creditors are required to establish escrow accounts 

for property taxes and homeowners’ insurance for all first lien 

mortgage loans. 

In addition to the rules for higher cost loans, the Board adopted 

other protections that apply to all mortgages. 

Currently, the Board is engaged in robust consumer testing to 

improve the content and comprehension of cost disclosures for 

mortgage loans and home equity lines of credit. 

Consumers receive an overwhelming amount of information at 

the time they close a mortgage loan. The truth in lending disclosure, however, is a single-page form, and we are hopeful that new 

requirements for providing this form earlier in the application procVerDate Nov 24 2008 10:39 Aug 06, 2009 Jkt 048864 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\48864.TXT TERRIE
6 

ess will distinguish the disclosure from the many legal documents 

presented at loan closing. 

However, it is important to note that the effectiveness of a disclosure is best judged through the results of consumer testing and not 

by the length of the disclosure alone. 

In 2007, the House of Representatives passed the Mortgage Reform and Anti-Predatory Lending Act. We commend Congress’ 

work on the bill, which represents a significant contribution to the 

public debate about these issues. Although some of the details regarding implementation differ, both the House bill and the Board’s 

rules set minimum underwriting standards for higher priced loans. 

The bill would also provide consumer remedies for violations of 

the bill’s standards and consumers would be able to seek remedies 

against creditors, assignees, and securitizers. 

In order for assignee liability to increase market discipline, the 

law must be clear about what acts or practices are prohibited so 

that assignees can detect violations before purchasing loans. 

Assignees may have difficulty in determining a creditor’s compliance with a broad prohibition against making loans that do not 

provide a net tangible benefit unless that term is clearly defined 

in either law or regulation. 

The bill also seeks to establish the Federal duty of care that 

would require loan originators to present a range of loan products 

for which the consumer is likely to qualify and which are appropriate for the consumer’s circumstances. 

Because these standards are broad and originators would be liable for violations, we believe that the establishment of clearly defined safe harbors may be appropriate in implementing the law and 

the statute should clarify that. 

I would also like to comment on the bill’s delegation of rule writing. Several provisions of the bill would be implemented by regulations that are promulgated jointly by the Federal banking agencies. 

In our experience, inter-agency rulemakings may provide an opportunity for different perspectives, but the joint rulemaking process 

generally is a less efficient, more time-consuming way to develop 

new regulations. 

In closing, the Federal Reserve is continuing its efforts to enhance consumer protection in the residential mortgage market. As 

we develop more useful consumer disclosures for both closed-end 

loans and home equity lines, we are mindful that improved disclosure may not always be sufficient to address abuses. 

Accordingly, we will carefully consider whether additional substantive protections are needed to prevent unfair or deceptive practices. We look forward to working with Congress to enhance consumer protections while promoting sustainable homeownership and 

access to responsible credit. 

Thank you. 

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

149 of the appendix.] 

Chairman GUTIERREZ. Thank you. 

Ms. Antonakes. 

7 

STATEMENT OF STEVEN L. ANTONAKES, COMMISSIONER, MASSACHUSETTS DIVISION OF BANKS, ON BEHALF OF THE CONFERENCE OF STATE BANK SUPERVISORS 

Mr. ANTONAKES. Good afternoon, Chairman Gutierrez, Ranking 

Member Hensarling, and distinguished members of the subcommittee. My name is Steven Antonakes, and I serve as the commissioner of banks for the Commonwealth of Massachusetts. It is 

my pleasure to testify today on behalf of the Conference of State 

Bank Supervisors to discuss Federal predatory lending legislation, 

and more broadly, reform of our system of mortgage regulation and 

supervision. 

My written statement provides you with a detailed discussion of 

dramatic regulatory reforms occurring at the State level and suggestions for Federal reforms. In my oral presentation, I would like 

to highlight two key points: First, an explanation of why federalism 

matters. And second, how a system of cooperative federalism can 

work and why it is in the best interests of the public, the industry, 

and our economy. 

For the past decade, it has been clear to the States that our system of mortgage finance and mortgage regulation was flawed and 

that a destructive and widening chasm had formed between the interests of borrowers and of lenders. Over that decade, through GAO 

reports and congressional testimony, one can observe an ever-increasing level of State concern over this growing chasm and its impact on the State and Federal regulatory relationship. 

Chairman Gutierrez, you are clearly one of the leading voices in 

Washington who saw how destructive this break between consumer, industry, State, and Federal interests was becoming. 

I would like the committee to consider how the world would look 

today had the OCC and the rating agencies not intervened and the 

ASNI liability and predatory lending provisions of the Georgia Fair 

Lending Act had been applicable to all financial institutions. 

I would suggest we would have far fewer foreclosures and would 

have avoided the need to bail out our largest financial institutions. 

It is worth noting that the institutions whose names were attached to the OCC’s preemption—National City, First Franklin, 

and Wachovia—were all brought down by the mortgage crisis. 

Regulatory reform must foster a system that incorporates the 

early warning signs that State laws and regulations provide, rather 

than eliminating them. I’m not suggesting a status quo solution or 

a return to a balkanized system of regulation. Instead, Congress 

needs to forge a regulatory system of high standards that more successfully coordinates among State and Federal regulators. 

A centralized, top-down, or consolidated system will set us up for 

future catastrophic boom or bust cycles similar to the ones that 

we’re currently experiencing. The wisdom of our forefathers in recognizing the necessity of checks and balances and grassroots innovation is timeless, and should be heeded. 

The model for this regulatory system is already in development. 

Thanks to the leadership of Ranking Member Bachus, who first introduced legislation, and to Chairman Frank, and Senators Feinstein and Martinez, who embraced it and helped it become law, a 

coordinated nationwide mortgage regulatory system is taking 

shape. 

8 

With the passage of a SAFE Act: nearly every State is now in 

the process of raising mortgage originator licensing standards; a 

centralized system of record and enforcement tools is up and running; and unprecedented State and Federal cooperation is beginning to evolve. 

The work that began at the State level in 2003 to create the nationwide mortgage licensing system was empowered and enhanced 

by Federal law in 2008 and has compelled significant State to State 

and State to Federal cooperation. This is how the regulatory system should work. 

We believe that H.R. 3915 also provides an example of how our 

system of federalism can work. The Miller-Watt-Frank-Bachus bill 

drew from the State laws and refined them. It does what only Congress can, which is ultimately make uniform applicable minimum 

standards. 

We suggest Congress confirm that H.R. 3915 serves as a minimum standard for all institutions and that it allow for State enforcement of State and Federal law. 

I’m not suggesting a regulatory free-for-all, but rather, a more coordinated and cooperative system of applicable law and enforcement. 

I must also recognize and thank my fellow witness, Sandy 

Braunstein of the Federal Reserve Board, for the Board’s leadership in creating a model of cooperative supervision through our 

joint pilot project to examine non-bank mortgage lenders. This 

project is an example of cooperative federalism. 

CSBS looks forward to continuing to work with this committee 

and our Federal counterparts to reform our system of mortgage 

regulation. 

Thank you for the opportunity to testify, and I would be glad to 

answer any questions the committee may have. Thank you. 

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

85 of the appendix.] 

Chairman GUTIERREZ. Thank you, Mr. Antonakes. 

Let me begin with you, Mr. Antonakes. I want to first applaud 

you for recommending in your testimony that we attend the National Bank Act to make it clear that State consumer protection 

laws can apply to national banks. As you alluded to, I have been 

fighting for years, and I appreciate you bringing it to the forefront 

today. 

In your testimony, you also advocate for a bifurcated supervision 

system, one for the large systemic institutions, and one for community banks. This is intriguing, and this issue is front and center, 

as we’re dealing with the fallout from the FDIC’s premium increases that apply to all banks of all sizes, and as we consider a 

systemic risk regulator. 

Could you expand a little bit on your proposal? For example, 

where would the cutoff be between a systemic bank and a regular 

bank, and how would you make that determination? 

Mr. ANTONAKES. Well, thank you, Mr. Chairman. 

The point I think we’re trying to make here is that the diversity 

of our banking system has always been a strength in this country, 

a system which allows community banks, credit unions, also to 

compete with large money center banks. 

9 

The community bank system has been, and continues to be, a 

strength in the system today, very important, providing credit to 

local communities, to consumers, and small businesses. To the extent that they can be allowed to effectively compete with these 

largest institutions that pose systemic risk to the system, I believe 

is no longer a certainty. 

Moreover, I think the concern is, if regulatory reform is more 

beneficial to our largest institutions, then I think continued consolidation of our industry will be harmful for our consumers ultimately, as well as for our businesses and for our local communities. 

The opportunity here I believe is to ensure that we have a diverse banking system and one in which our smaller institutions 

that are very heavily invested in the communities within which 

they operate are allowed to effectively compete with behemoth institutions that pose less risk. 

That being said, while I don’t propose to have all the answers for 

this, or where the direct cutoff can be, I think we can determine 

which institutions pose the greatest risk to our country’s financial 

system, those that do not, and determine whether or not separate 

rules in separate areas can be applied. 

Chairman GUTIERREZ. Thank you. 

Ms. Braunstein, how long have you been at the Federal Reserve 

system? 

Ms. BRAUNSTEIN. Twenty-one years. 

Chairman GUTIERREZ. Twenty-one years. Good. I just wanted to 

make sure it was during the last 8 years, and put that into the 

record. 

So one of the arguments is that the government said everyone 

should own a home, and so everyone said, ‘‘Since that’s what the 

government wants me to do, since the government is encouraging 

me to do it’’—and no one ever has come to me and said, ‘‘I bought 

my house because the government encouraged me to buy a house.’’ 

They said, ‘‘I wanted a home,’’ for a lot of other reasons. But that’s 

one of the arguments, and so, therefore, part of the reason we’re 

in the current situation. 

And so if that’s true, what policies during, I don’t know, from, 

let me see, 2001 to 2008, during the last 8 years, has the Federal 

Government forced on the American people so they could buy a 

home that has caused this problem? Is there such an entity that 

has caused this, such as the Community Reinvestment Act? 

Ms. BRAUNSTEIN. There are obviously a lot of reasons as to why 

we’re in the economic crisis we are in. It’s a very complex situation. 

But I can state very definitively that from the research we have 

done, the Community Reinvestment Act is not one of the causes of 

the current crisis. 

We have run data on CRA lending, and where loans are located, 

and we found that only 6 percent of all higher-cost loans were 

made by CRA-covered institutions in neighborhoods targeted— 

which would be low- and moderate-income neighborhoods—by CRA. 

So I can tell you, if that’s where you’re going, CRA was not the 

cause of the subprime crisis. 

Chairman GUTIERREZ. But it is somewhat because, as I remember my stay here, my short stay during the last 17 years here in 

Congress and on this committee, we have attempted to expand 

10 

homeownership to the American public, but every time I evaluate 

the loans that have been given to communities of color, AfricanAmerican and Latino and emerging immigrant communities, it 

hasn’t been the CRA-covered institutions. Actually, it has been the 

subprime lending industry bringing about those loans. 

I mean, if they were CRA, they might have gotten 51⁄2 and 6 percent regular mortgages, but that is not what happened in those 

communities. 

So I look forward—because I want Mr. Hensarling to be able to 

have his 5 minutes, I’m just going to end by saying, look, I would 

like especially Ms. Braunstein to—when we look at underwriting, 

let’s set so that we could also go back to some sanity in the way 

we do this. 

When I first bought my home in 1981, it was at 141⁄2 percent. 

I had to come up with a 20 percent downpayment. I had to show 

my last 2 years of income taxes. I mean, there were requirements. 

I had a stake. Had the home diminished in value, I still would 

have had a stake in it, and I looked at it as a home. 

So maybe we could look at some of those underwriting rules, so 

that the purchaser has something there, given that the government 

is many times the guarantor. 

I thank you both. 

Ms. BRAUNSTEIN. Congressman, just one quick statement to that. 

That is what we have attempted to do with our HOEPA rules— 

Chairman GUTIERREZ. Well, good. 

Ms. BRAUNSTEIN. —is to afford those protections to homeowners. 

Chairman GUTIERREZ. And now, Mr. Hensarling, my colleague, is 

recognized for 5 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

In assessing the various contributing and ‘‘but for’’ causes of our 

economic turmoil, I understand your opinion on CRA. I assume you 

haven’t drawn the same conclusions with respect to the GSEs, or 

do you differ from former Chairman Greenspan in that respect? 

Ms. BRAUNSTEIN. Well, I think that the Federal Reserve recognized that there were issues around the GSEs and their portfolios. 

I can’t really comment on the impact of what—I think what you’re 

talking about were the goals they were given for homeownership, 

and that, I cannot comment on whether that was a contributing 

cause or not. 

Mr. HENSARLING. Let me ask you to comment on this. 

In your testimony, you said, we are well aware that consumers 

receive an overwhelming amount of information at the time they 

close a mortgage loan. 

And in trying to, again, provide the consumer with more effective 

disclosure, I understand, and I believe in your testimony you talk 

about more results from consumer testing being needed. Just exactly where is the Federal Reserve in this process? 

Ms. BRAUNSTEIN. We actually initiated the consumer testing of 

mortgage disclosures last year. We are currently testing. We are redesigning disclosures, and we plan to have a proposal out with recommended new disclosures sometime this summer. 

Mr. HENSARLING. This has been an ongoing process for a number 

of years; has it not? 

11 

Ms. BRAUNSTEIN. Well, TILA, the Truth in Lending Act, has been 

an ongoing process, but we first, as I think you know, we issued 

recently comprehensive rules on open-end credit, which is credit 

cards, and that was the first chunk that we tackled, and then we 

went into the HOEPA rules, which we finalized in July, and during 

that process, we also initiated the look at the closed-end lending or 

mortgage loans and home equity lines, and that’s what we’re trying 

to complete now. 

Mr. HENSARLING. On page 10 of your testimony, you speak of assignee liability with respect to the earlier version of H.R. 3915. 

I believe you say that laws must be clear about what acts or 

practices are prohibited, so the assignees can perform due diligence 

and detect violations before purchasing the loans. Assignees may 

have difficulty in determining a creditor’s compliance with a broad 

prohibition against making loans that do not provide a ‘‘net tangible benefit,’’ unless that term is capable of being clearly defined 

in law or regulation. 

Given the problems we have had in the meltdown of our secondary mortgage market, given how many people are struggling to 

refinance their homes now, if we went forward with a fairly indefinite standard such as ‘‘net tangible benefit,’’ do you have an observation or impression on what that impact may be on the secondary 

mortgage market? 

Ms. BRAUNSTEIN. Well, I think that it could be problematic, because if the markets cannot determine what would be an allowable 

loan and what loan they would have, especially when they’re carrying liability for those loans, I think they would be very hesitant 

to participate in the markets. 

So we’re saying that it’s important to make sure that there are 

some bright lines drawn, that there is a clear definition, and 

whether that’s done through statute or regulation, there needs to 

be some way of determining when you’re evaluating what you’re 

going to buy whether or not you’re going to get in trouble for those 

loans. 

Mr. HENSARLING. In mentioning the market, what has the Federal Reserve observed as far as the lending standards of lenders 

today? 

My point would be this, in speaking your testimony, about there 

having to be a balance in some of the prescriptive acts that may 

come out of Congress or the Federal Reserve, but everything I read, 

see, and hear anecdotally is that already the market is adjusting 

to the excesses of the past, and I observe that those who may be 

accused of being the worst players and taking the greatest risk, for 

example, Countrywide, or New Century, they received the ultimate 

punishment of the marketplace; they no longer exist. 

So is the market responding to the excesses of the past? 

Ms. BRAUNSTEIN. Well, I think it’s true that the kinds of excesses 

we saw in the past we’re not seeing today, but also, we’re not seeing, frankly, a whole lot of lending today. So this is not what we 

would call a normal marketplace. 

Our concern in writing the HOEPA rules was that we wanted to 

make sure, because we know the markets will revive at some point, 

and when they do, that there are responsible loans being made. 

12 

And so, it is important to put a structure in place that will take 

care of the market when it does revive. 

Chairman GUTIERREZ. Thank you. We should be back in about— 

we have one 15-minute vote, of which we have 5 minutes left, and 

two 5-minute votes, so we will be back in about 20 or 25 minutes. 

We will be back as quickly as we can, so we would ask the witnesses to stay for questions from other members. 

Thank you so much. 

[recess] 

Chairman GUTIERREZ. Thank you very much for that short recess, and we’re going to go to Mr. Moore for 5 minutes. 

Mr. Moore, you are recognized. 

Mr. MOORE. Thank you, Mr. Chairman, and I guess Mr. Hensarling is not here, but I thank him, too, and I want to thank the 

witnesses for their testimony. 

We all know, and we have talked about this, nobody needs to tell 

you our economy faces some of the biggest challenges we have had 

since the early 1930’s, and the crisis in our housing sector is certainly part of this problem. 

I’m glad our subcommittee is taking a broad view of the U.S. 

mortgage system, so we can discuss how Congress might improve 

it and curb abusively predatory lending practices. 

The last time the housing market was this bad, Congress set up 

the FHA, or Federal Housing Authority, to insure mortgages that 

lenders wouldn’t otherwise make. 

This past decade, however, Americans were drawn to aggressive 

lenders, were seduced by easy credit and loans with no upfront 

costs and a few basic underwriting requirements, such as verifying 

income, but the subprime mortgage market has crashed and borrowers are flocking back to the FHA, which has become the only 

option for those who lack large downpayments or good credit 

scores. 

The FHA’s historic role in backing mortgages is more crucial now 

than at any time since its founding. With all the new FHA-insured 

loans, we are seeing a sharp increase in quick defaults where some 

borrowers are failing to make more than a single payment before 

defaulting. 

In response to this, HUD’s Inspector General, Kenneth Donohue, 

said, ‘‘If a loan is going into default immediately, it clearly suggests 

impropriety and fraudulent activity.’’ That’s a quote. 

What are your thoughts on this matter? Should Congress be increasing funding in the Inspector General’s office as well as the 

FHA to keep up with demand and ensure that basic FHA lending 

requirements are being met? 

In a Washington Post article, the reporter indicates Wells Fargo 

and Bank of America are increasing their requirements on certain 

FHA loans to ensure homeowners can afford the mortgage. 

Should Congress consider tightening the FHA’s standards to 

minimize defaults? 

Either witness. Yes, ma’am? 

Ms. BRAUNSTEIN. I would just say that I think FHA has a very 

important role to play in the mortgage markets, and maybe more 

so than ever now, given the crisis. 

13 

So, whatever needs to be done in order to make sure that credit 

flows, that it’s available to people, and that people are getting safe 

and sound loans, I think it would be important to do. 

Mr. MOORE. All right. Second question. Second and last question. 

I have concerns with adjustable-rate mortgages, or ARMs, as 

they’re called, that start with a low monthly payment that rises 

over time. Personally, I don’t have a problem with that, but I think 

some people get into those not understanding exactly how they 

work. 

What role have adjustable-rate mortgages played in the current 

housing crisis? Is there a legitimate purpose for allowing these 

kinds of mortgage products to exist? Should we put any kind of 

controls or limitations or regulations on adjustable-rate mortgages? 

Ms. BRAUNSTEIN. We have done that through the HOEPA rules 

that the Fed issued in July. Adjustable-rate mortgages were a big 

problem in the marketplace. A lot of people did not understand the 

terms, did not understand the payment shock, and that their loan 

would reset, and there was a huge difference, oftentimes, between 

the initial rate and the reset rate. 

A couple of things that we did for the loans we define as highercost loans, include—the HOEPA rules will require that they be underwritten at the ability to repay, which means that you look at 

the highest payment that would be made within the first 7 years 

of the mortgage, whereas we heard before that loans were often 

being underwritten at those teaser rates, and people couldn’t afford 

the resets. 

We also put a lot of restrictions on prepayment penalties, and basically any loan that resets in the first 4 years is banned from having a prepayment penalty attached, which would allow people to 

get out of loans much easier, not having a prepayment penalty. 

Mr. MOORE. Right. Sir, do you have any comments? 

Mr. ANTONAKES. Yes, Congressman. I would add that I don’t 

think traditional ARM products were the focus of the problem, and 

I would hate to cut those products out of the marketplace: 3/1 

ARMs; and 5/1 ARMs. 

As my colleague indicated, it was the option ARM products, nointerest loans, that caused the problems and created tremendous 

payment shocks that weren’t properly underwritten. 

In Massachusetts, we actually passed a law as part of a foreclosure prevention bill signed by Governor Patrick in 2007 that, for 

subprime ARMs, it requires a consumer to actually opt out of a 

subprime fixed-rate product, and then there’s mandatory counseling if they want to proceed with a subprime ARM, to ensure that 

they truly do understand the terms and conditions of that credit. 

Mr. MOORE. Thank you. Thank you, Mr. Chairman. 

Chairman GUTIERREZ. And we have the gentleman from Delaware for 5 minutes, Mr. Castle. 

Mr. CASTLE. Thank you, Mr. Chairman. 

Mr. Antonakes, you heard Ms. Braunstein talk about the rules 

that the Fed has issued, which I guess will go into effect in October, or something of that nature. We have passed legislation, I 

think it was 3195, here in the House, that was not acted on in the 

Senate, I don’t believe. 

14 

Obviously, you have indicated in your testimony otherwise; the 

States have done a few things. 

Can you either, by the use of data or anecdotally, tell us if the 

lending, mortgage lending habits of our banks have changed as a 

result of that? Obviously, they have changed somewhat. But is 

there any clear evidence that there have been very substantial 

changes in terms of some of both the subprime, ALT-A, and other 

mortgage problems that have existed? 

Mr. ANTONAKES. I think lending habits have changed dramatically, primarily because of the collapse of the mortgage market. I 

think there has been a mortgage correction, and many loans aren’t 

being written anymore, be they subprime loans, ALT-A loans. But 

that’s not to say they won’t be written again once the market returns and once housing values improve. 

So I think the real opportunity here, you know, we were supportive—I testified in support of the Federal Reserve Board’s 

HOEPA regulations. I do think there’s a historic opportunity here 

for the Congress to act on predatory lending legislation, action that 

has been taken in 35 States to date, plus the District of Columbia, 

but been blunted by Federal preemption. We haven’t had the opportunity for those laws to apply uniformly across the spectrum. 

I think the opportunity here is that Congress can act to set a 

minimum floor and allow States to continue to experiment and create laws that further protect the consumers if they so desire, as 

long as they do in fact apply to all entities within the jurisdiction 

of that State. 

Mr. CASTLE. Okay. Thank you. 

Ms. Braunstein, you said earlier, and we just heard Mr. 

Antonakes say, that mortgage lending is obviously way down at 

this point. 

Is there any evidence that mortgage lending is beginning to recover at all, even talking about the last 2 weeks or 4 weeks, or 

whatever? I mean, I was amazed to see, I think it was CitiGroup 

actually had a profit in the last couple of months, or something of 

that nature. I don’t know if that came from anything dealing with 

real estate. 

But my question is, is there any—are you tracking that? Is the 

Fed tracking that? Is there any way of judging that it’s beginning 

to actually recover? 

Ms. BRAUNSTEIN. I’m sure that there are people at the Federal 

Reserve who are watching the markets very closely, but actually, 

I’m not prepared to comment on that. 

Mr. CASTLE. That’s okay. 

Another question to you. You testified in your testimony, you 

spelled out the rules that the Fed is looking at for adoption in the 

fall of this year. 

If we were to pass legislation here with some similarities to it— 

you’re familiar, I think, with some of the legislation that we have 

dealt with in the past, in 3195, and some of the propositions for 

that—would this complement the Fed rule or would it be helpful 

or harmful, as far as you can ascertain? 

Ms. BRAUNSTEIN. Some of the provisions in the legislation that 

was dropped in November last year actually mirror what’s in our 

HOEPA rules. There are other things that go further and other 

15 

things that are different. And certainly, if you pass legislation, we 

would have to look at what we already have done in the HOEPA 

rules, and we’ll have to reconcile that in some form or another. 

But the HOEPA rules are scheduled to go into effect in October 

of 2009, so we’re hoping that will move forward. 

Mr. CASTLE. All right. 

Mr. Antonakes, I wasn’t going to ask this, but I will. Do you, in 

your position, have any thoughts or anything that we should be 

looking at or considering that we are not doing here at the Federal 

level, either in direct legislation, the kind of things that we do in 

Congress, beyond anything you may have testified to? 

Mr. ANTONAKES. Congressman, I don’t believe so. Again, I think 

the most important thing from my perspective is to ensure we truly 

have a level playing field in terms of what the rules are, that all 

entities, be they State licensed, State chartered, or federally chartered, are abiding by those rules, and that there’s universal enforcement. 

Mr. CASTLE. Very good. Thank you. 

Ms. Braunstein, we are concerned about the need to strengthen 

loan underwriting criteria and standards, but also to ensure that 

borrowers can afford their homes. We would like to get the real estate market moving again, to some degree. 

Are these two items completely, at this point, counterproductive, 

or do you feel that we can blend it together so that we can have 

good lending practices, but we can have the markets open up 

again? 

Ms. BRAUNSTEIN. Yes, I do think that both are possible. I do not 

think that they’re mutually exclusive at all. 

In fact, I think the markets will work even better if there is responsible lending in the markets and people are able to afford their 

loans and keep their homes. 

Mr. CASTLE. Thank you. 

I yield back, Mr. Chairman. 

Chairman GUTIERREZ. Thank you very much. 

Just for the institutional memory of everyone, the HOEPA rules 

are the same ones that came about as a result of the 1994 legislation that we passed here in Congress. 

Ms. BRAUNSTEIN. Correct. 

Chairman GUTIERREZ. Okay. I just want everybody to know it 

took quite a while; I got here in 1994, and the rules finally have 

come about. 

Mr. Sherman, you are recognized for 5 minutes. 

Mr. SHERMAN. Thank you, Mr. Chairman, and Mr.—author of 

the 1994 bill. What was the name of that bill again, Mr. Chairman? 

[laughter] 

Mr. SHERMAN. Can you see any reason not to simply ban stated 

income, low doc, and no doc loans? 

Ms. BRAUNSTEIN. We—the HOEPA rules that we issued in July 

do ban these products for higher-cost mortgages. Are you talking 

about across the entire spectrum? 

Mr. SHERMAN. Across the board. 

Ms. BRAUNSTEIN. I think we would have to look at that and see 

if there were unintended consequences 

16 

Mr. SHERMAN. Is it an important national priority to make sure 

that people can cheat on their taxes and still get good home loan 

financing? 

Ms. BRAUNSTEIN. No, I don’t think it is. I think that stated income, my understanding of stated income loans is that they were 

used in a small segment of the market for a number of years without any problem. However— 

Mr. SHERMAN. Except for the fact that people could cheat on 

their taxes and get good home financing, which the home financiers 

didn’t regard as a problem. 

Ms. BRAUNSTEIN. Well, and that the problems in the markets, 

though, the mortgage markets, ensued when they became widespread. 

Mr. SHERMAN. Until then, we just had the problem I—can you 

think of any reason why we shouldn’t ban what I call teaser rate 

ARMs? That is to say, where the adjustable-rate mortgage’s initial 

payments are below what they would be if the—at today’s index 

and today’s spread? 

Ms. BRAUNSTEIN. As with many products, I guess there could be 

a case where these could be helpful to somebody, but if you’re going 

to keep these products, there need to be protections around them, 

which we have done with the HOEPA rules. 

You need to prevent prepayment penalties, which lock people in 

and make it much more difficult for them to get out of the loan before— 

Mr. SHERMAN. If something has lots of harms, and whether it 

ever serves a good purpose at all is simply conjectural, as a matter 

of fact. We can’t even figure out what benefit it would have, why 

wouldn’t we ban it? 

Ms. BRAUNSTEIN. Well, I guess, you can always draft a case 

where somebody actually knows that they have a lower income 

right now, but their income is going to rise in the next couple 

years, and it allows them to buy a home that they ordinarily would 

not be able to buy. 

Mr. SHERMAN. I think that— 

Ms. BRAUNSTEIN. So you could always construct that argument. 

Mr. SHERMAN. —an awful lot of people are getting foreclosed now 

because they were sure they were going to get— 

Ms. BRAUNSTEIN. I agree. 

Mr. SHERMAN. —a couple of promotions, and I think that we 

ought to qualify people based on their current income, not based 

on, ‘‘Well, I’m going to graduate from school, unless I flunk out, 

and I’m going to get a high-paid job, unless there’s a recession 

when I graduate.’’ 

The chairman of the full committee has suggested that we prohibit loan originators, that first lender, from being able to fully sell 

without recourse the loan into the secondary market. He has proposed, if I got this right, that they retain at least 15 percent ownership of the mortgage or 15 percent, the first 15 percent of the risk. 

I would like both witnesses to comment on this. Do we want to 

abolish the business plan where a financial institution with limited 

capital is able to lend money and then sell the entire loan—lend 

money, sell the entire loan, and in that way, with limited capital, 

be able to originate a lot of loans? 

17 

Do we want, instead, only to have a business model where a portion of your capital is used up as you originate and sell off loans? 

I would like both witnesses to respond. 

Ms. BRAUNSTEIN. As business models are developed for the mortgage market going forward, I think it’s going to be extremely important to look at the incentive structures, and certainly some of 

the problems that we are seeing in the current markets or that we 

saw in the markets are due to the fact that there was not an incentive on the part of brokers and others to take due diligence and do 

good underwriting because there was no skin in the game, so to— 

Mr. SHERMAN. So you are saying not only should the loan originator have skin in the game, but the independent mortgage 

broker— 

Ms. BRAUNSTEIN. Possibly. There needs to be incentives. 

Mr. SHERMAN. —would have skin in the game? These are small 

businesses. Remember, they have to get audited financial statements to prove they have $75,000 in capital. 

Are we basically then going to ban the small mortgage broker— 

Ms. BRAUNSTEIN. Well, I’m not saying it would be easy to figure 

out how to structure it, but certainly the incentive structure is 

going to be important going forward, to make sure that people are 

making responsible decisions. 

Chairman GUTIERREZ. The time of the gentleman has expired. 

The gentleman from Texas for 5 minutes. 

Mr. MARCHANT. Ms. Braunstein, my concern is the lender who 

has 100 percent of the skin in the game, and that is a person who 

sells their home and takes the note back, and is the lender, and 

keeps the note, and does not try to securitize it. 

Do the rules sweep this whole class of people who make that 

kind of loan into a regulation scheme that puts them at risk of 

being drawn into court? 

Does it contemplate that a lot of the loans that are made in 

America are made by the sellers, and the loan is—of the property, 

and the loan is actually retained by them and is not a conforming 

loan, and has, you know, the underwriting criteria used was the 

person that sold it found the person that bought it to be creditworthy? 

And are we putting a lot—and I think across America, there are 

a lot of transactions like this that take place. Are we putting that 

lender in the same category as a mortgage broker at a mortgage 

company? 

Ms. BRAUNSTEIN. Well—are you talking about your—the legislation that was introduced in the House— 

Mr. MARCHANT. Yes, the rules or the legislation. I mean— 

Ms. BRAUNSTEIN. The HOEPA rules do not deal with that issue, 

the new HOEPA rules that we introduced. The legislation that was 

introduced in 2007 by the House deals with assignee liability, and 

in particular, that was to try to close a gap and put some responsibility for the products onto the securitizers and assignees. 

Mr. MARCHANT. So as long as a person has no contemplation to 

securitize, then they need not worry about this legislation? 

Ms. BRAUNSTEIN. Well, if they’re holding the note, they’re holding—they have plenty of skin in the game. 

18 

Mr. MARCHANT. Yes. My next question has to do with that group 

of—can you make a loan that specifically on its face is prohibited 

by law to be securitized, so that a life insurance company that intends to originate mortgages for their own portfolio, which used to 

happen, and banks for their own portfolio, can know that, when 

they originated that loan, that it’s specifically prohibited being put 

into a pool and securitized and sold in the secondary market, and 

if that happens, are banks and lenders going to be prohibited from 

making loans that they might make just for a business reason, for 

wanting to have a portfolio loan? 

Ms. BRAUNSTEIN. I have to admit, I’m not sure I understand the 

scenario. 

Mr. MARCHANT. Well, if you securitize—maybe Mr.— 

Ms. BRAUNSTEIN. I don’t think he does. 

Mr. MARCHANT. Okay, I’m sorry. Do you have an answer for 

that? No. Okay. I’m not explaining myself properly. 

What I’m concerned about is the small lender that makes loans 

for their own portfolio, and I’m afraid that these small lenders will 

get captured in some of these rules and in future legislation, that 

will basically curtail a great part of real estate business out there 

that never enters into the banking scheme and commercial banking. That’s my biggest concern. 

Ms. BRAUNSTEIN. If lenders are doing responsible lending, then 

there should not be a problem. They should not be prohibited. 

There should be nothing in the rules or—either our rules or legislation, that would prohibit that. 

I think it is always important to look at any potential regulation 

or statutes to make sure that there are not unintended consequences that would inhibit responsible lending. 

Mr. MARCHANT. And that would be my word of caution, because 

in many instances, the—I have had people call my office and say, 

‘‘Can I do—under these new rules, will I be able to owner finance, 

under these rules, will I be able to make loans on a property that 

I sell?’’ 

And I’ve said, ‘‘I don’t think you will be affected.’’ But it has had 

kind of had a chilling effect on some of the owner-sellers. 

Thank you, sir. 

Chairman GUTIERREZ. The gentlelady from New York, Ms. Maloney, is recognized for 5 minutes. 

Mrs. MALONEY. I thank the gentleman for yielding and for organizing this hearing, and I welcome both panelists. 

Beyond working on mortgage reform, this committee is working 

on regulatory reform, including a discussion of creating a systemic 

risk regulator, and I would like to ask each of the witnesses, could 

you discuss how you see these mortgage reforms working in concert 

with regulatory reforms? How do you see a systemic risk regulator 

overseeing parts of the mortgage market? 

Mr. ANTONAKES. I believe that a systemic risk regulator would 

be complementary to regulatory reform and structure on the mortgage side where the States are most closely focussed. You know, we 

are working through a number of initiatives, including the nationwide mortgage licensing system, to increase transparency and effectiveness for consumers, and increase and improve upon a partnership with Federal regulators. 

19 

However, what we’re doing is more focused, I believe, on the 

model of institutions that we’re supervising. Certainly, I believe 

there are institutions that have either been largely Wall Street institutions, that have been largely unregulated, and that pose tremendous risk to our financial system, and there should be a regulatory structure in place which better captures that risk, and is 

frankly more stringent, given the risk to the financial system. 

So I think the system has to be tailored very carefully to ensure 

that the greatest degree of oversight exists for our highest-risk institutions, and that there continues to be collaborative State and 

Federal action on those institutions, as well as those that frankly 

pose less risk to the system. And the model hopefully is flexible 

enough to ensure that those institutions that have less risk can 

continue to exist and compete well in the marketplace. 

Mrs. MALONEY. So you see the systemic risk regulator overseeing 

a level of regulatory relief, say, across the board, or regulation, 

even-playing-field regulation that would protect them before getting to systemic risk? 

Mr. ANTONAKES. I think they would have to work in a complementary fashion. I don’t think you could remove all the risk in 

an entity and just have it solely based within the systemic risk regulatory. I think there would have to be coordination between the 

different agencies to ensure proper oversight, and I think that is 

achievable. 

Mrs. MALONEY. And Ms. Braunstein? Nice to see you again. 

Ms. BRAUNSTEIN. Nice to see you, too. 

I also think a systemic risk regulator would have to be cognizant 

of all the risks in an organization, and that would include consumer protection risks. 

As we have certainly seen in the current situation, consumer protection was actually somewhat like the canary in the coal mine in 

terms of other things going on, so it would be very important that 

that be a strong component of whatever is developed going forward. 

Mrs. MALONEY. Some say that maybe we should have a separate 

regulator for consumer, separate from the systemic risk. Do you 

think it should be all together, or do you think it should be separate? 

Ms. BRAUNSTEIN. Well, I don’t have an answer to that question. 

I think that, obviously, these are issues that we’re going to be exploring, all of us, in the agencies and on the Hill, going forward. 

I think while there is a certain appeal to having a separate agency, I would say that I also think that there is a lot to be gained 

in terms of crafting rules that do not have unintended consequences and interrupt the flow of credit; there is a lot to be 

gained from the research analysis and the supervision that is done 

in the banking agencies. 

Mrs. MALONEY. A number of States, including my home State of 

New York, have really been at the forefront of State-level mortgage 

reform. 

Which States would you suggest the committee look towards for 

best practices and what advice would you give the committee as we 

discuss enacting nationwide reforms vis-a-vis existing State laws? 

Mr. ANTONAKES. I think there are a number of States you could 

look to for those initiatives. I think certainly New York is one. 

20 

North Carolina is another. I believe my State of Massachusetts has 

been very progressive in this area, as well as the Commonwealth 

of Pennsylvania, and several other States, and we would be happy 

to provide a more exhaustive list, as well as a list of initiatives 

from those States to the committee, as well. 

Chairman GUTIERREZ. I’m sorry. I can’t see. It is getting to be 

that time of life. 

Mr. Lance, for 5 minutes, is recognized. 

Mr. LANCE. Thank you, Mr. Chairman. 

Good afternoon to you both. 

Regarding the issue of the systemic regulator, to follow up on the 

questions of the gentlelady from New York, it would seem to me 

that I would favor one shop in this regard, and then perhaps have 

within that area several different agencies underneath it, and I 

would ask you to follow up further on that. 

Do you have an opinion as to whether it just should be one overall, as opposed to having a separate place for consumers in our society? 

Ms. BRAUNSTEIN. As I say, I don’t have a specific recommendation at this time. I mean, these are issues that we are certainly discussing, at the Federal Reserve, you know, were certainly being 

discussed in many venues. 

I would say that there are a number of things that need to be 

looked at, in the benefits of where that is, and there are, you know, 

pros and cons on both sides of the argument. 

Mr. LANCE. And from your experience at the State level in Massachusetts—and I come from a State legislature in New Jersey, 

where I served for 18 years, and I have great respect to what 

States are doing in this regard—do you have an opinion based 

upon your experience in Massachusetts? 

Mr. ANTONAKES. Yes, I do, Congressman. 

I don’t believe you can divorce the safety and soundness and 

compliance risk. I think they have to be housed in the same entity. 

Mr. LANCE. That would be my thought process, as well. 

Mr. ANTONAKES. But also, I believe checks and balances are incredibly important, and I would think that one single Federal regulator, while perhaps eliminating some redundancy, would have 

enormous power, and that would create risks in its own right. 

Mr. LANCE. I suppose, but I would not want to see a system 

where we didn’t know where to go, and a confusing system, and an 

overlapping system, and from my experience in the State capitol, 

sometimes you don’t know where to go, and certainly this is an 

area where there has to be continuity across the board, given the 

fact of what has occurred over the last year. 

Mr. ANTONAKES. I don’t disagree with you. Each agency has to 

have a charge that is well understood by the public, certainly, and 

by consumers. 

I mean specifically that it should be a cooperative effort between 

the State and Federal agencies that share supervision, as opposed 

to just one simple Federal agency that makes the final call on all 

decisions. 

Mr. LANCE. And from your perspective, given your expertise at 

the State level, are you concerned regarding a Federal system 

where, if there is not technically preemption, there is the view that 

21 

all is wise that comes from Washington and not from the various 

State capitals? 

Mr. ANTONAKES. Well, I certainly do have concerns in that area. 

I believe that the advantage of a local regulatory is that I am closest to my consumers. If there’s an issue somewhere in my State, 

I can have examiners at that facility within hours. 

And I think while we have great working relationships, generally, with our Federal counterparts, I think an issue that occurs 

in my State probably gets my attention quicker than it’s going to 

from a Federal agency in Washington. 

Mr. LANCE. Thank you. And of course, because our banking system is, to some extent, State regulated and Federal regulated, so 

long as that continues, it seems to me there has to be some sort 

of recognition of your responsibilities and the responsibilities of 

your counterparts across the country. 

Thank you, Mr. Chairman. I yield back the balance of my time. 

Chairman GUTIERREZ. The gentleman yields back. 

The gentleman from Charlotte, North Carolina, Mr. Watt, for 5 

minutes. 

Mr. WATT. Thank you, Mr. Chairman. 

I will start by complimenting Mr. Lance. I thought we had lost 

all of our States’ rights advocates, and I’ll be looking forward to 

adding him to my States’ rights caucus, as one of the people who 

has been trying to convince multiple members on your side that we 

should not set a Federal preemptive standard, but set a Federal 

floor standard that continues to allow State attorneys general and 

State regulators to be involved in regulating these loans. So it’s 

wonderful to know that I have an ally on that side on that issue. 

I was going to ask about that, but he did a magnificent job of 

fleshing that issue out for me, and so I will let your answer, Mr. 

Antonakes, stand on that point. It’s probably better made to him 

than it would have been made to me. 

Ms. Braunstein, there has been a relative sea change in this 

whole area of regulation of mortgage lending since my colleague, 

Brad Miller from North Carolina, and I started this discussion 

about—how many years ago was it, Brad?—6 years ago, and we finally got the regulators, after the horse was out of the barn, to 

issue some regulations that move in the direction of regulating the 

players in this industry. 

The one question I want to be clear on is whether you all have 

an opinion as to whether those regulations ought to preempt any 

additional legislation that is being contemplated by Congress. Do 

you think you have exhausted the whole field, or is there more to 

be done, in your estimation? 

Ms. BRAUNSTEIN. Well, I think that we should constantly be vigilant and look for opportunities to improve any law or regulation 

that’s out there, so I think that there may be some additional 

things. 

As I said in my testimony, we applaud a number of the things 

you have done in the bill. A lot of it overlaps with things that we 

have done. And we are just saying that if you intend to move forward with this, there are some areas of clarification that would be 

needed. 

22 

Mr. WATT. And have we gotten the benefit of your written comments about those areas of clarification, rather than just a general 

statement that there are some issues? 

Ms. BRAUNSTEIN. I know that when the bill was introduced back 

in 2007, we had Fed staff working closely with your staff on the 

Hill, and we are happy to do that again as you move forward on 

reintroducing it. 

Mr. WATT. And there are some things, I take it, that you cannot 

do in a regulatory fashion, such as determining what the private 

rights of action and the penalties and the— 

Ms. BRAUNSTEIN. —liabilities. 

Mr. WATT. —things of that kind. We have to do that at the legislative level; don’t we? 

Ms. BRAUNSTEIN. Yes. 

Mr. WATT. Okay. All right. 

I think that’s what I wanted to establish. I didn’t want to proceed with the assumption that we were doing something that was 

good, that—when other folks were saying we have done enough, so 

we will keep moving, or trying to move in the direction of tightening up these regulations, and I would welcome, I’m sure, the 

chairman of the full committee and the chairman of the subcommittee and Mr. Miller and I in particular, since we have been 

at this for a long time, would welcome those clarifications to which 

you made reference. 

Thank you. I yield back. 

Chairman GUTIERREZ. The gentleman yields back. 

Mr. Neugebauer, please, for 5 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

Ms. Braunstein, recently HUD has gotten a revised disclosure 

statement out. In House Bill 3195, I introduced an amendment 

that basically would bring forward a universal disclosure box. 

My opinion is that we don’t need longer disclosures, we need better disclosures, and somehow somebody got the message that a long 

disclosure was a better disclosure for the borrowers. 

And, you know, the other piece of it is, it would help, I think, 

everybody if HUD and the Fed maybe had coffee together and sat 

down and maybe tried to figure out, have a universal consumer disclosure so that there’s more clarity. 

And what needs to be on the front of that form, you can—if the 

lawyers want to lawyer up, let them lawyer up the back, but what 

we need to do is, while the lawyers are at coffee, we need to sit 

down and let people that are actually in the business, get consumers and lenders together, and talk about what are really the 

important things. 

And there are 10 or 12 things that a consumer needs to know 

about, you know, the contract that they’re about to sign, and it 

needs to be in big letters, and, you know, what’s the actual interest 

rate, what’s the payment, you know, some of those things, the highest interest rate during this contract can be X, if it goes to that, 

you would not qualify for this—I mean, sitting down. 

Why do we need two disclosure statements, and why can’t we 

look at thinking outside of the box with a new box? 

Ms. BRAUNSTEIN. Well, we issued a mortgage reform report back 

in the 1990’s that also recommended one joint disclosure, so we 

23 

have been an advocate of that. We have made overtures to HUD 

over the last few years. We have offered to work with them on their 

RESPA reform. And I can just say that we stand ready to do so. 

Another comment I would like to make, in terms of us moving 

forward on our TILA disclosure, which we’re doing now, another 

important part, I agree with you that more disclosure is not necessarily better. 

It is our strong opinion, based on our experiences in working on 

mortgage disclosures, as well as previously working on credit card 

disclosures, that consumer testing is a very important part of developing disclosures, because you can’t really know if consumers 

are going to understand these and get the information they need 

until you go out and test them, and that’s what we’re doing now. 

The new disclosure we plan to bring forward mid-year is going 

to be consumer tested—will have been consumer tested—and we 

will continue to do that with disclosures. 

It’s not the length of the disclosure that’s as important as making sure it’s well tested. 

Mr. NEUGEBAUER. Well, then, I would say that what would make 

sense to me is, let’s test the disclosure, let’s sit down with the consumers, let’s ask them what is the information that they think they 

need to know in order to make an informed decision. 

Ms. BRAUNSTEIN. That is the first part of the testing process, is 

we do interviews with consumers to ask them, ‘‘When you are going 

to buy a mortgage, or when you are going to get a credit card, what 

are you looking for, what is important to you?’’ 

And from that information is how we then design disclosures 

that we then go in and test again, and make sure the consumers 

are actually getting that information. 

Mr. NEUGEBAUER. And so you said you have made overtures to 

HUD in the past, and you have not gotten a positive response, evidently? 

Ms. BRAUNSTEIN. Well, I think they were on track to get RESPA 

done by the end of last year, and they were moving on that track 

to do so. 

Mr. NEUGEBAUER. Well, this is the change age, and maybe what 

we need to do, Mr. Chairman, is look at seeing if we can get some 

of these agencies to sit down together, because I think, you know, 

a uniform, universal disclosure for consumer credit, it almost 

makes too much sense, and also being able to get the people at the 

table who are borrowing money to find out, you know, the things 

that they need. On the front, you know, then you have these 10 

boxes or however many boxes that is, and then if you need to let 

the lawyers cover themselves on the next 25 or 30 pages, well, let 

them do that. 

But the borrower doesn’t really have a good way to shop consumer credit, because these disclosures are so convoluted, so long, 

that you’re trying to compare 3 pages of a good faith estimate to 

3 pages of another lender’s good faith estimate, really, where if we 

had the hull of that in a consolidated way on the front page, at 

least, I think it makes sense. 

So I look forward to working with—the chairman left me—look 

forward to working with the other side to do that. 

Mr. CLAY. [presiding]. I thank the gentleman from Texas. 

24 

I recognize the gentleman from Texas, Mr. Green, for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. 

And I would like to continue where my colleague from Texas left 

off, because Representative McHenry and I introduced an amendment that passed by voice vote out of this committee to have a onepage disclosure. It was a part of H.R. 3915. 

H.R. 3915 passed the House of Representatives on November 15, 

2007, but did not pass the Senate. 

So I would look forward to continuing the effort that we have put 

forth to get that one-page disclosure that Representative McHenry 

and I introduced and that passed out of committee, was in fact a 

part of a bill. 

Moving on from disclosure to originator compensation, you did 

not prohibit certain originator compensations, one known as the 

yield spread premium. What you did was move to disclosure of 

originator compensation. 

And in so doing, I am moved to ask, what happens when the disclosure requirement is not met? 

Ms. BRAUNSTEIN. Well, actually, what we did is we proposed, 

when we put out proposed HOEPA rules, in December of 2007, we 

had in there a disclosure provision for the yield spread premium 

for broker compensation. 

We then, between then and when we finalized our rules in July 

of 2008, we consumer tested that idea, and frankly, it did not work 

well, because that is a very complex concept, and we found that not 

only did consumers not understand what a yield spread premium 

was, it not only confused them, it actually could hamper them in 

decision making, so we— 

Mr. GREEN. Permit me to intercede— 

Ms. BRAUNSTEIN. Well, I just want to say we withdrew that from 

the final rule, so we did not mandate disclosure of yield spread premiums. We are working— 

Mr. GREEN. Let me do this, if I may, because I’m going to lose 

my time in just a moment. 

Ms. BRAUNSTEIN. Okay. 

Mr. GREEN. What I would like to know is this. If you move to 

disclosure, what is the penalty for failure to disclose, if there is a 

penalty? 

Ms. BRAUNSTEIN. Well, I’m not sure we are moving towards disclosure. I mean, that’s what I’m saying. We are working on that 

issue now. We are considering other options— 

Mr. GREEN. What other options are you considering? 

Ms. BRAUNSTEIN. —including restrictions about having— 

Mr. GREEN. What other options would you consider, other than 

disclosure or elimination? 

Ms. BRAUNSTEIN. Restrictions— 

Mr. GREEN. Say again? 

Ms. BRAUNSTEIN. Restrictions on yield spread premiums, potentially bans on yield spread premiums. We are looking at all possibilities—everything is on the table. 

Mr. GREEN. So right now, it’s safe to say that you have not come 

to a conclusion as to how yield spread premiums— 

Ms. BRAUNSTEIN. No. 

Mr. GREEN. —should be addressed? 

25 

Ms. BRAUNSTEIN. That will be addressed in the rules that will be 

coming out this summer. 

Mr. GREEN. All right. Thank you. 

Let’s move next to a provision for people who can pay a monthly 

payment, and who don’t have traditional credit. 

We have some people who can afford a mortgage payment, but 

they don’t have traditional credit. 

We have had the circumstance wherein persons didn’t have to reveal what their income was, and they were able to get some loans, 

no doc loans, but we do have a class of people who can actually 

make a monthly payment, but they don’t have traditional credit. 

Has anything been done to address this class of people? 

Ms. BRAUNSTEIN. Well, in our HOEPA rules that we just issued, 

in terms of people documenting income, we allow flexibility in there 

that— 

Mr. GREEN. No, no, no. Excuse me. I need to intercede. And I 

don’t want to be rude, crude, and unrefined, but I have to use the 

time efficaciously. 

I’m talking now about people where you can clearly document 

that they can afford the loan, they can make the payment, but they 

don’t have traditional credit. They pay light bills, gas bills, water 

bills, and phone bills, but they don’t have a car note, they don’t 

have a house note, and some other things. 

Ms. BRAUNSTEIN. And that’s what I’m saying. There’s flexibility 

in the current HOEPA rules to look at alternative means of documentation of credit. 

Mr. GREEN. So alternative credit scoring is something that you’re 

looking at? 

Ms. BRAUNSTEIN. It is definitely not prohibited. It can be looked 

at by lenders to make their decisions. 

Mr. GREEN. Okay. And my final comment would be, as you embrace yield spread premium, if you move to the concept of disclosure, ask yourself what is the penalty for failure to disclose. I think 

that’s going to be important, because my suspicion is that we’ll get 

a certain amount of failure to disclose. 

And I would like for your fellow witness to testify, if you would 

like to give a commentary. 

Mr. ANTONAKES. Congressman, I would only add that, in our examinations, if a disclosure is not provided, then it has been the 

consistent position of our agency that any fee collected has to be 

reimbursed to the consumer in full. 

Mr. CLAY. The gentleman from Texas’ time has expired, and I 

recognize the gentleman from North Carolina, Mr. Miller, for 5 

minutes. 

Mr. MILLER. Thank you. 

Ms. Braunstein, if you—I strongly discourage using disclosure as 

the remedy for yield spread premiums. The borrower relies upon 

the broker to tell them what it is they’re signing, and I do not 

think disclosure, having them sign a form, is going to work. 

I know after the proposed rules in December, there were many 

commenters who said roughly that. I was one of them. Do not remedy the problem with disclosure. It is not going to work. 

If you allow a payment at all, at closing, because the borrower 

is paying a higher interest rate than the interest rate, the par inVerDate Nov 24 2008 10:39 Aug 06, 2009 Jkt 048864 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\48864.TXT TERRIE
26 

terest rate, what they qualified for, it should be a payment made 

directly to the borrower and not to anybody else. 

You mentioned that the CRA was not the cause of our current 

financial problems. I think there has been a study by the Federal 

Reserve Board that 6 percent of subprime loans in the period were 

by institutions subject to the CRA, the depository institutions, 

banks and thrifts with federally insured deposits, in neighborhoods 

or to borrowers that the CRA encouraged lending to. 

Ms. BRAUNSTEIN. Yes. 

Mr. MILLER. Is that correct? 

Ms. BRAUNSTEIN. That is correct. 

Mr. MILLER. Six percent. And how has been the default or foreclosure rate among that 6 percent, as opposed to other subprime 

loans? 

Ms. BRAUNSTEIN. I think that we have found that the foreclosure, 

the delinquency rates in those areas are no different or no worse 

than those that you find in higher-income areas that are not CRA 

targeted areas. 

Mr. MILLER. Okay. On assignee liability, I have been generally 

sympathetic with the argument that someone buying a loan can’t 

know everything that happened at closing, can’t know ever oral 

representation, every discussion between the borrower and the 

lender, and that not all the sins of the originator should necessarily 

be attributed to an assignee. 

But looking at the loans made in 2004 to 2006, there’s a theory 

at law of constructive knowledge: if you didn’t actually know something, you had other facts that should have let you know something 

was going on. 

Ninety percent of the loans made, subprime loans, which jumped 

from 8 percent of all loans to 28 percent, 90 percent of them had 

a reset, a quick adjustment after 2 or 3 years, that went up 30 to 

50 percent in monthly payments; 43 to 50 percent did not have full 

income documentation; 70 percent had a prepayment penalty. 

Do you think the assignees—the people buying those mortgages—didn’t know something was up at the retail level? 

Ms. BRAUNSTEIN. Well, obviously, it is hard to speak for them, 

but it is hard to imagine that if due diligence was done, that you 

wouldn’t see something amiss. 

Mr. MILLER. Thank you. I have no further questions. 

Mr. CLAY. The gentleman yields back. I recognize the gentleman 

from Georgia, Mr. Scott, for 5 minutes. 

Mr. SCOTT. Well, I have a, kind of like a two-pronged question 

that I would like for you to respond to, if you would. 

I’m concerned about this just sort of reviewing this issue about 

the spread and increase of predatory lending practices, and I understand that subprime mortgages have allowed for a large number 

of families to purchase homes that they would not otherwise have 

been able to do, which conceivably is a good thing. 

However, I’m concerned about the nature and the targets of 

these loans and lending practices. There has been an inordinate 

percentage of minority families who have been tied up in what we 

can affectionately call a mess, and the facts are disturbing, at best, 

as black and Hispanic and individuals have been disproportionately 

borrowing in the higher-cost subprime market. 

27 

That has been because there have been certain incentives in 

place that steer people to these subprime lending markets, and I 

think in all of this area, this is sort of the meanest part of this 

predatory lending that, you know, I don’t think we’re really addressing enough; and that is, you have people here who don’t need 

to be steered into subprime lending, but are steered into subprime 

lending. 

And I’d like—you know, families with perfectly good credit, in 

some instances, have been swindled, they have been blindsided into 

these less than sound mortgage deals, and I want to know what 

steps are being taken towards stopping this, and what your 

thoughts are on having a mandatory standard for mortgage companies, having an increased number of people available to help people, and to be able to stop this purposeful effort of targeting Hispanic and black families and people, and short-circuiting them, and 

steering them into an area where they ought not be. 

I mean, this is a terrible thing to do, and I would like to get your 

thoughts on that, and maybe a mandatory standard would work, 

or just how you feel about that. Are we doing enough about it? 

Ms. BRAUNSTEIN. The HOEPA rules that we issued in July of 

2008 will hopefully address a lot of these problems, because the 

features of these products that people were steered into will no 

longer be allowed to occur in these markets, in the higher-cost markets, and the markets where people were steered, and that does 

serve as a floor. It is not a ceiling, so there is also room for the 

States to improvise and to experiment and to go further with those 

rules. 

Mr. ANTONAKES. Congressman, I would add that, and agree, that 

responsible subprime lending was advantageous to the market, but 

what has occurred over the past few years is hardly responsible 

lending, and yes, folks have been targeted by unfair and deceptive 

acts and practices. 

We continue to examine lenders and brokers now on an only surprise basis to try to ferret out fraud. We have taken numerous enforcement actions and have numerous criminal actions pending 

with law enforcement agencies. 

Also, I reject the notion that CRA caused this problem. Quite to 

the contrary, in Massachusetts, Governor Patrick signed legislation 

to extend our State CRA law, which already exists, and applies to 

banks and credit unions for the first time to non-bank mortgage 

lenders, so that they do have a responsibility to lend on appropriate terms throughout the communities within which they do 

business, including low- or moderate-income communities. 

We’re starting our CRA exams of non-bank mortgage lenders 

next month. 

Mr. SCOTT. Okay. Just finally, I know my time is winding down, 

but do you think that as we move to get some reform to the mortgage system, that in a way, as we move to correct some of these 

things and address some of these issues, by bringing forth some of 

the reforms that were in our previous legislation that did pass the 

House, did not pass the Senate, Mr. Frank provided leadership on 

that last year—which I thought was needed—so that in tightening 

up in these areas, making people more responsible, making sure 

people can pay back the loan, putting these kinds of restraints to 

28 

prevent the abuses, would that in fact, in your mind, lessen the 

credit availability to some of the very people that we’re protecting? 

In other words, would we come out of this thing having responded by over-responding, and then drying up the credit, and 

then the very people that we’re trying to get homes, we’ve tightened it up so that a lender is not going to lend now, because they 

think it’s risky, and we— 

Mr. CLAY. The gentleman from Georgia’s time has expired. 

Mr. SCOTT. Would you answer that for me— 

Mr. CLAY. And I recognize—no—I recognize the gentleman from 

Missouri. We have to respect his time, too. Mr. Cleaver is recognized for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Exhaustingly, I have been running from Homeland Security. I 

apologize for not being here. 

I only have one question, maybe two parts to it, which is, as we 

are contemplating legislation, should we consider some part of this 

legislation as a regulatory mandate on brokers and appraisers? 

Should they be regulated? 

Yes? 

Mr. ANTONAKES. The mortgage broker industry is regulated, on 

a State basis, and we have taken numerous actions to improve 

standards within the mortgage broker business. 

In addition, I would submit that there’s something called thirdparty risk, and that is that the lenders or the banks that choose 

to outsource their origination to mortgage brokers have a duty to 

oversee those brokers, and to the extent that bad acts or practices 

are allowed to exist, then I believe supervision of those entities 

doing business should also be brought to task, as well. 

Mr. CLEAVER. In Missouri, we have a real estate board, but I 

guess the question is, do you believe we need to have a national, 

uniform regulation of mortgage brokers? 

Mr. ANTONAKES. Well, the SAFE Act, which was part of 3915, is 

what was enacted, creating this uniform platform for licensing and 

supervision of all mortgage originators throughout the country. 

We now believe that 40 States will be on the system by the end 

of next year, and I believe the standards are in place and the oversight will be in place, as well, to ensure higher standards from the 

mortgage origination side. I think there still needs to be work on 

the funding side, as well as the securitization side. 

Mr. CLEAVER. What about appraisers? 

Mr. ANTONAKES. Appraisers, there are a lot of folks who were involved in the bad practices that existed, and I wouldn’t limit it to 

mortgage brokers or to appraisers. Certainly, there were bad acts 

that existed there, but I would suggest closing attorneys, real estate brokers, Wall Street investment firms, securitization, and the 

rating agencies were involved, as well. 

Ms. BRAUNSTEIN. I would also add, on appraisers, that we did, 

when we enacted the HOEPA rules, we also enacted a general prohibition for all mortgages on the coercion of appraisers or in any 

way trying to influence the value that they come to. 

Mr. CLEAVER. Is there a penalty provision? I mean, how do we— 

Ms. BRAUNSTEIN. Well, anything under TILA is subject to truth 

in lending penalties, and we would certainly, when we’re out examVerDate Nov 24 2008 10:39 Aug 06, 2009 Jkt 048864 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\48864.TXT TERRIE
29 

ining financial institutions, we’ll be looking at those kinds of 

issues. 

Mr. CLEAVER. Thank you, Mr. Chairman. I yield back the balance of my time. 

Mr. CLAY. The gentleman from Missouri yields back his time. 

Let me thank the two witnesses for your testimony, as well as 

your responses. This panel is dismissed and now we will take a 

slight break to set up for the second panel. 

[recess] 

Mr. CLAY. The committee will come to order. 

On our second panel today, we have David Berenbaum, who is 

the executive vice president for the National Community Reinvestment Coalition. Thank you for being here today. 

Julia Gordon is the senior policy counsel for the Center for Responsible Lending. So good to see you. 

Margot Saunders is counsel of the National Consumer Law Center, and is testifying on behalf of both the National Consumer Law 

Center and the National Association of Consumer Advocates. And 

welcome today. 

Stephanie Jones is the executive director of the National Urban 

League Policy Institute. Welcome to the committee. 

And Gracia Aponte—did I say that right? Okay. ‘‘Graciela,’’ I’m 

sorry, Aponte is an analyst at the National Council of La Raza. 

Welcome to the committee. 

And our final witness is Donald C. Lampe, who is a partner with 

the firm of Womble Carlyle Sandridge & Rice, PLLC, in Charlotte, 

North Carolina. 

Thank you all for being here today, and we will start with Mr. 

Berenbaum. You may begin. You have 5 minutes. 

STATEMENT OF DAVID BERENBAUM, EXECUTIVE VICE PRESIDENT, NATIONAL COMMUNITY REINVESTMENT COALITION 

Mr. BERENBAUM. Thank you, Mr. Chairman, Ranking Member 

Hensarling, and members of the committee. I’m honored to testify 

today on behalf of the members of the National Community Reinvestment Coalition on the subject of mortgage lending reform, a 

comprehensive review of the American mortgage system. 

Yesterday, Federal Reserve Chairman Ben Bernanke, in his remarks before the Council on Foreign Relations, stated that the financial system must be regulated, to quote him, ‘‘as a whole, in a 

holistic way,’’ and acknowledged that the current financial crisis 

has, ‘‘revealed some shocking gaps in our regulatory oversight.’’ 

To speak candidly, the sharp economic decline and distress in the 

mortgage market resulting from the foreclosure crisis can be traced 

both to out-of-date consumer protection laws and failed regulatory 

oversight. 

Loopholes in the law and inadequate regulatory enforcement allowed abusive and problematic lending to flourish. The foreclosures 

that arose from predatory lending have not only severely undermined the financial stability of working families and communities, 

but also are now weakening the credit markets and diminishing 

overall activity and performance. 

Massive foreclosures are spurring a self-reinforcing cycle of defaults, now compounded by rising unemployment. Multiple studies 

30 

by Credit Suisse and others have documented the impact of, in fact, 

this reality. Over 600,000 jobs were lost last month, and in fact 

now unemployment is at 8.1 percent, the 14th consecutive month 

of job losses in our Nation. 

The foreclosure crisis has destroyed significant amounts of national and family wealth, and, since the onset of the crisis, home 

prices have declined by at least 25 percent nationwide. 

We request that you consider four emerging issues at this time: 

First, we call for an investigation with regard to spikes in foreclosure within the FHA loan program. It is completely unacceptable 

at this time that a number of consumers who are simply 1 month 

into their FHA loan program payments are now defaulting. That 

documents widespread fraud, ongoing fraud, regardless of loan 

product in our system today, and the need for anti-predatory lending ordinances. 

Second, since 3915 was originally enacted, there is substantial 

evidence that the rating agencies played a crucial role in the entire 

crisis. NCRC has filed letters of grievance to the SEC and three 

discrimination complaints to the United States Department of 

Housing and Urban Development, documenting the impact, the 

foreclosure impact, in minority, predominantly African-American, 

low- to moderate-income, and Latino communities. 

Third, the widespread availability of foreclosure ‘‘scams’’ represented to be foreclosure assistance programs to consumers. Consumers again and again today are going to these for-profit con artists and having tens and tens of thousands of dollars in communities across the country stolen from them. 

And then the abusive use of broker price opinions. It’s a race to 

the bottom right now. In fact, real estate professionals are playing 

a role in managing REO, and also selling that property, a clear 

conflict of interest, compounding appraisal valuation issues, originally pushing to increase value, now in fact lowering the tax base 

around the Nation. 

We believe that 3915, when it passed the House, was a significant step forward. However, we would like you to take a serious 

look at, in fact, the companion bill that, in the Senate, though it 

did not move, was, in fact introduced, that looks at some very difficult issues, such as assignee liability, looking at servicing, and 

other areas. We believe that that review would be extremely positive, in fact, moving a bill ahead. 

I would like to address the issue of the Community Reinvestment 

Act, which also emerged in the first panel. There are any number 

of solutions to where we are in the current mortgage crisis. 

CRA was not, I say again not, a factor in the current crisis. Multiple studies, not solely out of the Fed, have documented that CRA 

played a positive role in sustainable mortgage loans, and in fact, 

NCRC strongly argues for what Massachusetts has done, on a national level, to expand the Community Reinvestment Act to reach 

many in the marketplace: investment bankers; large credit unions; 

financial service corporations; Wall Street; and others. 

Last, we also recognize that there’s a need for a national financial product safety commission to really take a look at what is in 

a consumer’s interest. I respectfully submit to you, with my 10 secVerDate Nov 24 2008 10:39 Aug 06, 2009 Jkt 048864 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\48864.TXT TERRIE
31 

onds of remaining time, that what is in a consumer’s interest is in 

corporate America’s interest. Responsible lending benefits all. 

Thank you. 

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

124 of the appendix.] 

Chairman GUTIERREZ. Ms. Gordon. 

STATEMENT OF JULIA GORDON, SENIOR POLICY COUNSEL, 

CENTER FOR RESPONSIBLE LENDING 

Ms. GORDON. Thank you, Mr. Chairman, Ranking Member Hensarling, and members of the committee. Thank you so much for inviting me to speak about mortgage lending reform. 

I am senior policy counsel at the Center for Responsible Lending, 

a nonprofit, nonpartisan research and policy organization dedicated 

to protecting homeownership and family wealth. 

We’re an affiliate of Self-Help, which makes responsible home 

mortgage loans to people who have not been able to access mainstream credit. 

Our lending record amply demonstrates that carefully underwritten mortgages, with fixed rates and full payments, can create 

sustainable homeownership. Even in the current economic climate, 

our mortgages are still performing far better than the dangerous 

subprime or non-traditional mortgage products. 

I need not belabor the point, but the mortgage market looks vastly different today than it looked when this body passed H.R. 3915 

in November of 2007. That’s why we think we need to start from 

scratch, in crafting smart, sensible rules of the road for the mortgage market. 

There are several important principles that should underlie any 

new legislation: 

First, the law must be simple and straightforward. Last year’s 

law had a structure not unlike one of those Russian nesting dolls. 

Although it established some important protections, we feared that 

it would have been hard for consumers to understand, tricky for industry to follow, and all but impossible for regulators to enforce. 

Where possible, bright lines and clear rules will benefit all market participants, from the consumer through the investor. 

Second, the law should ensure that mortgage originators serve 

the best interests of their customers by putting them into appropriate products with sound terms and conditions. No loans should 

be made on the basis of stated income. We should ban prepayment 

penalties and yield spread premiums. These fees reward lenders 

and brokers for locking families into loans that are bad for them 

and bad for the economy. And for heaven’s sake, originators should 

have to check whether the customer can afford a mortgage before 

giving it to them. 

Third, the secondary market should share responsibility for the 

terms of the loan. A lesson from the recent meltdown is that every 

player in the mortgage chain needs to have skin in the game. 

When Wall Street purchases high-risk mortgages and receives the 

corresponding financial benefits, it also needs to accept responsibility for the risk placed on consumers and what its purchases will 

encourage at the origination level. In that way, the market can accurately price risk and police itself. 

32 

Fourth, the law should require mortgage servicers to attempt to 

save a family’s home before foreclosing. Had this requirement been 

in place 2 years ago, it could have saved hundreds of thousands of 

homes. FHA and VA already require this of their servicers, and 

with the streamlined loan modification templates developed recently by the Treasury Department, there’s no reason why all 

servicers cannot easily comply with such a requirement. 

Fifth, consumers need to be able to assert their rights in a timely 

and meaningful way. While public enforcement is both powerful 

and necessary, there will never be enough public resources to take 

effective action against the whole universe of players in the mortgage system. 

Finally, States should be able to protect their residents quickly 

and effectively. While Congress was still discussing whether to 

pass a so-called first generation anti-predatory lending law, the 

market had already moved on to new risky practices, which the 

States quickly recognized. 

Ohio enacted its second generation law in 2006, soon followed by 

Minnesota and approximately 10 other States. As for Congress, we 

are still here 3 years later discussing whether to pass a second generation law, despite the fact that the market self-destructed in the 

meantime and the former subprime lenders are now moving to trying to push new products and services. 

Despite the current state of the economy, we believe that longterm homeownership remains one of the best and most reliable 

ways that families can build a better economic future. We urge 

Congress to strengthen the mortgage system, not by creating impediments to sensible home loans, but by focussing on marketbased solutions that result in profitable mortgage-backed investments and sustainable homeownership. 

Thank you, and I look forward to your questions. 

[The prepared statement of Ms. Gordon can be found on page 162 

of the appendix.] 

Chairman GUTIERREZ. Thank you. 

Ms. Saunders, please, for 5 minutes. 

STATEMENT OF MARGOT SAUNDERS, COUNSEL, NATIONAL 

CONSUMER LAW CENTER 

Ms. SAUNDERS. Thank you, Chairman Gutierrez, and members of 

the subcommittee. Thank you for inviting me to testify today on behalf of the low-income clients of the National Consumer Law Center and the National Association of Consumer Advocates. 

We are the attorneys who are representing the homeowners in 

foreclosure proceedings and trying to help maintain homes. 

You asked first that we comment on H.R. 3915. This was an aggressive bill, for its time. This bill essentially maintained the current complex structure of regulation of mortgage origination, while 

tweaking—sometimes significantly—the law to enhance the obligations of the parties. Stronger consumer protections, however, were 

limited by the fear that too much regulation would limit access to 

credit. 

We propose to you today a new approach, with three key criteria. 

One, simplicity. The rules should be easy for everybody to understand. Multiple categories of creditors, borrowers, and types of 

33 

loans result in confusion, without establishing a clear structure designed to facilitate affordable and safe mortgage lending. 

Two, transparency. The rules governing the transaction should 

be clearly disclosed and easy to understand. 

Most importantly, appropriate incentives. The current system rewards originators for making bad loans, because originators are 

paid, regardless of whether the loan is unfair or unaffordable. 

This is how we would do this: 

One, realign the incentives. Pay the originators from the payment stream only. Insurance brokers are paid their commissions 

entirely from the stream of payments made by the consumer for 

the insurance product in the first few years. The insurance model 

should be the model for the mortgage industry. 

Require that originators recover their costs associated with originating the loan only from the monthly payment stream. The homeowner’s regular monthly payments are the sign of a sustainable 

mortgage. 

The origination process is the only source of profit for the mortgage broker, and this current system encourages loan churning. 

Making new loans is the only way originators make money. If instead, the originator received a percentage of each payment for the 

first several years of the loan, the originator would have a very 

strong incentive to make sure that homeowner would make the 

first several years of payments. 

Two, mandate a uniform mortgage offer. Originators should be 

required to offer every homeowner applicant a uniform mortgage, 

which is a 30-year, fully amortizing, fixed rate, no prepayment penalty mortgage. Alternatives could be offered as well, but they would 

always have to be compared to this 30-year uniform mortgage. 

The mortgage would thus be simple for consumers to understand, 

and the only variable would be the change in rate which was based 

on the consumer’s credit risk. 

Three, common-sense rules should be required. Homeowners 

must be underwritten for their ability to repay all payments that 

can be due on the loan. No loan should be made for more than the 

home is worth. Foreclosures should only be permitted when the investor makes more money from the foreclosure than an affordable 

loan modification. 

Public and private enforcement is essential. Government administrators enforcing the laws simply do not protect consumers. If you 

have private enforcement, it enhances compliance. It also allows 

the individual consumer who has been harmed to use those rules 

to protect themselves. 

Fifth, full responsibility. The rules should be simple. There 

should be no enforcement of a loan made in violation of these rules. 

And most importantly, preemption. Please do not preempt the 

State laws. We have seen in the last few years that it’s the State 

laws that have been used to protect consumers from foreclosure, repeatedly. One of the most serious problems with 3915 was that it 

did preempt a series of State laws as they were applied to holders, 

and I would point you to a report that we did that detailed how 

3915 actually would have cut back significantly on consumer protections. 

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

34 

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

228 of the appendix.] 

Chairman GUTIERREZ. Thank you. 

Ms. Jones, please, for 5 minutes. 

STATEMENT OF STEPHANIE JONES, EXECUTIVE DIRECTOR, 

NATIONAL URBAN LEAGUE POLICY INSTITUTE 

Ms. JONES. Thank you, Mr. Chairman, and Ranking Member 

Hensarling. I appreciate the opportunity to testify before you today 

on this critical issue of mortgage lending reform. 

My name is Stephanie Jones. I am an executive director of the 

National Urban League Policy Institute, which is the research and 

policy arm of the National Urban League based here in Washington. 

Through our front-line housing counseling services in Urban 

League programs throughout the country, the National Urban 

League received first-hand insight into the brewing mortgage housing crisis long before many in the country saw it coming. Our findings led the National Urban League president, Marc Morial, to release our Home Buyers’ Bill of Rights in March of 2007. I have attached a copy of the Home Buyers’ Bill of Rights to my testimony 

for inclusion in the hearing record. At that time, unfortunately, policymakers and government officials were reluctant to support 

greater regulation. 

But today, I will focus my testimony on three of the six rights 

in the Home Buyers’ Bill of Rights that address problems in the 

lending process and their impact on low- and moderate-income 

homeowners and mortgage applicants: One, the right to be free 

from predatory lending; two, the right to fairness in lending; and 

three, the right to fair treatment in case of default. 

The National Urban League has long called for the elimination 

of incentives for lenders to make predatory loans, a fair competitive 

market that responsibly provides credit to consumers, access to justice for families caught in abusive loans, and the preservation of essential Federal and State consumer safeguards. 

The National Urban League supports legislation that promotes 

these objectives and that works to better protect the consumers, 

such as the Mortgage Reform and Anti-Predatory Lending Act of 

2007, H.R. 3915, that was passed by the House in 2007. 

In fact, we in the nonprofit counseling industry strongly feel that 

we have a fiduciary responsibility to our clients to see that this bill 

is enacted into law. 

We support the measure strongly, but believe that it can and 

should be improved, and so we would like to offer some suggestions 

on how we believe that it can be improved. 

First, we believe that it should protect those States that have 

stronger anti-predatory lending laws. It should hold Wall Street accountable for buying abusive loans. And it should provide effective 

remedies for homeowners when brokers and lenders break the law. 

Bottom line is, we really do need to get some of these bad eggs 

out of the business, when it comes to lending and mortgage brokers, and we find that broker licensing doesn’t necessarily need to 

be nationwide, but it should be stricter. 

35 

Currently, as Sy Richardson, the National Urban League’s vice 

president for housing, says, in most States, if you can fog a mirror, 

you can get a broker’s license. 

But education, qualification, and testing should be tougher. Individual mortgage brokers and loan officers must be licensed and registered and required to act in the best interest of the consumer, 

under guidelines comparable to those that financial advisors are 

subject to. 

Penalties for bad behavior need to be strong enough to have a 

deterrent effect, and H.R. 3915 should increase enforcement capabilities even further. 

The bill should also have stronger compensation disclosure requirements. 

And we see that the current housing crisis that is threatening 

our entire economy is proof positive that these measures are absolutely necessary. 

In addition, policymakers should pay particular attention to communities that have traditionally been underserved or at a disadvantage when obtaining credit, including communities of color 

and the elderly, to ensure that they have full access to the most 

appropriate loan products that can help them build and maintain 

wealth. 

Those who are shown to have taken advantage of vulnerable populations, by offering inappropriate products or charging unjustified 

fees, should be held fully accountable for their actions. 

The National Urban League believes there must be strict limits 

to prepayment penalties. 

We also assert that steering borrowers qualified for prime loans 

into subprime loans is an unfair and deceptive practice. Numerous 

studies have documented that middle- and upper-income minorities 

are significantly more likely than middle- and upper-income whites 

to receive subprime loans, and that a significant number of minorities who were steered into subprime loans actually qualified for 

conventional mortgages. 

Lenders must be held liable for deceptive and fraudulent practices committed by brokers with whom they do business. 

We’re generally pleased that many lenders, as well as the big 

mortgage gatekeepers, such as Freddie Mac, FHA, and the VA, 

have amended their approach to managing delinquencies, having 

fully realized that it’s usually more cost-effective to help a borrower 

to stay in his or her home than to pursue foreclosure. 

But in the case of default, the National Urban League believes 

that we must afford some protection to home buyers, including the 

opportunity to restructure the loan if the loan is determined to be 

onerous, and an opportunity, or access to the holder of the loan for 

development of reasonable workout plans, where the objective is 

preservation. 

Chairman GUTIERREZ. The time of the gentlelady has expired. 

Ms. JONES. Okay. Thank you. 

Chairman GUTIERREZ. You are welcome. 

Ms. Aponte, for 5 minutes. 

36 

STATEMENT OF GRACIELA APONTE, LEGISLATIVE ANALYST, 

WEALTH-BUILDING POLICY PROJECT, NATIONAL COUNCIL 

OF LA RAZA (NCLR) 

Ms. APONTE. Thank you. Good afternoon. 

My name is Graciela Aponte. I handle NCLR’s legislative and advocacy work on issues such as affordable housing and foreclosure 

prevention. 

Prior to joining NCLR, I worked with low-income families, constituents, community-based organizations, for congressional representatives in Maryland and in New York City, and for 4 years, 

I worked as a bilingual housing counselor. 

I would like to thank Chairman Gutierrez and Ranking Member 

Hensarling for inviting NCLR to testify on this important issue. 

Forecasters are predicting that 400,000 Latino families will be 

losing their homes in 2009, at the height of the crisis for the Latino 

families during 2009 and 2010 when more loans are scheduled to 

be reset. 

NCLR provides funding to more than 50 housing counseling 

agencies across the country. Despite the counselors’ skills and the 

clients’ best efforts, many are still losing their homes and financial 

security. 

We are pleased Congress is beginning to turn their attention to 

mortgage reform. However, this effort will have limited success unless Congress and the Administration follow through on their plans 

to reduce foreclosures. 

In my brief time today, I will share with you three principles on 

which to organize strategy, a strategy to reform and revitalize our 

mortgage markets: Number one, reforming our loan servicing system; number two, reforming the mortgage market; and number 

three, the role of nonprofits. 

Let’s start with changes needed to our loan servicing system. 

Last week, we gathered the heads of our housing counseling 

agencies and they shared stories about loan modifications that are 

being denied, even when a family can afford to make payments, 

loan modifications that are being approved days after the home has 

gone to foreclosure auction, borrowers that are given unaffordable 

loan modifications that leave them even worse off. 

Housing counseling agencies are overburdened and underfunded, 

and foreclosure scam artists have stepped up their marketing efforts. 

President Obama’s foreclosure plan takes several steps to address these issues. However, parts of the plan must be strengthened to keep borrowers from falling through the cracks. 

We also need legislation to raise the level of service provided to 

all borrowers. 

Second, I will turn to reforming the mortgage market. 

By now, it’s clear that borrower protections are closely linked to 

safety and soundness. Latino families were routinely targeted by 

predatory lenders. They were steered toward expensive and risky 

products, even when they had good credit. 

Take the case of the Rodriguez family, who went to our housing 

counseling agency in Stockton, California. They worked with a 

mortgage broker to help them purchase their first home. The 

broker told them that they qualified for a fixed-rate loan. 

37 

Four years later, their mortgage bills increased, and they realized that their broker had sold them an option ARM. Worse, even 

though the Rodriguez family could document all their income, the 

broker used Wite-Out to write in a higher income. They had paid 

a premium to be in a stated income loan, even though they had all 

their documentation. 

We have seen this story repeated across the country. Brokers 

were paid more for risky loans, so it’s no surprise that they steered 

families toward these products. 

A reformed market must connect borrowers to products they can 

afford. One step would be to increase accountability measures 

throughout the process. 

And finally, I want to discuss the role of nonprofits. 

Credit unions, CDFIs, and community lenders have been providing safe and affordable mortgages to underserved communities 

for years. Housing counselors prepare families for homeownership 

and match them to good loans. 

Another one of our counseling clients is a great example. Maria 

Martinez is a single mother from West Humboldt Park, Chicago. 

Maria came to the Spanish Coalition for Housing 4 years ago. She 

was displaced and facing homelessness. 

The counselor was able to find her an apartment. She also put 

her on a plan to build her credit and savings. After years of working together, a door opened for Maria when a community land trust 

program offered an affordable homeownership opportunity. She 

went to closing 2 weeks ago. 

The nonprofit lenders and organizations understand how to lend 

to underserved communities. Their work should serve as a model 

of what is possible when considering reform. 

Ultimately, any effective response to our current crisis must include reforming the servicing system so that homeowners who are 

struggling to keep up with their mortgage payments can secure affordable and sustainable mortgages, reforming the mortgage system to protect future home buyers and keeping safe and affordable 

lending products available to underserved and vulnerable communities. 

In my written testimony, I provide specific recommendations, 

with special attention to reforming the loan servicing system, restoring balance to the mortgage market, and promoting positive 

lending models. 

I will be happy to answer any questions you may have. Thank 

you. 

[The prepared statement of Ms. Aponte can be found on page 117 

of the appendix.] 

Chairman GUTIERREZ. Thank you, Ms. Aponte. 

Mr. Lampe, for 5 minutes. 

STATEMENT OF DONALD C. LAMPE, PARTNER, WOMBLE 

CARLYLE SANDRIDGE & RICE, PLLC 

Mr. LAMPE. Mr. Chairman, Ranking Member Hensarling, and 

members of the subcommittee, thank you for the opportunity to appear today. 

My name is Don Lampe, and I am a partner in the Charlotte, 

North Carolina, office of Womble Carlyle Sandridge & Rice. I have 

38 

been practicing consumer credit law for 25 years, and I have been 

involved on behalf of trade organizations, mortgage lenders, and 

others in the enactment of many significant State and local mortgage lending laws and regulations, over the past 10 years. 

Because the legislation that the committee is reconsidering 

today, H.R. 3915, is based on residential mortgage lending laws 

from various States, I hope to be able to respond to the committee’s 

questions regarding our experience with similar State laws. 

Obviously, any assertion today that Congress should not act to 

reform the regulation of consumer mortgage lending is untenable, 

but then, what should Congress do to accomplish two things: protect consumers now; and make sure that we never have to endure 

this kind of a crisis again? 

In the brief time that I have, I want to make three points. These 

points are built around a central theme. 

First and foremost, it is critically important, as other panelists 

have said, that any legislation provide strong and effective consumer protection. That is the beginning point. We also must be 

mindful of preserving access for consumers, future consumers, for 

fairly priced, non-discriminatory, lawful, and appropriate mortgage 

credit. 

The three points are as follows: 

First, the Federal Reserve Board. There have been superseding 

events since the passage of 3915 by the House. One of the significant superseding events, which you heard about earlier, was the 

Fed exercised the powers that had been granted in 1994, and 

Chairman Bernanke was praised for that, to enact comprehensive 

unfair and deceptive trade practice laws. 

It’s important for Congress to give due regard to these 

groundbreaking rules, to consider carefully whether these rules already address fundamental consumer protections, and likewise, 

consider whether the rules should serve as a basis and/or complementary to additional consumer protection legislation. 

Second, reform of consumer mortgage lending laws should be real 

reform, and not just the adding of additional layers of conduct requirements, disclosures, and liability to existing laws. 

There is a real opportunity now, more than ever, for Congress to 

overhaul what many describe as a broken system of mortgage regulation, of loan origination. 

Third, and very importantly, it is widely believed that too much 

credit created, if not outright caused, the current housing crisis. It’s 

all too easy for all of us to believe right now that all you have to 

do is ban certain products and certain features, and make less 

credit available, and we won’t have these problems in the future. 

But I urge the subcommittee to give serious, thoughtful, and 

heartfelt consideration to the needs of current homeowners who 

wish to refinance, often out of unfair and potentially predatory 

loans, and also to new homeowners looking for loans. 

Let’s not forget that fair lending and anti-discrimination is based 

on credit being available to all Americans on fair terms. 

In the moment that I have left, the most resonant point I could 

make has already been touched on by this panel. The disclosures 

now required by Federal law are virtually incomprehensible, and 

this is the case across-the-board. Subprime, FHA, confirming, 

39 

jumbo—what the disclosures have brought to mortgage lending is 

more information, but much less understanding. 

It’s very difficult, in my mind, to justify more disclosures and additional liabilities related to disclosure violations. At this time, 

Congress has an enormously unique opportunity to reconsider the 

overly complex system, where you have disclosures that are inconsistent between Federal agencies, even. 

If consumers understand a transaction that is put before them, 

are capable of determining that the loan is fair and is affordable, 

and that they can afford to pay it back, if that is understood from 

the beginning, that outcome is the best way for us not to repeat 

the mistakes of the past. 

In short, as has been said many times, sometimes seriously, 

sometimes tongue-in-cheek, that a crisis is a terrible thing to 

waste. 

Thank you. 

[The prepared statement of Mr. Lampe can be found on page 186 

of the appendix.] 

Chairman GUTIERREZ. Thank you very much, Mr. Lampe. 

HOEPA was passed in 1994. This is my 9th term, so that was 

my first term in Congress. And let me say, there are 38 Members 

I have here—no, 39 Members on my side of the aisle—Frank, Kanjorski, Waters, Maloney, Gutierrez, Velazquez, and Watt—those 

are the only survivors of this panel, of this committee, when we 

passed—all of us voted to pass that law. Now, we have 32 new 

Members. 

In other words, there is no institutional memory, because the 

Federal Reserve, you spoke very eloquently, Mr. Lampe, about how 

great the regulations were that the Federal Reserve—it took them 

14 years. 

Now, if they are so great today, and everybody likes them so 

much, can you imagine what would have happened if we actually 

had that regulation on the books, as they should have done? 

But here is what the Chairman of the Fed consistently said to 

us: ‘‘It’s ideological.’’ Sometimes he was even berated by members 

of this committee on this side of the aisle, asking him to please promulgate the rules, the same rules that today we thank Mr. 

Bernanke for. A little late, though. 

So it wasn’t as though people didn’t see things that could come 

about in a bad fashion for the consumer and for the mortgage industry. The fact is that it’s very hard, and there are some very 

powerful interests out there that stop us from promulgating the 

rules, until it is actually too late. 

I don’t know how many members on the minority side were here, 

but not many. I think that’s a very shameful action of the way government works. 

So I know that people always complain that government does too 

much, that we should have smaller, less government. But in this 

case, it seems that everybody says, where was the government in 

this certain area, in not promulgating those rules? 

Having said that, we have called this hearing so that we could 

hear from people about how it is we take on our anti-predatory 

lending bill, which we’re going to mark-up from the last Congress. 

40 

We’re going to use it as our base bill to see how we can improve 

it. 

We’re not simply going to—I hope the ultimate product isn’t simply the Z regulations. I don’t think they go far enough. I would like 

to see other kinds of rules and regulations put into place. 

And I won’t take my complete 5 minutes, but I do want to thank 

all of the panelists, especially those engaged in helping consumers 

go through the mire. It’s overwhelming in congressional district offices across this country, people losing their homes and filing for 

bankruptcy, and the dire situations that they find themselves in. 

And I know that there are those who want to blame the victims, 

that is, those who took out the mortgages, but I think there is a 

lot greater blame. 

And there are those who want to blame government, and specifically the Community Reinvestment Act. And I’m almost—maybe 

make an amendment that says to anybody who provides a mortgage that not only does the recipient of the mortgage have to sign, 

but those issuing the mortgage: ‘‘The government didn’t make me 

do it. I hereby sign that the government didn’t make me do it,’’ so 

that from here forward, this issue would never come up again. And 

the consumer would sign somewhere on these documents, ‘‘The government didn’t ask me to take this loan, and the mortgager never 

told me the government made me do it.’’ 

Because I, in my 17 years in Congress and 8 years on the Chicago City Council, have never called a financial institution and 

asked them to make a mortgage for any one specific individual. We 

have implored, we have cajoled, begged, used every possible manner, to ask them to please make mortgages, and they have resisted. 

So given all of that resistance, I just find it a little mind-boggling 

that those who did get a mortgage, all of a sudden, it was the government that made them do it. 

I’m going to ask the next panel, which is the industry, I’m going 

to ask them if the government ever made them issue a mortgage. 

I want to know about that mortgage and I want to know who called 

them, because I want an investigation into that official who made 

them issue that mortgage. 

I thank all of the panelists and I yield 5 minutes to the ranking 

member, Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. Thank you for 

yielding me 5 minutes. 

In 1997, Wall Street firms, the GSEs, and the CRA converged in 

a landmark event, the first securitization of CRA loans, a $384 million offering guaranteed by Freddie Mac, which de facto encouraged 

lenders and underwriters to relax their traditional underwriting 

practices, as did later the GSEs. 

We have heard from the Federal Reserve. In 1993, they issued 

guidelines entitled, ‘‘Closing the Gap, a Guide to Equal Opportunity Lending,’’ that says, in part, ‘‘Lack of credit history should 

not be seen as a negative factor.’’ 

Furthermore, in May of 1998, Bear Stearns—and we know what 

happened to Bear Stearns—published an article on guidance of 

why and how lenders should package CRA loans into mortgagebacked securities. 

41 

The document advised lenders that, ‘‘Traditional rating agencies 

view loan to value ratios as the single most determinant of default. 

It is more important at the time of origination and less so after the 

third year.’’ ‘‘Explaining the credit quality of a portfolio to a rating 

agency or GSE, it is essential to go beyond credit scores.’’ 

My point is again, regardless of how noble the intent may have 

been in CRA—it has a very proud legacy, I have no doubt—the 

question is, has it served us well today? 

Maybe there are different options. One is to try to bring down 

the lending standards of the lender. Another option is to attempt 

to improve the economic opportunities of the borrower. 

Now, clearly, CRA, as far as volume of loans, was low. As far as 

putting the imprimatur, or, if you will, the Good Housekeeping 

Seal of Approval of Uncle Sam, on bringing down traditional lending standards, I believe that its impact was critical, and did play 

a role in where we find ourselves today, and I’m sure that the 

chairman and I will have ample opportunity to continue this discussion in further hearings. 

Ms. Gordon, I have a question for you. In your testimony, on 

page 5, you state, ‘‘bright lines, such as bans on prepayment penalties and yield spread premiums and a requirement of income 

verification and escrow will redound to everyone’s benefit.’’ 

Let me ask you specifically about prepayment penalties, prepayment fees. And one, it underscores a broader question. 

I have seen a number of studies that have convinced me—maybe 

you have seen similar studies, maybe you are unconvinced—that 

the right to prepay, that those who want that feature in their mortgage end up paying a higher rate of interest than they otherwise 

would. 

So one, have you seen studies, and if so, do you believe that to 

be true? 

Ms. GORDON. There was a time—there are a number of features 

in the, you know, historic prime market, that you could put into 

a loan to buy down your rate. What we have seen happen, though, 

as the market moved over the past decade or so, was that prepayment penalties became almost exclusively a tool of the subprime 

market. Only about 2 percent of prime market loans have prepayment penalties. 

And what happened in the subprime market was, they were misused. You had subprime borrowers not understanding the terms of 

the mortgages, and they were buying— 

Mr. HENSARLING. I’m sorry, I think my time is running out, but 

let me just ask you this one question. If a borrower understood the 

terms of the mortgage product, and if he was convinced that he 

could receive a lower interest rate by agreeing to prepayment penalties, would you have Federal law preempt his or her decision? 

Ms. GORDON. Now I would, because— 

Mr. HENSARLING. Okay. Well, that’s— 

Ms. GORDON. —we know that— 

Mr. HENSARLING. —that’s all— 

Ms. GORDON. —there are anti-competitive practices— 

Mr. HENSARLING. I’m about to run out of time. 

Mr. Lampe, real quick, can you state any similarities you see in 

H.R. 3915 to the provisions in North Carolina and Georgia? 

42 

Mr. LAMPE. The way I have said it concisely is, the similarities 

are the similarities between a zebra and a horse. They look very 

much alike, but they are different animals. And I can provide more 

information on that. 

But the original Miller-Watt proposal, of course, which has been 

on the table for quite some time, is based on North Carolina, but 

not literally North Carolina, and it differs in important features, 

such as the size of loans covered, remedies, and the types of loans 

that are covered. 

So the similarities, again, the analogy I draw is the similarity between a zebra and a horse. They are different— 

Mr. HENSARLING. I see I am out of time, so perhaps we can get 

those answers in writing at a later time. 

Thank you, Mr. Chairman. 

Chairman GUTIERREZ. Thank you, Mr. Hensarling. 

The gentleman from Charlotte, North Carolina, Mr. Watt, for 5 

minutes. 

Mr. WATT. I will actually do Mr. Hensarling a favor, because one 

of the questions I had on my list of questions was, how did the 

North Carolina law fail? 

I mean, we have massive foreclosures and the need for modifications taking place in North Carolina, too, so maybe that’s the answer he was trying to get to. I hope that was the answer he was 

trying to get to. 

Mr. LAMPE. Yes, sir. I think I can answer that question. 

Number one is, North Carolina does not have one of the nation’s 

highest foreclosure rates, and there’s not—none of the 34 top counties are in North Carolina. 

The genius of regulation in North Carolina was the Mortgage 

Lending Act, which required licensing of all mortgage brokers, all 

loan officers, and anyone who had contact with a borrower in connecting with making a loan. 

You cannot consider the North Carolina experience without the 

whole portfolio of consumer protections, and I think our banking 

commissioner and Martin Eakes of the Center for Responsible 

Lending have said that the Mortgage Lending Act did more to 

clean up the market in North Carolina than the substantive regulations of credit terms. 

Mr. WATT. So really, what you are saying is North Carolina, if 

we would have had a similar regime at the Federal level as we had 

in North Carolina, not only a predatory lending law but the whole 

regime, we would be a lot better off today than we were. Is that 

what I hear you saying, bottom line? 

Mr. LAMPE. I can’t say a lot better off, but better off, and this 

Congress did pass a step with the National Mortgage Registry and 

Licensing System that very much emulates North Carolina. 

Mr. WATT. All right. Let me get to a couple of other questions. 

I hear both Ms. Gordon, Ms. Saunders, and Mr. Lampe actually, 

to some extent, saying that we need a massive overhaul, and suggesting possibly that the predatory lending bill that we passed before out of this committee may not even be an appropriate starting 

point. 

I’m a little concerned about that, because I know how difficult it 

was to get to that point, and I’m not suggesting that the final prodVerDate Nov 24 2008 10:39 Aug 06, 2009 Jkt 048864 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K:\DOCS\48864.TXT TERRIE
43 

uct was where we ought to end up going forward, but to scuttle the 

whole process and start over again, I think, could possibly be counterproductive, if that’s what you’re saying. 

So clarify for me whether that’s what you’re saying, or what are 

you saying? 

Yes, Ms. Saunders, go first. 

Ms. SAUNDERS. It is what we’re saying, for this reason, that it 

was a great bill, for that time, but North Carolina, if the North 

Carolina bill had been passed nationally, we still would have had 

payment option ARM loans, unfortunately. We still would have had 

a lot of the subprime loans. 

What we can’t do, what we believe is not possible to do at any 

time, is to capture a certain type of loan and apply regulation to 

that type of loan. That’s what HOEPA did in 1994, over my—I was 

there in 1994. I vigorously objected to that. And then we tried to— 

Mr. WATT. So basically, what you’re saying is we need a regime 

that covers all loans, regardless of the category— 

Ms. SAUNDERS. That’s what we all— 

Mr. WATT. —and a set of rules for the road that govern all loans, 

whether they are subprime, prime, whatever? 

Ms. SAUNDERS. Yes, sir. And one other point. 

Mr. WATT. Okay, go ahead. 

Ms. SAUNDERS. Rather than—we, of course, need specific rules, 

‘‘You shall do this, you shall not do this.’’ But we should take a moment to think about the incentives. What about the marketplace is 

actually making originators make the bad loans? And let’s try to 

address that. 

Mr. WATT. We’re going to run out of time, and I do want to hear 

from Ms. Gordon, and I want to at least put one more question out 

there, if I can. 

Ms. GORDON. I’ll just make two additional points. 

One is, with respect to 3915, in addition to needing to extend 

protections to all loans, the actual structure of 3915 was very complex, it was—you know, there was a safe harbor and a qualified 

safe harbor, and a rebuttable presumption, and an irrebuttable presumption. And it was so complex that literally, if you asked everybody in this room how they understood it, I think you would get 

different answers. 

Structure-wise, we might—not talking about content—structurewise, you might look at the bill that was introduced in the Senate 

by Chairman Dodd, which was—again, it may not be the same substantive place we want to get to, but it was clearer in its structure. 

You know, the other substantive thing I’ll say about 3915, and 

this is true of the recently promulgated HOEPA rules, as well, that 

the chairman has noted were 14 years late in coming, is both of 

them ignore the market that contains the payment option ARMs, 

and in fact, 3915 substantively last year would have determined, 

as an irrebuttable presumption, that those loans were affordable. 

So that’s why we need an approach that’s more incentive-based, 

rather than picking specific things and saying, ‘‘This is good today 

and this is bad today.’’ 

Mr. WATT. Can I just ask, Mr. Lampe, not today, but at some 

point, you mentioned that we need to do something different with 

disclosures, and I agree with you. I just don’t know what we should 

44 

be doing. So if you can submit some more information to us on 

what you’re proposing subsequent to today’s hearing. 

I yield back. 

Chairman GUTIERREZ. Thank you very much. That would be useful to all of us. 

Without objection, I would like to enter into the record a statement from the Attorney General of New York, Andrew Cuomo, 

which describes the cooperation between the State of New York 

and Fannie and Freddie to preserve appraiser independence during 

the home appraisal process. 

Without objection, it is so ordered. 

I would also like to enter into the record, without objection, a letter from the Chairman of the Federal Reserve to Senator Bob 

Menendez, stating that the Federal Reserve found no evidence that 

the Community Reinvestment Act caused high levels of default in 

the subprime mortgage market. 

Without objection, it is so ordered. 

And the gentleman, Mr. Cleaver, is recognized for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

I’m curious. The chairman—actually, I was ready to second his 

proposed legislation, but—because I do think that he made a point 

that many of us have been struggling with, which is that somehow 

we have done contortions to come up with the blame being laid out 

over the people who have been wounded. 

I guess what I would like to—Ms. Jones, in your experience with 

the Urban League, are you finding, have you found that there are 

people coming to you to complain that somehow they were pushed 

into signing mortgages, that they actually were misrepresented as 

they sought to make the most significant purchase in their financial lives? 

Ms. JONES. Thank you for that question, Mr. Cleaver. That is 

something we definitely have seen on the ground across the country. 

One of the things we have found is that a significant number of 

borrowers who actually qualify for conventional loans are being 

steered into and have been steered into subprime loans. 

This is something that often isn’t talked about, as we hear the 

blame being passed around, and blame put on, particularly, low-income and minority borrowers, or blame being placed on the Community Reinvestment Act, which was designed to expand homeownership opportunities to those borrowers. 

What we found in looking at this is that a substantial majority 

of the subprime loans were made by non-CRA compliant companies 

and lenders, so the—most of this activity was done outside of the 

regulatory scheme, and so it can’t be blamed on CRA. We took a 

very close look at it. In fact, we report on it in our upcoming State 

of Black America Report, which will be out in a couple of weeks. 

And we have also seen that, even though some of the standards 

were relaxed in order to make it easier for creditworthy borrowers 

to participate in the conventional market, we’re seeing a lot of 

blame being passed over onto the borrowers and the CRA. 

But to go back to your question, we are seeing a significant number of people who are just doing the best they can, who have saved 

their money, who qualify for conventional loans, being pushed into 

45 

loans that they can’t afford or loans that Marc Morial refers to 

‘‘Jack-in-the-Box’’ loans, that start off okay, and they’re told, ‘‘No 

problem, you can pay this,’’ and then, later on, the interest rate 

jumps up. 

Another thing we’re seeing also is that people, a large number 

of people qualify for loans, for conventional loans they can afford, 

they can afford those payments, but other things intervene, such 

as loss of a job or health care costs that result in their being unable 

to pay. 

So there are a number of factors that feed into this, but—and 

we’re very concerned about the blame, the blame game, which is 

something that, again, Marc Morial refers to the ‘‘weapons of mass 

deception.’’ 

And we have called on Congress, we have called on public officials and commentators to help defuse that, because it is problematic. 

Mr. CLEAVER. Janet Murguia brought before this committee several months back actual cases of Ms. Aponte where this had happened, but nothing will stop, it seems, people from saying—I want 

this to go on the record. There was a story written on the front 

page of my hometown newspaper last Friday, I believe, with me 

dealing with this issue, and I’m not going to read the whole story, 

I don’t have the time. 

But it’s from a Sidney Willens, an attorney in Kansas City, and 

he tells a story of a Sherrita Richardson, a 37-year-old African 

American mother of 4, who has been a bus driver for 9 years, and 

she lives, of course, in my district, and she is making just an inch 

above minimum wage, and in this letter, he outlines the fact that 

she went into a house that was appraised at $93,000, requiring a 

10 percent downpayment. 

I will quote here, ‘‘A Kansas broker’’—I’m from Missouri—‘‘A 

Kansas mortgage broker purchased a $9,300 cashier’s check payable to the seller, made a copy to show that 10 percent downpayment was made, then redeemed the $9,300 check 24 hours later.’’ 

And he goes on to talk about what the woman’s condition is. I 

would like this to go into the record, Mr. Chairman. It’s a letter 

that— 

Chairman GUTIERREZ. Without objection, it is so ordered. 

Mr. CLEAVER. —that points very clearly to the point you made 

earlier, and the comments of Ms. Jones. Thank you. 

Chairman GUTIERREZ. Without objection, the letter will be made 

a part of the record. 

We’re going to just want to note a change. In the past, the order 

was always the regulator, the consumer groups, and then the industry, so today we changed it a little bit. We had the regulator, 

the consumer groups, and then the industry. 

But I just want to see how this best works, so the next time 

we’re not necessarily going to have the regulators first. Maybe we’ll 

have the community groups come first, and see how we become 

much more knowledgeable, because many times, by the time you 

guys get here, the room is empty. We want to make sure that people had a dialogue and listened to one another. 

I thank you so much for your testimony this afternoon. 

We will now hear from the third panel: 

46 

Mr. Michael Middleton is the president and CEO of Community 

Bank of Tri-County and is testifying on behalf of the American 

Bankers Association. Mr. David G. Kittle is the chairman of the 

Mortgage Bankers Association. Mr. Marc S. Savitt is the president 

of the National Association of Mortgage Brokers. Mr. Charles McMillan is the president of the National Association of Realtors. Mr. 

Jim Amorin is the president of the Appraisal Institute. Mr. Joe R. 

Robson is the chairman of the board of the National Association of 

Home Builders. And last but not least, Mr. Laurence Platt is a 

partner at K&L Gates, who is testifying on behalf of the Securities 

Industry and the Financial Markets Association. 

Welcome to you all, gentlemen, and Mr. Middleton, please proceed for 5 minutes. 

STATEMENT OF MICHAEL MIDDLETON, PRESIDENT AND CEO, 

COMMUNITY BANK OF TRI-COUNTY, ON BEHALF OF THE 

AMERICAN BANKERS ASSOCIATION 

Mr. MIDDLETON. Thank you, Mr. Chairman, Ranking Member 

Hensarling, and members of the subcommittee. 

I’m honored to be here today on behalf of the American Bankers 

Association to testify on possible initiatives to improve mortgage 

lending standards, particularly related to subprime mortgages. 

I wish to make it clear from the outset that the Community 

Bank of Tri-County is one of the many banks that has never varied 

from traditional lending standards. We offer both prime and affordable-based, affordable housing loan products. 

Our residential owned portfolio is strong, with very low delinquencies, especially among our affordable housing portfolio. We 

have a high satisfactory rating for lending for CRA purposes. We 

have a zero default rate on our affordable housing portfolio. 

Like other community banks, we work closely with the Federal 

Home Loan banks to acquire grants and affordable housing funding. 

Many forces combined to create the problems we face today. The 

greatest was the migration of household sector assets from FDICinsured institutions to Wall Street. This flow of funds to the uninsured sector was driven in part by pressure to seek ever-increasing 

returns. 

The scope of the migration was extraordinary. Money market 

mutual funds accounts grew by some $16 trillion from 1990 to 

2008, while FDIC-insured deposits only grew by $2 trillion. 

Much of that money was then directed to the housing sector, 

where securitized credit helped to fuel a boom in home prices. The 

vehicle of choice for this allocation of funds was largely State-licensed, non-bank mortgage originators. 

The frenzy that ensued—in the frenzy, sound underwriting practices were sacrificed, for the most part, by non-bank originators. 

Because the standards were relaxed, there was no regulator to examine them. The result was catastrophic. 

To address the problems in the mortgage markets, the Federal 

Reserve has issued amendments to Regulation Z. The ABA supports many of these changes, including regulations to strengthen 

the integrity of appraisals and prohibit deceptive advertising, in 

addition to requirements that mortgage lenders properly consider 

47 

a borrower’s ability to repay the mortgage, whether it is a fixed or 

adjustable-rate loan. 

In fact, we believe some of the elements in these rules codify the 

underwriting practices of many of our members. 

The use of these practices throughout the mortgage industry will 

help to ensure that future lending is done in a prudent and safe 

manner. However, the new standards are so stringent that some 

loans that were previously classified as prime will now be part of 

a new category called ‘‘higher-priced mortgage loans.’’ 

This definition in pricing may force State housing authorities to 

change pricing to meet the new standards, which could curtail their 

operations, and further limit the supply of credit. 

In the wake of these changes, conservative local banks like Community Bank of Tri-County are reevaluating their lending policies 

to assure that we are in compliance, and to consider whether or not 

to exit the residential mortgage product line. 

Because new legislation or regulation could have the unintended 

effect of decreasing credit availability, the ABA has formulated 

principles to keep in mind when considering further legislative action on mortgages: 

All new standards should be national standards, preempting the 

myriad of State laws and regulations. 

Terms should be specific and well-defined, limiting the potential 

for unnecessary litigation. 

Any new mortgage standards should give enough guidance to 

regulators to ensure that the standard is both meaningful, as well 

as measurable. 

Prime loans should be given a safe harbor from additional requirements, recognizing that the new amendments to Regulation Z 

restrict the definition of prime to a well-defined loan unlikely to be 

problematic for qualified borrowers. 

Basic underwriting standards should be an important element of 

the loan origination process, and at the time in the process where 

the lender would reasonably expect to exercise judgment and adhere to the standards. 

While the SAFE Act has embraced the essential components of 

H.R. 3915, we remain concerned that the Act’s compliance hurdle 

for non-bank originators is minimal and easily met. 

Thank you, Mr. Chairman. I hope these suggestions will be helpful. 

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

203 of the appendix.] 

Chairman GUTIERREZ. Thank you, Mr. Middleton. 

Mr. Kittle, please, you are recognized for 5 minutes. 

STATEMENT OF DAVID G. KITTLE, CHAIRMAN, MORTGAGE 

BANKERS ASSOCIATION (MBA) 

Mr. KITTLE. Thank you, Mr. Chairman. 

I appreciate the opportunity to testify before you today on proposals to reform mortgage lending. 

After all that has transpired since the House passed H.R. 3915, 

we believe a fundamental reform of mortgage regulation is needed. 

That reform should take into account not only the many problems 

48 

exposed since the end of 2007, but also the many legal and regulatory changes that have occurred since then. 

In July of 2008, the Federal Reserve Board undertook a review 

of the mortgage process. The Board then finalized comprehensive 

rules addressing the central issues in H.R. 3915. 

These rules, which go into effect on October 1st, include greater 

protections for subprime borrowers with new requirements for underwriting, escrows, and prepayment penalties. The rules also address appraiser coercion and abuses in mortgage servicing and advertising. 

MBA believes that the Board’s rules, coupled with other important requirements, should serve as the basis for a single consumer 

protection standard that applies to everyone, regardless of where 

they live. 

As you know, many domestic regulatory agencies, as well as the 

G–20 nations, have been working on regulatory reform proposals. 

MBA has been studying and learning from these proposals, and we 

believe that a comprehensive national package would be most effective. 

At the same time, we have been developing our own approach to 

mortgage reform. While the mortgage industry is not the sole cause 

of today’s difficulties, we believe that our industry must be central 

to solutions that restore faith in the market and protect future borrowers. 

We know that these proposals will constrain some in our industry, but they will also help members and their customers in the 

long run. 

MBA is working to complete our comprehensive reform proposal, 

and we plan to announce it shortly. In the meantime, we want to 

share the principles embodied in that proposal. 

Reform proposals directed to the mortgage lending industry 

should be considered in a comprehensive, not piecemeal, manner. 

While consumer protection, systemic risk, and safety and soundness all deserve attention, MBA believes that assuring sustainable 

homeownership demands that we pay special attention to mortgage 

lending. 

Reform legislation should provide a rigorous new regulatory 

standard to protect consumers, regardless of where they live. Just 

as emergency efforts to return credit to the market have been national in scope, long-term solutions to mortgage lending challenges 

must also be national, with an important role for the States. 

A new standard should build on the Fed’s HOEPA rules, H.R. 

3915, as well as MBA’s initiatives. 

A single set of consumer protection rules should be dynamic, and 

able to quickly respond to new concerns. Federal and State officials 

should work together to revise the national standard to address 

new abuses and concerns. 

Standards, including assignee liability restrictions, must be 

clearly defined to facilitate the flow of affordable capital into the 

mortgage market. 

MBA favors effective regulation and enforcement, and believes 

that regulated entities should pay reasonable costs to assure sufficient funding. 

49 

All players in the mortgage industry should be subject to consistent Federal regulation, including rigorous licensing, education, 

net worth, bonding requirements, as well as regular review and examination. 

Regulatory reform must improve transparency for borrowers, including harmonizing the RESPA and TILA disclosures. 

And finally, regulatory reform should assure better resources for 

counseling, financial literacy, and fighting mortgage fraud. Should 

adequate resources become available, MBA will even support mandatory counseling for some mortgage products. 

We look forward to providing the details of our proposals to you 

shortly, and working with you to achieve efficient and effective regulatory reform. 

Thank you. 

[The prepared statement of Mr. Kittle can be found on page 183 

of the appendix.] 

Chairman GUTIERREZ. Thank you very much. 

Mr. Savitt, please. 

STATEMENT OF MARC S. SAVITT, PRESIDENT, NATIONAL 

ASSOCIATION OF MORTGAGE BROKERS (NAMB) 

Mr. SAVITT. Good afternoon, Chairman Gutierrez, Ranking Member Hensarling, and members of the committee. I am Marc Savitt, 

president of the National Association of Mortgage Brokers. 

In addition to serving as NAMB president, I am also a licensed 

mortgage broker in two States, and like most of my fellow NAMB 

members, I am also a small business owner. 

Thank you for the opportunity to testify today on comprehensive 

review of the American mortgage system. 

NAMB applauds this committee’s response to the current problems in our mortgage market. NAMB shares resolute commitment 

to protecting consumers throughout the mortgage process. 

I must first address the false allegations targeted at mortgage 

brokers for the past several years. 

Mortgage brokers do not create or develop loan products. Brokers 

do not arrange or control the automated underwriting system used 

to qualify borrowers. Brokers to not underwrite loans, brokers do 

not approve the borrowers, brokers do not fund loans. 

NAMB commends this committee for its work on H.R. 3915 in 

the 110th Congress, in particular, on the all originator approach it 

incorporated. 

Now, turning to some of the significant legislative and regulatory 

changes that were enacted in 2008. 

There are many provisions contained in H.R. 3915 that NAMB 

supported, as they provided consumers with needed protections. 

NAMB is very pleased that a major section of 3915 became law 

last year as part of the Housing and Economic Recovery Act requiring loan originator standards for licensing and registration. 

Under the SAFE Act, all originators will submit to a background 

check and be placed in a national registry. 

In addition, the Act created a floor for pre-licensing and continuing education requirements for all State-chartered mortgage 

originators. 

50 

This all originator approach is one that NAMB has advocated 

since 2001, and we applaud Chairman Frank and Ranking Member 

Bachus for their leadership on this issue. 

There have been some implementation issues with regard to the 

Act. Therefore, we recommend that HUD issue regulations needed 

for implementing the Act. With July 31st fast approaching, we believe each State should have the right to exercise independent 

judgment in interpreting silent or ambiguous provisions of the 

SAFE Act. 

Turning now to RESPA and HOEPA rules. 

A significant component of the RESPA proposal addresses broker 

compensation, YSP. Since 1992, brokers have been required to disclose YSP, or yield spread premium, on the good faith estimate in 

the HUD-1 settlement statement. The proposal, however, reclassifies this compensation as a credit to the borrower. 

Many studies—two, incidentally, from the FTC—have shown 

HUD’s method of disclosure is very confusing to consumers, causing them to choose higher-cost loans and put brokers at a competitive disadvantage by imposing unequal disclosure obligations 

among originators who receive comparable equal compensation. 

YSP or its equivalent is present in every origination channel, regardless of whether a broker is involved in the transaction or not. 

In fact, with the originate to distribute model, most bank and 

lender originators are brokering loans, yet fail to address the converging roles of the mortgage originators in its proposal. 

NAMB encourages HUD to work with the Federal Reserve Board 

to product an alternative disclosure proposal. The RESPA rule 

should be withdrawn to allow both agencies to work together to 

harmonize provisions. 

We also urge this committee to examine and pass a Federal 

standard of care based on good faith and fair dealing for all originators, as articulated in H.R. 3915. We believe such a standard 

would greatly enhance consumer protections. 

On the issue of appraisals, NAMB commends and appreciates the 

work of Representatives Kanjorski and Biggert for their tireless effort to reform and strengthen oversight of our appraisal system. 

NAMB supports independent appraisal standards as contained in 

3915. 

NAMB is not supportive of the Home Valuation Code of Conduct, 

or the HVCC, which created a de facto regulation in 2008 by the 

New York attorney general and the GSEs’ regulator, which prohibits mortgage brokers and real estate agents from ordering appraisals and communicating at all with appraisers. 

Finally, NAMB is deeply concerned over recent fee increases by 

the GSEs that are more than doubling consumer costs, based on alleged credit risks of credit scoring, property demographic, and/or 

loan to values. 

At a time when consumers are experiencing a severe credit 

crunch, efforts should be made to drive down mortgage costs, not 

increase them. 

These fees imposed on consumers are not what our mortgage 

market needs in these turbulent times, and they fly in the face of 

so many other efforts to help consumers and facilitate an economic 

recovery. 

51 

We urge you to explore this troubling issue and consider appropriate action when contemplating legislative reform. 

NAMB appreciates the opportunity to appear before you today, 

and we look forward to continuing to work with you to craft solutions that are effective in helping consumers, but not disruptive to 

the mortgage market or competition. 

Thank you, and I’m happy to answer any questions. 

[The prepared statement of Mr. Savitt can be found on page 246 

of the appendix.] 

Chairman GUTIERREZ. Mr. McMillan, for 5 minutes. 

STATEMENT OF CHARLES McMILLAN, PRESIDENT, NATIONAL 

ASSOCIATION OF REALTORS (NAR) 

Mr. MCMILLAN. Thank you, Chairman Gutierrez, Ranking Member Hensarling, and members of the subcommittee. Thank you so 

much for the opportunity to be invited here today to testify on the 

need for mortgage lending reform. 

I am Charles McMillan, 2009 president of the National Association of Realtors, and I am also a practicing Realtor. I am here to 

share the views of more than 1.2 million Realtors who are involved 

in all aspects of the real estate industry every day. 

On behalf of all Realtors, I thank the subcommittee for holding 

this hearing on an issue that is paramount to the success of the 

housing market, and indeed, the U.S. economy. Realtors have a tremendous stake in protecting consumers from unfair lending practices. 

As we have seen recently, abusive lending erodes confidence in 

the Nation’s housing system, strips equity from homeowners, and 

damages our local and national economies. 

In May of 2005, NAR adopted a set of responsible lending principles. They include steps to ensure affordability, limited stated income and assets underwriting, provide flexibility for life circumstances, eliminate mortgage flipping, bar prepayment penalties, improve the way lenders assess creditworthiness, provide 

mortgage choice, strengthen enforcement, and promote appraiser 

independence. 

My written testimony includes specific details on each of those 

principles, but my oral testimony today will focus on just one of 

those, appraiser independence. Realtors believe that a strong and 

independent appraisal industry is vital to restoring faith in the 

mortgage origination process. 

In November of 2007, the House passed a bill that we believe 

would have struck an appropriate balance of oversight and consumer protection. That bill, H.R. 3915, referenced here several 

times today, would have strengthened the independence of the appraisal process by ensuring appraisers serve as an unbiased arbiter 

of a property’s value. 

More recently, Fannie Mae and Freddie Mac signed an agreement with New York Attorney General Andrew Cuomo that provides for a home valuation code of conduct, and like H.R. 3915, this 

code also attempts to strengthen appraiser independence. However, 

it does have significant flaws. 

We believe primarily that implementing the code on May 1, 2009, 

could lead to an over-reliance on automated valuation models. Such 

52 

models do not consider qualitative factors as well as professional licensed and certified appraisers. 

Additionally, the code also fails to address the cost of the real estate transaction. 

H.R. 3915 and the code also fail to address regulation of appraisal management companies. It’s an important issue that must 

be addressed to assure that appraisals are based on sound and fair 

appraisal principles and that they are accurate. 

With that in mind, we recommend the following measures: 

First, lenders should be required to inform each borrower of the 

method used to value the property in connection with the mortgage 

application, give the borrower the right to receive a copy of each 

appraisal, and at no additional cost. 

Second, the Federal Government also should provide assistance 

to States to help strengthen regulatory and enforcement activities 

related to the appraisals. 

And third, we support enhanced education and qualifications for 

appraisers. 

Like all our responsible lending principles, we believe appraisal 

independence is absolutely vital to the future success of the housing market. However, Realtors also recognize the need for the Federal Government to address the current operational issues that are 

impeding the delivery of mortgage credit. 

Specifically, we ask that you encourage lenders and private mortgage insurers to remove unnecessarily strict underwriting standards, and urge consumer reporting agencies to move quickly to correct errors in credit reports. 

Realtors are proud to encourage responsible lending, and we 

stand ready to work with you to ensure that the nightmare of foreclosure does not overshadow the American dream of homeownership. 

I thank you for this opportunity to share our thoughts, Mr. 

Chairman, and I welcome any questions from the subcommittee. 

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

193 of the appendix.] 

Chairman GUTIERREZ. Mr. Amorin, please. 

STATEMENT OF JIM AMORIN, PRESIDENT, APPRAISAL 

INSTITUTE 

Mr. AMORIN. Thank you. 

A few years ago, the Appraisal Institute appeared before this 

committee and warned that the lack of oversight and enforcement 

in the mortgage lending industry was a ticking time bomb threatening our economy. That was 2005. 

Now that the bomb has exploded, with aftershocks heard ’round 

the world, what now? 

Four measures can help us work our way back to the basics and 

restore confidence in America’s system of mortgage finance. 

First, refine and reintroduce the concepts of H.R. 3915, which 

emerged from this committee in the last Congress, and was passed 

in the House. 

A revised bill, with enhanced consumer protection, is needed to 

provide additional resources for aggressive oversight and enforcement. 

53 

Regrettably, too often, mortgage originators, who are only paid if 

the transaction goes forward, have been in charge of ordering appraisals. Such a system is ill-equipped to avoid bias and manipulation to the detriment of the consumer, and ultimately, the taxpayer. 

As you are aware, the home valuation code of conduct, prompted 

by Attorney General Cuomo, elevated the issue of appraiser coercion to the national stage. This heightened awareness is further 

evidence that a system-wide approach to mortgage reform is needed. 

Congress needs to look closely at the participation of appraisal 

management companies under the code, as they are unregulated 

entities and must be brought under control and fully engrossed in 

the regulatory process. 

Congress must also ensure that any insertion of middlemen in 

the appraisal process does not come at the expense of obtaining 

competent appraisals. 

Ultimately, this comprehensive legislation is central to curing a 

mortgage industry in distress. 

Second, Congress should empower the oversight agencies for appraisal regulation, the Appraisal Subcommittee, to act more effectively in performing its functions. Legislation in response to our 

last financial crisis, the savings and loan disaster, created a system 

of licensing and certification for appraisers, but the current regulatory structure can only be described as feeble. 

We can strengthen oversight by funding improvements for State 

appraisal licensing boards and giving the Federal oversight body 

the necessary authority to issue rules and effective guidelines. 

Currently, this oversight agency only has one tool at its disposal 

to compel States to act. It can only decertify a State. 

We believe it should have additional and more realistic enforcement authorities. Further, State appraisal boards must be given 

additional resources to strengthen enforcement activities. 

Third, as indicated in our written testimony, the Administration’s recently announced loan modification plan allows for home 

values to be determined by broker price opinions and automated 

valuation models. Frankly, we are shocked. 

Once again, we are not treating the valuation process seriously. 

Congress must immediately review this policy and ensure it is consistent with longstanding bank regulations that require or encourage the use of appraisals. 

Our last recommendation is to create an independent authority 

to oversee appraisal issues and keep them from getting lost in the 

shuffle of industry restructuring. This should be a high-level, senior position in an agency, such as the Treasury Department, where 

the Office of Chief Appraiser can effectively guide valuation policy 

and criteria across agency lines, and ensure consistency in application and oversight. 

Members of this committee, just a week ago, the Treasury Inspector General released a devastating analysis of what went 

wrong in the Indy Mac mortgage meltdown. That lender shopped 

for appraisers, and ordered multiple appraisals, until it found a 

valuation that hit its desired numbers. 

54 

This is a systematic avoidance of the requirements, much in the 

same way the now-infamous peanut supplier shopped for laboratories and lab results until it found one willing to endorse its tainted product. 

In one case, Indy Mac picked a $1.5 million valuation, more than 

double the lowest it was given, while regulators were asleep at the 

switch. 

Unfortunately, such an abuse of the system has been repeated 

over and over again throughout the mortgage finance industry. 

The corruption of mortgage lending practices helped doom Indy 

Mac to fail, ruining many innocent borrowers as it collapsed. Sadly, 

Indy Mac typifies the abuses in the mortgage industry, and ineffectual action by regulators before it was too late. 

We need to start today to close the loopholes, to refine the regulations, and to empower enforcement that will return the industry 

to solid fundamentals of safe and sound underwriting with adequate oversight. 

Thank you for your time today. 

[The prepared statement of Mr. Amorin can be found on page 70 

of the appendix.] 

Chairman GUTIERREZ. Mr. Robson, for 5 minutes. 

STATEMENT OF JOE R. ROBSON, CHAIRMAN OF THE BOARD, 

NATIONAL ASSOCIATION OF HOME BUILDERS 

Mr. ROBSON. Chairman Gutierrez, Ranking Member Hensarling, 

and members of the subcommittee, I thank you for the opportunity 

to testify today. 

I’m a builder and developer from Tulsa, Oklahoma, and the 2009 

chairman of the board of the National Association of Home Builders. 

The housing market, the financial system, and the economy’s 

performance continue to reel from the excesses earlier in the decade. Soaring mortgage foreclosures and declining home prices are 

interacting in an adverse feedback cycle that shows no signs of diminishing. 

While the Nation will continue to suffer these consequences in 

the months ahead, the mortgage system itself has already undergone radical changes. 

Federal and State bank regulators have taken significant steps 

to curb risky mortgage lending, strengthening underwriting and 

loan management policies, and improved consumer information and 

safeguards. 

Congress has taken action to improve mortgage lending standards and oversight. 

In addition, the private label securities market, which was a primary vehicle for exotic mortgages, has shut down, and mainstream 

lenders have become extremely cautious. 

The pendulum, in fact, has swung back well past center, so that 

mortgage credit is currently available primarily to those with unblemished credit histories and the resources to make a significant 

downpayment on their home. 

NAHB’s members have supported steps to ensure that mortgage 

lending occurs in a manner consistent with sound underwriting, 

55 

prudent risk management, and appropriate consumer safeguards 

and disclosure. 

Home builders and their customers, however, have been significantly impacted by the upheaval in the financial marketplace, and 

are highly focussed on what might lie ahead. There is a great deal 

of uncertainty with regard to how the mortgage lending system will 

function when the housing and financial markets finally stabilize, 

and there is a deep concern that additional market dislocations will 

increase the depth and length of the current downturn. 

Single family appraisal problems are also an area of concern for 

home builders, and are contributing to the current housing and 

credit crisis. 

Appraisers have often used sales of homes and foreclosures or 

other distressed properties as comparables of new homes, without 

having made the appropriate value adjustments. 

NAHB believes that many appraisers lack the training and skills 

to perform the type of complex appraisals that are called for during 

this economic crisis. NAHB is working with the Appraisal Institute 

to raise the bar of appraiser education and performance. 

As Congress considers additional actions to avoid future mortgage lending problems, NAHB urges careful evaluation of steps already taken, the ongoing market impairments and structural shifts 

in the housing finance system and the immediate and longer-term 

impacts on the cost and availability of mortgage credit for qualified 

borrowers. 

As this subcommittee works to build upon legislation passed in 

Congress in 2007, we offer two specific policy recommendations: 

First, NAHB urges Congress to implement a clear national 

framework for mortgage origination standards to replace the current— 

Chairman GUTIERREZ. Excuse me, Mr. Robson. Could we please 

table the conversation—the gentlemen on the right? Just a little 

competition between our witnesses and the staff. I apologize, Mr. 

Robson. We will give you more time. 

Mr. ROBSON. No, that’s fine. Thank you. 

—patchwork of State and local laws, which often lead to unnecessary restrictions on mortgage credit. 

Specifically, Congress should establish a Federal preemption 

statute creating central uniformity in the mortgage market. 

And second, as H.R. 3915 would have excluded the use of arbitration as a means to resolve disputes, NAHB urges the committee to 

refrain from limiting the use of alternative dispute resolution techniques, including binding arbitration, which we believe is the most 

rapid, fair, and cost-effective means to resolving disputes. 

NAHB opposes any attempt to prohibit the use of pre-dispute arbitration in contracts. 

Thank you again for this opportunity to testify, and NAHB looks 

forward to working with Congress and the committee to address 

these issues. 

[The prepared statement of Mr. Robson can be found on page 218 

of the appendix.] 

Chairman GUTIERREZ. Thank you, Mr. Robson. 

Mr. Platt, for 5 minutes. 

56 

STATEMENT OF LAURENCE E. PLATT, PARTNER, K&L GATES, 

ON BEHALF OF THE SECURITIES INDUSTRY AND FINANCIAL 

MARKETS ASSOCIATION AND THE AMERICAN 

SECURITIZATION FORUM 

Mr. PLATT. Chairman Gutierrez, Ranking Member Hensarling, 

and members of the subcommittee, thank you for the privilege of 

testifying here today on behalf of the Securities Industry and Financial Markets Association and the American Securitization 

Forum regarding reform of mortgage finance, and in particular, 

certain mortgage origination practices that contributed to the housing crisis affecting the Nation today. 

We were pleased to have worked on this issue constructively with 

the committee, as it moved toward the November 2007 passage of 

H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act. 

We appreciate the opportunity to highlight the key considerations that guided the involvement of SIFMA and ASF in the earlier legislative initiative, and that remain important to SIFMA and 

ASF today. 

And let me state the obvious: The market is very different today 

than it was in the fall of 2007. We believe the House at that time 

wisely sought to limit the majority of the bill’s provisions to 

subprime loans by focusing on the core practices that it believed 

contributed to the subprime crisis. 

The underlying premise was that every segment of the market, 

from borrower and broker through to the investor, bore some responsibility for the breakdown, but that loans to subprime borrowers could be made in a responsible way, and that the industry 

could continue to support this segment of the mortgage market. 

As such, the committee worked to make the new requirements 

relatively understandable and provide penalties for violations that 

maintained a sense of proportionality. 

Since then, of course, the availability of subprime credit has 

evaporated. This market has not returned. The conforming prime 

market is functioning, but fragile. 

Congress and the Administration have made several attempts to 

address the foreclosure and housing crisis. When the Federal Reserve Board adopted its final regulations to the Home Ownership 

Equity Protection Act, it sought to address certain of the major underwriting concerns that H.R. 3915 had covered. 

As a result, it appears that this legislative initiative will be 

largely an anticipation of the eventual return of a private lending 

and securitization market, and one of the key questions going forward is the extent to which policymakers wish to encourage the return of private investment in housing finance, particularly for borrowers who may not meet agency standards. 

Underlying the debate over H.R. 3915 back in 2007 was one 

basic question. Would the private market make buyers securitize 

subprime loans that were subject to those new restrictions, given 

its reluctance to purchase high-cost loans under HOEPA? 

We believed then, and we still believe today, that there are certain principles that guide the willingness of the industry to participate in the primary and secondary markets. 

First, lenders, assignees, and securitizers need legal certainty before being subject to potential legal liability. 

57 

Second, borrowers and market participants are looking primarily 

for a system that works. That is, one that both protects the legitimate interests of innocent consumers from inappropriate lending 

products, and provides incentives for investors to invest the funds 

needed to help get that borrower a loan. 

Although we had some concerns, we felt that many of the provisions of H.R. 3915 provided a fair balance, and we hope that any 

newly proposed legislation will do the same. 

For the secondary market, H.R. 3915 basically attempted to do 

two things: 

First, it lowered the financial triggers that cause a loan to be 

classified as a high-cost loan. In other words, certain subprime 

loans that previously would not have qualified as high-cost loans 

under HOEPA would so qualify under 3915. 

Second, it created a whole new set of restrictions for loans that 

cost more than prime loans but less than high-cost loans. The 

House used cost as a proxy for borrowers who it was perceived 

needed greater protection. 

Please know that the final version of H.R. 3915 had many provisions that we considered extremely helpful. 

It properly differentiated between the new legal responsibilities 

of mortgage brokers and mortgage lenders, recognizing the inherent differences in the roles of those two types of originators, and 

the related expectations of consumers. 

It limited its applicability, generally, to subprime loans, recognizing that the lending abuses that afflicted the subprime market 

were generally absent in the prime market. 

It qualified the responsibilities of creditors to determine a borrower’s ability to repay and the presence of a net tangible benefit 

in order to lessen the likelihood of successful claims for errors in 

judgment made in good faith by lenders. 

And while it increased the monetary damages that would have 

been available for violations, it limited the availability of penalty 

damages to ensure some level of proportionality between the violation and the remedy. 

While it increased the availability of the extraordinary remedy of 

recision, at least the bill offered a creditor the ability to avoid recision by curing the violation, and the bill also properly balanced the 

interests of assignees. 

Underlying these positive measures was the belief that consumers with troubled credit histories may have required greater 

protection— 

Chairman GUTIERREZ. Your time has expired. 

Mr. PLATT. Thank you. 

[The prepared statement of Mr. Platt can be found on page 212 

of the appendix.] 

Chairman GUTIERREZ. That’s quite all right. 

I want to thank all of you, and just to go back to Mr. Savitt from 

the National Association of Mortgage Brokers, and just in general 

to respond to all of you, I personally can’t think of any one of your 

industries I haven’t dealt with over my last 30 years since I have 

owned a home, and paid for many a year of college for the members 

of the Realtors Association. You have done the best, as I look at 

58 

the books. So I have had wonderful experience dealing with members of your association through the years. 

That is not to say that there aren’t issues within each one of 

your groupings, whether it’s bankers, whether it’s appraisers, 

whether it’s—so I don’t want anybody to think that is the purpose 

of this. 

We just want to get your information and want to tell you that 

you’re welcome to continue to address the members of this committee and the chairmanship, as we go forward on this vote, but 

we will go forward on this vote, and from what I have heard from 

all of you, you think it’s a good idea that we move, that there are 

many moving parts of this legislation that are very good, and so 

we’re going to take that into consideration and move forward with 

that. 

I have just one question of Mr. Kittle and Mr. Platt, so I’ll ask 

both of you to answer just this one question. 

There have been some extensive discussions in this committee 

about the mortgage securitization process, and I believe some valid 

concerns have been raised. Among those concerns is the fact that, 

in the entire loan securitized, the risk for the loan is passed on to 

the buyer, along with the profit, leaving little incentive for the 

originator to make a responsible loan. 

Would you be in favor of a rule that requires part of the 

securitized loan to be maintained on the books of the originator in 

order to help keep them with what is called some ‘‘skin in the 

game?’’ 

So why don’t you just both respond to that question in general? 

Mr. Kittle first. 

Mr. KITTLE. Thank you, Mr. Chairman. 

Well, our members, with the Mortgage Bankers Association, most 

of our members are lenders, and we already have skin in the game, 

so we underwrite the loan, we have to have warehouse lines of 

credit, we have to have substantial net worth, minimum net worth 

at HUD, but many of our lenders are required to have a millionplus net worth. So the skin in the game is already there. 

We have buyback agreements with the investors. Fannie and 

Freddie are sending loans back to our members right and left, right 

now, for repurchase. 

So the skin in the game for our members, Mr. Chairman, is already there. 

Chairman GUTIERREZ. Mr. Platt. 

Mr. PLATT. Thank you. I would like to really second what Mr. 

Kittle said. There is risk retained already. 

Non-depository institutions simply won’t have the capital, I 

think, to be able to retain that kind of risk, and there are many 

securitization, asset-backed securitizations that presently don’t 

have that kind of risk retention feature and work just fine. 

SIFMA is looking at this issue, though, because it has been 

raised more recently, and so I think there’s not a formal position 

yet of SIFMA on this. 

Chairman GUTIERREZ. Thank you. I’m not going to pursue the 

question. I’m going to yield back the time, and yield 5 minutes to 

Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

59 

I actually share a number of the concerns that you articulated. 

Clearly, there were a number of problems and shortcomings in the 

mortgage finance system that helped lead to this economic crisis. 

I’m somewhat fearful, though, that we may go from one extreme 

to the other, as is often the case in public policy. 

My fear is particularly, as I looked at the original version of H.R. 

3915, I’m having a hard time concluding at the end of the day that 

it’s not going to make credit more expensive and less available precisely at a time when a number of people are trying to desperately 

refinance their homes and stay there. 

I’m particularly concerned—I think, Mr. Middleton, you used the 

phrase that you were concerned about unnecessary litigation. And 

I know that you, under the provisions of 3915, would be held liable 

for, ‘‘net tangible benefit.’’ 

Can you tell me what a net tangible benefit is, to the borrower? 

Mr. MIDDLETON. I was struggling with that definition myself. 

Mr. HENSARLING. Well, I’m concerned, and I know that we have 

a process to work through, but for example, in retrospect, there 

were a number of borrowers who originally were renters, and opted 

to buy a home, ended up they couldn’t afford the home that they 

bought, and I suppose one could make the case that they didn’t 

have a net tangible benefit, they had a net tangible detriment. 

Some people may be financially better off to rent, but it could be 

that they want to have their part of the American dream and own 

a home. 

Might some very creative attorney decide that somebody came to 

you, they want to buy a home, they want to move from rental status, and you have to crunch a bunch of numbers and say, ‘‘You 

know what? I’ve decided that you will not receive a net tangible 

benefit from becoming a homeowner, therefore, I have to legally 

deny you credit’’? 

I mean, is this off the wall, or might this have— 

Mr. MIDDLETON. No, sir. If you look at the Fair Credit Act, the 

Fair Lending Act, you almost have that condition now. 

If John Doe applies for a fixed-rate mortgage, you must run that 

through and decline and counter-offer. So that’s a rule we’ve been 

living with for all the years, ever since that bill has been in effect. 

So the detail of the definition is what bothers me the most, because it becomes very subjective, and it really doesn’t look at the 

four ‘‘C’s’’ of credit that one always follows in a traditional lending, 

you know: capacity; character; collateral; and credit. 

It just seems to be inconsistent with prudent underwriting. Prudent underwriting answers that, when you get into judgments 

about, ‘‘Is this really going to fit your tangible net benefit, Mrs. 

Jones?’’ I don’t think that’s something that we would like to see in 

this bill. 

Mr. HENSARLING. Well, again, I think that sometimes we see 

public policy excesses, and I think we’ve gone from an atmosphere 

where a lot of you people would be brought before this committee 

and publicly slapped around for not making credit available to lowincome people, and now to some extent, you’re being slapped 

around for providing financing to low-income people. 

I’m also concerned, besides the net tangible benefit—let me ask 

you this question, Mr. Middleton, since I started with you. How 

60 

many of the loans that your bank makes are HOEPA loans? Do you 

have a rough percentage? 

Mr. MIDDLETON. We have never— 

Mr. HENSARLING. Never? 

Mr. MIDDLETON. Never, ever. 

Mr. HENSARLING. Well, under H.R. 3915, as I understand it, 

we’re going to essentially expand the scope of definition of HOEPA, 

and so a much greater universe of loans will now be HOEPA loans. 

Representing your organization, should I conclude from that that 

there will be a whole new universe of loans that will not be made 

at a time when many borrowers again are trying to refinance? 

Mr. MIDDLETON. At our institution, we would not approach that 

level of pricing, so the HOEPA loan criteria would not negatively 

affect us, because that is not our business model. We’re not doing 

high interest rate loans, irrespective of the reason. 

Mr. HENSARLING. Do you have an approximation of, representing 

your organization, how many of the loans are made by your member organizations that might be HOEPA loans? 

Mr. MIDDLETON. By my organization, none. 

Mr. HENSARLING. I’m sorry. Referring to the ABA. 

Mr. MIDDLETON. Oh, I’m sorry. 

Mr. HENSARLING. Not your individual bank. I’m sorry if I was not 

clear. 

Mr. MIDDLETON. The reputational risk of being a HOEPA loan 

lender would not be in the business model or the interest of the 

member of the ABA. There’s so much risk with that. 

Additionally, we live with every loan. Every year, we have an examiner onsite going through the entire alphabet of compliance laws 

and safety and soundness laws, so we have no interest—and I 

think I speak for many of the community bank members and a 

large majority of members—we have no interest in being known as 

a HOEPA loan provider. 

Mr. HENSARLING. I see I’m out of time. Thank you. 

Mr. ELLISON. [presiding] The gentleman from North Carolina. 

Mr. WATT. Thank you, Mr. Chairman. You look great over there 

in that chair. 

Mr. ELLISON. Thank you, sir. 

Mr. WATT. I didn’t want to pass up this opportunity to compliment you on that. 

We’re kind of getting down to serious brass tacks. Brad Miller 

and I have been working on this for years now. 

And while I don’t normally do this, I know that you all have severe time constraints, and 5 minutes really won’t allow me to get 

to all the issues that I would like to raise with you. 

So what I think I will do, and this is unusual for me, is ask you 

all to, if you don’t mind, give me some written responses to some 

things that are on my mind. 

Mr. Middleton, you say at the bottom of page 6 and the top of 

page 7 of your testimony, ‘‘We also believe that had the secondary 

market provided for some degree of skin in the game for all market 

participants, there would have been far less abuse and fewer bad 

loans.’’ 

So obviously, Mr. Kittle says he has skin in the game; Mr. Platt 

said everybody has skin in the game. 

61 

Skin in the game, as I understand it, is kind of like a proposal 

that, if you make a loan, whoever makes that loan, got to retain 

5, 10, 15 percent of it on their books, rather than selling it off into 

a secondary market, so that—so my question to you is, and if you 

can just give me something in writing on this, how do you do that, 

how do you require people to have skin in the game without increasing interest rates? Because I think that probably will have 

some impact on interest rates. And how do you do it without it just 

becoming a cost of doing business, which I think a lot of credit card 

companies assume that there will be some loss on—so, I mean, you 

know, they just factor it into what they’re doing. 

Give me a comment on that in writing. 

Second, you say at the bottom of page 8 of your testimony that 

there should be terms that should be specific and well-defined, limiting the potential for unnecessary litigation. 

And I know what unnecessary litigation—that’s litigation that— 

against whomever—you know. 

So I hope you’re not suggesting there not be some means, either 

through attorneys general, regulators, or private participants to enforce whatever these specific and well-defined terms are, and if you 

are saying that, or if you’re not saying that, tell me what those enforcement mechanisms should be, and if you can, give me something on that in writing, and how you both write a safe harbor provision, and not make that a hiding place for people to be irresponsible. 

Mr. Savitt, please tell me your reaction in writing to the proposal 

that was made on the last panel for spreading yield spread premium or broker fees over a period of time, rather than paying them 

up front, as a means of making brokers more responsible in the 

process. 

If you can tell me your reaction to, and if you are against it, tell 

me why, and what detriment there would be. I would like that. 

The reason I’m doing this is because I mean, I think we’re 

down—I could sit here and talk to you for 5 minutes about some 

of these issues, but we’re down to the end of the road now, and I 

need you all to be constructive with me. 

I’m particularly appreciative for the tone of Mr. Platt’s testimony, 

but I hope he will continue to give us some way of making the 

securitization market have some responsibility for assuring that 

lenders don’t make irresponsible loans and just sell them over and 

over and over into secondary, tertiary, 100th markets. 

I know my time has expired, and that is why I did it this way, 

because I knew nobody was going to have time to respond. 

Thank you, sir. Thank you, Mr. Chairman. 

I thought if I called him ‘‘Mr. Chairman,’’ he would give me more 

time, but it didn’t work. 

Mr. ELLISON. You got a little extra. 

The gentleman from New York. 

Mr. LEE. Thank you. Good evening, gentlemen. Thank you for 

coming. 

I don’t want to pick on Mr. Savitt, but whether you like it or not, 

I believe the mortgage broker industry is taking probably some of 

the brunt of this, and I’m always for not looking backward, I’m for 

looking forward and finding ways that, going forward, we can find 

62 

a better solution that protects taxpayers and keeps a system that 

gets people back into their homes, so I appreciate your comments 

as we go forward. 

I know you’re here representing the brokers, and there have been 

some very good actors, but there have also been some bad actors 

in the industry. 

I would be very curious to hear your ideas and thoughts, outside 

of a registration process that has been put in place. What else 

should we be legislating or initiating to help eliminate some of 

these individuals who really shouldn’t have been representing the 

industry. 

Mr. SAVITT. Well, first of all, when you say registration, you’re 

talking about the SAFE Act? 

Mr. LEE. Yes. 

Mr. SAVITT. Okay. Mortgage brokers would not be registered 

under the SAFE Act. They would be licensed under the SAFE Act. 

They would go through, as many States now require them to do, 

they would have to pass a test, they would have 20 years of preeducation, they would have continuing education, background investigations, fingerprinting, both State and Federal. 

They would have to have either a surety bond, a net worth requirement, or pay into a recovery fund. And mortgage brokers are 

the only ones that would be licensed that extensively under the 

SAFE Act. 

Many of us now do have those very similar requirements in the 

States. I’m licensed in the State of West Virginia and also in the 

State of Maryland, and I went through those very same procedures 

that I just cited to you. 

I think one of the things that we can do that can really help this 

industry is we have to regulate the practice, not regulate the license. We have to treat all originators, regardless of how they’re 

licensed, the same, I mean, as far as disclosure. 

In other words, on a good faith estimate, mortgage brokers have 

taken quite a hit, as you know, for the yield spread premium that 

they receive. It’s an indirect compensation. 

All originators, regardless of how they’re licensed, receive some 

type of indirect compensation. The only difference is, with mortgage brokers, is that mortgage brokers have been required, under 

HUD regulation, since 1992, to disclose that to consumers. It’s very 

confusing. The FTC has come out and said it’s confusing. 

And I think what we need to do to give a level playing field to 

the consumer, all originators should have to disclose all of their indirect compensation. 

All originators should disclose, in the exact same manner, on the 

exact forms, because when you don’t—you know, a consumer comes 

to shop, and they do shop. It doesn’t matter if they’re at a broker’s 

office or a bank or a lender. They don’t understand the difference. 

What they understand is they’re applying for a mortgage loan. So 

we have to level the playing field for the consumer. 

Mr. LEE. If I can continue on for one more point. 

You also, I believe, in your testimony, mentioned there were 

some problems with the SAFE Act, and I’d like you to expound 

upon those and where you see that there is a problem. 

63 

Mr. SAVITT. Well, as far as the implementation, also the SAFE 

Act is silent as far as things like grandfathering. 

I have been a mortgage broker for a little over 28 years, and I 

would be required to take a test for something that I have been 

doing for 28 years, and have 20 hours of pre-education, when I 

have gone through 7 hours of continuing education each year for, 

I think, 10 years. 

I think there needs to be a certain provision spelled out, even 

though it is silent, and my understanding is that it was left silent 

to leave it up to the States, but the States have a different interpretation based upon what they have been told by CSBS, that 

there is no provision for grandfathering, and if Congress wanted 

grandfathering, they would have spelled it out. 

I think the stronger argument is, since there is nothing spelled 

out, that again, it’s being left up to the States. 

It’s—there needs to be a delay in the implementation, I believe— 

first of all, let me just say this. The SAFE Act was something that 

we have been supporting, or what’s now the SAFE Act, we have 

been supporting since 2001. 

The brokers were the first ones that came up with the idea for 

a registry. We backed off on that in the beginning, because it was 

only going to be for brokers, it wasn’t going to be for all originators, 

which it now is, even federally chartered banks, their originators 

are in the registry. 

Our model State statute from 2002 is almost a mirror image of 

what is in the SAFE Act, so we had a lot of input as to what goes 

into that, but HUD has not even written their regulations yet. 

HUD told us it will take them 18 months to write their regulations, because they don’t have the funds for it right now, so I think 

what we need to do is not rush into this. It should be a slow implementation, give the States a chance to get a handle on this, and 

make sure that, you know, if they do change their laws in the 

States, they don’t have to go back and do it again because the HUD 

regulations say something different. 

Mr. LEE. I’m not sure how much time I have left. 

Mr. ELLISON. You’re out, but make it quick. 

Mr. LEE. I will make it really quick, because I appreciate that. 

The gentleman who just left, from North Carolina, had talked 

about the yield spread premium and the fact of the skin in the 

game concept. You didn’t have a chance to reply. But I did think 

that was an idea of trying to spread that. 

I came from the business world, have been in Congress now for 

2 months, but I worked in the private sector exclusively, and our 

sales people were compensated, but they’re always compensated. 

Typically, a bonus was paid at the end of the year, so there was 

time to actually evaluate and ensure that the products were sold 

and we were paid, and I like the concept of trying to do some form 

of a holdback or something. 

I would like your comments on what kind of a system would 

work effectively. 

Mr. SAVITT. I don’t think that would work, for several reasons. 

First of all, those who receive their compensation over a period 

of time right now also receive additional fees, servicing fees, over 

the period of time. 

64 

The other thing is that mortgage brokers have absolutely no control—let me back up even further. The loans are not our products. 

We have no say in the guidelines of those loans. We do not underwrite or approve those loans. That comes from the GSEs and also 

from the lenders. We have no control or say in the approval of 

products. 

So that would be asking us to take a risk on something that we 

have no control or no say over. 

Mr. LEE. My biggest concern was just ensuring that we get accurate data that’s passed along so that, through an entire system, 

that, at the end of the day, we have qualified loans that will be 

paid. 

Mr. ELLISON. The gentleman’s time is up. 

Mr. Robson, I was intrigued by your idea of a preemption statute 

that might add uniformity to mortgage law, and I think that does 

have the advantage of lending uniformity, but I wonder what your 

views are about a floor, a basic law that could leave room for States 

to apply their own local standards, and also, in order to have, you 

know, 50 attorneys general regulators to keep their eyes on fraud, 

waste, abuse, and things like that. 

Mr. ROBSON. I think a lot of it has to do with the transparency 

of securities and that sort of thing, as much as anything, not necessarily oversight on abuses, but how do you analyze a loan from 

one various State under certain rules and regulations versus another, and have some sort of uniformity throughout the country. 

So certainly you could have, I guess, every State attorney general 

kind of watching out after that, but I mean, some uniformity I 

think would go a long way in correcting some of the problems. 

Mr. ELLISON. Also, I like the idea of alternative dispute resolution as well, but my problem is that I’ve received reports that in 

some cases, where there are binding arbitration clauses, there are 

companies that do arbitration, and that’s their business, and 

they’re paid by the person with the greater market power in the 

transaction, and things always seem to go their way. 

I mean, do you see any opening or any flexibility in how, between 

the consumer and the lender, that we might arrive at an alternative resolution method that might be amenable to both sides? 

Do you have any ideas on how we can make that more flexible? 

Mr. ROBSON. The whole idea of arbitration is having a fair game. 

Mr. ELLISON. Yes, it is. 

Mr. ROBSON. And so if there is some need to tweak the arbitration rules so that everybody is playing fair, that’s fine. 

But it’s certainly a lot quicker and easier and less expensive, if 

you want expense and that sort of thing to enter into it, to go to 

court. 

Mr. ELLISON. Thank you, sir. 

Mr. McMillan, could you share with me whatever ideas you may 

have about initiatives that you could recommend to help low-income families rehabilitate their credit score so that they don’t have 

to be susceptible to predatory lending in the future? 

Mr. MCMILLAN. Certainly, Mr. Chairman. 

A number of those things have been addressed here, but one of 

the things that studies have shown is that most renters, which 

most low-income persons are, pay substantially more proportionate 

65 

toward rent than someone owning a home; therefore, the flexibility 

in underwriting guidelines and being able to consider someone who 

has paid their rent on time for years, while that may be 40 percent 

of their income, to receive a conventional type loan and therefore 

improve their credit by having credit in the normal marketplace. 

With your permission, I would like to opine as well, if you don’t 

mind, on the arbitration issue, because many of us in States have 

included arbitration provisions which bind the parties to arbitration should there be a dispute or any number of alternative dispute 

resolution procedures— 

Mr. ELLISON. Reclaiming my time. But, Mr. McMillan, maybe in 

that case, the parties could somehow jointly pick an arbitrator. I 

get concerned when, you know, the lender, the person with the 

greater market power and the more access to more information, 

gets to sort of designate who that person is. 

Any response? 

Mr. MCMILLAN. Absolutely correct, sir. 

What normally happens when someone purchases a home using 

the builder’s contract, with the bias that you’ve just addressed, is 

that they supersede any State-mandated contracts and the borrower has those provisions as a take it or leave it type of process. 

Mr. ELLISON. Reclaiming my time. Thank you, Mr. McMillan. 

Mr. Savitt, could you offer your views on what powers a systemic 

risk regulator might have with respect to mortgage and consumer 

protections, particularly given that the current crisis was in many 

ways fueled in part by weak standards in that regard? 

Mr. SAVITT. You are talking about an overall regulator? I think 

an overall regulator is a good idea, but something that I heard in 

the second panel I would agree with, also, is that there needs to 

be checks and balances. 

So you may have an overall regulator who supervises other regulators, and I think that would be a very appropriate idea. 

Mr. ELLISON. Thank you. My time has expired. 

The gentleman from Minnesota. 

Mr. PAULSEN. Thank you, Mr. Chairman. 

You know, this committee has heard from the oversight authorities as well as representatives of the communities that are affected 

by lending rules, and I’m just wondering, for the bankers, you 

know, Mr. Middleton and Mr. Kittle, can you tell us the current 

lending conditions right now that you are facing, given the challenges right now that the markets are facing? 

Mr. MIDDLETON. The economic conditions? 

Mr. PAULSEN. Correct. 

Mr. MIDDLETON. The borrower, the prospective borrower? 

We’re seeing what we would consider a prime-A credit that has 

sufficient downpayment, good credit history, are the ones that are 

venturing back into the market, so that I think we’re seeing jumbo 

conforming, but they all have the same underwriting criteria, meet 

the same traditional underwriting criteria that we’ve always had. 

So it’s a fairly competent borrower who has the means to support 

the purchase. 

Mr. PAULSEN. So in general, are homes being purchased and sold 

and under what conditions in general? 

66 

Mr. MIDDLETON. In southern Maryland, I can tell you that it is 

gradually moving—we feel a bottom has occurred in the pricing, 

and we’re getting more seekers. I’m hearing good reports about 

traffic over the weekend, significantly higher visits to houses in the 

southern Maryland region. So that’s good news. 

Did I answer your question, sir? 

Mr. PAULSEN. You did. Please, Mr. Kittle. 

Mr. KITTLE. Well, we’re finding that lending right now is more 

robust. We’re coming into springtime. I agree with what Mr. Middleton just said. I mean, our business is cyclic, even though it’s 

been tough over the last couple of years. 

The biggest problem our members are facing right now is warehouse lines of credit. There are major banks that have decided to 

get out of the space. Chase. The rumor is, the announcement since 

the merger of PNC buying National City, that they will exit that 

space. National City is a huge warehouse lender. 

So the small lenders, the independent mortgage bankers who 

take the risk, who have the skin in the game, are not able to get 

lines of credit. 

We have a brand new housing program that the President just 

initiated on the modifications and to help with refinancing. There’s 

not going to be the capacity out there to fund these loans. 

And the problem is, if I may take just one more moment, that 

when you fund a loan on a warehouse line of credit, it’s treated as 

a commercial loan, and it has certain cash requirements by that 

bank that must be set aside for that loan, and those cash requirements are restrictive. 

So MBA, we took a group of our lenders to Treasury last week, 

to ask Treasury to help maybe the GSEs to get into possibly a participation with them. Fannie and Freddie will most likely end up 

with these loans, anyway. And if they could come in and do a participation on those lines of credit, it would free that cash up. 

But clearly, our biggest problem facing us right now, other than 

the cramdown legislation, is warehouse lending. 

Mr. PAULSEN. Well, that kind of leads into my question; have the 

underwriting rules changed since the credit crisis? 

Mr. KITTLE. Well, we’re making the best loans we have made in 

15 years. We have tightened the underwriting. And now, there is 

even some criticism that we’re too tight. So the pendulum has 

swung back. We’re making good loans, and now we’re in some cases 

being criticized because we’re not loose enough. 

Mr. MIDDLETON. To respond to that question, as well, we had not 

changed our underwriting criteria when things were loose. We’re 

just consistent with the way we always did it. So there was really 

no tightening or loosening of any criteria. 

Mr. PAULSEN. And just one more question. 

How are the regulatory requirements of CRA, the Community 

Reinvestment Act, affecting the way that you do business in this 

economic environment right now? 

Mr. MIDDLETON. Like I mentioned, we’re a satisfactory CRA 

lender. We really find the CRA as a tool, not an obstacle. 

And I mentioned also that all of our affordable housing loans are 

current, none of them are in default. We work with CDCs, and of 

particular interest to meet the CRA requirements, we work with 

67 

our community development corporations to be a partner in the 

layering of funds with other sectors, HUD and various grant folks, 

and we are finding that to be a very effective partnership with a 

highly productive outcome 

Mr. PAULSEN. No other questions, Mr. Chairman. I yield back. 

Mr. ELLISON. Thank you. The gentleman yields back. 

I would like to enter into the record written testimony by Terry 

Clemmons, executive director of the National Credit Reporting Association. 

Without objection, it is so ordered. 

I want to thank the witnesses and the members for their participation in this hearing. The Chair notes that some members may 

have additional questions for the witnesses, which they may wish 

to submit in writing. 

Therefore, without objection, the hearing record will remain open 

for 30 days for members to submit written questions to the witnesses and to place their responses in the record. 

This subcommittee hearing is now adjourned. 

[Whereupon, at 6:48 p.m., the hearing was adjourned.] 

(69) 

A P P E N D I X 

March 11, 2009 

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